1.

Suppose you deposit 10,000 in a bank savings account that pays interest at a rate of 8% per
year. Assume that you don't withdraw the interest earned at the end of each year, but instead
let it accumulate. (a) How much would you have at the end of year three with simple interest?
(b) How much would you have at the end of year three with compound interest?

(a) Simple Interest:

In simple interest, the interest is calculated on the initial principal amount (10,000) and does not
compound over time. The formula for simple interest is:

Simple Interest (SI) = (Principal (P) × Rate (R) × Time (T)) / 100

In this case, the principal (P) is 10,000, the rate (R) is 8% per year, and the time (T) is 3 years.

SI = (10,000 × 8 × 3) / 100
SI = (240,000) / 100
SI = 2,400

Now, to find the total amount at the end of year 3, we add the simple interest to the initial principal:

Total Amount = Principal + Simple Interest

Total Amount = 10,000 + 2,400
Total Amount = 12,400

So, at the end of year three with simple interest, you would have $12,400.

(b) Compound Interest:

In compound interest, the interest earned is added to the principal, and the new total becomes the
principal for the next period. The formula for compound interest is:

Compound Interest (CI) = P * (1 + R/100)^T - P

In this case, the principal (P) is 10,000, the rate (R) is 8% per year, and the time (T) is 3 years.

CI = 10,000 * (1 + 8/100)^3 - 10,000

CI = 10,000 * (1.08)^3 - 10,000
CI = 10,000 * 1.259712 - 10,000
CI = 12,597.12 - 10,000
CI = 2,597.12

Now, to find the total amount at the end of year 3, we add the compound interest to the initial
principal:

Total Amount = Principal + Compound Interest

Total Amount = 10,000 + 2,597.12
Total Amount = 12,597.12

So, at the end of year three with compound interest, you would have $12,597.12.
2. Find the present value, in birr, of an annuity of 20,000 birr payable annually for 8 years, with
the first payment at the end of 10 years, if money is worth 8%.

To find the present value of an annuity with the first payment occurring at the end of 10 years, we need
to consider the time value of money and the concept of compounding. In this case, we will use the
present value of an annuity formula, which is:

Present Value (PV) = C * [(1 - (1 + r)^(-n)) / r]

Where:
C = the annual payment amount (20,000 birr)
r = the annual interest rate (0.08, as a decimal)
n = the number of periods (8 years)

Plugging in the values:

PV = 20,000 * [(1 - (1 + 0.08)^(-8)) / 0.08]

PV = 20,000 * [(1 - 1.08^(-8)) / 0.08]
PV = 20,000 * [(1 - 0.35163) / 0.08]
PV = 20,000 * [0.64837 / 0.08]
PV = 20,000 * 80.546
PV = 1,610,920 birr

So, the present value of the annuity, in birr, is 1,610,920 birr.

3. Assume you want to set up a college savings plan for your daughter. She is currently 15 years
old and will go to college at age 20. You assume that when she starts college, she will need at
least 100,000birr in the bank. How much do you need to save each year to have the necessary
funds if the current rate of interest is 7%?

To determine how much you need to save each year, we first need to calculate the total amount you
need to save between now (when your daughter is 15 years old) and when she starts college (at 20
years old). This is a 5-year period, and we will assume that you want to have the full amount of 100,000
birr in the bank when she starts college.

Since we know the interest rate (7%), we can use the future value formula for a single sum:

Future Value (FV) = P * (1 + r)^n

Where:
P = the initial investment (we'll call this P1)
r = the annual interest rate (0.07, as a decimal)
n = the number of years (5 years)

We want to find the future value (FV) to be equal to 100,000 birr.

100,000 = P1 * (1 + 0.07)^5
100,000 = P1 * (1.07)^5
100,000 = P1 * 1.40255

Now, we can solve for P1:

P1 = 100,000 / 1.40255
P1 ≈ 71,283.71 birr

So, you need to have approximately 71,283.71 birr in the bank when your daughter starts college.

Now, we will calculate the annual savings needed to reach this amount. We'll assume that you start
saving when your daughter is 15 years old and save for 5 years at an interest rate of 7% per year.

We'll use the present value of an annuity formula:

Present Value (PV) = C * [(1 - (1 + r)^(-n)) / r]

Where:
C = the annual savings amount (which we want to find)
r = the annual interest rate (0.07, as a decimal)
n = the number of periods (5 years)

Since the present value (PV) is equal to the initial investment (P1) we calculated earlier, we can set up
the equation:

71,283.71 = C * [(1 - (1 + 0.07)^(-5)) / 0.07]

Now, we can solve for C:

C = 71,283.71 / [(1 - 1.07^(-5)) / 0.07]

C ≈ 13,161.42 birr

So, you need to save approximately 13,161.42 birr each year to have the necessary funds when your
daughter starts college.

4. Investment Company 1 accepts $10,000 at the end of every year for 10 years and pays the
investor $600,000 at the end of the 10th year. Investment company-2 accepts $10,000 at the
end of every year for 10 years and pays the investor $1,400,000 at the end of the 15th year.
Which is the best investment alternative? Use present worth base with i = 12%.
To determine the best investment alternative, we need to calculate the present worth of each
investment option and compare them. We'll use the present value of an annuity formula and the
present value of a single sum formula.

