ASSIGNMENT #1

Question #1:
A postal clerk wants to accumulate $20,000 in order to take a year's vacation 10 years from
now. She has now $6,000 in saving certificates which will earn interest at 6 percent compounded
semiannually. She plans to invest an equal amount each year in an account that earns 6 percent
annual interest. How large should this amount be to give her $20,000 in 10 years when it is
combined with the future value of the savings certificate?
Question #2:
By his fifty-fifth birthday, Joshua had accumulated $75,000. He invested it in a I0-year bond
that earned 9 percent compounded annually. He planned to retire at the age 65 and to have enough
saved so that he could draw out $25,000 from his savings each year for the next 15 years, starting
on his sixty-sixth birthday. What equal payments into a savings account that paid annual interest at
7 percent did he have to make, starting on his fifty-fifth birthday with the last payment made on his
sixty-fifth birthday, to fund his retirement? The amount accumulated, including the maturity value
of the bond (first cost plus interest) will also earn 7 percent during the retirement period.
Question #3:
A commercial rental property is for sale at $100,000. A prospective buyer estimates the
property would be held for 12 years, at the end of which it could be sold for $90,000. During the
ownership period, annual receipts from the rentals would be $15,000, and average disbursements
for all purposes in connection with ownership would be $6,000. If a rate of return of 9 percent is
expected, what is the maximum bid the prospective purchaser should make to buy the property?
Question #4:
A marina has two alternative plans for constructing a small-boat landing on a lake behind their
sales building; one is a wooden dock, and the other is a metal and concrete wharf. Data for the
two plans are as shown:
Wood Metal and Concrete
First cost
$25,000
Period before replacement
20 years
Salvage Value
$5,000
Annual maintenance
$5,500
Question #5:
To attract industry, a city has made an offer to a corporation. The city will install all roads and
services for the plant at no immediate cost for the corporation, but the corporation will be
expected to bear the cost of operation and maintenance on a cost-sharing schedule whereby
$65,000 is paid the first year and each subsequent payment will be $5,000 less. The first payment
will be made 2 years from now, and the corporation's obligation will end with the last $5,000
payment. What is the present worth today of this agreement if the annual interest rate is 9 percent?
Question #6:
The lining of a chemical tank must be replaced every 3 years at a cost of $1,800. A new type of
lining is available that is more resistant to corrosion. The new lining costs $3,100. If the minimum
rate of return required is 12 percent, and taxes and insurance are 4 percent of the first cost
annually, how long must the improved lining last to be more economical that the present lining?
ASSIGNMENT #1 Solutions
1)
Future value of current savings ( $6000) invested at 6% semiannually (
3% for 20 periods) = F
F = (6000) * (F/P,3,20) = 6000 * 1.8060 = $10836
Amount to accumulate = 20000 - 10836 = $9164
Annual investment required = A = 9164 * (A/F,6,10)
= 9164 * 0.07587
= $695.27 *******
2)
Amount needed at age 65; P = 25,000 * (P/A,7,15)
= 25,000 * 9.1078
= $ 227,695
Therefore:
$ 227,695 = 75,000 * (F/P 9,10) + A * (F/A,7,11)
= 75000 * 2.3673 + A * 15.783
Solving for A:
A=$3177.3 *********
3)
A reasonable bid for the property is at least equal to the present worth
of its cash flow:
PW = 90,000 * (P/F,9,12) + (15,000-6,000) * (P/A,9,12)
= 90,000 * 0.35554 + 9,000 * 7.1606
= $96,444 *********
4)
Since the two alternatives have unequal lives
Therefore one can use the common multiple method
Using 60 years study period:
PW(A) = 25000 + 5500 * (P/A,10,60) + (25000-5000) * [ (P/F,10,20) +
(P/F,10,40) ]- 5000 * (P/F,10,60)
= 25000 + 5500*9.9671 + 20000*(0.14865+0.02210) - 5000*0.00328
= $ 83,218
PW(B) = 50000 + 2800 * (P/A,10,60) + 50000 * (P/F,10,30)
= 50000 + 2800*9.9671 + 50000 * 0.05731
= $ 80,000
Alternative B (metal and concrete) is preferred because it has a lower
present worth of 60 years of its life than alternative A (wood).
