Chapter 9: Other Analysis Techniques

9-1
$200
$100

i = 10%

$100
F

= $100 (F/P, 12%, 5) + $200 (F/P, 12%, 4) - $100 (F/P, 12%, 1)

= $100 (1.762) + $200 (1.574) - $100 (1.120)
= 379.00

9-2
$100

$100

$100

$100

$100

= $100 (F/P, 10%, 5) + $100 (F/P, 10%, 3) + $100 (F/P, 10%, 1)

- $100 (F/P, 10%, 4) - $100 (F/P, 10%, 2)
= $100(1.611 + 1.331 + 1.100 1.464 1.210)
= $136.80

9-3

$100

$300
$250
$200
$150

F
P

P = $100 (P/A, 12%, 5) + $50 (P/G, 12%, 5)

= $100 (3.605) + $50 (6.397)
= $680.35
F

= $680.35 (F/P, 12%, 5)

= $680.35 (1.762)
= $1,198.78

Alternate Solution
F

= [$100 + $50 (A/G, 12%, 5)] (F/A, 12%, 5)

= [$100 + $50 (1.775)] (6.353)
= 1,199.13

9-4
4x

3x

2x

i = 15%
F

= [4x x(A/G, 15%, 4)] (F/A, 15%, 4)

= [4x x(1.326)] (4.993)
= 13.35x

Alternate Solution
F

= 4x (F/P, 15%, 3) + 3x (F/P, 15%, 2) + 2x (F/P, 15%, 1) + x

= 4x (1.521) + 3x (1.323) + 2x (1.150) + x
= 13.35x

9-5

$5

$10

$15

$20

A = $30

$25

i = 12%
F
P

= $5 (P/G, 10%, 6) (F/P, 10%, 12) + $30 (F/A, 10%, 6)

= $5 (6.684) (3.138) + $30 (7.716)
= 383.42

9-6
Psystem 1
Psystem 2
PTotal
FTotal

= A (P/A, 12%, 10)

= $15,000 (5.650) = $84,750
= G (P/G, 12%, 10) = $1,200 (20.254) = $24,305
= $84,750 + $24,305 = $109,055
= PTotal (F/P, 12%, 10)= $109,055 (3.106) = $338,725

9-7
ia

= (1 + r/m)m 1
= (1 + 0.10/48)48 1
= 0.17320

= P (1 + ia)5

= $50,000 (1 + 0.17320)5

9-8
G = $100
$100

21

P20

..
55

P65

= $111,130

P20 = $100 (P/A, 12%, 35) + $100 (P/G, 12%, 35)

= $100 (8.176) + $100 (62.605)
= $7,078.10
P65 = P20 (F/P, 12%, 45) = $7,078.10 (163.988)

= $1,160,700

9-9
$30,000

A = $600

n = 15
F

= $30,000 (F/P, 10%, 15) + $600 (F/A, 10%, 15)

= $30,000 (4.177) + $600 (31.772)
= $144,373

9-10
G = $60
$3,200
...
n = 30
F

= $3,200 (F/A, 7%, 30) + $60 (P/G, 7%, 30) (F/P, 7%, 30)
= $3,200 (94.461) + $60 (120.972) (7.612)
= $357,526

9-11
F

= $100 (F/A, %, 24) (F/P, %, 60)

= $100 (25.432) (1.349)
= $3,430.78

9-12
$550
g = +$50

$100

i = 18%

P = $100 (P/A, 18%, 10) + $50 (P/G, 18%, 10)

= $100 (4.494) + $50 (14.352)
= 1,167.00
F

= $1,167 (F/P, 18%, 10)

= $1,167 (5.234)
= 6,108.08

9-13
F

= 100 (1 + 0.10)800

= 1.3 x 1035

9-14
$150

$100

i = %
F

= $150 (F/A, %, 4) (F/P, %, 14) + $100 (F/A, %, 14)

= $150 (4.030) (1.072) + $100 (14.464)
= 2,094.42

9-15
Using single payment compound amount factors
F

= $1,000 [(F/P, 4%, 12) + (F/P, 4%, 10) + (F/P, 4%, 8) + (F/P, 4%, 6)
+ (F/P, 4%, 4) + (F/P, 4%, 2)]
= $1,000 [1.601 + 1.480 + 1.369 + 1.265 + 1.170 + 1.082]
= $7,967

Alternate Solution

$1,000

$1,000

A = $1,000 (A/P, 4%, 2) = $1,000 (0.5302)

= $530.20
F = $530.20 (F/A, 4%, 12)
= $530.20 (15.026) = $7,966.80

9-16
A = $20,000
Retirement
x

.
.

$48,500

A = $5,000
Adding to fund

21 - x

21 years
Age 55

x = years to continue working

age to retire = 55 + x

Age 76

Amount at Retirement
= PW of needed retirement funds
$48,500 (F/P, 12%, x) + $5,000 (F/A, 12%, x)
= $20,000 (P/A, 12%, 21- x)
Try x = 10
$48,500 (3.106) + $5,000 (17.549)
$20,000 (5.938)

= $238,386
= $118,760

so x can be < 10

Try x = 5
$48,500 (1.762) + $5,000 (6.353)= $117,222
$20,000 (6.974)
= $139,480

so x > 5

Try x = 6
$48,500 (1.974) + $5,000 (8.115)= $136.314
$20,000 (6.811)
= $136,220
Therefore, x = 6. The youngest age to retire is 55 + 6 = 61.