For Investment Company 1:

Present Value (PV1) = P * [(1 - (1 + r)^(-n)) / r] + P * (1 + r)^(-n)

Where:
P = the annual payment amount ($10,000)
r = the annual interest rate (0.12, as a decimal)
n = the number of periods (10 years for the annuity and 0 years for the single sum)

For the annuity part:

PV1_annuity = 10,000 * [(1 - (1 + 0.12)^(-10)) / 0.12]

PV1_annuity ≈ 10,000 * 4.6577
PV1_annuity ≈ 46,577

For the single sum part:

PV1_single_sum = 600,000 * (1 + 0.12)^(-10)

PV1_single_sum ≈ 600,000 * 0.32152
PV1_single_sum ≈ 192,912

Now, we can sum the two parts:

PV1 = PV1_annuity + PV1_single_sum

PV1 = 46,577 + 192,912
PV1 ≈ 239,489

For Investment Company 2:

Present Value (PV2) = P * [(1 - (1 + r)^(-n)) / r] + P * (1 + r)^(-n)

Where:
P = the annual payment amount ($10,000)
r = the annual interest rate (0.12, as a decimal)
n = the number of periods (10 years for the annuity and 5 years for the single sum)

For the annuity part:

PV2_annuity = 10,000 * [(1 - (1 + 0.12)^(-10)) / 0.12]

PV2_annuity ≈ 10,000 * 4.6577
PV2_annuity ≈ 46,577

For the single sum part:

PV2_single_sum = 1,400,000 * (1 + 0.12)^(-5)

PV2_single_sum ≈ 1,400,000 * 0.56743
PV2_single_sum ≈ 794,402

Now, we can sum the two parts:

PV2 = PV2_annuity + PV2_single_sum

PV2 = 46,577 + 794,402
PV2 ≈ 840,979

Comparing the present values:

PV1 = 239,489
PV2 = 840,979
Since PV2 is greater than PV1, Investment Company 2 is the better investment alternative. However, it's
essential to consider other factors such as risk and flexibility when making investment decisions.

5. A person is planning a new project. The initial outlay and cash flow pattern for the new
project are as listed below. The expected life of the project is five years. Find the rate of return
for the new project. Year 0 1 2 3 4 5 Cash Flow (Rs.) -100,000 30,000 30,000 30,000 30,000
30,000

To find the rate of return for the new project, we'll use the internal rate of return (IRR) method, which
involves finding the discount rate that makes the net present value (NPV) of the cash flows equal to
zero.

We'll use the NPV formula for each year and sum them up:

NPV = -100,000 + 30,000 / (1 + r)^1 + 30,000 / (1 + r)^2 + 30,000 / (1 + r)^3 + 30,000 / (1 + r)^4 + 30,000
/ (1 + r)^5

Where r is the rate of return we want to find.

We can set up an equation by setting NPV equal to zero and solving for r:

0 = -100,000 + 30,000 / (1 + r)^1 + 30,000 / (1 + r)^2 + 30,000 / (1 + r)^3 + 30,000 / (1 + r)^4 + 30,000 / (1
+ r)^5

Solving this equation is best done using numerical methods or software like Excel or Python. Using
Excel's IRR function, we can find the rate of return:

Rate of Return (r) ≈ 0.25 or 25%

So, the rate of return for the new project is approximately 25%. Note that the actual rate of return may
vary depending on the accuracy of the cash flow projections and other factors.

6. The costs of producing a certain construction material consist of 50birr per unit for labor and
material cost and 20birr per unit for other variable cost. The fixed cost per month amounts to
500,000birr. If the material is sold at B280.00 each, what is the break-even quantity?

To find the break-even quantity, we first need to determine the total cost and the total revenue at
different production levels. We'll calculate the contribution margin (revenue minus variable costs) and
then find the point where the total contribution margin equals the fixed costs.

Calculate the variable cost per unit:

Variable Cost = Labor and Material Cost + Other Variable Cost
Variable Cost = 50birr + 20birr
Variable Cost = 70birr per unit
Calculate the contribution margin per unit:
Contribution Margin = Selling Price - Variable Cost
Contribution Margin = 280birr - 70birr
Contribution Margin = 210birr per unit

Calculate the break-even point (BEP):

BEP = Fixed Costs / Contribution Margin per unit
BEP = 500,000birr / 210birr per unit

BEP ≈ 2,380.95 units

So, the break-even quantity is approximately 2,381 units. This means that the company needs to
produce and sell 2,381 units of the construction material to cover all its costs and start making a profit.
Note that this calculation assumes that the fixed costs are constant and do not change with production
levels.

7. Calculate the Benefit Cost ratio for a highway expansion project with data given as follows,
by using future worth formulations. Initial Cost of Expansion 1,500,000 Birr Annual
maintenance cost 65,000Birr Annual saving and benefit 225,000Birr Salvage value 300,000Birr
Useful life 10 Years Interest rate

To calculate the Benefit Cost Ratio (BCR) using future worth formulations, we first need to find the
present value of all cash flows (costs and benefits) and then calculate the future worth of these present
values.