5)
Number of payments = 65000/5000 = 13
annual worth of payments A:
A = 65000 - 5000 * (A/G,9,13)
= 65000 - 5000 * 4.8182 = $ 40909
Payments start at year 2 (i.e. at the end of year 1) ; To find its
present worth, the annuities have to be transferred to the to the
present worth at year 2 ( by multiplying in (P/A,9,13) and then transfer
the value to the present (by multiplying in (P/F,9,1)
PW = 40909 * (P/A,9,13)*(P/F,9,1)
= 40909 * 7.4869 * 0.91743 = $280,992 *******
6)
The problem can be solved by assuming the repeated project assumption
and equating the annual worth of both linings
1800 (A/P,12,3) + 1800*0.04 = 3100 * (A/P,12,N) + 3100*0.04
1800 * 0.41635 + 72 = 3100 * (A/P,12,N) + 124
(A/P,12,N) = 0.22484
from tables by interpolation N=6.76 years
For the improved lining to be more economical, it has to last at least
6.76 years.
ASSIGNMENT #2
Question #1:
A company can purchase a piece of equipment for $20,000 and sell it
for $4,000 at the end of an eight year service life, or lease the unit
for the same period by making first-of-the-year payments of $3,000.
Compare the equivalent annual cost of the alternatives using an interest
rate of 15%.
Question #2:
A company borrowed $100,000 under an agreement to set up a sinking
fund to pay back the amount owned in 5 years. The interest rate earned
on the sinking fund in 7%. Annual payments of $9,000 are to be paid by
the company to the lenders. What is the annual cost of the company to pay back
the loan?
Question #3:
A triplex apartment building is purchased at $110,000. Receipts from
the rent are $19,200 annually, while maintenance, taxes and repair costs
are $5,600 annually. If the property will be sold 10 years later at
$110,000, what IRR will be obtained on the investment.
Question #4:
A company can purchase a new desktop laser printer for $7500 or
lease the machine for three years with annual payments of $3,000.
Determine at what interest rate leasing and purchasing costs would be
equivalent in the following case:
a) if lease payments were due at the beginning of each year
b) if lease payments were due at the end of each year
Question #5:
Two types of productivity programs are being considered for funding.
Both have an initial cost of $10,000 for training, equipment and
consulting contracts. Program A promises to produce constant net
revenues of $4,000 per year for 5 years. Net revenues from program B are
expected to be $10,000 the first year and $2,000 per year for the next
four years.. All revenues are considered end-of-year receipts.
a) which program is preferable at i = 10%
b) which program is preferable at i = 20%
c) Draw a graph of present worth versus I for the two proposals, and
state a decision rule for selecting between the two proposals.
Question #6:
A 5-year subscription can be purchased today for $48. One-year
subscriptions payable in advance year-by-year could be purchased to

provide the same number of issues. The current price of the one year
subscription is $10, but it will probably increase in price at the rate
of $2 per year. What IRR is earned on the 5-year subscription?

