Beruflich Dokumente
Kultur Dokumente
7-2
(a) F = $5, P = $1, n = 5
F = P (1 + i)n
$5 = $1 (1 + i)5
(1 + i) = 50.20 = 1.38
i* = 38%
(b) For a 100% annual rate of return
F = $1 (1 + 1.0)5 = $32, not $5!
Note that the prices Diagonal charges do not necessarily reflect what anyone will
pay a collector for his/her stamps.
7-3
A = $12.64
.
n = 12
$175
7-4
The rate of return exceeds 60% so the interest tables are not useful.
F = P (1 + i)n
$25,000 = $5,000 (1 + i)3
(1 + i) = ($25,000/$5,000)1/3 = 1.71
i* = 0.71
Rate of Return = 71%
7-5
$3,000
A = $325
n = 36
$12,375
7-6
1991 1626 = 365 years = n
F = P (1 + i)n
12 109 = 24(1 + i)365
(1 + i)365 = 12 x 100/24= 5.00 108
This may be immediately solved on most hand calculators:
i* = 5.64%
Solution based on compound interest tables:
(F/P, i%, 365) = 5.00 108
= (F/P, i%, 100) (F/P, i%, 100) (F/P, i%, 100) (F/P, i%, 65)
Try i = 6%
(F/P, 6%, 365) = (339.3)3 (44.14) = 17.24 108 (i too high)
Try i = 5%
(F/P, 5%, 365) = (131.5)3 (23.84) = 0.542 108 (i too low)
Performing linear interpolation:
i* = 5% + (1%) [((5 0.54) (108))/((17.24 0.54) (108))]
= 5% + 4.46/16.70
= 5.27%
The linear interpolation is inaccurate.
7-7
106
(F/A, i, 35) =
= 172.414 and is very close to 8% from tables. (Exact = 8.003%)
5800
7-8
107
= 40 and interpolating
2.5 105
36.786 40
i = 6% + (1%)
= 6.76% (exact value 6.774%)
36.786 40.996
(F/A, i, 20) =
7-9
Year
0
3
6
Cash Flow
$1,000
+$1,094.60
+$1,094.60
7-10
3,000 = 30 (P/A, i*, 120)
(P/A, i*, 120) = 3,000/30 = 100
Performing Linear Interpolation:
(P/A, i%, 120)
103.563
100
90.074
I
%
i*
%
7-11
$3,000 = $119.67 (P/A, i%, 30)
(P/A, i%, 30) = $3,000/$119.67 = 25.069
Performing Linear Interpolation:
(P/A, i% 30) i
25.808
1%
24.889
1.25%
i = 1% + (0.25%)((25.80825.069)/(25.80824.889))
= 1.201%
(a) Nominal Interest Rate = 1.201 12 = 14.41%
(b) Effective Interest Rate = (1 + 0.01201)12 1 = 0.154 = 15.4%
7-12
$125
$10
$20
$30
$40
$50
$60
7-13
$5
$10
$15
$20
$25
$42.55
7-14
The algebraic sum of the cash flows equals zero. Therefore, the rate of return is 0%.
7-15
A = $300
$1,000
Try i = 5%
$1,000 = (?) $300 (3.546) (0.9524)
= (?) $1,013.16
Try i = 6%
$1,000 = (?) $300 (3.465) (0.9434)
= (?) $980.66
Performing Linear Interpolation:
i* = 5% + (1%) (($1,013.6 $1,000)/($1,013.6 $980.66))
= 5.4%
7-16
Since the rate of return exceeds 60%, the tables are useless.
F = P (1 + i)n
$4,500 = $500 (1 + i)4
(1 + i)4 = $4,500/$500 = 0
(1 + i) = 9 = 1.732
i* = 0.732 = 73.2%
7-17
(a) Using Equation (4-39):
F = Pem
$4,000 = $2,000er(9)
2 = er(9)
9r = In 2 = 0.693
r = 7.70%
(b) Equation (4-34)
ieff = er 1 = e0.077 1 = 0.0800 = 8.00%
7-18
Year
0
1
2
3
4
5
Cash Flow
$640
40
+$100
+$200
+$300
+$300
7-19
Year
0
1
2
3
4
5
6
7
8
9
10
Cash Flow
$223
$223
$223
$223
$223
$223
+$1,000
+$1,000
+$1,000
+$1,000
+$1,000
7-20
Do nothing has a cash flow of zero, thus, the difference between alternatives is just
the Leaseco cash flow.