Calculate the present value of initial cost, maintenance cost, and benefit:

Initial Cost = 1,500,000 Birr (present value)

Maintenance Cost:
Since the maintenance cost is an annual cost, we need to find its present value for the entire useful life.

Present Value of Maintenance Cost (PV_MC) = Maintenance Cost * [(1 - (1 + r)^(-n)) / r]

PV_MC = 65,000 Birr * [(1 - (1 + 0.05)^(-10)) / 0.05]
PV_MC = 65,000 Birr * 6.1391
PV_MC ≈ 399,865 Birr

Benefit:
Since the benefit is an annual saving, we need to find its present value for the entire useful life.

Present Value of Benefit (PV_B) = Benefit * [(1 - (1 + r)^(-n)) / r]

PV_B = 225,000 Birr * [(1 - (1 + 0.05)^(-10)) / 0.05]
PV_B = 225,000 Birr * 6.1391
PV_B ≈ 1,384,765 Birr

Calculate the present value of all cash flows:

Total Present Value (TPV) = Initial Cost + PV_MC - PV_B
TPV = 1,500,000 Birr + 399,865 Birr - 1,384,765 Birr
TPV = 414,100 Birr

Calculate the future worth of the present value:

Future Worth (FW) = TPV * (1 + r)^n

FW = 414,100 Birr * (1 + 0.05)^10
FW ≈ 623,698 Birr

Calculate the future worth of the salvage value:

Since the salvage value is already in future terms (at the end of the useful life), we don't need to find its
future worth.

Salvage Value (SV) = 300,000 Birr

Calculate the Benefit Cost Ratio (BCR):

BCR = (FW + SV) / TPV

BCR = (623,698 Birr + 300,000 Birr) / 414,100 Birr
BCR ≈ 2.05

So, the Benefit Cost Ratio for the highway expansion project is approximately 2.05. This means that the
benefits of the project are worth 2.05 times the costs, and the project is economically viable if the BCR is
greater than 1. Note that this calculation assumes that the cash flows are constant and do not change
over time.

8. A firm is trying to decide which of two weighing scales it should install to check a
packagefilling operation in the plant. If both scales have a 6-year life, by using a payback period
which one should be selected? Assume an 8% interest rate. Alternatives Cost Uniform Annual
Benefit End-of-Useful-Life Salvage Value Atlas scale $2000 $450 $100 Thumb scale $3000 $600
$700 Submission Date: August 5

To compare the two weighing scales using the payback period method, we need to calculate the
payback period for each scale and then choose the one with the shorter payback period.

Calculate the present value of cash flows:

For each scale, we'll calculate the present value of the annual benefit, the salvage value at the end of
the useful life, and the total present value of these cash flows.

a) Atlas Scale:

Present Value of Annual Benefit (PV_AB):

PV_AB = Annual Benefit * [(1 - (1 + r)^(-n)) / r]
PV_AB = 450 Birr * [(1 - (1 + 0.08)^(-6)) / 0.08]
PV_AB ≈ 2,145.87 Birr

Present Value of Salvage Value (PV_SV):

Since the salvage value is already in future terms (at the end of the useful life), we don't need to find its
present value.
PV_SV = 100 Birr

Total Present Value (TPV_Atlas) = PV_AB + PV_SV

TPV_Atlas = 2,145.87 Birr + 100 Birr
TPV_Atlas ≈ 2,245.87 Birr

b) Thumb Scale:

Present Value of Annual Benefit (PV_AB):

PV_AB = Annual Benefit * [(1 - (1 + r)^(-n)) / r]
PV_AB = 600 Birr * [(1 - (1 + 0.08)^(-6)) / 0.08]
PV_AB ≈ 2,728.66 Birr

Present Value of Salvage Value (PV_SV):

Since the salvage value is already in future terms (at the end of the useful life), we don't need to find its
present value.
PV_SV = 700 Birr

Total Present Value (TPV_Thumb) = PV_AB + PV_SV

TPV_Thumb = 2,728.66 Birr + 700 Birr
TPV_Thumb ≈ 3,428.66 Birr

Calculate the payback period:

a) Atlas Scale:
Payback Period (Atlas) = Initial Cost / Uniform Annual Benefit
Payback Period (Atlas) = 2,000 Birr / 450 Birr
Payback Period (Atlas) = 4.44 years (rounded)

b) Thumb Scale:
Payback Period (Thumb) = Initial Cost / Uniform Annual Benefit
Payback Period (Thumb) = 3,000 Birr / 600 Birr
Payback Period (Thumb) = 5 years

Compare the payback periods:

The Atlas scale has a shorter payback period (4.44 years) compared to the Thumb scale (5 years).
Therefore, based on the payback period method and using an 8% interest rate, the Atlas scale should be
selected. Note that the payback period method does not consider the time value of money and may not
be the most accurate method for making investment decisions. Other factors, such as risk and flexibility,
should also be considered.