- Your company needs to purchase ten oscilloscopes
during the coming year. The oscilloscopes are top-of-the-line models,
with a built-in Pentium processor, and cost $80,000 each.
You are presenting an argument to Revenue Canada that they
should be considered as computers, and depreciated at 30% per annum.
Revenue Canada thinks that they're generic electronic equipment,
which is depreciated at 20% per annum. Your company pays tax at
50%, and your pre-tax cash flow every year is at least $500,000.
Your after-tax MARR is 5%.
What is the present value of convincing Revenue Canada that they're computers?
- Your company, which makes gas separation equipment, is considering
several alternative strategies.
One strategy is to market an existing separation rig. This will generate
a revenue of $200,000 at the end of this year, declining by 20% per year
as your competitors put better products on the market.
A second strategy is to invest in the development of a greatly improved rig.
If you do this, you will not have any sales this year (`Year 1').
There is a 50% chance of your development efforts succeeding the following year (`Year
2');
if they don't succeed, there is again a 50% chance that they will succeed the year after
that (`Year 3'), and similarly for the following year (`Year 4').
Beyond that it's impossible to predict.
As soon as the development efforts succeed, they will yield an income of $300,000
a year, and this income is expected to continue till at least the end of Year 4.
Your pre-tax MARR is 25%. Which strategy will you choose?
-
- (8 points) Sketch a diagram showing cash flow within a corporation.
The diagram should clearly show which cash flows are subject to tax,
and should include dividends to stockholders, income from borrowing, wages,
and depreciation allowance, plus whatever other cash flows are necessary to give
a complete picture.
- (8 points) Your company needs to raise $650,000 to set up a new
production facility.
It will be four years before the new facility starts generating income, but as soon as
it does start generating income, you'll have enough to pay back the cost of setting up.
You can raise the money either by taking out a bank loan, selling bonds, or using internal
funds.
The bank charges 10% interest per year. The bonds are sold now for $1000, with
a promise to redeem them for $1,500 four years in the future. If you use internal funds
for this project, you will have to divert them from other potential investments
within the company. Your pre-tax MARR is 15%. How should you raise the money?
- A machine has five years of life remaining to it, and its function will
be needed for exactly that period. It costs $19,000 per year to operate.
Right now its market value is $8,000, and in five years time its salvage value will
be $1,000.
A new machine of advanced design can perform the same function as the current
machine for an operating cost of just $12,000 per year. It will cost $24,000 to
purchase, and will have a salvage value of $6,000 after 5 years of use.
The company has a 52% effective tax rate, and its after-tax MARR is 20%.
Both machines are in Class 8: declining balance depreciation at 20%.
Should the machine be replaced?
- An old wooden bridge over a bay is in danger of collapse.
The highway department is considering two alternatives to alleviate the situation and
provide for expected increases in future traffic. One plan is a conventional steel
bridge, and the other is a tunnel. The department is familiar with bridge construction and
maintenance, but has no experience with maintenance costs for tunnels. The following data
have been developed for the bridge:
| First cost |
$17,000,000 |
| Painting every 6 years | $1,000,000 |
| Deck resurfacing every 10 years | $3,000,000 |
| Structural overhaul after 15 years | $4,000,000 |
| Annual maintenance | $300,000 |
The tunnel is expected to cost $24,000,000 and will require repaving every 10 years at a
cost of $2,000,000. If both designs are expected to last 30 years with minimal salvage
value, determine the maximum equivalent annual amount for maintenance that could be
permitted for the tunnel while holding the total equivalent annual cost equal to that of
the bridge. The interest rate is 8%.
- On completing a doctorate in industrial engineering, a student has been offered
two jobs. One, a faculty postion in a university, pays a starting salary of $45,000 with
expected annual raises of 8% over the next 5 years. The other, a research position with an
aerospace company, has a starting salary of $52,000 with annual raises of 5% over the
next 5 years. If inflation is 5% per annum and the market interest rate is 15% per annum,
what is the difference in the present worths of the two job offers?
- The following table shows the activities that must be completed to put a new
mobile phone on the market. Which activities are on the critical path, and
what is the estimated time to project completion?
| Activity |
Initial State |
Final State |
Duration |
Description |
| 1 |
1 |
2 |
2 |
Overall Design |
| 2 |
2 |
3 |
2 |
Design Casings |
| 3 |
2 |
4 |
4 |
Write Chip Specifications |
| 4 |
3 |
5 |
6 |
Purchase Moulder |
| 5 |
4 |
6 |
2 |
Order Chips |
| 6 |
4 |
7 |
3 |
Write Battery Specifications |
| 7 |
5 |
8 |
9 |
Produce Moulds |
| 8 |
6 |
9 |
11 |
Receive Chips |
| 9 |
7 |
10 |
2 |
Order Batteries |
| 10 |
8 |
9 |
13 |
Receive Moulds |
| 11 |
9 |
11 |
0 |
Dummy |
| 12 |
10 |
12 |
8 |
Receive Batteries |
| 13 |
11 |
13 |
7 |
Install Chip in Casing |
| 14 |
12 |
13 |
0 |
Dummy |
| 15 |
13 |
14 |
10 |
Install Battery in Casing |
| 16 |
14 |
15 |
12 |
Test |
| 17 |
15 |
16 |
2 |
Package and Ship |
- Three Martian colonies, Lowell,
Bradbury and Clarke, are planning their crop production for 2098.
The colonies have a limited amount of useable land and water, as shown in the following table:
| Colony |
Useable Land (Hectares) |
Water Allocation (Hectare metres/hectare) |
| Lowell |
400 |
600 |
| Bradbury |
600 |
800 |
| Clarke |
300 |
375 |
Crops adapted for Martian conditions include sour potatoes,
bladder-root, and transgenic hemp.
There is an upper limit on the total area that can be devoted to each crop by the
three colonies together, imposed by the Martian Board of Agriculture.
This limit, and the different profitability and water requirement of the crops, are
given by the following table:
| Crop |
Maximum Quota (Hectares) |
Water Consumption (Hectare metres/hectare) |
Net Return |
| Sour Potatoes |
600 |
3 |
400 |
| Bladder-root |
500 |
2 |
300 |
| Transgenic Hemp |
325 |
1 |
100 |
The three colonies are developing a joint plan to maximize the profitability of
their crops. By selecting suitable decision variables, set up a linear programming
problem whose solution will give the most profitable crop mix for the three colonies
together. You should put the problem into suitable form for input to a standard
simplex solution package, but do not attempt to solve it.
