MINING INVESTMENT ANALYSIS

PROBLEM II
(March 8, 2017)

1. Machine A has an initial cost of $50,000, an estimated service period of 10

years and an estimated salvage value of $10,000 at the of the 10 years.
Estimated end-of-year annual disbursements for operation and maintenance are
$5,000. A major overhaul costing $10,000 will be required at the end of 5
years. An alternate Machine B has an initial cost of $40,000 and an estimated
zero salvage value at the end of the 10 year service period with estimated end-
of-year disbursements for operating and maintenance of $8,000 for the first
year, $8,000 for the second year and increasing $500 each year thereafter.
Using a minimum ROR cost of 10 year service of 10%, compare the present
worth cost of 10 year service from Machine A and B.
2. The owner of a patent is negotiating a contract with a corporation that will give
the corporation the right to use the patent. The corporation will pay the patent
owner $3,000 a year at the end of each of the next 5 years, $5,000 a year at the
end of each year for the next 8 years and $6,000 a year at the end of each year
for the final 3 years of the 16 year life of the patent. If the owner of this patent
wants a lump sum settlement 3 years from now in lieu of all 16 payments, at
what price would be receive equivalent value if his minimum rate of return in
8% before income taxes?
3. A Machine in use now has a zero net salvage value and is expected to have an
additional two years of useful life but its service is needed for another 6 years.
The operating costs with this machine are estimated to be $4,500 for the next
year of use at year 1 and $5,500 at year 2. The salvage value will be 0 in two
years. A replacement machine is estimated to cost $25,000 at year 2 with
annual operating cost of $2,500 in its first year of use at year 3, increased by
end arithmetic gradient series of $500 per year in following years. The salvage
value is estimated to be $7,000 after 4 years of use (at year 6). And alternative
is to replace the existing machine now with a new machine costing $21,000
and annual operating cost of $2,000 at year 1, increasing by an arithmetic
gradient series of $500 each following year. The salvage value is estimated to
be $4,000 at the end of year 6. Compare the economics of these alternatives for
a minimum ROR of 20% using a 6 year life by:
a. Present worth cost analysis
b. Equivalent annual cost analysis