TUTORIALS.

Tutorial 2 : Money-Time Relationships

1.a. Whatwillbetheamountaccumulatedbythefollowingpresentinvestment?

R5 000 in 8 years at 14% compounded annually. (R14263).

F=?

8years

5000
i=14%compoundedannually
Formule:

n
8
F P1 i 50001 0.14 R14263

Tabels:
F=P(F/P,i,n)=5000(F/P,14,8)=5000(2.8526)=R14263

2.a. For an interest rate of 14% compounded annually, find how much can be loaned now if
R2 000 will be repaid at the end of 3 years? (R1350).

F=2000
0

3years

P=?i=14%compoundedannually

Formula:
P

2000
F

R1350
n
(1 i )
(1 0.14) 3

Tables:
P=F(P/F,i,n)=2000(P/F,14,3)=2000(0.6750)=R1350

3.a. Whatistheaccumulatedvalueofeachofthefollowingseriesofpayments:

R600attheendofeachyearfor5yearsat14%compoundedannually?(R3996).

012345years
600600600600600
i=14%compoundedannually
Formula:
F

(1 0.14) 5 1
(1 i ) n 1

600
A
R 3966

i
0.14

Tables:
F=A(F/A,i,n)=600(F/A,14,5)=600(6.6101)=R3966

4.

What equal series of payments must be put into a sinking fund to accumulate the following
amount:
R65000in15yearsat14%compoundedannuallywhenpaymentsareannual?(R1482.65).

F=65000
0115years

i=14%compoundedannually
Formula:

i
0.14

A F
65000 (1 0.14) 15 1 R1482.58
n

(
1
)
1

Tables:
A = F(A/F,i,n) = 65000(A/F,14,15) = 65000(0.02281) = R1482.65

5.

Whatisthepresentvalueofthefollowingseriesofprospectivereceipts?
R1500ayearfor15yearsat14%compoundedannually?(R9213.3).

15001500

115

P=?
i=14%compoundedannually
Formula:
n
15
1
P A (1 i ) n 1 1500 (1 0.14) 15
R 9213.3
i (1 i )

0.14(1 0.14)

Tables:
P=A(P/A,i,n)=1500(P/A,14,15)=1500(6.1422)=R9213.3

Tables:F=P(F/P,i,n)
23670=10000(F/P,i,10)
(F/P,i,10)=2.3670
i=9%(F/P,9,10)=2.3670
i=8%(F/P,8,10)=2.1589
Afterinterpolation:i=0.08998=9%

7.

Whatseriesofequalpaymentsisnecessarytorepaythefollowingpresentamount?
R5000in5yearsat14%compoundedannuallywithannualpayments?(R1456.4).

5000

05years
AA

i=14%compoundedannually
Formula:

i (1 i ) n
0.14(1 0.14) 5
A P
5000
R1456.37
n
5
(1 i ) 1
(1 0.14) 1

Tables:
A=P(A/P,i,n)=5000(A/P,14,5)=5000(0.29128)=R1456.4

Multiple Factors in a Cash Flow

1.Convertthecashflowtoanequivalentuniformannualamount,usinganinterestrateof12%per
year.(P=+127279AW=+23888)
Year
1
2
3
4
5
6
7
8
9
Cash
20000 20000 20000 25000 25000 25000 30000 30000 30000
flow

30000
25000

20000

0123456789
AE=+20000+5000(P/A,12,6)(P/F,12,3)(A/P,12,9)+5000(P/A,12,3)(P/F,12,6)(A/P,12,9)
=+20000+5000(4.1114)(0.7118)(0.18768)+5000(2.4018)(0.5066)(0.18768)
=+23888

2.Convertthecashflowtoanequivalentuniformannualamount,usinganinterestrateof12%per
year.(P=+7559AW=+1419)
Year 2
3
4
5
6
7
8
9
Cash 1200 1200 1200 2000 2000 2000 3000 2000
flow

3000
20002000
1200

0123456789

AE=[1200(P/A,12,8)(P/F,12,1)+800(P/A,12,3)(P/F,12,4)+1800(P/F,12,8)
+800(P/F,12,9)](A/P,12,9)
=[+1200(4.9676)(0.8929)+800(2.4018)(0.6355)+1800(0.4039)+800(0.3606)](0.18768)
=+1418.72

Tutorial1:CostEstimation.
2.1.Manufacturingequipmentthatwaspurchasedin2005forR500000mustnowbereplacedat
theendof2010.Whatistheestimatedcostofthereplacementbasedonthefollowingequipmentcost
index?

YEAR
2005

2006
2007
2008
2009
2010

C 2005 500000
C 2010 ?

I 2005 223
I 2010 293
I 2010
I 2005

C 2010 C 2005

Index
223
238
247
257
279
293

293
500000
656950.6
223

2.2.Prepareacomposite(weighted)indexforhousingconstructioncostsin2010usingthe
followingdata:
Typeofhousing

Percent

Referenceyear2005
Cost(R/sqm)2010
(R/sqm)
Index=100
Singleunits
70%
4100
6200
Duplexunits
5%
3800
5700
Multipleunits
25%
3300
5300
Howwouldachangeinthepercentageofthemixofsingle,duplex,andmultipleunitsinfluencethe
valueofthecompositeindex?
Whatmixwouldyouprefertobethemoreadvantageousforyourcompany?