9-17
Geometric Gradient:
n = 10

g = 100%

A1 = $100

i = 10%

P = A1 [(1 (1+g)n (1 + i)-n)/(i g)]

= $100 [(1 (1 + 1.0)10 (1 + 0.10)-10)/(0.10 1.0)]
= $100 [(1 (1,024) (0.3855))/(-0.90)]
= $43,755
Future Worth

= $43,755 (F/P, 10%, 10)

= $43,755 (2.594)

= $113,500

9-18
i
n

= 0.0865/12
= 24

= 0.007208

= P (1 + i)n

= $2,500 (1 + 0.007208)24

= $2,970.30

9-19
F56 = $25,000 (F/P, 6%, 35) + $1,000 (F/A, 6%, 35)
+ $200 (P/G, 6%, 35) (F/P, 6%, 35) *
= $25,000 (8.147) + $1,000 (111.432) + $200 (165.743) (7.686)
= $569.890
* The factor we want is (F/A, 6%, 35) but it is not tabulated in the back of the book. Instead
we can substitute: (P/G, 6%, 35) (F/P, 6%, 35)

9-20
Assuming no disruption, the expected end-of-year deposits are:
A1
= $1,000,000 (A/F, 7%, 10)
= $1,000,000 (0.0724)
= $72,400
Compute the future worth of $72,400 per year at the end of 7 years:
F7
= $72,400 (F/A, 7%, 7)
= $626,550
Compute the future worth of $626,550 in 3 years i.e. at the end of year 10:
F10
= $626,550 (F/P, 7%, 3)
= $767,524
Remaining two deposits = ($1,000,000 - $767,524) (A/F, 7%, 2)
= $112,309

9-21
F

= $2,000 (F/A, 10%, 41)

= $2,000 (487.852)

= $975,704

Alternative solutions using interest table values:

F

= $2,000 (F/A, 10%, 40) + $2,000 (F/P, 10%, 40)

= $2,000 (45.259 + 442.593)
= $975,704

9-22
FW (Costs) = $150,000 (F/P, 10%, 10) + $1,500 (F/A, 10%, 10)
+ $500 (P/G, 10%, 7) (F/P, 10%, 7) (0.05) ($150,000)
= $150,000 (2.594) + $1,500 (15.937) + $500 (12.763) (1.949)
- $7,500
= $417,940

9-23
Given:

n
i

P
= $325,000
A1-120 = $1,200
A84-120 = $2,000 - $1,200 = $800
F60
= $55,000 overhaul
= 12 (10)
= 120 months
= 7.2/12
= 0.60% per month

Find: F120 = ?

FP
FA1- 120
FA84-120
F60

= (F/P, 0.60%, 120) ($325,000)

= (1 + 0.0060)120 ($325,000)
= $666,250
= (F/A, 0.60%, 120) ($1,200)
= [((1 + 0.006)120 1)/0.006] ($1,200)
= $210,000
= (F/A, 0.60%, 36) ($800)
= [((1 + 0.006)36 1)/0.006] ($800)
= $32,040
= (F/P, 0.60%, 60) ($55,000)
= (1 + 0.006)60 ($55,000)
= $78,750

F120 = $666,250 + $210,000 + $32,040 + $78,750

= $987,040

9-24
Find F.
F = $150 (F/A, 9%, 10) + $150 (P/G, 9%, 10) (F/P, 9%, 10)
= $10,933
Alternate Solution
Remembering that G must equal zero at the end of period 1, adjust the time scale where
equation time zero = problem time 1. Then:
F
= $150 (F/G, 9%, 11) = $150 (P/G, 9%, 11) (F/P, 9%, 11)
= $150 (28.248) (2.580)
= $10,932

9-25
isemiannual

= (1 + 0.192/12)6 1 = 0.10 = 10%

F1/1/12
= FA + FG
From the compound interest tables (i = 10%, n = 31):
FA = $5,000 (F/A, 10%, 31)
= $5,000 (181.944)
FG = -$150 (P/G, 10%, 31) (F/P, 10%, 31)
= -$150 (78.640) (19.194)
= -$226,412
F1/1/12
F7/1/14

= $909,720 - $226,412
= $683,308 (F/P, 10%, 5)

= $909,720

= $683,308
= $683,308 (1.611)

= $1,100,809

9-26
The monthly deposits to the savings account do not match the twice a month compounding
period. To use the standard formulas we must either

(1) compute an equivalent twice a month savings account deposit, or

(2) compute an equivalent monthly interest rate.
Method (1)
A

A
n=2
i = 0.045/24 = 0.001875

$75

Equivalent twice a month deposit (A)

= $75 (A/F, i%, n)

= $75 [0.001875/((1 + 0.001875)2 1)]
= $37.4649

Future Sum F1/1/15 = A (F/A, i%, 18 x 24)

= $37.4649 [((1 + 0.001875)432 1)/0.001875]
= $24,901
Method 2
Effective i per month (imonth) = (1 + 0.045/24)2 1

= 0.0037535

Future Sum F1/1/15 = A (F/A, imonth, 18 x 12)

= $75 [((1 + 0.0037535)216 1)/0.0037535]
= $24,901

9-27
Bobs Plan
A = $1,500
..
i = 3.5%
n = 41
F7/1/2018

= $1,500 (F/A, 3.5%, 41)