Year
0
1
2
3
4
5
Leaseco Do
Nothing
$1,000
$200
$200
$1,200
$1,200
$1,200
NPW = 0 = 1000 + 200 (P/A, ROR, 5) + 1000 (P/F, i, 2) (P/A, i, 3) and interpolating
85.271
7-21
$80 $80 $80 $80 $80 $80
$200
$200
$200
$80
$200
$120
7-22
For infinite series: A = Pi
EUAC = EUAB
$3,810 (i) = $250 + $250 (F/P, i%, 1) (A/F, i%, 2)*
Try i = 10%
$250 + $250 (1.10) (0.4762) = $381
$3,810 (0.10) = $381
i = 10%
*
Alternate Equations:
$3,810 (i) = $250 + $250 (P/F, i%, 1) (A/P, i%, 2)
$3,810 (i) = $500 $250 (A/G, i%, 2)
7-23
P
A = $1,000
Yr 0
n=
n = 10
$412
$5,000
10
7-24
$400 = [$200 (P/A, i%, 4) $50 (P/G, i%, 4)] (P/F, i%, 1)
Try i = 7%
[$200 (3.387) $50 (4.795)] (0.9346) = 409.03
Try i = 8%
[$200 (3.312) $50 (4.650)] (0.9259) = $398.08
i* = 7% + (1%) [($409.03 $400)/($409.03 $398.04)]
= 7.82%
7-25
The one-time $2,000 life membership fee avoids the 40-year series of beginning-ofyear membership dues that start at $200 and increase 3% annually.
(a) The equation for determining the rate of return for the life membership is the
difference of the present worth of the two cash flows set to zero:
2000 200 206 (P/A, 3%, ROR, 39) = 0 (39 since beginning-of-year
payments)
1800 1 (1 0.03)39 (1 i) 39
11
Homew
work Solutions for Engin
neering Econ
nomic Analys
sis, 10th Editiion
Newnan, La
avelle, Esche
enbach
7-26
Ye
ear
0
1
2
3
4
5
6
7
8
9
10
Cash
Flow
100
27
27
27
27
27
27
27
27
27
27
PW
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
170.0
108.5
65.9
35.5
13.2
-3.6
-16.5
-26.7
-34.8
-41.5
-46.9
PW = -100 + 27
7*(P/A, i, 10
0) ; use NPV
V in for (P/A
A, i, 10) in E
Excel.
estment.
This is a typical PW graph for an inve
12
Homew
work Solutions for Engin
neering Econ
nomic Analys
sis, 10th Editiion
Newnan, La
avelle, Esche
enbach
7-27
Period
Value
0
-640
1
0
Interest, i
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2
100
3
4
5
20
00 300 300
3
PW
260
105
-16
-112
-190
-252
-304
-347
-382
-412
-438
This
T
is a typical NPW graph.
g
As th
he interest rrate increasses, future benefits arre
discounted more
m
heavily and the NPW
N
decre
eases.
13
7-28
$1,000
A = $40
n = 10
$925
PW of Cost = PW of Benefits
$925 = $40 (P/A, i%, 10) + $1,000 (P/F, i%, 10)
Try i = 5%
$925 = $40 (7.722) + $1,000 (0.6139) = $922.78 (i too high)
Try i = 4.5%
$925 = $40 (7.913) + $1,000 (0.6439) = $960.42 (i too low)
i* = 4.97%
7-29
$1,000
A = $40
n = 40 semiannual periods
$715
PW of Benefits PW of Costs = 0
$20 (P/A, i%, 40) + $1,000 (P/F, i%, 40) $715 = 0
Try i = 3%
$20 (23.115) + $1,000 (0.3066) $715 = $53.90 i too low
Try i = 3.5%
$20 (21.355) + $1,000 (0.2526) $715 = $35.30 i too high
Performing linear interpolation:
i* = 3% + (0.5%) [53.90/(53.90 (35.30))] = 3.30%
Nominal i* = 6.60%
14
7-30
$1,000
A = $30
.
n = 2(2001 1998) + 1 = 27
$875
PW of Benefits PW of Cost = $0
$30 (P/A, i%, 27) + $1,000 (P/F, i%, 27) $875 = $0
Try i = 3 %
$30 (17.285) + $1,000 (0.3950) $875 = $38.55 >$0
Try i = 4%
$30 (16.330) + $1,000 (0.3468) $875 = $38.30 < $0
i* = 3.75%
Nominal rate of return = 2 (3.75%) = 7.5%
7-31
6.8%
= 3.4%, so (0.034) (1000) = $34 is
2
paid semi-annually and $1,000 is paid at the end of the 10th year (20th pay
period).
i = 3% (0.5%)
= 3.4546% (exact value = 3.453%),
67.018 6.692
r = (2) (3.4546%) = 6.909%, and ia = (1 + 0.034546)2 1 = 0.07029 or 7.029%.
15
7-32
(a) NPW = 0 = -3118 + 10000 (P/F, i, 20), so, (P/F, i, 20) = 0.3118. Next you can
solve (1 i ) 20 0.3118 for i or look in the tables to find i = 0.06 or 6.0%.
Next, because it is paid annually, the effective annual interest rate is 6.0%.
(b) The fee is $10,000 x 0.01 = $100. So ABC Corp. receives $3,118 - $100 =
$3,018.
NPW = 0 = 3018 10000 (P/F, i, 20), so, (P/F, i, 20) = 0.3018. Next
(1 i) 20 0.3018 and find i = 0.06173 or 6.173%. As above ia = 6.173%.