6200
5700
5300
Composite Index 0.7
0.05
0.25
100 153.5
3800
3300
4100
2.3.Ifaplantthatproduces500000KgperyearcostR2500000toconstruct8yearsago,what
woulda1500000Kgperyearplantcostnow?.Theconstructioncosthasincreasedatanaveragerate
of12%peryearforthepasteightyearsandthatthecostcapacityfactoris0.65.

Q
C 2 C1 2
Q1

1500000
25000001 0.128

500000

0.65

12641900

2.4.ThepurchasepriceofaboilerwithacapacityXwasR181000eightyearsago.Anothersimilar
boilerwithcapacity1.42Xisconsidered.Iftheboilerispurchasedsomeextrafeatureswouldincrease
thepurchasingpricebyR28000.Thecostindexwas162forthisequipmentwhenthesmallerboilerwas
purchasedandis221today.Thecostcapacityfactoris0.8.Whatistheestimatedpriceforthenew
boiler?.

Q
C 2 C1 2
Q1

I2

I1

221 1.42 X
28000 181000

162 X

0.8

354878.61

2.5.Thestructuralengineeringdesignsectionwithintheengineeringdepartmentofaregional
electricalutilitycorporationhasdevelopedseveralstandarddesignsforagroupofsimilartransmission
linetowers.Thedetaileddesignforeachtowerisbasedononeofthestandarddesigns.Atransmission
lineprojectinvolving50towershasbeenapproved.Theestimatednumberofengineeringhoursneeded
toaccomplishthefirstdetailedtowerdesignis126.Assuminga95%learningcurve,

a.whatisyourestimateofthenumberofengineeringhoursneededtodesigntheeighttower
andtodesignthelasttowerintheproject.
b.whatisyourestimateofthecumulativeaveragehoursrequiredforthefirstfivedesigns?

a.
Z 8 1268

1268

log 0.95
log 2

Z 50 12650

log 0.95
log 2

0.073999

12650

108.02 hours

0.073999

94.33 hours

b.

T 5 126 10.073999 2 0.073999 3 0.07399 4 0.07399 5 0.07399 587.42

C 5

587.42
117.48 hours per unit
5

2.6.Thecostofbuildingasupermarketisrelatedtothetotalareaofthebuilding.Dataforthelast
10supermarketsbuiltareshowninthetablebelow:
BuildingNo.
1
2
3
4
5
6
7
8
9
10

Area(sqm)
14500
15000
17000
18500
20400
21000
25000
26750
28000
30000

Cost(R)
8000000
8250000
8750000
9720000
10740000
12500000
13070000
15340000
14755000
15250000

a. DevelopaCERfortheconstructionofsupermarkets.UsetheCERtoestimatethecostofthe
nextstorethathasaplannedareaof23000sqm.
b. ComputethestandarderrorandthecorrelationcoefficientfortheCERdevelopedinpart(a).

1
2
3
4
5
6
7
8

xi
14500
15000
17000
18500
20400
21000
25000
26750

yi
8000000
8250000
8750000
9720000
10740000
12500000
13070000
15340000

x i2
210250000
225000000
289000000
342250000
416160000
441000000
625000000
715562500

xi y i
1.16E+11
1.2375E+11
1.4875E+11
1.7982E+11
2.19096E+11
2.625E+11
3.2675E+11
4.10345E+11

9
10

28000
30000
216150

14755000
15250000
116375000

b=
a=

784000000
900000000
4948222500

4.1314E+11
4.575E+11
2.65765E+12

514.9751802
506311.4803

b.

xi

yi

Costi

y i Costi)^2 xi x

yi y

( xi x)( y i y )

( xi

x )^2(( y i y )^2

14500

8000000

7973400

707560000

7115

3637500

2.5881E+10

50623225

1.32E+13

15000

8250000

8230970

362140900

6615

3387500

2.2408E+10

43758225

1.15E+13

17000

8750000

9260900

2.61019E+11

4615

2887500

1.3326E+10

21298225

8.34E+12

18500

9720000

10033300

98156890000

3115

1917500

5973012500

9703225

3.68E+12

20400

10740000

11011810

73880676100

1215

897500

1090462500

1476225

8.06E+11

21000

12500000

11320700

1.39075E+12

615

862500

530437500

378225

7.44E+11

25000

13070000

13380600

96472360000

3385

1432500

4849012500

11458225

2.05E+12

26750

15340000

14281870

1.11964E+12

5135

3702500

1.9012E+10

26368225

1.37E+13

28000

14755000

14925580

29097536400

6385

3117500

1.9905E+10

40768225

9.72E+12

10

30000

15250000

15955500

4.9773E+11

8385

3612500

3.0291E+10

70308225

1.31E+13

21615

11637500

3.56781E+12

1.4221E+11

276140250

7.68E+13

R=

0.97649641

SE=

597311.7955

2.7.Anelectronicsmanufacturingcompanyisplanningtointroduceanewproductinthemarket.The
bestcompetitorsellsasimilarproductatR420perunit.Otherdataare:
Directlaborcost:R15.00/hour
Factoryoverheads:120%ofdirectlabor
Productionmaterials:R300.00perunit
Packagingcosts:20%ofdirectlabor

Ithasbeenfoundthatan85%learningcurveappliestothelaborrequired.Thetimetocompletethe
firstunithasbeenestimatedtobe5.26hours.Thecompanydecidestousethetimerequiredto
completethe20thunitasastandardforcostestimationpurposes.Theprofitmarginisbasedonthe
totalmanufacturingcosts.
a. Basedontheaboveinformation,determinethemaximumprofitmarginthatthe
companycanhavesoastoremaincompetitive.
b. Ifthecompanydesiresaprofitmarginof15%,canthetargetcostbeachieved?Ifnot,
suggesttwowaysinwhichthetargetcostcanbeachieved.

a.