$50,000
30 years
O
$2,800

ASSIGNMENT #2 Solutions
1)
Purchasing of Equipment:
EAC =(P-S)(A/P,i,n)+Si
=(20000-4000)*(A/P,15,8) + 4000*0.15
= 16000*0.22285 + 600
= $4165.6
Leasing of Equipment (first of year payment)
The payments have to be transferred to the end of year
i.e. we find the future worth after one year
EAC =3000*(F/P,15,1)
=3000*1.15
=$3450.0
The lease has a lower annual cost
2)
EAC =100000*(A/F,7,5) + 9000
=100000*0.17389 + 9000
=$26389
3)
-110000 + (19200-5600)*(P/A,i,10) + 110000*(P/F,i,10) = 0
at i=12% -110000 + 13600*5.6502 + 110000*0.32197 = $2259.42
at i=13% -110000 + 13600*5.4262 + 110000*0.29459 =-$3798.78
By interpolation
RR = 12 + 1 *(2259.42-0)/(2259.42+3798.78)=12.37%
4)
PW (Purchase cost) - PW (leasing) = 0 at i = RR
a) Paymants at the beginning of each year
7500 - (3000 + 3000(P/A,i,2) = 0
(P/A,i,2) = 1.5
at i=20% (P/A,20,2) = 1.5227
at i=25% (P/A,25,2) = 1.44
By interpolation RR=21.58%
b) Payments at the end of year:
7500 - 3000(P/A,i,3) = 0
(P/A,i,3) = 2.5
at i=9% (P/A,20,2) = 2.5312
at i=10% (P/A,25,2) = 2.4868
By interpolation RR=9.7%
5)
PW(A) = -10000 + 4000(P/A,i,5)
PW(B) = -10000 + 10000(P/F,i,1) + 2000(P/A,i,4)(P/F,i,1)
a) at i=10%
PW(A) = -10000 + 4000*3.79078 = $5163
PW(B) = -10000 + 10000*0.909 + 2000*3.16986*0.909 = $4853
Program A is preferable
b) at i=20%
PW(A) = -10000 + 4000*2.9906 = $1962
PW(B) = -10000 + 10000*0.833 + 2000*2.5887*0.833 = $2647
Program B is preferable
c) PW(A) = PW(B) at i=12.5%
Decision Rule: If MARR is less than 12.5%, choose project A, otherwise
choose project B
6)
By equating the two subscription plans:
48 = 10 + [ 12+2(A/G,i,4)](P/A,i,4)
at i=15% PW= -38 + [12 + 2*1.3262]*2.8549 = 3.8311
at i=20% PW= -38 + [12 + 2*1.2742]*2.5887 =-0.3386
By interpolation
RR = 19.6 %
Assignment #3
Question #1:
A firm finds that it will be necessary to air-condition a rather
large
area for its computers and data-processing equipment. An engineering
study revealed that the more money spent on insulating the walls and
ceiling area, the less money is required for the air-conditioning
unit.The engineer's estimates are as follows:
1234
First cost of insulation $35,000 $45,000 $60,000 $80,000
First cost of air-conditioning equipment $52,000 $45,000 $38,000 $32,000
Annual power cost $ 6,500 $ 5,100 $ 4,100 $ 3,500
The study also estimated that the insulating material would have a life
of 20 years with zero salvage value, and the air-conditioning equipment
would have a life of 10 years with no salvage value. Taxes and insurance
are expected to be 2 percent of the first cost per year. Which
alternative should be selected if the firm requires a 15 percent rate of
return before taxes0? Use a PW comparison, and check the incremental
IRR.
Question #2:
Three independent proposals have passed a preliminary screening to
confirm that all are acceptable at a minimum IRR of 15 percent. Each one
has an economic life of 4 years.
The cash flows are given in the table, with the salvage values
included in the final year's income.
End-of-Year Cash Flows
Proposal First Cost 1 2 3 4
A $17,000 $10,000 $ 8,000 $ 6,000 $ 4,000
B $22,200 $ 4,000 $ 7,000 $10,000 $13,000
C $20,700 $ 8,000 $ 8,000 $ 8,000 $ 8,000
(a) Which combination of proposals should be selected if sufficient
capital is available to fund any choice, so long as the rate of return
is 20 percent or greater? Why?
(b) Which combination of proposals should be selected when the minimum
must be 15 percent, but an income of at least $14,000 per year is
necessary?
Question #3:
A new delivery truck has a sticker price of $6895, but the dealer
will sell it for $6,300 cash. A 3-year-old van can be traded for $2700
on the new truck purchased at the sticker price, or it can be sold to a
used-car dealer for $2500. The resale value of the van is expected to
decrease annually by 40 percent of the previous year's value each year.
Operating costs for the van will be $1020 next year and will
increase each following year by $400.
A new truck is expected to have operating costs of $700 per year
for the next 2 years; these costs will then increase by $300 each year.
After 6 years a truck can likely be sold for 10 percent of its sticker
price. It is the policy to retire trucks and vans after 6 years of
service and to earn 8 percent annually on invested funds.
Assuming the price of a new truck will not increase in the next few
years, when should the van be replaced?
Question #4:
The Shortcircuit Co. is considering the purchase of a newly developed
Sparksalot chip tester. The following data have been provided by the
manufacturing engineering group for a cost evaluation: The purchase
price of the equipment is $45,000 + $5000 for installation. The
installation cost for each replacement is $5000. the maximum life is 6
years, with the following intermediate salvage values: year 1, $30,000;
year 2, $20,000; year 3, $15,000; year 4, $11,000; year 5, $8000; and
year 6, $6000. Operating expenses will be $20,000 for year 1, with an
annual increase of $4000 in future years.
