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with step-by-step methods and formula.
Question 1:Question 2:
Thanks !!!
Directions: Find two errors that is wrong with this letter and
rewrite it the correct way. This is due Sunday 7/21/19
8.5 Document for Analysis: Instruction E-Mail
(L.O. 2)
The following wordy and poorly expressed e-mail from a CEO
discusses a growing problem for organizations: how to avoid the
loss of valuable company data to hackers.
Your Task Study the message, list its weaknesses, and then
rewrite it in the form of an instruction message. Is it better to
use bullets or numbers for an internal list?
To: Staff Members
From: G. B. Goldman <[email protected]>
Subject: Hackers!
Staff Members:
This is to inform you that, like other banks, we are afraid of
hackers. We fear that employees will expose valuable
information to hackers without realizing what they are doing.
Because of our fear, we have consulted cybersecurity experts,
and they gave us much good advice with new procedures to be
followed. Here are the procedures suggested by experts:
1. We don't want you to leave out-of-office messages. These
voice mail or e-mails might explain when you will be away.
Such messages are a red flag to hackers telling them that your
computer is vacant and not being monitored.

2. Because smartphones can be lost or stolen, don't snap photos
of company documents. Phones may be lost or stolen, and our
data might be compromised.
3. Although small memory devices (thumb drives) are handy
and easy to use, you may be inclined to store company files or
information on these drives. Don't do it. They can easily be lost,
thus exposing our company information.
4. Using work e-mail addresses for social media is another
problem area. When you post details about your job, hackers
can figure out an organization's best target.
5. Phishing links are the worst problem. Any request for
password information or any requests to click links should be
viewed with suspicion. Never click them. Even messages that
seem to be from high-level officials or the human resources
department within our own company can be sophisticated,
realistic fakes. Examples include a request to click a link to
receive a package or to download a form from within the
company.
We want to let you all know that within the next two months,
we plan to begin implementing a program that will educate and
train employees with regard to what to avoid. The program will
include fake phishing messages. The program will be explained
and you will learn more from your managers in training
workshops that are scheduled to begin September 1.
G. B. Goldman, CEO
[Full contact information]
Composing Instruction Messages
Ethics Check
How Authentic Are Customer Reviews Online?
As the value of social media buzz is steadily increasing, so are
efforts to rig the system. Not all customer critiques on the Web

can be trusted, particularly when so many are anonymous. Some
businesses pay for positive online reviews or encourage their
employees to sing the praises of their own products while
knocking the competition. How seriously should companies take
the threat of potentially fraudulent reviews?
Instruction messages describe how to complete a task. You may
be asked to write instructions about how to repair a paper jam in
the photocopier, order supplies, file a grievance, or hire new
employees. Instructions are different from policies and official
procedures, which establish rules of conduct to be followed
within an organization. We are most concerned with creating
messages that clearly explain how to complete a task.
Like requests and responses, instruction messages follow a
straightforward, direct approach. Before writing instructions for
a process, be sure you understand the process completely.
Practice doing it yourself. A message that delivers instructions
should open with an explanation of why the procedure or set of
instructions is necessary.
Creating Step-by-Step Instructions.
The body of an instruction message should use plain English
and familiar words to describe the process. Your messages
explaining instructions will be most readable if you follow these
guidelines:
· Divide the instructions into steps.
· List the steps in the order in which they are to be carried out.
· Arrange the items vertically with numbers.
· Begin each step with an action verb using the imperative
(command) mood rather than the indicative mood.
· Indicative Mood
Imperative Mood
The contract should be sent immediately.
Send the contract immediately.
The first step involves downloading the app.
Download the app first.
A survey of employees is necessary to learn what options they
prefer.

Survey employees to learn the options they prefer.
In the closing of a message issuing instructions, try to tie
following the instructions to benefits to the organization or
individual.
If you are asked to prepare a list of instructions that is not part
of a message, include a title such as How to Clear Paper Jams.
Include an opening paragraph explaining why the instructions
are needed.
Revising a Message Delivering Instructions.
Figure 8.6 shows the first draft of an interoffice memo written
by Brian Belmont. His memo was meant to announce a new
method for employees to follow in requesting equipment
repairs. However, the tone was negative, the explanation of the
problem rambled, and the new method was unclear. Finally,
Brian's first memo was wordy and filled with clichés (do not
hesitate to call).
Figure 8.6Memo Explaining Instructions
Memo Explaining Instructions
Copyright ©2015 by Pearson Education, Inc.
Upper Saddle River, New Jersey 07458
All rights reserved.
Engineering Economy, Sixteenth Edition
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
Engineering Economy

Chapter 13: The Capital Budgeting
Process
The objective of Chapter 13 is to
give the student an understanding
of the basic components of the
capital budgeting process so that
the important role of the engineer
in this complex and strategic
function will be made clear.

Capital financing and allocation
functions are primary components of
capital budgeting.
• Capital financing determines funds needed from
investors and vendors—in the form of additional
stock, bonds, loans—and funds available from
internal sources.
• Capital allocation is where the competing
engineering projects are selected. The total
investment is constrained by decisions made in
capital financing.