Z 20 5.2620

log 0.85
log 2

5.2620

0.234465

2.61 hours

Directlabour=2.61(15)=R39.086
Overheads=1.2(39.086)=R46.90
Material=R300
Packaging=0.2(39.086)=R7.8172
Totalcost=393.80
Maximumprofit=420393.80=R26.20

b.
Targetcost=420/1+0.15=R365.21

Actualprofit%=26.20/393.80=0.066=6.6%

2.8.ApersonalcomputercompanyistryingtobringanewmodelofaPCtothemarket.According
tothemarketingdepartmentthebestsellingpriceforasimilarmodelfromaworldclasscompetitoris
R2500.Thecompanywantstosellatthesamepriceasitsbestcompetitor.Thecostbreakdownofthe
newmodelis:
Assemblytimeforfirstunit:1.00hour
Handlingtime:10%ofassemblingtime
Directlabor:R15.00perhour
Planninglabour:10%ofdirectlabour
Qualitycontrol:50%ofdirectlabour
Factoryoverheads:200%oftotallabour
General&admin.Expense:300%oftotallabour
Directmaterialcost:R200percomputer
Outsidemanufacture:R2000percomputer
Packingcost:10%oftotallabour
Facilityrental:10%oftotallabour

Profit:20%oftotalmanufacturingcost
Numberofunits:20000

Thecompanymanagementisoftheopinionthattheaverageassemblytimeforthe
first8computerscanbeusedforthefeasibilitystudy.Sincethecompanymainlyproducessub
assembliespurchasedfromothermanufacturersandrepackagestheproduct,thedirectmaterialcostis
estimatedatR200.00percomputer.Directlabortimeconsistsofhandlingtimeandassemblingtime.
Thecompanyestimatesthelearningcurveforassemblingthenewmodelis95%.Computethetotal
manufacturingcostfor20000ofthesecomputersanddeterminetheunitsellingprice.Howcanthe
companyreduceitscoststomeetthetargetcost.

log 0.95 0.022276

0.073999
log 2
0.301029

T8 110.073999 2 0.073999 3 0.073999 4 0.073999 5 0.073999 6 0.073999 7 0.073999 8 0.073999

=1[1+0.95+0.9219+0.9025+0.88772+0.87582+0.86589+0.857377]
=7.2612hours

7.2612
0.90765 hours
8

x
0.2
2500 x

x 416.66

T arg et cos t 2500 416.66 2083.34

Cost/unit FactorEstimate

DirectEstimate

Total

Totalhours

0.90765hours/unit

18153hours

Factorylabour

1.1hours/unit

R15/hour

R330000

Planninglabour

R1.50/hour

R27202.5

Qualitycontrol

R7.50/hour

R136147.5

Totallabour

R493350

Factoryrental

10%oftotallabour

R49335

Overheads

R30/hour

R544590

General&Adm

R45/hour

R816885

Productionmaterial

R200/computer

R4000000

10 Outside
Manufacture

R2000/computer

R40000000

11 Subtotal

R45904160

12 Packingcost

R1.50/hour

R27229.50

15 Total
manufacturingcost

R45931389.50

16 Quantity/lotsize

20000

17 Manufacturingcost
/unit

R2296.56

18 Profit

20%oftotal
manufacturingcost

R9186277.90

19 Unitsellingprice

R2755.88

2.9.Youhavebeenrequestedtoprepareaquickestimateoftheconstructioncostforacoalfired
electricitygeneratingplantandfacilities.Aworkbreakdownstructure(level3)isshownbelow.Youhave
thefollowinginformationavailabletomakeyourdecision:
Acoalfiredgeneratingplanttwicethesizeoftheoneyouareestimatingwasbuiltin1977.The1977
boiler(1.2)andboilersupportsystem(1.3)costR110million.Thecostindexforboilerswas110in1977;
itis492in2000.Thecostcapacityfactorforsimilarboilersandsupportsystemsis0.9.
The600acresiteispropertyyoualreadyown,butimprovements(1.1.1)androads(1.1.2),willcost
R2000peracreandrailroads(1.1.3)willcostR3000000.Projectintegration(1.9)isprojectedtocost
3%ofallotherconstructioncosts.
Thesecuritysystems(1.5.4)areexpectedtocostR1500peracre,basedonrecent(2000)
constructionofsimilarplants.Allothersupportfacilitiesandequipment(1.5)elementsaretobebuiltby
IndexEngineering.IndexEngineeringhasbuiltthesupportfacilitiesandequipmentelementsfortwo
similargeneratingplants.Theirexperienceisexpectedtoreducelaborrequirementssubstantially;a
90%learningcurvecanbeassumed.IndexEngineeringbuiltthesupportfacilitiesandequipmenton
theirfirstjobin95000hours.ForthisprojectIndex`slaborwillbebilledtoyouatR60perhour.Index
estimatesmaterialsfortheconstructionofthesupportfacilitiesandequipmentelements(except(1.5.4)
willcostyouR15000000.