Based on a required rate of return of 20 percent and an assumption of
cyclic replacement, determine the economic life of the tester.
(HINT: Use the EAC method and find N such that EAC is minimized)
Question #5:
Eight investment proposals having identical economic lives are given
below.
Proposal Investment IRR % Proposal Investment IRR %
Number
1A 10 12 3A 15 2
1B 15 14 3B 20 9
2A 5 11 4A 10 8
2B 15 10 4B 20 15
(a) If all the proposals are independent and the capital rationing
cutoff rate is 10 percent, which ones should be accepted?
(b) If the 2 levels of each numbered proposal are mutually exclusive,

and the cutoff rate is still 10 percent, which ones should be accepted?
Question #6:
A manufacturing manager has received several proposals for future
expenditures to improve materials handling in four production areas.
The proposals within each area are mutually exclusive, but the
acceptance of a proposal in one area has no effect on the economic
attractiveness of a proposal in any other area.
Area Proposal Initial Cost Net Annual Cash
Flow
A A1 $ 50,000 $ 8,200
A2 $ 60,000 $15,000
A3 $ 75,000 $17,000
B B1 $100,000 $20,000
B2 $120,000 $25,000
B3 $130,000 $29,000
B4 $140,000 $30,000
C C1 $ 80,000 $15,000
C2 $120,000 $24,000
D D1 $ 60,000 $14,000
D2 $ 80,000 $15,000
D3 $ 90,000 $21,000
Using an estimated project life of 10 years with no salvage value
and a corporate after-tax MARR of 12 percent answer the following:
(a) Which proposalS should be selected if unlimited funds are
available? What overall rate of return would be obtained on the
investment?
(b) If only $160,000 of internal funding is available, which proposals
should be selected? What effect will this have on the overall rate of
return?
(C) Corporate management has decided that only two capital expenditure
projects are to be funded. Which 2 should be selected, and what overall
rate of return will be obtained?

ASSIGNMENT #3 Solutions
1)
PW(1)=
87000+52000(P/A,15,20)+(0.02)(35000+52000)(P/A,15,20)+6500(P/A,15,20)
= 87000+52000(.24719)+1740(6.2593)+6500(6.2593)= $151,431
PW(2)=45000+45000+(.02)(45000+45000)(P/A,15,20)+45000(P/F,15,10)+5100(P/A,15,20)
= $144,313
PW(3)=60000+38000+(.02)(60000+38000)(P/A,15,20)+38000(P/F,15,10)+4100(P/A,15,20)
= $145,325
PW(4)=80000+32000+(.02)(80000+32000)(P/A,15,20)+32000(P/F,15,10)+3500(P/A,15,20)
= $155,838
Since Alt. 2 provides the lowest present worth (it has the lowest cost),
that's the choice.
at RR: AW(first cost increment)-AW(net savings)=0
1-->2 2-->3 2-->4
P (insulation) $10000 $15000 $35000
P (A.C. equipment) -7000 -7000 -13000
Annual taxes (2%) 60 160 440
Annual power -1400 -1000 -1600
RR(1-->2): 10000(A/P,i,20)-7000(A/P,i,10)+60-1400=0
@50%: 10000(.50015)-7000(.50882)-1340=$99.8
which indicates that RR is slightly less than 50%, but alt. 2 is
certainly acceptable because its IRR>15%.
RR(2-->3): 15000(A/P,i,20)-7000(A/P,i,10)+160-1000=0
@13%: 15000(.14235)-7000(.18429)-840=$5.22
which indicates the RR is slightly less than 13%, and that alt. 3 is
unacceptable because its RR<15%.
RR(2-->4): 35000(A/P,i,20)-13000(A/P,i,10)+440-1600=0
@5%: AW= -$35.23
@6%: AW= $125.34
since the RR<15% keep alt. 2.
Therefore, alt.2 is preferred.