= $1,500 (86.437)

= $129,650

Joes Plan
$40,000

i = 3.5%
n = 31
F7/1/2018

= $40,000 (F/P, 3.5%, 31)

= $40,000 (2.905)

= $116,200

Joes deposit will be insufficient. He should deposit:

$132,764 (P/F, 3.5%, 31) = $132,764 (0.3442) = $45,701
9-28
Fearless Bus

$200

$400

$600

$800

dividends

100 shares/yr
$65,000/yr salary

P = $65,000 (P/A, 9%, 5) + $200 (P/G, 9%, 5) + 500 shares of stock

= $65,000 (3.890) + $200 (7.111) + 500 shares of stock
= $254,272 + 500 shares of stock
F

= $257,272 (F/P, 9%, 5) + $500 shares ($60/share)

= $257,272 (1.539) + $30,000
= $421,325

Generous Electric
F

= $62,000 (F/A, 9%, 5) + 600 shares of stock

= $62,000 (5.985) + 600 shares of stock
= $371,070 + 600 shares of stock

Set FFearless = FGE

600 shares of GE stock + $371,070

= $421,325

Required Value of GE stock

= ($421,325 - $371,070)/600
= $50,255/600
= $83.76/share

9-29

A1

P = $50,000

Geometric gradient at a 10% uniform rate.

A1 = $10,000

i = 10%

g = 1-%

n = 8 yrs

Where i = g:
P = A1n (1 + i)-1
B/C
= PW of Benefits/PW of Cost
= [$10,000 (8) (1 + 0.10)-1]/$50,000
= 1.45
9-30
Cost
Uniform Annual
Benefit
B/COF A
B/COF B
B/COF C

A
$600
$158.3

B
$500
$138.7

C
$200
$58.3

= $158.3/[$600 (A/P, 10%, 5)]

= 1.00
= $138.7/[$500 (A/P, 10%, 5)]
= 1.05
= $58.3/[$200 (A/P, 10%, 5)] = 1.11

All alternatives have a B/C ratio > 1.00. Proceed with incremental analysis.
Cost
Uniform Annual
Benefit

B- C
$300
$8034

A- B
$100
$19.6

B/COF B-C = $80.4/[$300 (A/P, 10%, 5)] = 1.02

Desirable increment. Reject C.
B/COF A-B = $19.6/[$100 (A/P, 10%, 5)] = 0.74
Undesirable increment. Reject A.
Conclusion: Select B.
9-31
B/CA
B/CB
B/CC

= ($142 (P/A, 10%, 10))/$800= 1.09

= ($60 (P/A, 10%, 10))/$300 = 1.23
= ($33.5 (P/A, 10%, 10))/$150
= 1.37

Incremental Analysis
B- C Increment
B- C
Cost $150
UAB $26.5
B/C

= ($26.5 (P/A, 10%, 10))/$150

= 1.09

This is a desirable increment. Reject C.

A- B Increment
A- B
Cost $500
UAB $82
B/C
= ($82 (P/A, 10%, 10))/$500 = 1.01
This is a desirable increment. Reject B.
Conclusion: Select A.
9-32
Cost (including land)
Annual Income (A)
Salvage Value (F)

2 Stories
$500,000
$70,000
$200,000

5 Stories
$900,000
$105,000
$300,000

10 Stories
$2,200,000
$256,000
$400,000

B/C Ratio Analysis

Cost
- PW of Salvage Value = F(P/F,
8%, 20) = 0.2145F
PW of Cost
PW of Benefit = A (P/A, 8%, 20)

$500,000
$42,900

$900,000
$64,350

$2,200,000
$85,800

$457,100
$687,260

$835,650
$1,030,890

$2,114,200
$2,513,410

= 9.818A
B/C Ratio = PW of Benefit/PW of
Cost
Incremental B/C Ratio Analysis

PW of Cost
PW of Benefit
B/C = PW of
Benefits/PW of Costs
Decision

1.50

1.23

5 Stories Rather than 2

Stories
$835,650 - $457,100
= $378,550
$1,030,890 - $687,260
= $343,630
$343,630/$378,550
= 0.91
<1 Undesirable increment.
Reject 5 stories.

1.19

10 Stories Rather than 2

Stories
$2,114,200 - $457,100
= $1,657,100
$2,513,410 - $687,260
= $1,826,150
$1,826,150/$1,657,100
= 1.10
> 1 Desirable increment.

With B/C = 0.91, the increment of 5 stories rather than 2 stories is undesirable. The 10
stories rather than 2 stories is desirable.
Conclusion: Choose the 10-story alternative.