Thecoalstoragefacility(1.4)forthecoalfiredgeneratingplantbuiltin1977costR5million.Although
yourplantissmaller,yourequirethesamesizecoalstoragefacilityasthe1977plant.Youassumeyou
canapplythecostindexforsimilarboilerstothecoalstoragefacility.
Whatisyourestimated2000costforbuildingthecoalfiredgeneratingfacility?.Summarizeyour
calculationsinacostestimatingworksheet,andstatetheassumptionsyoumake.

WBS:

LineNo.
001
002
003
004
005
006
007
008
009
010
011
012
013
014
015
016
017
018
019
020
021
022
023
024
025
026
027
028
029
030
031

Title
Coalfiredpowerplant
Site
Landimprovements
Roads,parkingandpavedarea
Railroads
Boiler
Furnace
Pressurevessel
Heatexchangesystem
Generators
Boilersupportsystem
Coaltransportsystem
Coalpulverizingsystem
Instrumentation&control
Ashdisposalsystem
Transformers&distribution
Coalstoragefacility
Stockpilereclaimsystem
Railcardump
Coalhandlingequipment
Supportfacilities&equipment
Hazardouswastesystems
Supportequipment
Utilities&communicationsystem
Securitysystems
Projectintegration
Projectmanagement
Environmentalmanagement
Projectsafety
Qualityassurance
Test,startup&transitionmanagement

WBSElementcode
1.
1.1.
1.1.1
1.1.2.
1.1.3.
1.2.
1.2.1.
1.2.2.
1.2.3.
1.2.4
1.3.
1.3.1
1.3.2.
1.3.3.
1.3.4.
1.3.5.
1.4.
1.4.1.
1.4.2.
1.4.3
1.5.
1.5.1.
1.5.2.
1.5.3.
1.5.4
1.9.
1.9.1.
1.9.2.
1.9.3.
1.9.4.
1.9.5.

Tutorial3:RiskAnalysis.
1. AmachinecostingR10000willproducenetcashsavingsofR4000peryear.Theusefullifeis5
years.Amajoroverhaulisplannedafter3yearsofoperation.TheserepairswillcostR5000.If
thecompany`sMARRis10%,wouldthisprojectbeeconomicallyviable?Analyzethesensitivity
oftheeconomicviabilityoftheprojectiftheonceofoverhaulcostchangesby20%.
4000

0135
5000
10000MARR=10%
PV(R5000)=10000+4000(P/A,10,5)5000(P/F,10,3)

=10000+4000(3.7908)5000(0.7513)

=1406.7
PV(R3000)=10000+4000(P/A,10,5)3000(P/F,10,3)

=10000+4000(3.7908)3000(0.7513)

=2909.3
PV(R7000)=10000+4000(P/A,10,5)7000(P/F,10,3)

=10000+4000(3.7908)7000(0.7513)

=95.9

PV(R6000)=10000+4000(P/A,10,5)6000(P/F,10,3)

=10000+4000(3.7908)6000(0.7513)

=655.4
Afterinterpolationbetween6000and7000x=6872.35(Maximumvalueforupgrade)
2. Itisdesiredtodeterminetheoptimalheightforaproposedbuildingthatisexpectedtolast40
years.ThenetmarketvalueafterbeingdemolishediszeroRand.Analyzethesensitivityofthe
decisionduetochangesinestimatesoftheMARRvaluebetween10%,15%and20%.Usethe
presentvaluecalculation.Ignoretaxpayable.

Numberoffloors

Capitalinvestment 200000 250000 320000 400000

Annualrevenue

40000

60000

85000

100000

Annualcost

15000

25000

25000

45000

PV=Po+A(P/A,i,40)
Numberoffloors

MARR

10%

PV 44477.50 92268.5

15%

PV 33955

17316.50 78886

20%

PV 75085

75119

266746 137850.50
34354.50

20204 125187

PV(10%)(2floors)=200000+25000(P/A,10,40)=200000+25000(9.7791)=44477.50
PV(10%)(3floors)=250000+35000(P/A,10,40)=250000+35000(9.7791)=92268.5
PV(10%)(4floors)=320000+60000(P/A,10,40)=320000+60000(9.7791)=266746
PV(10%)(5floors)=400000+55000(P/A,10,40)=400000+55000(9.7791)=137850.50
PV(15%)(2floors)=200000+25000(P/A,15,40)=200000+25000(6.6418)=33955
PV(15%)(3floors)=250000+35000(P/A,15,40)=250000+35000(6.6481)=17316.50
PV(15%)(4floors)=320000+60000(P/A,15,40)=320000+60000(6.6481)=78886
PV(15%)(5floors)=400000+55000(P/A,15,40)=400000+55000(6.6481)=34354.50
PV(20%)(2floors)=200000+25000(P/A,20,40)=200000+25000(4.9966)=75085
PV(20%)(3floors)=250000+35000(P/A,20,40)=250000+35000(4.9966)=75119
PV(20%)(4floors)=320000+60000(P/A,20,40)=320000+60000(4.9966)=20204
PV(20%)(5floors)=400000+55000(P/A,20,40)=400000+55000(4.9966)=125187