2)
All possible combinations of proposals are listed in the table below:
End of Year Cash Flows
Proposals 0 1 2 3 4 RR
------------------------------------------------------------000000000
A 0 0 17000 10000 8000 6000 4000 28%
0 B 0 22200 4000 7000 10000 13000 16%
0 0 C 26700 8000 8000 8000 8000 20%
A B 0 39200 14000 15000 16000 17000 20.5%
0 B C 42900 12000 15000 18000 21000 18%
A 0 C 37700 18000 16000 14000 12000 24%
A B C 59900 22000 23000 24000 25000 20%
(a) Under the asumption of unlimited capital, all three proposals could
be funded as a combination that earns the required min. 20%. However,
the combinationof A+C, which earns 24%, is preferred becasue each of the
included proposals exceeds the minimum RR requirement. The remaining
capital compared to A+B+C (59900-37700=22200) could theoritically be
invested at 20% in other unlisted projects.
(b) Two combinations have revenues of at least $14000 per year: A+B and
A+B+C. Of these two combinations, a slight preference for A+B results
because its RR barely exceeds the RR for A+B+C: 20.5% to 20%, but A+B+C
is preferred under the assumption that the maximum amount should be
invested as long as the incremental RR exceeds 15%; which is the case
for A+B+C.
3)It is apparent by inspection that that it would cost less to pay cash
for a new delivery truck ($6300) and save $595 than to pay the sticker
price ($6895) and get $200 more on the trade-in. Therefore, the EAC of
the challenger is:
EAC(C)= [6300-6895(.1)](A/P,8,6)+6895(.1)(.08)+700+
300(A/G,8,5)(P/A,8,5)(P/F,8,1)(A/P,8,6)
= $2412
EAC of the defender for one more year of service is:
EAC(D1)= 2500(.4)(A/P,8,1)+2500(.6)(.08)+1200= $2220
Since this is less than EAC(C), keep the old truck for another year.
Next, find the EAC(D) during year 2. The salvage value of the defender
at the end of the second year of service would be 2500(0.6)(0.6)=$900:
EAC(D2)= (1500-900)(A/P,8,1)+900(0.08)+(1020+400)= $2140
The cost during the sixth (and last) year of the defender's life:
EAC(D3)= (900-540)(A/P,8,1)+540(0.08)+(1420+400)= $2,252
The van should not be replaced until it is 6 years old (3 years from
now) because its annual costs are less than the challenger.
4)
Units in thousands;
P=50; EAC=(P-S)(A/P,20,N)+Si+20+4(A/G,20,N);
Year S P-S (A/P,20,N) Si A G (A/G,20,N) EAC
1 30 20 1.20000 6 20 4 0 50.00
2 20 30 0.65455 4 20 4 0.4545 45.45
3 15 35 0.47473 3 20 4 0.8791 43.13
4 11 39 0.38629 2.2 20 4 1.2742 42.36
5 8 42 0.33438 1.6 20 4 1.6405 42.21
<-6 6 44 0.30071 1.2 20 4 1.9788 42.32
Therefore, the economic life= 5 years
5)
(a) Select all alternatives with IRR>10%. That is, select
1A,1B,2A,2B,4B.
(b) Within eahcnumbered proposals, select the one with highest IRR.
Therefore, select 1B, 2B, and 4B.
6)
MARR=12%
Annual
Proposal COST Revenue (P/A,i,10) I.R.R.
Do nothing-->A1 50000 8200 6.0976 10.2%
Do nothing-->A2 60000 15000 4 21.5%
A2-->A3 15000 2000 7.5 5.6%
===> CHOOSE A2
Do nothing-->B1 100000 20000 5 15.1%
B1-->B2 20000 5000 4 21.5%
B2-->B3 10000 4000 2.5 38.7%
B3-->B4 10000 1000 10 NEGATIVE
===> CHOOSE B3

Do nothing-->C1 80000 15000 5.333 13.4%

C1-->C2 40000 9000 4.444 18.5%
====> CHOOSE C1
Do nothing-->D1 60000 14000 4.2857 19.4%
D1-->D2 20000 1000 20 NEGATIVE
D1-->D3 30000 7000 4.2857 19.4%
===> CHOOSE D3.
(a)
Proposal Investment Rate of Return Weighted R.O.R.