9-33
Note that the three alternatives have been rearranged below in order of increasing cost.
C
$120
$40
$0
1.45

First Cost
Uniform Annual Benefit
Salvage Value
Compute B/C Ratio

B
$340
$100
$0
1.28

A
$560
$140
$40
1.13

Incremental Analysis
First Cost
Uniform Annual
Benefit
Salvage Value
Compute B/C
value

B- C
$220
$60

A- B
$220
$40

$0
1.19

$40
0.88

Benefit- Cost Ratio Computations:

Alternative A:

B/C

= [$140 (P/A, 10%, 6)]/[$560 - $40 (P/F, 10%, 6)]

= [$140 (4.355)]/($560 - $40 (0.5645)]
= 1.13

Alternative B:

B/C

= [$100 (P/A, 10%, 6)]/$340

= 1.28

Alternative C: B/C = [$40 (P/A, 10%, 6)]/$120

= 1.45
Incremental Analysis:
B- C

B/C = [$60 (P/A, 10%, 6)]/$220

= 1.19

B- C is a desirable increment.
A- B

B/C = [$40 (P/A, 10%, 6)/[$220 - $40 (P/F, 10%, 6)]

= 0.88

A- B is an undesirable increment.
Conclusion: Choose B.
The solution may be checked by Net Present Worth or Rate of Return
NPW Solution
NPWA

= $140 (P/A, 10%, 6) + $40 (P/F, 10%, 6) - $560

= $140 (4.355) + $40 (0.5645) - $560
= +$72.28

NPWB

= $100 (P/A, 10%, 6) - $340

= +$95.50

NPWC

= $40 (P/A, 10%, 6) - $120

= +$54.20

Select B.
Rate of Return Solution
Cost
Uniform Annual
Benefit
Salvage Value
Computed ROR
Decision

B- C
$220
$60

A- B
$220
$40

$0
16.2%
> 10%
Accept B. Reject C.

$40
6.6%
< 10%
Reject A.

Select B.

9-34
This is an above-average difficulty problem. An incremental Uniform Annual Benefit
becomes a cost rather than a benefit.
Compute B/C for each alternative

Form of computation used:

(PW of B)/(PW of C)

= (UAB (P/A, 8%, 8))/(Cost S (P/F, 8%, 8))

= (UAB (5.747))/(Cost S (0.5403))
= ($12.2 (5.747))/($100 - $75 (0.5403))
= 1.18
= ($12 (5.747))/($80 - $50 (0.5403)) = 1.30
= ($9.7 (5.747))/($60 - $50 (0.5403)) = 1.69
= ($12.2 (5.747))/$50
= 1.40

B/CA
B/CB
B/Cc
B/Cd

All alternatives have B/C > 1. Proceed with analysis.

Incremental Analysis
C- D Increment
C- D
$10
-$2.5

Cost
Uniform Annual
Benefit
Salvage Value

$50

The apparent confusion may be cleared up by a detailed examination of the cash flows:
Year
0
1- 7
8

Cash Flow C
-$60
+$9.7
+$9.7
+$50

Cash Flow D
-$50
+$12.2
+$12.2

B/C ratio

Cash Flow C- D
-$10
-$2.5
+$47.5

= ($47.5 (P/F, 8%, 8)/($10 + $2.5 (P/A, 8%, 7))

= ($47.5 (0.5403)/($10 + $2.5 (5.206)
= 1.11
The C- D increment is desirable. Reject D.
B- C Increment
Cost
Uniform
Annual Benefit
Salvage Value
B/C ratio

B- C
$20.0
$2.3
$0

= ($2.3 (0.5403)/$20
= 0.66

Reject B.
A- C Increment
Cost
Uniform Annual

A- C
$40.0
$2.5

Benefit
Salvage Value
B/C ratio

$25.0

= ($2.5 (0.5403)/($40 - $25 (0.5403))

= 0.54

Reject A.
Conclusion: Select C.

9-35
Cost
UAB
PW of Benefits =
UAB (P/A, 15%, 5)
B/C Ratio
Cost
UAB
PW of Benefits
B/C
Decision

A
$100
$37
$124

B
$200
$69
$231.3

C
$300
$83
$278.2

D
$400
$126
$422.4

E
$500
$150
$502.8

1.24

1.16

0.93

1.06

1.01

B- A
$100
$32
$107.3
1.07
Reject A.

D- B
$200
$57
$191.1
0.96
Reject D.

E- B
$300
$81
$271.5
0.91
Reject E.

Conclusion: Select B.
9-36
By inspection one can see that A, with its smaller cost and identical benefits, is preferred to
F in all situations, hence F may be immediately rejected. Similarly, D, with greater benefits
and identical cost, is preferred over B. Hence B may be rejected. Based on the B/C ratio
for the remaining four alternatives, three exceed 1.0 and only C is less than 1.0. On this
basis C may be rejected. That leaves A, D, and E for incremental B/C analysis.

Cost
Benefits
PW of Benefits
B/C
Decision
Therefore, do A.

E- D
$25
$10
$10 (P/A, 15%, 5)
= $10 (3.352)
$10 (3.352)/$25 = 1.34
Reject D.

A- E
$50
$16
$16 (P/A, 15%, 5)
= $16 (3.352)
$16 (3.352)/$50 = 1.07
Reject E.

9-37
Investment= $67,000
Annual Benefit
= $26,000/yr for 2 years
Payback period

= $67,000/$26,000q= 2.6 years

Do not buy because total benefits (2) ($26,000) < Cost.