3. Abridgeistobeconstructedaspartofanewroad.Analysishasshownthattrafficdensityon
thenewroadwilljustifyatwolanebridgeatthepresenttime.Becauseofuncertaintyregarding
futureuseoftheroad,thetimeatwhichanextratwolaneswillberequirediscurrentlybeing
studied.Theestimatedprobabilitiesofhavingtowidenthebridgetofourlanesatvarioustimes
inthefutureare:
Widenbridgein Probability
3years

0.1

4years

0.2

5years

0.3

6years

0.4

ThepresentestimatedcostofthetwolanebridgeisR2000000.Ifconstructednow,thefour
lanebridgewillcostR3500000.ThefuturecostofwideningthebridgewillbeanextraR2000
000plusR250000foreveryyearthatwideningisdelayed.
a. IftherelevantMARR=12%whatshouldthedecisionbe?
4Lanebridgeifconstructednow=R3500000
2Lanebridgeifconstructednow=R2000000
2lanebridge

PV(2lane+3Y)

0.7118
[2 x10 6 2.75 x10 6
]0.1
P / F ,12,3

=395745

PV(2lane+4Y)

0.6355
[2 x10 6 3x10 6
]0.2
P / F ,12,4`

=781300

PV(2lane+5Y)

0.5674
[2 x10 6 3.25 x10 6
]0.3
P / F ,12,5

=1153215

PV(2lane+6Y)

0.5066
[2 x10 6 3.5 x10 6
]0.4
P / F ,12,6

=1509240

EPV=

3839500

b. Determinehowsensitivethechoiceofafourlanebridgebuiltnowversusafourlanebridge
constructedin2stagestotherelevantMARRvalue.
2lanebridge

PV(2lane+3Y)

=380812.5
0.6575
[2 x10 6 2.75 x10 6
]0.1
P / F ,15,3

PV(2lane+4Y)

0.5718
[2 x10 6 3x10 6
]0.2
P / F ,15,4`

=743080

PV(2lane+5Y)

0.4972
[2 x10 6 3.25 x10 6
]0.3
P / F ,15,5

=1084770

PV(2lane+6Y)

0.4323
[2 x10 6 3.5 x10 6
]0.4
P / F ,15,6

=1405220

EPV=

3613882.5

c.WillaMARR=15%changethedecision?No
d.AtwhatMARRwouldconstructingthetwolanebridgenowbepreferred?
2lanebridge

MARR=16% MARR=17%

PV(2lane+3Y) 376192.5

371710

PV(2lane+4Y) 731380

720220

PV(2lane+5Y) 1064197.5

1044697.5

PV(2lane+6Y) 1374560

1345720

EPV=

3546330 3482347.5

Afterinterpolationbetween16%and17%MARR=16.72%
4.AskiresortisconsideringbuyinganewskiliftforR900000.Expensesforoperatingand
maintenanceareestimatedatR1500perdaywhenoperating.Itisestimatedthatthereisa60%
probabilityof80daysofskiingweatherperyear,30%probabilityof100daysperyearand
probabilityof10%of120daysperyear.Theowneroftheresortestimatesthatduringthefirst
80daysofoperationanaverageof500peoplewillusetheliftperdayatafeeofR10each.If20

additionaldaysareavailable,theliftwillbeusedby400peopleperdayfortheextra20days.If
another20dayscanbeadded300peoplewillbeusingtheliftduringtheadditional20days.The
ownerwantstorecoverhisinvestmentoveraperiodof5yearsifhisMARR=25%.Isthisproject
economicallyviable?.

80
days/year

80+20days/year

80+20+20days/year

Po

900000

900000

900000

Income/year

80(500)(10)

80(500)(10)+20(400)(10) 80(500)(10)+20(400)(10)+20(300)(10)

O&M
cost/year

80(1500)

(80+20)1500

(80+20+20)1500

Probability

60%

30%

10%

MARR

25%

25%

25%

PV(80days/5years)=900000+[80(500)(10)120000](P/A,25,5)

=900000+[80(500)(10)120000](2.6893)

=146996
PV(80+20days/5years)=900000+[80(500)(10)+20(400)(10)150000](P/A,25,5)

=900000+[80(500)(10)+20(400)(10)150000](2.6893)

=12531
PV(80+20days/5years)=900000+[80(500)(10)+20(400)(10)+20(300)(10)180000](P/A,25,5)
=900000+[80(500)(10)+20(400)(10)+20(300)(10)180000](2.6893)
=68148
EPV=(146996)(0.6)+(12531)(0.3)+(68148)(0.1)
=85142.1

Tutorial6:Capitalinvestmentdecisions.

1.

Engineering projects A, B1, B2 and C are being considered with cash flows estimated over
10 years as shown in the table below. Projects B1 and B2 are mutually exclusive. Project

C depends upon B2, and Project A depends upon B1. The budget limit is R100 000. The
MARR is 12%.