Management must make the decisions
for the financing/allocation connection
• Companies establish the allocation proposal
process.
• Management must select projects that ensure a
reasonable return to investors, to motivate
additional investment when required.
• In summary, these decisions are how much and
where financial resources are obtained and
expended.

A company has a variety of sources
available for capital funds. These
sources expect an attractive return.
Type of Security
Average Annual
Return, Rm
Standard Deviation
of Returns
Treasury Bills 3.8% 4.4%
Long-term U.S. Bonds 5.8 9.4
Corporate Bonds 6.2 8.7
S&P 500 Stocks 12.2 20.5

Small-firm Stocks 16.9 33.2
Source: R.G. Ibbotson Associates, Chicago, IL., 2003.
Debt capital represents borrowed money.
• Companies can borrow money from lenders (e.g.
banks) or can issue bonds or debentures.
• Creditors get interest, bondholders get dividends
and face value at maturity.
• The cost of bond financing depends on the bond
rating, which is dependent on the financial health
of the company.
• Investors have a risk-free alternative of U.S.
government treasure bills. This risk-free rate of

return is denoted RF.
Interest paid on corporate debt is tax
deductible. This savings can be handled
in two different ways.
• Interest can be deducted each year before taxes are
computed. This approach adds more computation,
and it is generally difficult to assign debt
payments to a specific project.
• The most commonly used is to modify the MARR
to account for the tax deductibility of the debt.
• The cost of debt capital is denoted ib.

We can reflect the use of a modified
MARR in the equations below.
where
Equity capital represents money already
in the firm.
• This can be capital held by stockholders
through company stock.
• It can also be earnings retained by the

company for reinvestment purposes.
• The percentage cost of equity funds, ea, can
be estimated in many ways, perhaps the best
of which is using the capital asset pricing
model (CAPM).
The CAPM asserts that the best
combinations of risk and return lie along
the security market line, SML.

The CAPM reveals that the return, RS, on
any stock depends on its risk relative to
the market. The risk premium of any
stock is proportional to its beta.
where
The graph below illustrates this
relationship.

The cost of equity, ea, is estimated as RS.
A company has a beta value of 2.4, with no long
term debt. If the market premium is 8.4%, and the
risk-free rate is 2%, what is the company’s cost of
equity?
so,
Acme has a beta value of 0.7. They have no long-term debt.
What is their cost of equity, based on the Capital Asset
Pricing Model? Use a risk-free rate of 1% and RM = 9.2%.
Pause and solve

The Weighted Average Cost of Capital
(WACC) represents the average cost of
all funds available to the firm.
Where
In the first fiscal quarter of 2009 Dell Computer
showed total debt of $1.98mil and total equity of
$3.55mil. Assume Dell’s beta is 2.2, the cost of
debt is 7%, and Dell’s effective income tax rate is

0.35. What is the WACC?
Each company may have an “optimal”
mix of debt and equity, minimizing the
WACC.
• One task of a company treasurer is to
identify and maintain this mix.
• A constant debt/equity mix is difficult to
maintain over time.
• The separation principle specifies that the
investment decisions (project selection) and
financing decisions should be separated.

Establishing the minimum attractive rate
of return (MARR).
• If risks are roughly normal, the WACC is an
appropriate hurdle rate (i.e., MARR).
• WACC is a floor on the MARR, which should be
increased to reflect more risk.
• Management may choose to set the MARR based
on many factors, such as conserving capital in
anticipation of large future opportunities, or
encouraging new ventures. This may also be
differential across divisions.

Opportunity costs and MARR
• In this chapter we focus on independent projects.
• The opportunity cost viewpoint is a direct result of
capital rationing, when limited funds are available
for competing proposals.
• Prospective projects (of similar risk) are ranked in
order of profitability. The cut-off point falls such
that the capital is used on the better (more
profitable) projects.
• Firms may set two or more MARR levels,
analyzing within particular risk categories.

Establishing the MARR using
prospective project profitability.
Selecting projects that are not mutually
exclusive has multiple considerations.
• Those projects that are most profitable should be
selected, allowing for
– intangibles and nonmonetary considerations
– risk considerations
– availability of capital
• In certain cases monetary return is of minor

importance compared to other considerations, and
these require careful judgment.
Investment proposals can be classified in
any number of different ways, some of
which are given below.
• Kinds and amounts of
scarce resources used
• Tactical or strategic
• The business activity
involved
• Priority—essential,
necessary, desirable,

or improvement
• Type of benefits
expected
• Facility replacement,
facility expansion, or
product improvement.
• The way benefits are
affected by other
proposed projects
There can be many possible degrees of
dependency among projects.
“If the results of the first project would

by the acceptance of the second
project
then the second project is said to be
the first project.”
be technically possible or would result
in benefits only
a prerequisite of
have increased benefits a complement of
not be affected independent of
have decreased benefits a substitute of
be impossible or would result in no
benefits
mutually exclusive with

Organizing for capital allocation
• Organizations generally have a formal project
selection process that progresses through the
organizational levels.
• Clearly “good” proposals, or proposals clearly
executing corporate policies, can be approved at
the division level, within certain funding limits.
• Proposals requiring a commitment of a large
amount of funds are sent to higher levels in the
organization (see the table on the next slide).
An example of a required organizational
approval structure.

