Exam 5: Evaluating a Single Project

Lane College in Jackson, Tennessee, is considering the conversion of an abandoned church pew manufacturing plant adjacent to the school's campus into a 34,000- square- foot building to house the campus bookstore, a conference center, a small business incubator, and a community computer lab. The project requires $30 million for renovation costs, additional annual fixed operating and maintenance expenses of $100,000, and variable expenses of 190 per square- foot over a 10- year period. The college expects to generate an annual revenue of $7,810,000 over a 10- year period. The college uses a MARR of 7 percent per year in its economic evaluations of the new project. The market value of the building will be $2 million at the end of 10 years. Write the correct equation to determine if this building should be renovated using the IRR method.

Quinn purchases a bond for $29,000 when the market interest rate is 13% per year, compounded semiannually. The bond has an interest rate of 10% per year payable semiannually and a maturity date of 24 years. What is the face value of this bond?

Thai Savings Bank issues 100,000 bonds as a response to the Thai Central Bank's initiatives to increase domestic saving. The bonds have a face value of $40,000 each, a bond interest rate of 8% per year payable annually, and a maturity date of 14 years. What is the current price of a bond, if the market interest rate is 9% per year, compounded semiannually?

Sun Devil Inc. is building two small additions onto its corporate headquarters in Tempe in order to maximize its operating efficiency. The additions, which total 27,000 square feet, will attach to the east and south sides of its existing 66,000- square- foot headquarters. The construction costs are estimated to be $40 per square feet. The company estimates $60,000 per year in fixed costs (e.g., maintenance and insurance, etc.) and $3 per square foot in variable costs (e.g., utilities, etc.) for the additional facility. The market value of the additions is expected to be 33% of the construction costs at the end of 20 years. Determine the capital recovery cost and the EUAC of the two additions if the minimum attractive rate of return is 4% per year.

Determine the internal rate of return of the following cash flow. Year Cash Flow ,\ Year Cash Flow ,\ 0 -450,000 6 56,000 1 50,000 7 57,000 2 52,000 8 58,000 3 53,000 9 59,000 4 54,000 10 60,000 5 55,000 11 61,000

HighJump Inc. is considering partnering with FieldFeet to open "Athlete Heaven" stores in the United States as it seeks to expand its own retail network to better control how its products are displayed and sold. One particular store will require an initial investment of $220,000 and an annual operating cost of $59,000. The buildings and equipment will have a $62,500 resale value after 10 years. HighJump expects the store to generate annual revenue of $69,000. Calculate the future worth of the investment in this particular store at the end of year 10, and determine the acceptability of the investment if the company's minimum attractive rate of return is 8% per year.

The cost of building the gondola lift system that transports visitors from the tops of the mountain peaks to the valley at the Zhangjiajie National Forest Park in China is $10.5 million. The lift system will need an annual maintenance cost of $164,000, and the elevators will need to be replaced every 5 years with the estimated cost of $603,000, for an indefinite period of time. What is the capitalized worth of the lift system at an interest rate of 16% per year?

AmeriTextile Co. is considering opening a production and shipping facility in Dallas to keep up with demand for its pillows. The 105,000- square- foot facility will require an initial investment of $280,000, and an annual operating cost of $26,000. It will have a $74,500 salvage value after 9 years. Calculate the net present worth of this investment if the company's minimum attractive rate of return is 5% per year.

A 24- hour music network plans to add satellite technology to allow its expansion into other major southern markets. The network expects the monthly revenue to increase by $380,000 from new cable subscription fees. The satellite will require an initial cost of $2 million with monthly operating and maintenance costs of $340,000. It will have a $122,000 salvage value after 6 years. Calculate the net present worth of this investment at an interest rate of 4% per year, compounded continuously.

Husker Co., a major drug store chain, plans to spend $35 million in capital investments for its new inventory loss reduction initiative. By upgrading the current inventory tracking system using advanced RFID technology, the company estimates the annual maintenance cost of $210,000. The salvage value of the system at the end of year 13 is expected to be 0.4% of the original investment. What is the minimum annual inventory loss prevention required to make this investment economically acceptable if the company's minimum attractive rate of return is 8% per year.