A
B1
B2
C

Firstcost
25000
20000
50000
70000
Installationcost
3000
1000
10000
10000
Systemtest
2000
1000
10000
2000

Annualsales
100000
80000
120000
130000
Annual cost of 92000
74000
106000
112000
production
Salvagevalue
3000
2000
5000
7000

1.1 IdentifyALLpossiblealternatives.

1.2 DevelopthecashflowsforALLFEASIBLEalternatives.

1.3 Whichinvestmentalternativeshouldbeselected?UsethePresentValueMethod.

1.4 Verifyyourdecisionbyusingtheannualequivalentcostmethod.(Answer:Limitedbudget
A+B1UnlimitedbudgetB2+C)

1.

TotalInvestmentApproach.

AlternativeA:3000
8000

0110
30000
NPV 30000 8000 5.6502 3000 0.3220 16167 .6
P / A,12,10

P / F ,12,10

AlternativeB1:2000
6000

0110
22000
NPV

5 . 6502
0 . 3220
22000 6000
2000
12545 . 2
P / A ,12 ,10
P / F ,12 ,10

AlternativeB2:5000
14000

0110
70000
NPV

5 . 6502

0 . 3220

70000 14000
5000
10712 . 8
P / A ,12 ,10
P / F ,12 ,10

AlternativeC:70000
8000

0110
82000
NPV

0 . 3220

5 . 6502

82000 18000
21957 . 6
7000
P / F ,12 ,10
P / A ,12 ,10

A B1 B2 C Investment NPV

FV

AE

AO 0 0

0 0

A1

30000

16167.6 50214

2861

A2

22000

12545.2 38962

2220

A3

1 82000

21957.6 68197

3886

A4

1 1

52000

28712.8 89174

5081 Limited

A5

70000

10712

1896

A6

1 152000

32669.6 101456 5780 Unlimited

A7

A8

A9

A11 1 1

A12

A13 1 1

A14 1 1

A15 1

A10

33270

2.

A small company has surplus funds that it wishes to invest in new revenue producing
projects. Three independent sets of mutually exclusive projects have been developed. At
most one project from each one of the three different sets can be selected.

IftheMARR=12%nominalcompoundedannually:

Set

Project

2.1
2.2

A1
A2

B1
B2

C1
C2

R5000
R7000

R12000
R18000

R14000
R18000

NPW

INVESTMENT

A1 +1258.3

5000

A2 211

7000

Notconsidered

B1 2764

12000

Notconsidered

B2 +472

14000

C1 +6064.4

14000

C2 +4572.45 18000

Usefullifeof
project

R1500
R1600

R2000
R4000

R4000
R4500

Salvagevalue

5years
5years

6years
6years

7years
7years

R1500
R1800

R2000
R4000

R4000
R4500

Usetheannualequivalentcostconcepttodeterminewhichprojectsshouldbeselectedif
theavailablefundsareunlimited.(Answer:A1+B2+C1)
Usetheannualequivalentcostconcepttodeterminewhichprojectsshouldbeselectedif
theavailablefundsarelimitedtoR20000?(Answer:LimitedbudgetA1+C1)

NetAnnual
benefits

FirstCost

A1 B2 C1 C2 NPW

INVESTMENT

A1

+1258.3

5000

A2

+472

14000

A3

+4572.45 18000

A4

+1730.3

19000

A5

+6064.4

14000

A6

A7

+7322.7

19000limited

A8

+5044.45 36000

A9

+5830.75 23000

A10

+6536.4

A11 1

+6302.75 41000

A12

A13 1

A14 1

+7794.7

37000unlimit.

A15 1

32000

Tutorial4:Decisionbetweenalternatives.
1.a.WhichalternativeofAandBshouldberecommendediftheMARR=20%andtherequirement
isshortterm?
A:0123456

1000
1500
100002000
2500
3000
3500

B01234

2500250025002500
9000

PV(A)=100001000(P/A,20,4)500(P/G,20,4)
=100001000(2.5887)500(3.2986)
=14238
PV(B)=90002500(P/A,20,4)
=90002500(2.5887)
=15471.75
AlternativeAmosteconomical

1.b.WhichalternativeofAandBshouldberecommendediftheMARR=20%andtherequirementis
shortterm?
ThesalvagevaluedecreasesbyR1000peryear.

Salvagevalue5500

A:0123456

200020002000200020002000
10000
Salvagevalue4500
B:01234

150015001500
1500
9000

PV(A)=100002000(P/A,20,4)+7500(P/F,20,4)

=100002000(2.5887)+7500(0.4823)
=11560.15

PV(B)=90001500(P/A,20,4)+4500(P/F,20,4)
=90001500(2.5887)+4500(0.4823)
=10712.7
AlternativeBmosteconomicalone

1.c.WhichalternativeofAandBshouldberecommendediftheMARR=20%andtherequirementis
shortterm?
ThesalvagevaluedecreasesbyR1000peryear.

