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Tutorials Posted: | 401 |
MSC,MBA(IT)
Standford
Jun-1997 - Sep-2000
IT Manager
Honeywell
Aug-2001 - Present
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11-22. Extended Learning Exercise
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Consider these two alternatives for solid-waste removal (11.3, Chapter 7):
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Alternative A: Build a solid-waste processing facility. Financial variables are as follows:
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Capital investment             $108 million in 2008
(commercial operation
starts in 2008)
Expected life of facility       20 years
Annual operating                $3.46 million
expenses
Estimated market value    40% of initial capital cost
at all times
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Alternative B: Contract with vendors for solid-waste disposal after intermediate recovery. Financial variables are as follows:
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Capital investment              $17 million in 2008 (This is
for intermediate recovery
from the solid-waste
stream.)
Expected contract                20 years
period
Annual operating                $2.10 million
expenses
Repair costs to                      $3.0 million
intermediate
recovery system
every five years
Annual fee to vendors        $10.3 million
Estimated market value     $0
at all times
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Related Data:
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MACRS (GDS) property class     15 yr (Chapter 7)
Study period                                     20 yr
Effective income tax rate               40%
Company MARR (after-tax)Â Â Â Â Â Â Â Â 10% per year
Inflation rate                                     0% (ignore inflation)
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           How much more expensive (in terms of capital investment only) could Alternative B be in order to breakeven with Alternative A?
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           How sensitive is the after-tax PW of Alternative B to cotermination of both alternatives at the end of year 10?
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          Is the initial decision to adopt Alternative B in Part (a) reversed if our company’s annual operating expenses for Alternative B ($2.10 million per year) unexpectedly double? Explain why (or why not).
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           Use a computer spreadsheet available to you to solve this problem.
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