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1. You currently have a piece of equipment that is 2 years old and cost $13,000 when it was new. It has five years left on it’s economic life and can be traded in for $8000. It will have annual operating costs of $4,000. A new piece of equipment can be purchased for $I 8,000 and it will have annual operating costs of $1000. This new equipment will have an economic life of 6 years. Should you keep the old equipment or buy the new equipment?

2. What is the purpose of depreciation?

3. Tow electrical systems are being compared for a new industrial plant. The one system will have first cost of $200,000 and annual operating costs of $10,000. The second system will have first cost of$300,000 and annual
operating costs of $5,000. Each system will be depreciated over a period of 10 years using straight line depreciation. The company is in a 35% tax bracket. Which system should be selected if they both help produce the same expected profits over the life of the investment?

4. Two computer systems are being compared. System A has life expectancy of 5 years and will cost $14,000 plus $2,000 annually for maintenance. System . B has a life expectancy of three years and will cost $9000 plus $700 annually for maintenance. System A will generate about $10,000 in income and System B will generate about $9,000. Each system will be depreciated using straight line depreciation over their respective lives and the company is in a 30% tax bracket. Which system should you choose?

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5. A new machine will cost your firm $50,000. It will be depreciated over 5 years with a salvage value at the end of five years of $2000. It is expected that the machine will produce $18,000 in income the first year and an additional 5% growth in income in each subsequent year for up to six years. The operating costs the first year are $3,000. These will rise at a rate of $2000 per year up to a maximum of$14000. Your company is in a 35% tax
bracket. You want to realize a return on your investment of at least 15%; At what point should you consider selling the equipment?

6. What is the rate of return on an investment over it’s economic life that costs $29,000 and has a $1000 salvage value after 7 years( straight line depreciation) if it can earn $6,000 before taxes annually? Assume that you are in a 25% tax bracket.

7. A new park has been proposed in a downtown business district. To build the park, several businesses will have to be relocated. This process will disrupt the businesses for about six months and cause a loss of income of
approximately 100,000. The new park will cost about $1,200,000 to build and will cost about 50,000 annually for maintenance. The addition of the park will encourage the construction of more apartments in the area with the
net benefit valued at about $280,000 annually. Using a social discout rate of 9% and a period of analysis of 10 years, detennine if this project has an acceptable benefit/cost ratio

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