Expert Solutions

Q1.  The table below summarizes the costs of treatment for three diseases using an antibiotic that has a limited supply. What priorities should be set on the use of the antibiotic from a cost effectiveness perspective?  Note that if sufficient antibiotic supply was available all diseases could be treated.

Q2.  Six approaches have been proposed to address a possible epidemic situation.  There is only time and resources to implement one of these.  The data is shown below.  Supply the decision makers with information to assist in their choice.

Q3.  The town of Oxford has received a donation of 100 acres of land.  It is 70% wooded and 30% of open fields.  Below are listed the alternative uses which could be located on the property.    Shown for each possible use is a cost to build, estimated users per year, cost to  the town of each user (maintenance), and an estimated benefit value for each user.  Costs are the Cost to Build only.  Consider Benefits as the net benefit of each user (benefit minus cost).  Use a 10 year time frame for the benefits, and they will be constant in each year.  Oxford uses a 7% rate for evaluations.
A If only one alternative can be chosen in the first year, which one should it be using the B/C criteria.
B Assign a priority for the various projects from 1 to 7 with 1 the highest priority using the B-C criteria.

Q4a.  A city government has to choose from among three types of town-dump sanitary systems. Revenues (fee collections) from the residents would be $100,000 per year over the 15 year time span of the proposal.  The interest rate is 8%, and no salvage value is associated with either system.  Benefits are defined as revenues minus operating costs and the Investment would be the cost in a B-C  approach.  Which system should be selected using a B-C approach?

Q4b.  A city government has to choose from among three types of town-dump sanitary systems. Revenues (fee collections) from the residents would be $100,000 per year over the 15 year time span of the proposal.  The interest rate is 8%, and no salvage value is associated with either system.  Benefits are defines as revenues minus operating costs and the Investment would be the cost.  Which system should be selected using the B/C approach?  (Since the designs are mutually exclusive, an incremental analysis is needed).

Q5a.  The government is considering undertaking four projects. These projects are mutually exclusive, and the estimated present worth of their costs and the present worth of their benefits are shown below in millions of dollars. All of the projects have the same duration.  Assuming that there is no do-nothing alternative, which alternative would you select using a B-C approach?

Q5b.  The government is considering undertaking four projects. These projects are mutually exclusive, and the estimated present worth of their costs and the present worth of their benefits are shown below in millions of dollars. All of the projects have the same duration.  Assuming that there is no do-nothing alternative, which alternative would you select using a B/C approach?

Q6.  The state of Michigan is considering a bill that would ban the use of road salt on highways and bridges during icy conditions. Road salt is known to be toxic, costly, corrosive, and caustic. Chevron Chemical Company produces a calcium magnesium acetate (CMA) deicer and sells it for $600 a ton as Ice-B-Gon. Road salts, by contrast, sold for an average of $14 a ton. Michigan needs about 600,000 tons of road salt each year. Chevron estimates that each ton of salt on the road costs $650 in highway corrosion, $525 in rust on vehicles, $150 in corrosion to utility lines, and $100 in damages to water supplies, for a total of $1,425. Unknown salt damage to vegetation and soil surrounding areas of highways has occurred. Michigan would ban road salt (at least on expensive steel bridges or near sensitive lakes) if state studies support Chevron’s cost claims.
a. What would be the users’ benefits and sponsor’s costs if a complete ban on road salt were imposed in Michigan?
b. Compute B-C and B/C evaluations for the Ice-B-Gon with the available data.
c. How would you go about determining the salt damages (in dollars) to vegetation and soil?

Q7.  Roger Lovrenich of Lovrenich Motor Electronics has spent his career building his company, and invested all profits back into the company.  He now realizes that he needs to plan for his retirement in 5 years and has little retirement funds beyond social security, and his company.  His plan is to milk as much net earnings out of the company for five years and then sell it.  To do this he will progressively reduce S.G,&A.  expenses.  He expects no change in the % for cost of goods sold, nor in working capital.   The company will be sold in year 5 and this should be considered the salvage value.  Capital Gains tax in his state is 15%.
A simplified Income statement for the five years is shown below.  All assets are fully depreciated.
Prepare a cash flow statement and determine the minimum price for selling the company at the end of year 5 to attain a present value of $5 million using  a MARR of 10%?