A2 60000 0.215 3.58%**
B3 130000 0.182* 6.57%
C1 80000 0.134 2.98%
D3 90000 0.194 4.85%
-------- ------SUM 360000 AVG. RATE OF RETURN=17.98%
* The R.O.R for B3 is obtained by equating PW(B3)=0 and solving for i.
**sample calculation: 3.58%=[0.215(60000)/360000]*100
(b)
Proposal Investment Rate of Return Weighted R.O.R.
A2 60000 0.215 8.06%**
D3 90000 0.194 10.93%
Outside 10000 0.12 0.75%
-------- ------SUM $160000 AVG. RATE OF RETURN=19.72%
** sample calculation: 8.06%=[0.215(60000)/160000]*100
(c)
Proposal Investment Rate of Return Weighted R.O.R.
A2 60000 0.215 8.6%
D3 90000 0.194 11.64%
-------- ------SUM $150000 AVG. RATE OF RETURN=20.24%
ASSIGNMENT #4
Question #1:
A $5,000, 10-year, 12% semi-annual bond is purchased now for par
value. After receiving the 12th dividend, Dr. Rich sells the bond to Dr.
Ruth at a price sufficient to yield a return on the original purchase
price equivalent to 10% compounded semi-annually. What was Dr Rich's
selling price? If Dr. Ruth keeps the bond until maturity and redeems it
for $5000, what annual effective yield rate will Dr. Ruth receive?
Question #2:
Two projects are being considered for implementation. Project A
costs $50,000, provides $25,000 revenues per year, and is expected to
have a 3-year economic life. Its annual operating costs are estimated at
$5,000 and it has a salvage value of $10,000. Project B costs $75,000,
provides annual revenues of $23,000, with an economic salvage value of
$15,000. It is expected that its economic life will be 5 years. Its
operating costs are $3,000 for the first year and will increase by $500
per year after that. If funds are worth 10%, which project is superior?
Question #3:
A small construction firm's front loader is working fairly well
but is only expected to last for 2 more years. An offer of $3,500 has
been made for it by a small township. A new machine has a first cost of
$18,500 and should last for 8 years. The annual savings in operation and
maintenance are expected to be $1,500 per year over the current machine.
The current machine will have $500 salvage value in 2 years. What is the
minimum salvage value required for the new machine that will barely
allow it to be selected? A MARR of 10% is required.
Question #4:
Several alternative projects involving water supply systems are
under consideration by the Leakydam Public Utility. The following data
have been summarized for your consideration:
Project A B C D E
First cost $2000 $100 $700 $1200 $500
Annual operating cost $70 $4 $60 $100 $30
Annual recreation benefits $150 $0 $55 $170 $25
Annual increase in agricultural
production $200 $30 $50 $160 $90
All costs are given in thousands of dollars and negligible salvage
values are assumed at the end of a fifty year life. Since annual
operating costs are to be paid from area property tax revenues they are
treated as disbenefits. Using a discount rate of 7 percent, determine
the following:
(a) Which projects should be selected if the alternatives are
independent?
(b) Which project should be selected if the alternatives are mutually
exclusive?
(c) Which of the mutually exclusive projects should be selected if a
rate of return analysis is used?
Question #5:
The Dry Springs Flood Control District has applied for a federal
grant to eliminate a persistent flooding problem. Two alternative
projects are being considered, and the following data have been
collected.
Plan 1 Plan 2
First cost $25,000,000 $50,000,000
Average annual reduction in
flood damage $1,300,000 $2,800,000
Annual irrigation benefits $350,000 $600,000
Annual recreation benefits $100,000 $300,000
Annual operating and
maintenance costs $210,000 $400,000
A social discount rate of 6 percent is recommended. The life of both
plans is estimated at 50 years, and no salvage value is expected.
(a) Calculate the benefit-cost ratio using disbenefits in the
numerator, and compare it with B/C when disbenefits are added to costs
in denominator.
(b) Determine the incremental benefit-cost ratio of plan 1 to that of
plan 2 using both methods from part (a) above.
Question #6:
Rimrock Construction Co. is purchasing a new piece of equipment in
Class 8 in 1982 for $34,000. The unit is expected to produce annual
revenue of $21,000 for each of the next 4 years and will be sold at the
end of that time for an expected salvage value of $4000. Maintenance
expenses on the equipment are expected to be $2000 for the first year
and to increase by $500 per year for each successive year of operation.