9-38
Payback Period

= Cost/Annual Benefit = $3,800/(4*$400)

= 2.4 years

A = $400

n = 60 months
$3,800

Pattern of monthly
payments repeats for
2 more years

$3,800= $400 (P/A, i%, 4) + $400 (P/A, i%, 4) (P/F, i%, 12)
+ $400 (P/A, i%, 4) (P/F, i%, 24) + $400 (P/A, i%, 4) (P/F, i%, 36)
+ $400 (P/A, i%, 4) (P/F, i%, 48)
$3,800= $400 (P/A, i%, 4) [1 + (P/F, i%, 12) + (P/F, i%, 24) + (P/F, i%, 36)
+ (P/F, i%, 48)]
Try i = 3%
P(3%)

= $400 (3.717) [1 + 0.7014 + 0.4919 + 0.3450 + 0.2420]

= $1,486.80 [2.7803]
= $4,134
i too low

Try i = 4%
P(4%)

= $400 (3.630) [1 + 0.6246 + 0.3901 + 0.2437 + 0.1522]

= $1,452 [2.4106]
= $3,500
i too high

Try i = 3.5%
P(3.5%)

= $400 (3.673) [1 + 0.6618 + 0.4380 + 0.2898 + 0.1918]

= $1,469.20 [2.5814]
= $3,798

So i 3.5% per month

Nominal Rate of Return

= 12 (3.5%)

= 42%

9-39
Costs = Benefits at end of year 8
Therefore, payback period = 8 years.

9-40
Lease:

A = $5,000/yr

Purchase:
S = $500

$7,000

A = $3,500

(a) Payback Period

Cost
= $7,000
Benefit = $1,500/yr + $500 at any time
Payback
= ($7,000 - $500)/$1,500

= 4.3 years

(b) Benefit- Cost Ratio

B/C
= EUAB/EUAC
= [$1,500 + $500 (A/F, 10%, 6)]/[$7,000 (A/P, 10%, 6)]
= [$1,500 + $500 (0.1296)]/[$7,000 (0.2296)]
= 0.97
9-41
(a) Payback Periods
Period
-2
-1
0
1
2
3
4
5
6
7

Alternative A
Cash Flow
-$30
-$100
-$70
$40
$40
$40
$40
$40
$40
$40

Sum CF
-$30
-$130
-$200
-$160
-$120
-$80
-$40
$0
$40
$80

Alternative B
Cash Flow
-$30
-$100
-$70
$32.5
$32.5
$32.5
$32.5
$32.5
$32.5
$32.5

Sum CF
-$30
-$130
-$200
-$167.5
-$135
-$102.5
-$70
-$37.5
-$5
$27.5

PaybackA = 5.0 years

PaybackB = 7 years (based on end of year cash flows)
(b) Equivalent Investment Cost
= $30 (F/P, 10%, 2) + $100 (F/P, 10%, 1) + $70
= $30 (1.210) + $100 (1.100) + $70
= $216.3 million
(c) Equivalent Uniform Annual Worth = EUAB EUAC
EUAWA
= $40 - $216.3 (A/P, 10%, 10)
= $4.81 million
EUAWB
= $32.5 - $216.3 (A/P, 10%, 20)
= $7.08 million
Since the EUAW for the Alternative B is higher, this alternative should be selected.
Alternative A may be considered if the investor is very short of cash and the short
payback period is of importance to him.

9-42
(a)
Cost
UAB

Increment B- A
$300
$50

Incremental Payback = Cost/UAB

(b) B/C = [$50 (P/A, 12%, 8)]/$300

= $300/$50

= 6 years

= 0.83

Reject B and select A.

9-43

Year

Conventional

Solar

0
1- 4
4
5- 8
8
9- 12
12

-$200
-$230/yr

-$1,400
-$60/yr
-$180
-$60/yr
-$180
-$60/yr
- $180

-$230/yr
-$230/yr

|-----------------Part (a) ----------------------|

Solar
Net Investment
Conventional
-$1,200
-$1,200
+$170/yr
-$520
-$180
-$700
+$170/yr
-$20
-$180
-$200
+$170/yr
+$480 Payback
-$180
+$300

(a)

Payback = 8 yrs + $200/$170

= 9.18 yrs

(b)

The key to solving this part of the problem is selecting a suitable analysis method.
The Present Worth method requires common analysis period, which is virtually

impossible for this problem. The problem is easy to solve by Annual Cash Flow
Analysis.
EUACconventional- 20 yrs = $200 (A/P, 10%, 20) + $230
EUACsolar- n yrs
= $1,400 (A/P, 10%, n) + $60
For equal EUAC:
(A/P, 10%, n)
= [$253.50 - $60]/$1,400

= $253.50

= 0.1382

From the interest tables, n = 13.5 years.

9-44
(a) Net Future Worth
NFWA
NFWB
NFWC
NFWD

= $18.8 (F/A, 10%, 5) - $75 (F/P, 10%, 5)

= $13.9 (F/A, 10%, 5) - $50 (F/P, 10%, 5)
= $4.5 (F/A, 10%, 5) - $15 (F/P, 10%, 5)
= $23.8 (F/A, 10%, 5) - $90 (F/P, 10%, 5)

= -$6.06
= +$4.31
= +$3.31
= +$0.31

Select B.
(b) Incremental Analysis
Cost
UAB
Computed Uniform Annual Cost
(UAC)
B/C Ratio
Decision
B- C
$9.40
$9.23
1.02
Reject C.

UAB
UAC
B/C
Decision

(c) Payback Period

= $75/$18.8
= $50/$13.9
= $15/$4.5
= $90/$23.8

= 4.0
= 3.6
= 3.3
= 3.8

To minimize Payback, select C.

B
$50.0
$13.9
$13.19

A
$75.0
$18.8
$19.78

1.14
Ok

1.05
Ok

0.95
Reject

D- B
$9.90
$10.55
0.94
Reject D.

Conclusion: Select B.