Salvagevalue5500
A:250025002500250025002500

0123456

10200
Salvagevalue5000

2500250025002500

B:01234

8000

PV(A)=10200+2500(P/A,20,6)+5500(P/F,20,6)
=10200+2500(3.3255)+5500(0.3349)
=10000+8313.75+1841.95
=44.3
PV(A)=10200+2500(P/A,20,4)+7500(P/F,20,4)
=10200+2500(2.5887)+7500(0.4823)
=10200+6471.75+3617.25=111

PV(B)=8000+2500(P/A,20,4)+5000(P/F,20,4)
=8000+2500(2.5887)+5000(0.4823)
=883.25
AlternativeBmosteconomicalone

1.d.WhichalternativeofAandBshouldberecommendediftheMARR=20%andtherequirement
isshortterm?
ThesalvagevaluedecreasesbyR1000peryear.

Salvagevalue5500

A:300030003000300030003000

0123456

10000

Salvagevalue5000

2500250025002500

B:01234

8000

PV(A)=10000+3000(P/A,20,6)+5500(P/F,20,6)

=10000+3000(3.3255)+5500(0.3349)
=1818.45
PV(B)=8000+2500(P/A,20,4)+5000(P/F,20,4)
=8000+2500(2.5887)+5000(0.4823)
=883
AlternativeAmosteconomicalone

AE(B)=10712.7(A/P,20,4)=10712.7(0.38629)
=4138.20
AlternativeBmosteconomicalone

Tutorial5:DepreciationandIncomeTaxes
Loans:
1.AnindividualisborrowingR100000at10%compoundedannually.Theloanistoberepaidin
equalannualpaymentsover10years.However,justafterthefifthpaymentismade,thebank
increasestheinterestrateto15%peryearcompoundedannually.Calculate:
a. Theannualpaymentsiftheinterestrateis10%.(16275)
b. Whatamountisbeingpaidasinterestwiththefifthpayment.(7088.25)
c. Whatamountisbeingpaidascapitalwiththefifthpayment(9187.23)
d. Whatisthebalanceoftheprincipalamountafterthefifthpayment.(61689.49)
e. Whatisthebalanceoftheprincipalamountafterthe6thpayment.(52539.91)
f. Whatamountisbeingpaidasinterestwiththe6thpayment.(9253.68)
g. Whatamountisbeingpaidascapitalwiththe6thpayment(9150)

100000i=10%i=15%

015610y

16275
18403.2
a. Annualpaymentsi=10%:

A = 100000(A/P,10,10) = 100000(0.16275) = 16275

b.Interestcomponentof5thpayment:
I(t=5)=A(P/A,i,nt+1)i=16275(P/A,10,6)0.10=16275(4.3553)0.10=7088.25
Alternativecalculation:
U(4)=100000(F/P,10,4)16275(F/A,10,4)
=100000(1.4641)16275(4.6410)
=70877.7
I(t=5)=U(4)i=70877.72(0.10)=7087.7

c.Capitalcomponentof5thpayment:
B(t=5)=A(P/F,i,nt+1)=16275(P/F,10,6)=16275(0.5645)=9187.23
Alternativecalculation:
B(t=5)=AI(t=5)=162757088.25=9186.75

d.Balanceofprincipalamountatt=5:
U(5)=100000(F/P,10,5)16275(F/A,10,5)=100000(1.6105)16275(6.1051)=61689.49
Alternativecalculation:
U(5)=16275(P/A,10,5)=16275(3.7908)=61695.27
e.Annualpaymenti=15%:
A(y6y10)=61689.49(A/P,15,5)=61689.49(0.29832)=18403.2
U(t=6)=61689.49(F/P,15,1)18403.2(F/A,15,1)
=61689.49(1.15)18403.2(1.0000)
=52539.91
Alternativecalculation:
U(6)=18403.2(P/A,15,4)=18403.2(2.8550)=52541.13
f.Interestcomponentof6thpayment:
I(t=6)=A(P/A,i,nt+1)i=18403.2(P/A,15,5)0.15=18403.2(3.3522)0.15=9253.68
Alternativecalculation:
I(t=6)=U(5)0.15=61689.49(0.15)=9253.42
g.Capitalcomponentof6thpayment:
B(t=6)=A(P/F,i,nt+1)=18403.2(P/F,15,5)=18403.2(0.4972)=9150

After tax cash flow calculations.

1.AlathecanbepurchasednewforR18000.Itwillhavean8yearusefullifeandazerosalvage
valueafterthe8years.Reductionsinoperatingcosts(savings)fromthemachinewillbeR8000
forthefirst4yearsandR3000forthelast4years.Depreciationwillbebythe200%Declining
BalanceMethodandusingataxlifeof5years.AusedlathecanbeboughtforR8000andwill
have a salvage of R3000 after 5 years. It will save a constant R3000 per year over the 8year
period , a market value of R3000 after 8 years , and will be depreciated by the straightline
methodoveraperiodof5years.Theeffectiveincometaxrateis40%.ThebeforetaxMARR=
15%.Shouldthecompanybuythenewlathe?Note:.(Answer:NPVnewmachine=7543NPV
usedmachine=5024)

NewMachine:
Y

BTCF

Depr.

