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FINAL CIVL2812
Question 1 (2 marks)
An energy company is considering developing an LNG fuelled power station. The project will require
an initial investment of $130 million. Operation and Maintenance (O&M) costs are expected to be $5
million per year and revenues are expected to be $34 million per year. The energy company’s MARR
is 12% per annum, compounding quarterly.
(a) What is Simple Payback Period for this project? (1 mark)
(b) What is the Discounted Payback Period for this project? (1 mark)
Question 2 (3 marks)
A project has the following expected cashflows:
• An initial investment of $250,000 at time zero
• Annual revenues of $65,000 starting at the end of year 3
• Annual expenses of $20,000 starting at the end of year 3. These expenses are expected to
increase by 3% per year until the end of year 7, after which they will remain constant.
• A salvage value of $55,000 at the end of the project’s 10 year life
• A MARR of 12% per annum
(a) Draw the cash flow diagram for the above cashflows (1 mark)
(b) What is the Present Worth of these cashflows at time zero? (1 marks)
(c) What is the Annual Worth of these cashflows across the project’s useful life? (0.5 mark)
(d) What is the Future Worth of these cashflows at the end of the project? (0.5 mark)
Question 3 (2 marks)
You are considering investing $X in a fund that will provide you a return of 8% per annum,
compounding monthly. How many years will it take for your investment to be worth $8X?
IRR=17.3%
2 | P a g e
Question 4 (5 marks)
A machine can be purchased for $165,000 and depreciated over three years to a book value of $0
using the Straight Line method. The machine will generate revenues of $65,000 (time zero dollars) per
year, with these revenues starting at the end of year one and increasing by 5% each year. The
Operation and Maintenance (O&M) costs are expected to total $15,000 (time zero dollars) per year
and are expected to increase by 9% per year. The firm’s effective tax rate is 30%, and its after-tax
MARR (im) is 26% per year.
(a) Perform an actual-dollar (A$) analysis and determine the annual After Tax Cash Flows of
the above investment opportunity. Use a life of three years and work to the nearest dollar.
(3 marks)
(b) What interest rate would be used for discounting purpose? (1 mark)
(c) Based on your results in (a) and (b), what is the Present Worth of the machine? (1 marks)
Question 5 (4 marks)
A Monte Carlo analysis reveals that the following probabilities for the Present Worth of a project:
Present Worth Probability
-$10,000 0.05
-$5,000 0.10
$0 0.05
$5,000 0.15
$10,000 0.15
$15,000 0.25
$20,000 0.25
(a) What is the expected value of the Present Worth of this project? (1 mark)
(b) What is the variance of the Present Worth of this project? (1 mark)
(c) What is the standard deviation of the Present Worth of this project? (0.5 mark)
(d) Provide 2-3 sentences explaining your results from part (a), (b) and (c). What do these
results mean? (1.5 marks)
3 | P a g e
Question 6 (4 marks)
Mary is considering purchasing a new work utility vehicle (ute). The purchase price, expected
maintenance costs, expected salvages value and useful lives of two different models are detailed
below. Mary’s cost of capital is 12% per annum.
Model A Model B
Purchase price $65,000 $45,000
Annual maintenance cost $5,000 $10,000
Salvage Value at end of useful life $25,000 $15,000
Useful life 10 years 5 years
(a) What is the market value of each ute at the end of year 5? (2 marks)
(b) Assuming that Mary will sell the ute at the end of year 5, which ute should she select? (2
marks)
Question 7 (3 marks)
The NSW Government is considering a project that will require an investment of $6 million.
However, it will provide benefits to the public at a value of $920,000 per year. Annual maintenance
expenses are anticipated to be $104,000. The project can be assumed to have an infinite life (N = ∞).
If the NSW Government’s MARR is 10% per year, determine whether the project is economically
attractive using the conventional Benefit-Cost ratio.