Payback A
PaybackB
PaybackC
PaybackD

C
$15.0
$4.5
$3.96

D
$90.0
$23.8
$23
74
1.00
Ok

9-45
Cost
Annual Benefit
Useful Life
(a)

A
$50
$28.8
2 yr

B
$150
$39.6
6 yr

C
$110
$39.6
4 yr

Solve by Future Worth analysis. In future worth analysis there must be a common
future time for all calculations. In this case 12 years hence is a practical future time.
Alternative A
A = $28.8

$50

$50

$50

$50

$50

$50

FW

NFWA = $28.8 (F/A, 12%, 12) - $50 (A/P, 12%, 2) (P/A, 12%, 12)
= $28.8 (24.133) - $50 (0.5917) (24.133)
= -$18.94
Alternative B
A = $39.6

$150

$150

FW

NFWB = $39.6 (F/A, 12%, 12) - $150 (F/P, 12%, 6) - $150 (F/P, 12%, 12)
= $39.6 (24.133) - $150 [1.974 + 3.896]
= +$75.17
Alternative C

A = $39.6

$110

$110

$110

FW

NFWC = $39.6 (F/A, 12%, 12) - $110 (F/P, 12%, 4) - $110 (F/P, 12%, 8)
$110 (F/P, 12%, 12)
= $39.6 (24.133) - $110 [1.574 + 2.476 + 3.896]
= +$81.61
Choose Alternative C because it maximizes Future Worth.
(b) Solve by Benefit-Cost ratio analysis
With neither input nor output fixed, incremental analysis is required.
Alternative C- Alternative A
Year
0
1
2

Alt. C
-$110
+$39.6
+$39.6

3
4

+$39.6
+$39.6

Alt. A
-$50
+$28.8
+$28.8
-$50
+$28.8
+$28.8

C- A
-$60
+$10.8
+$60.8
+$10.8
+$10.8

Four years is a suitable analysis period for Alternatives C and A.

For the increment C- A:
PW of Cost = $60
PW of Benefits
= $10.8 (P/A, 12%, 4) + $50 (P/F, 12%, 2)
= $10.8 (3.037) + $50 (0.7972)
= $72.66
B/C

= PW of Benefits/PW of Cost

= $72.66/$60 > 1

The increment of investment is acceptable and therefore Alternative C is preferred over

Alternative A.
Increment B- C
Year
0
1- 4
4
5-6

Alt. B
-$150
+$39.6
$0
+$39.6

Alt. C
-$110
+$39.6
-$110
+$39.6

B- C
-$40
$0
+$110
$0

6
7- 8
8
9- 12

-$150
+$39.6
$0
+$39.6

$0
+$39.6
-$110
+$39.6

-$150
$0
+$110
$0

Twelve years is a suitable analysis period for Alternatives B and C.

For the increment B- C
Ignoring the potential difficulties signaled by 3 sign changes in the B- C cash flow:
PW of Cost

= $40 + $150 (P/F, 12%, 6)

= $40 + $150 (0.5066)
= $115.99

PW of Benefits

B/C

= $110 (P/F, 12%, 4) + $110 (P/F, 12%, 8)

= $110 (0.6355) + $110 (0.4039)
= $114.33

= PW of Benefits/PW of Cost = $114.33/$115.99 < 1

The increment is undesirable and therefore Alternative C is preferred over Alternative B.

Alternative Analysis of the Increment B- C
An examination of the B- C cash flow suggests there is an external investment of money
at the end of Year 4. Using an external interest rate (say 12%) the +$110 at Year 4
becomes:
+$110 (F/P, 12%, 2) = $110 (1.254) = $137.94 at the end of Yr. 6.
The altered cash flow becomes:
Year
0
1- 6
6
7-8
8

B- C
-$40
$0
-$150 +$137.94 = -$12.06
$0
+$110

For the altered B- C cash flow:

PW of Cost

= $40 + $12.06 (P/F, 12%, 6)

= $40 + $12.06 (0.5066)
= $46.11

PW of Benefits

= $110 (P/F, 12%, 8)

= $110 (0.4039)
= $44.43

B/C = PW of Benefits/PW of Cost = $44.43/$46.11 < 1

The increment is undesirable and therefore Alternative C is preferred to Alternative B.

Solutions for part (b): Choose Alternative C.

(c)

Payback Period
Alternative A: Payback
Alternative B: Payback
Alternative C: Payback

= $50/$28.8 = 1.74 yr
= $150/$39.6 = 3.79 yr
= $150/$39.6 = 2.78 yr

To minimize the Payback Period, choose Alternative A.

(d)

Payback period is the time required to recover the investment. Here we have
three alternatives that have rates of return varying from 10% to 16.4%. Thus
each generates uniform annual benefits in excess of the cost, during the life of
the alternative. From this is must follow that the alternative with a 2-year life has
a payback period less than 2 years. The alternative with a 4-year life has a
payback period less than 4 years, and the alternative with a 6-year life has a
payback period less than 6 years.
Thus we see that the shorter-lived asset automatically has an advantage over
longer-lived alternatives in a situation like this. While Alternative A takes the
shortest amount of time to recover its investment, Alternative C is best for longterm economic efficiency.

9-46
(a) B/C of Alt. x

= [$25 (P/A, 10%, 4)]/$100

(b) Payback Period

x
= $100/$25
y
= $50/$16
z
= $50/$21

= 0.79

= 4 yrs
= 3.1 yrs
= 2.4 yrs

To minimize payback, select z.