If the total investment is . . .
More than But less than
Then approval is required
through
$50 $5,000 Plant manager
$5,000 $50,000 Division vice president
$50,000 $125,000 President
$125,000 -- Board of directors
The process of communicating and
“selling” project proposals is important.
• Good communication is required regardless of the
strength of the project proposal.

• Consider the needs of the decision maker.
• Provide investment requirements, measures of
merit, and other benefits, and
– bases and assumptions used for estimates
– level of confidence in the estimates
– how would the outcome be affected by variation?
• A corporate-wide proposal structure is helpful.
For improved capital budgeting, conduct
postmortem reviews (postaudits).
• It helps determine if planned objectives of the
project were obtained.
• It determines if corrective action is needed.

• It improves estimating and future planning.
• It provides an unbiased assessment of project
results compared to the proposed outcomes.
• Postaudits are inherently incomplete, so care
should be used decisions based on these results.
Budgeting for capital investments is a
difficult managerial challenge.
• Just because a project is “attractive” doesn’t mean
it should be undertaken.
• Capital budgets, while perhaps with a one- or two-
year horizon, should be supplemented with a long-
range capital plan.
• Technological and market forces change rapidly.

• Decisions must be made regarding investing now
or “saving” some funds to invest in the future
(e.g., next year), postponing returns.
Lease vs. buy vs. status quo decisions
• Leases allow the firm to use available capital for
other uses.
• Leases are legal obligations very similar to debt,
reducing the ability to attract further debt capital
and increasing leverage.
• One should not compare only lease and buy, but
also the status quo (do nothing), separating to the
extent possible the equipment and financing

decisions.
• Always consider tax implications.
One way to allocate capital among
independent projects is to create MEAs
from the set of projects and use familiar
equivalent worth methods.
• Project risks should be about equal
• Enumerate all feasible combinations (those
that meet any budget constraints).
• The acceptance of the best MEA will
specify those projects in which to invest.

With a budget of $150,000, which of the
following independent projects should
Mitselfik, Inc. invest in?
Independent project Initial capital outlay PW
A $70,000 $18,000
B $45,000 $12,000
C $40,000 $11,000
D $50,000 $14,000

The set of feasible projects.
Combination Capital required Total PW
A $70,000 $18,000
B $45,000 $12,000
C $40,000 $11,000
D $50,000 $14,000
AB $115,000 $30,000
AC $110,000 $29,000
AD $120,000 $32,000
BC $85,000 $23,000
BD $95,000 $26,000
CD $90,000 $25,000
BCD $135,000 $37,000*

Selecting independent projects B, C, and
D results in the greatest PW.
• Project combinations ABC, ABD, ACD,
and ABCD are not feasible because of the
capital constraint.
• Management must decide how best to
allocate (or not allocate) the remaining
$15,000.
Other important managerial
considerations and complications.

• Projects have different lives, and different cash
flow commitments.
• Projects have differing levels of risk.
• The long-term capital plan must be considered.
• The overall risk of the firm must be considered.
• The corporate strategic plan may favor one part of
the company over another for investment.
• Much, much more. . .
Capital allocation problems can be
modeled as linear programs.
• “Brute force” evaluation of all independent
alternatives, especially when the number of
alternatives is very large, is cumbersome at best.

• Linear programming can be used to determine an
optimal portfolio of projects.
• Linear programming is a mathematical procedure
for maximizing (or minimizing) a linear function
subject to one or more linear constraints. We will
present the formulation of problems, but not the
solution, which is beyond our scope.
The objective function of the capital
allocation problem.
where

Typical constraints are limitations on
cash outlays in each period, and
interrelationships among projects.
Let
Limitations on cash outlays for period k.
If projects p, q, and r are mutually
exclusive, then

If project r can be undertaken only if project s has
already been selected, then
If projects u and v are mutually exclusive and
project r is dependent (contingent) on the
acceptance of u or v, then
Consider six projects under
consideration with the information

below. Formulate the linear
programming selection model.
Project
Initial investment
cash flow ($000s)
PW ($000s) at
MARR
A -75 15
B1 -50 11
B2 -30 9
C1 -50 13
C2 -60 14
C3 -15 5

Consider that B1 and B2 are mutually
exclusive, and C1, C2, and C3 are
mutually exclusive. C2 and C3 are each
contingent on A. The budget for new
projects this year is $130,000.
Objective function: Maximize Net PW
Constraint on initial investment.
B1 and B2 are mutually exclusive.
C1, C2, and C3 are mutually exclusive.
C2 and C3 are contingent on A.
No fractional projects are allowed.

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