E:\TERRY'~1\DR~1.WOL\partiii.htm

1.) A finance company bought a computer system 4 years ago for $280,000. At that time it was estimated to have a service period of 10 years with no salvage value. Annual operating costs for this system is $76,000. A new IT system is being considered that would do the required work for $40,000 a year. The new system is expected to cost $300,000, have a 6-year service period, and $50,000 salvage value at that time. Also a $95,000 trade in allowance would be made on the purchase of the new system. Cost of capital is 15%. Should the switch be made based on the economics?

2.) A firm is considering one of the machines listed below. The data on each is:

Machine X Machine Y
Initial Cost 3400 6500
Service period 3 7
Annual service income 4000 4000
Annual Operating cost 2000 1800

If the firm wants a MARR of 8%, which alternative should be selected?

3.) Every year the office supply department of PSE&G uses 1, 200,000 sheets of paper with three holes drilled for binding and 250,000 sheets that have the comers rounded. At present the drilling and comer cutting is done by an outside finn at a cost of. 750 and $ 1.00 per thousand respectively. The company is considering doing this in house. Two possibilities exist.

Drilling Combined Drilling

Machine and Cutting Machine

Initial Cost 2000 2800
Salvage value 150 200
Annual operating cost 65 76
Annual labor to drill 330 240
Annual labor to cut - 100
Usage period 15 years 15 years

If interest cost is 25% , what should be done?

4.) A B C D E
Initial cost 4000 2000 6000 1000 9000
Uniform annual benefit 639 410 761 117 785
PW of Benefit 7330 4700 8730 1340 9000
Rate of Return 15% 20% 11% 10% 6%

If the required rate of return is 6% which alternative should be selected from those listed?

5. An NET graduate presently working for Johnson and Johnson has been offered ajob with a new Bio Science Co. paying $50,000 a year and an option to
purchase 5000 shares of their stock at the end of 5 year costing $1.00 a share. At Johnson and Johnson he is making $ 80,000 a year and receives a bonus of 100
shares at the end of each year. Assume the stock has a value of $90 per share and pays a dividend of $3.00 per share. Assume end of year payment of salary, stock
and dividends. If this individual thinks that 10% rate of return is satisfactory, what would the Bio Science Co. stock have to worth to make the switch? What would
you recommend?