(c) No computations are needed. The problem may be solved by inspection.
Alternative x has a 0% rate of return (Total benefits = cost).
Alternative z dominates Alternative y. (Both cost $50, but Alternative z yields more
benefits).
Alternative z has a positive rate of return (actually 24.5%) and is obviously the best of
the three mutually exclusive alternatives.
Choose Alternative z.
9-47
(a) Payback Period
Payback A
= 4 + $150/$350
PaybackB
= Year 4
PaybackC
= 5 + $100/$200

= Year 4.4
Year 5.5

For shortest payback, choose Alternative B.

(b) Net Future Worth
NFWA = $200 (F/A, 12%, 5) + [$50 (P/F, 12%, 5) - $400] (F/P, 12%, 5)
- $500 (F/P, 12%, 6)
= $200 (6.353) + [$50 (6.397) - $400] (1.762) - $500 (1.974)
= +$142.38
NFWB = $350 (F/A, 12%, 5) + [-$50 (P/G, 12%, 5) - $300] (F/P, 12%, 5)
- $600 (F/P, 12%, 6)
= $350 (6.353) + [-$50 (6.397) - $300] (1.762) - $600 (1.974)
= -$53.03
NFWC = $200 (F/A, 12%, 5) - $900 (F/P, 12%, 6)
= $200 (6.353) - $900 (1.974)
= -$506.00
To maximize NFW, choose Alternative A.

9-48
(a) PaybackA
PaybackB
PaybackC

= 4 years
= 2.6 years
= 2 years

To minimize payback, choose C.

(b) B/C Ratios
B/CA = ($100 (P/A, 10%, 6) + $100 (P/F, 10%, 1)/$500
= 1.05
B/CB = ($125 (P/A, 10%, 5) + $75 (P/F, 10%, 1)/$400
= 1.36
B/CC = ($100 (P/A, 10%, 4) + $100 (P/F, 10%, 1)/$300
= 1.36
Incremental Analysis
B- C Increment
Year
0
1
2
3
4
5

B- C
-$100
$0
+$25
+$25
+$25
+$125

B/CB-C = ($25 (P/A, 10%, 3)(P/F, 10%, 1) + $125 (P/F, 10%, 5))/$100
= 1.34

This is a desirable increment. Reject C.

A- B Increment
Year A- B
0
-$100
1
$0
2
-$25
3
-$25
4
-$25
5
+$100
By inspection we see that B/C < 1
B/CA-B = ($100 (P/F, 10%, 6))/($100 + $25 (P/A, 10%, 4) (P/F, 10%, 1))
= 0.33
Reject A. Conclusion: Select B.

9-49
(a) Future Worth Analysis at 6%
NFWE = $20 (F/A, 6%, 6) - $90 (F/P, 6%, 6)
= +$11.79
NFWF = $35 (F/A, 6%, 4) (F/P, 6%, 2) - $110 (F/P, 6%, 6) = +$16.02*
NFWG = [$10 (P/G, 6%, 6) - $100] (F/P, 6%, 6)
= +$20.70
NFWH = $180 - $120 (F/P, 6%, 6)
= +$9.72
To maximize NFW, select G.
(b) Future Worth Analysis at 15%
NFWE = $20 (F/A, 15%, 6) - $90 (F/P, 15%, 6)
NFWF = [$35 (P/A, 15%, 4) - $110] (F/P, 15%, 6)
NFWG = [$10 (P/G, 15%, 6) - $100] (F/P, 15%, 6)
NFWH = $180 - $120 (F/P, 15%, 6)

= -$33.09
= -$23.30*
= -$47.72
= -$97.56

* Note: Two different equations that might be used.

To maximize NFW, select F.
(c) Payback Period
PaybackE
= $90/$20
PaybackF
= $110/$35
PaybackG
= 5 yr.
PaybackH
= 6 yr.

= 4.5 yr.
= 3.1 yr

To minimize payback period, select F.

(d) B/CG

= PW of Benefits/PW of Cost = [$10 (P/G, 7%, 6)]/$100

= 1.10

9-50
EUACAMERICAN =($8,900 - $1,700) (A/P, 8%, 3)+$1,700 (0.08)+12,000(0.09)
= $4,010
EUACFIASCO =($8,000 x) (A/P, 8%, 3) + x (0.08) + 12,000 (0.08)
= $3,104 0.3880x + 0.08x + $960
Set EUACAMERICAN = EUACFIASCO
$4,010

= $4,064 0.308X

Minimum Fiasco Resale Value x = $54/0.308

9-51

= $175

A = $12

n=?
P = $45

$45

= $12 (P/A, i%, n)

(P/A, i%, n)

= $45/$12

n
4
5
6
7
8

= 3.75

i%
2.6%
10.4%
15.3%
18.6%
20.8%
A/P = $12/$45 = 26.7%

(b) For a 12% rate of return, the useful life must be 5.25 years.
(c) When n = , rate of return = 26.7%

9-52
(EUAB EUAC)A = $230 - $800 (A/P, 12%, 5)
Set (EUAB EUAC)B

= +$8.08

= +$8.08 and solve for x.