The company has an effective tax rate of 40% and requires an after-tax
MARR of 10%. What is the present worth of the proposed purchase?
Question #7:
A $10,000 investment can be made today that will produce savings
of $2000 annually for the next 7 years. There is no salvage value
involved. Calculate the present worth of the investment at MARR= 10%.
Show that the same PW results when the real-dollar savings inflate at 8%
annually. Apply the combined interest-inflation rate to discount the
actual-dollar cash flow.

ASSIGNMENT #4 Solutions
1)
A= 5000*0.06=$300 every six month
PW= 0 ===> -5000+ F(P/F,5%,12) +300(P/A,5%,12)=0
SOLVE FOR F ===> F= $4204.2 (The selling price)
(b) PW=0 ===> -4204.2 +300(P/A,i,8) + 5000(P/F,i,8)=0
for i=8% PW=221
for i=9% PW=-34.5 ===> by interpolation: i=8.86%
i_eff= (1+0.0886)^2-1= 18.5%/year
2)
(numbers in thousands of dollar)
EAW(A)= -50(A/P,10,3)+25-5+10(A/F,10,3)= $2915
EAW(B)= -75(A/P,10,5)+23-[3+0.5(A/G,10,5)]+15(A/F,10,5)= $1767
===> SELECT A.
3)
EAC(OLD)= (3500-500)(A/P,105,2)+500*0.10= $1778.6
EAC(NEW)= (18500-S)(A/P,10%,8)+S*0.10-1500
EAC(OLD)=EAC(NEW) ===> 1778.6=3467.8-(0.1875)S+(0.1)S-1500
===> S>= $2163.5
4)

First, arrange projects in ascending order of intial investment:

(a)
Project annual benefit* annual cost** B/C
B 30-4=26 7.25 3.59
E 90+25-30=85 36.23 2.35
C 55+50-60=45 50.72 0.89
D 160+170-100=230 86.95 2.65
A 200+150-70=280 144.92 1.93
* THE PROBLEM HAS ASSUMED THAT OPERATING COSTS ARE DISBENEFITS. THUS,
THEY ARE SUBTRACTED FROM BENEFITS.
** ANNUAL COST= FIRST COST * (A/P,7%,50)= FIRST COST*0.07246
Select all projects with B/C>=1 ===> select A,B,D,E
(b) Use ~B/~C method (NOTE: Read '~' as DELTA!)
project ~C ~B ~B/~C Decision
do nothing -->B 26 7.25 3.59 select B
B -->E 59 29.98 1.97 select E
E -->D 145 50.72 2.86 select D
D -->A 50 57.97 0.86 keep D
===> SELECT D.
(c) Use incremental IRR:
project ~Invest ~annual (P/A,i,50) ~RR Decision
benefit
do nothing-->B 100 26 3.846 26.2%(>7%) select B
B -->E 400 59 6.780 14.7%(>7%) select E
E -->D 700 145 4.828 20.9%(>7%) select D
D -->A 800 50 16 5.9% (<7%) keep D
===> SELECT D.
5)
units in thousands of dollars.