BVbeginning

Taxable

Tax

=0.4

oftheyear

income

40%

ATCF

18000

18000

+8000

7200

18000

+800

320

+7680

+8000

4320

10800

+3680

1472

+6528

+8000

2592

6480

+5408

2163

+5837

+8000

1555

3888

+6445

2578

+5422

+3000

933

2333

+2067

826.8

+2173

+3000

1400

+3000

1200

+1800

+3000

+3000

1200

+1800

+3000

+3000

1200

+1800

MV

1400

1400

+560

+560

AfterTaxMARR=(0.15)(10.40)=0.09=9%
NPV=18000+7680(P/F,9,1)+6528(P/F,9,2)+5837(P/F,9,3)+5422(P/F,9,4)
+2173(P/F,9,5)+1800(P/A,9,3)(P/F,9,5)+560(P/F,9,8)
=18000+7680(0.9174)+6528(0.8417)
+5837(0.7722)+5422(0.7084)
+2173(0.6499)+1800(2.5313)(0.6499)
+560(0.5019)
=7543

UsedMachine:

BTCF

Depr.

BVbeginning

Taxable

Tax

oftheyear

income

40%

ATCF

8000

8000

+3000

1000

8000

+2000

800

+2200

+3000

1000

7000

+2000

800

+2200

+3000

1000

6000

+2000

800

+2200

+3000

1000

5000

+2000

800

+2200

+3000

1000

4000

+2000

800

+2200

+3000

3000

+3000

1200

+1800

+3000

+3000

1200

+1800

+3000

+3000

1200

+1800

MV

+3000

3000

+3000

AfterTaxMARR=(0.15)(10.40)=0.09=9%
NPV=8000+2200(P/A,9,5)+1800(P/A,9,3)(P/F,9,5)+3000(P/F,9,8)
=5024

5.Firstcost:R75000

Savingsperyear:R10000
Projectlife:6years
Taxlife:10years
Taxrate:40%
Residualvalue:R25000
Loan:R25000
Interestonloan:12%
Paybackperiod:2years
Marketvalueendofprojectlife:R30000
Depreciationmethod:200%decliningbalancemethod.
BeforetaxMARR=33.3333%
BycalculatingtheaftertaxNPV,determineifthisprojectiseconomicallyfeasible.

BTCF

DB

BV

It

=0.2

Taxable

Tax

income

Loan

ATCF

repay
ment

50000

50000

10000

15000

75000

3000

8000

+3200

14792.50

1592.5

10000

12000

60000

1585

3585

+1434

14792.50

3358.5

10000

9600

48000

+400

160

+9840

10000

7680

38400

+2320

928

+9072

10000

5720

30720

+4280

1712

+8288

10000

+15000

6000

+34000

Mv

30000

25000

NPV=28872.63Noteconomicallyfeasible
A=25000(A/P,12,2)=25000(0.59170)=14792.50
It(y1)=14792.50(P/A,12,2)0.12=14792.50(1.6901)0.12=3000
It(y2)=14792.5(P/A,12,1)0.12=14792.5(0.8929)0.12=1585

3.IndexEngineeringspecializeinthemanufacturingoflowvolumecomponentsforthehealthsector.
IndexEngineeringreceivedanorderforcomponentsthatwillrealizeanannualprofitofR20000per
yearforthenexttenyears.ToexecutethisorderIndexEngineeringwillhavetoprocureequipment
worthR100000.AloanworthR42252.50toberepaidintwoequalannualpayments,theinterest
payableis12%peryear,hasbeennegotiatedwiththelocalbank.TheloanofR42252.50formspartof
thetotalamountofR100000tobeinvested.Thefollowinginformationisalsoavailable:
Taxlife:8years
Depreciationmethod:Thestraightlineorthe200%decliningbalancemethodcanbeapplied
whichisthemostadvantageousforthecompanyineachyear.
Residualvalueattheendofthetaxlife:R15000
Effectivetaxrate:40%
BeforetaxMARR=33.3333%
Originalprojectlife:10years
Marketvalue:R10000fromyear5untilyear10
TheclientofIndexEngineeringisnownegotiatingtoterminatethecontractattheendofyear5.
WillthecontractbeeconomicallyviableforIndexEngineeringiftheyallowtheirclienttochangethe
contractaccordingly?

BTCF

Straight

BV

linedepr.

200%

It

DB

Taxable

Tax

income

Loan

ATCF

repay

=0.25

ment

57747.5

100000

20000

10625

75000

25000

5070.3

10070.3

+4028.12

25000 971.88

20000

8571.42

56250

18750

2678.7

1428.7

+571.48

25000 4428.5

20000

6875

42188

14062

5938

2375.2

17624.8

20000

5437.6

31641

10547

9453

3781

16219

20000

4160.25

23731

7910

12090

4836

15164

Mv

10000

23731

13731

+5492.4

15492.4

A=42252.50(A/P,12,2)=42252.50(0.5917)=25000

57747.5

I(t1)=25000(P/A,12,2)0.12=5070.3
I(t2)=25000(P/A,12,1)0.12=2678.7
AftertaxMARR=33.3333(10.4)=20%

NPV=57747.5971.88(P/F,20,1)
4428.52(P/F,20,2)
17624.8(P/F,20,3)
+16219(P/F,20,4)
+15164(P/F,20,5)+15492.4(P/F,20,5)
=31291.46
Noteconomicallyfeasible