(EUAB EUAC)B = $230 - $1,000 (A/P, 12%, x)

= +$8.08

(A/P, 12%, x)

= 0.2219

= [$230 - $8.08]/$1,000

From the 12% compound interest table, x = 6.9 yrs.

9-53
NPWA

= $40 (P/A, 12%, 6) + $100 (P/F, 12%, 6) - $150 = +$65.10

Set NPWB = NPWA

= $65 (P/A, 12%, 6) + $200 (P/F, 12%, 6) x
$368.54 x
x
9-54
NPW Solution
NPWA
= $75/0.10 - $500
= +$250
NPWB
= $75 (P/A, 10%, n) - $300 = +$250
(P/A, 10%, n)
= $550/$75
= 7.33
From the 10% table, n = 13.9 yrs.

9-55
Alternative 1: Buy May 31st
trip

x weeks
$1,000

Alternative 2: Buy just before trip

trip

$1,010

Difference between alternatives

= +$65.10
= +$65.10
= 303.44

$1,010

x weeks
$1,000

i = % per week
$1,000

= $1,010 (P/F, %, x weeks)

(P/F, %, x)

= 0.9901

x = 4 weeks
9-56
Untreated:
Treated:

EUAC = $10.50 (A/P, 10%, 10)

= $10.50 (0.1627)
= $1.71
EUAC = ($10.50 + treatment) (A/P, 10%, 15)
= $1.38 + 0.1315 (treatment)

Set EUACUNTREATED = EUACUNTREATED

$1.71 = $1.38 + 0.1315 (treatment)
Treatment
= ($1.71 - $1.38)/0.1315
= $2.51
So, up to $2.51 could be paid for post treatment.

9-57
F
A = $1,000

$10,000

= $10,000 (F/P, 10%, 5) - $1,000 (F/A, 10%, 5)

= $10,000 (1.611) - $1,000 (6.105)
= $10,000

9-58
Year Cash Flow
0
-x

1
2
3
4
5
6
7
8
9
10
11
12

+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$8,400
+$80,000

Where x = maximum purchase price,

x
= ($14,400 - $6,000) (P/A, 7%, 12) + $80,000 (P/F, 7%, 12)
= $8,400 (7.943) + $80,000 (0.4440)
= $102,240
9-59
Since both motors have the same annual maintenance cost, it may be ignored in the
computations. Here, however, we will include it.
Graybar
EUACG = $7,000 (A/P, 10%, 20) + $300
+ [[(200 hp) (0.746 kw/hp) ($0.072/kwhr)]/0.89 eff]
= $7,000 (0.1175) + $300 + 12.07 hrs
= $1,122.50 + $12.07/hr (hrs)
Blueball
EUACB = $6,000 (A/P, 10%, 20) + $300
+ [[(200 hp) (0.746 kw/hp) ($0.072/kwhr)]/0.85 eff]
= $6,000 (0.1175) + $300 + 12.64 hrs
= $1,005 + 12.64 hrs
Set EUACB = EUACG
$1,005 + 12.64 hrs

= $1,122.50 + $12.07/hr (hrs)

The minimum number of hours the graybar, with its smaller power cost, must be used is:
(12.64 12.07) hrs = $1,122.50 - $1,005
hrs
= $117.50/$0.57
= 206 hours
9-60
The difference between the alternatives is that Plan A requires $20,000 extra now and Plan
B requires $40,000 extra n years hence.
At breakeven:
$20,000 = $40,000 (P/F, 8%, n)
(P/F, 8%, n) = 0.5

From the 8% interest table, n = 9 years.

9-61
The annual cost of the untreated part:
$350 (A/P, 10%, 6) = $350 (0.2296)

= $80.36

The annual cost of the treated part must be at least this low so:
$80.36 = $500 (A/P, 10%, n)
(A/P, 10%, n) = $80.36/$500 = 0.1607
So n = 10 yrs + (1) [(0.1627 0.1607)/(0.1627 0.1540)]

= 10.2 years

9-62
(a)

PW of CostA
$55,000 + $16,200 (P/A, 10%, n)

= PW of CostB
= $75,000 + $12,450 (P/A, 10%, n)

(P/A, 10%, n) = ($75,000 - $55,000)/($16,200 - $12,450)

= 5.33
From the 10% interest table, (P/A, 10%, 8) = 5.335 so the machines are equivalent at 8
years.
(b) At 0% interest, from (a):
(P/A, 0%, n) = 5.33
Since (P/A, 0%, n) = n, the machines are equivalent at 5 1/3 years.
9-63
(a) Payback Period
At first glance, payback would appear to be
$5,240/$1,000 = 5.24 years
However, based on end-of-year benefits, as specified in the problem, the correct answer
is:
Payback
= 6 years
(b) Breakeven Point (in years)
Here interest is used in the computations. For continuous compounding:
P

= A[(ern 1)/(ern (er 1)]

P = $5,240

A = $1,000

R = 0.10

$5,240 = $1,000[(e0.10n 1)/(e0.10n (e0.10 1)]

= $1,000 [(e0.10n 1)/(0.1052 e.10n)]
[e0.10n 1]

= 5.24 [0.1052 e0.10n]

n=?

e0.10n [1- 0.5511]

e0.10n

=1
= 1/(1 0.5511)

= 2.23

Solving, n = 8 years.
(c) Both (a) and (b) are correct. Since the breakeven analysis takes all eight years of
benefits into account, as well as the interest rate, it is a better measure of long term
economic efficiency.