(a)
DISBENEFITS IN DINOMINATOR:
Plan 1. B/C= (350+100+1300)/[25000(A/P,6,50)+210]
= 1750/(25000*0.06344+210) = 0.974
PLAN 2. B/C= (600+300+2800)/[50000(A/P,6,50)+400]
= 3700/(3172+400)= 1.036
DISBENFITS IN NUMERATOR:
PLAN 1. B/C= (1750-210)/1586= 0.970
PLAN 2. B/C= (3700-400)/3172= 1.11
(b)
~(B-D)/~C= [(3700-400)-(1750-210)]/(3172-1586)= 1760/1586=1.11
~B/~(C+D)= (3700-1750)/(3572-1796)= 1.1
6)
Class 8 --> CCA rate=d=20% t=40% i=10%
CCTF (before 1981)= 1- td/(i+d)= 1- 0.4*0.2/(0.1+0.2)=0.733
CCTF (after 1981)= 1- [{(td/(i+d)}{(1+0.5*i)/(1+i)}]= 0.745
PW= -34000*CCTF(after)+ (1-t)[21000-{500(A/G,10,4)+2000}](P/A,10,4)
+4000(P/F,10,4)*CCTF(before)
PW= -34000(0.745)+ 0.6[21000-{500(1.381)+2000}](3.1698)
+4000(0.68302)(0.733)
PW= $11480
7)
PW= -10000 +2000(P/A,10,7)= -10000+2000(4.8683)= -$263
f=8% i=10%
i_f= (1.1)(1.08)-1= 0.188 or i_f=18.8%
End of Cash flow in
year N actual dollars (P/F,18.8,N) PW
0 -10000 1.000 -10000
1 2160.0 0.8418 1818.2
2 2332.8 0.7085 1652.9
3 2519.4 0.5964 1502.6
4 2721.0 0.5020 1366.1
5 2938.7 0.4226 1241.9
6 3173.7 0.3557 1129.0
7 3427.6 0.2994 1026.3
--------$ 263.0
ASSIGNMENT #5
Question 1:
A manufacturer estimates that the fixed costs at his plant amount to
about $600,000 per year, while variable costs are approximately $14 per
unit. The price per unit of output averages $20 over the year. What is
the break-even point? If practical annual capacity is estimated to be
160,000 units, how does the break-even point compare to it? Represent
your analysis graphically.
Question 2:
A firm has fixed costs of $475,000 per month. Variable costs are $18
per unit. The product can be sold for $25 per unit. What is the
break-even point for the firm? Suppose that the variable costs can be
reduced by $1 per unit by increasing the fixed costs by $25,000 per
month. Is this desirable? Explain. The firm's "standard volume" has
been around 75,000 unit per month.
Question 3:
A data processing firm mails 1000 bimonthly newsletters to present
or potential clients. In one issue the firm announced a new service and
asked that the interested parties write for more information. The firm
believed that one of every two replies would come from one of its
present customers. From the past experience, it is estimated that the
probability of a reply from non-customers is 0.40. On the assumption
that the mailing list includes the names of 300 present customers, how
many replies can be expected?
Question 4:
A payoff table for three investments of equal size and duration is
as follows:
Alternative Boom (P=0.3) So-So (P=0.5) Bust (0.2)
A 1,000,000 200,000 -500,000
B 300,000 400,000 0
C 400,000 600,000 -300,000
Which alternative should be selected? why?
ASSIGNMENT #5 Solutions
1)
BEP= FC/(SP-VC)
= 600000/(20-14)= 100,000 UNITS
Z= profit= (160000-100000)*(20-14)= $360,000
2)
BEP= FC/(SP-VC)
= 475000/(25-18)= 67,857 units
Z= (75000-67857)*7= $50,000
margin of profit (safety)= Z/FC= 50000/475000=0.105
FC'= $500000;
VC'=17
BEP'= FC'/(SP-VC')
= 500000/(25-17)=62500 units
Z'= (75000-62500)*8= $100,000
margin of profit (safety)= Z/FC= 100000/500000=0.2
by adopting the second strategy, firm obtains both a higher profit and a
higher margin of profit. Therefore, it is desirable to do that.
3)
Number of non-costumers= 1000-300=700
expected reply from non-customers= number of non-costumers* prob. of
reply by non-customers
= 700*0.4= 280 replies from non-customers
since one of every two replies would come from one of its present
customers, total number of replies equals:
280*2= 560 replies
Alternative solution:
P(N)= prob. of a non-customer= 700/1000= 0.7
P(R|N)= prob. of a reply given a non-customer= 0.4
P(N|R)= prob. of non-curtomer given a reply= 0.5
P(NR)= P(R|N)*P(N)= 0.7*0.4= 0.28
P(R)= P(NR)/P(N|R)= 0.28/0.5=0.56
number of replies= number mailed * prob. of a reply
= 1000*0.56= 560
4)
By using the expected value criterion:
EV(A)= 1000000(0.3)+200000(0.5)-500000(0.2)= $300,000
EV(B)= 300000(0.3)+400000(0.5)+0(0.2) = $290,000
EV(C)= 400000(0.3)+600000(0.5)-300000(0.2) = $360,000

SELECT ALT. C, BECAUSE IT HAS THE HIGHEST EV.