ENGIN5510 Company Economics and Finance : Cash Flows


1. Maintenance costs for a new piece of mining equipment are expected to be $20,000 in the first year, rising by $2,500 per year thereafter. The machine has an expected life of 10 years and interest is 5% annually. To evaluate bids from outside firms for a maintenance contract you need to know the present value of these costs. What is this value?
2. What is meant by the term cash flow? For the table below determine the yearly cash flows and the total cash flow. If a discounting rate of 8% is used what is the Net Present Value?
3. A coal stripping company currently operates three dozers for reclamation work. To reduce costs three alternatives are being considered for the future: rebuild the present equipment, purchase new dozers and employ a contractor. Details of the alternatives are given below:
Rebuild Purchase Contractor
No of units required 3 2 N/A
Initial cost per unit $360,000 $920,000 $0
Annual costs per 
Maintenance $140,000 $85,000
Labour $240,000 $160,000 $2,000,000
Supplies $58,000 $42,000
Life 8 years 8 years 8 years
Salvage value per 
$0 $120,000 $0
If interest is 5% annually, which alternative should be selected?
4. A Truck is purchased for $200,000 and is planned to have an operating life of 8 years working 5,000 hours per year. What is the hourly owning cost of this machine, assuming the company requires a 12% return on investment, using
a) The average investment method
b) The equivalent lease cost method
5. A system of mining requires 3 operators at any one time. The mine operates on a three shift basis per day, 6 days per week. Allowing for availability the mining system operates 5,000 hours per year. Each worker costs $105,000 per year. Assuming all personnel are required on service shifts, an absenteeism rate of 5%, determine the hourly cost of labour.
6. Undertake both a declining balance and straight-line depreciation of an item of capital expenditure of $10 million. The declining balance depreciation rate is 30%, effective tax rate is 40%, cost of capital is 10% and straight-line depreciation rate is 20%.
7. The table below details three possible alternatives to replace existing machinery. The life of each alternative is 5 years. Assuming the cost of capital is 10%, depreciation for tax purposes of capital expenditure is allowable at 30% on a declining balance basis and the effective tax rate is 45%. Determine the preferred alternative.
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