BioPharm Inc. recently acquired Cow Biopharmaceuticals Inc., a producer of antibodies and Cow- HB to prevent Hepatitis B re- infection in liver transplant patients. The company plans to invest $3.5 million in new manufacturing equipment. The Cow Biologics division is expected to generate revenue of $300,000 and operating cost of $330,000 each month. The new equipment is estimated to have a $700,000 salvage value after 7 years. What is the future worth of this investment if the company's minimum attractive rate of return is 18% per year, compounded monthly.

A new water treatment operation is being considered for the new automated water treatment plant in South Africa. The system can be purchased and installed for $44.5 million and requires additional annual operating and maintenance expenses of $2.7 million over a 22- year period. However, it will save an estimated $5.7 million each year from the reduced operational, environmental, and security risks. The company uses a MARR of 12 percent per year in its economic evaluations of the new system. The market value of the system will be $4.45 million at the end of 22 years. Write the correct equation to determine if this system should be installed using the IRR method.

Shin Satellite Corp. issues 10,000 debenture bonds with a face value of $26,000 each and a bond interest rate of 18% per year payable semiannually. The bonds have a maturity date of 10 years. If the market interest rate is 14% per year, compounded semiannually, what is the present worth of one bond to a person who wants to purchase it and earn the market rate?

Determine the rate of return of the following cash flow using the ERR method and the reinvestment rate of 4% per year. Year Expense, \ Revenue, \ Year Expense, \ Revenue, \ 0 140,000 - 6 32,000 82,000 1 32,000 47,000 7 32,000 89,000 2 32,000 54,000 8 32,000 96,000 3 32,000 61,000 9 32,000 103,000 4 32,000 68,000 10 32,000 110,000 5 32,000 75,000 11 32,000 117,000

Smoothy Smoothies, a Florida- based chain that sells shakes, juices, salads, wraps, and soups, plans to develop franchises in central Tennessee. Each new store will require an initial investment of $270,000 and a monthly operating cost of $25,000. Each will have a $78,500 salvage value after 5 years. The company also estimates that a new store will bring in revenue of $40,000 each month. Determine the acceptability of the investment if the company's minimum attractive rate of return is 8% per year, compounded monthly, using the annual worth analysis.

GoBulls Media is considering opening a new manufacturing facility to process and mail coupons to 660,000 households in the Tampa Bay area. The new facility will require an initial investment of $240,000 and an annual operating cost of $22,000. It will have a $86,500 salvage value after 5 years. Calculate the net present worth of this investment if the company's minimum attractive rate of return is 5% per year, compounded monthly.

Aztec Corp., a clothing retailer, plans to open another 95 stores by the end of the year. Each new store will require an initial investment of $270,000 and an annual operating cost of $24,000. Each will have a $61,000 salvage value after 5 years. The company expects to garner revenue of $36,000 each year. What is the future worth of this investment if the company's minimum attractive rate of return is 13% per year, compounded semiannually?

Kenny Pipe & Supply Inc., a wholesale distributor of plumbing supplies, pipe, valves, and fittings, plans to remodel its existing facility in the Birmingham, Alabama, location. The facility will require an initial remodeling cost of $370,000 and a monthly operating and maintenance cost of $30,000. It will have a $66,500 salvage value after 7 years. What is the net present worth of this investment if the company's minimum attractive rate of return is 6% per year, compounded monthly?

Dean bought a $26,000 bond that has interest rate of 8% per year payable semiannually, 3 years ago. The bond has a maturity date of 12 years from the date it was issued. How much should he be able to sell the bond for today, if the current market interest rate is 9% per year, compounded semiannually?

Longhorn Energy is planning a $340 million expansion of two major pipelines in Texas. The Austin- based pipeline company will add 56 miles of 36- inch pipeline and 20,000 horsepower of compression. The expansion will increase the capacity of the Katy pipeline in southeast Texas to more than 1.1 billion cubic feet per day from 700,000 million cubic feet per day. Net revenue per cubic foot is $1.25 and the pipeline is expected to have a resale value of 28 million at the end of year 38. Determine the capital recovery cost of this investment if the minimum attractive rate of return is 14% per year.