7-33
A = $110
.
n = 24
$3,500 - $1,200
= $2,300
16
solve
7-34
A = $100
.
n = 36
$3,168
PW of Cost = PW of Benefits
$100 (P/A, i%, 36) = $3,168
(P/A, i%, 36) = $3,168/$100 = 31.68
Performing Linear Interpolation:
(P/A, 1%, 36) i
32.871
%
21.447
%
i* = (1/2%) + (1/4%) [(32.87 31.68)/(32.87 31.45)]
= 0.71%
Nominal Interest Rate = 12 (0.71%) = 8.5%
7-35
F = $2,242
A = $50
n=4
P = $1,845
17
7-36
6000
$166.67 (over 3 years).
36
NPW = 0 = 6000 -250 166.67 (P/A, i, 36), so, (P/A, i, 36) = 34.50 . The tables
dont go to a low enough interest rate so must solve:
(1 i )36 1
i (1 i )36 34.50 by trial and error or Excel using the IRR function. Excel
yields
18
7-37
(a) The foregone cash rebate is like a hidden finance charge. You pay $12,000 for
the car but receive a car only worth $12,000 - $3,000 = $9,000. The monthly
12000
payments =
= $250 for 48 months. NPW = 0 = 9000 250 (P/A, i, 48),
4 12
so, (P/A, i, 48) = 36.0 and interpolating
37.974 36.0
i = 1% + (0.25%)
= 1.242%, so, r = (12) (1.242%) = 14.90%
37.974 35.932
and ia = (1 + 0.01242)12 -1 = 0.15965 or 15.97%.
7-38
First determine the monthly payments for the loan where i =
4%
= 0.3333%, so,
12
(0.003333)(1 0.003333)36
A = 6000 (A/P, 0.3333%, 36) =
= $177.14 .
(1 0.003333)36 1
(a) NPW = 0 = 6000 250 177.14 (P/A, i, 36), so, (P/A, i, 36) = 32.46 and
interpolating
32.871 32.46
i = 0.50% + (0.25%)
= 0.572%, so,
32.871 31.447
r = (12) (0.572%) = 6.86% and ia = (1 + 0.00572)12 1 = 0.0709 or 7.09%.
19
(b) Worth of the car = $6,000 $800 = $5,200 but the payments are determined by
the actual cost to buyer, here $6,000. Thus, the payments are the same as
above.
NPW = 0 = 5200 250 177.14 (P/A, i, 36), so, (P/A, i, 36) = 27.944 and
28.847 27.944
= 1.440%, so,
interpolating i = 1.25% + (0.25%)
28.847 27.661
r = (12) (1.440%) = 17.28% and ia = (1 + 0.01440)12 1 = 0.1872 or 18.72%.
(c) The actual value of the car seems to be the most important factor!
7-39
The amount of cash paid will be $75,000 $50,000 = $25,000 with $50,000
financed, so, the monthly payments will be 50000 (A/P, 8%, 4) = (50000) (0.3019) =
$15,095. The reduction in cost if one pays entirely in cash is $75,000 x 0.10 =
$7,500, so, a 100% cash payment would be $75,000 $7,500 = $67,500 (true value
of equipment).
Year
0
1
2
3
4
Borrow from
Pay Cash Manufacturer
-$67,500 $25,000
15,095
15,095
15,095
15,095
Incremental
Difference
$42,500
15,095
15,095
15,095
15,095
IRR = IRR (the (1) (2) values for the Periods 04) = 15.69% per year
7-40
The loan value is $120,000 $12,000 (10% down payment) = $108,000. The loan
origination fee is $108,000 x 0.02 = $2,160, so, the loan becomes $108,000 +
$2,160 = $110,160.
6%
(a) Number of months is 30 x 12 = 360. The monthly interest rate, i =
= 0.5%.
12
The monthly payment = 110160 (A/P, 0.5%, 360) but to get accuracy use
110160
110160
$660.46 .
( P / A, 0.5%,360) 166.792
20
(b) The actual value received is $108,000, thus, to find the effective interest rate
solve
NPW = 0 = 108,000 660.46 (P/A, i, 360).
108000
= 163.522. Interpolating
(P/A, i, 360) =
660.46
imo = % + ( %)[(163.522 166.792)/(124.282 166.792]
= 0.51923% per month
ia = (1 + 0.0051923)12 1 = 0.0641 or 6.41%
(c) In ten years there are still 20 years left on the original loan, so,
value of remaining loan at year ten
= 660.46 (P/A, 0.5%, 240) = (660.46)(139.581)
= $92,187.67 . To find the effective interest rate solve
NPW = 108,000 660.46 (P/A, i, 120) 92,187.67 (P/F, i, 120) . Interpolating
imo = % + ( %)[2156.62/(2156.62 + 18258.62]
= 0.5264% (exact value 0.5236%)
ia = (1 + 0.005264)12 1 = 0.0650 or 6.50% (exact value 6.467%)
7-41
$2,000 = $91.05 (P/A, i*, 30)
(P/A, i*, 30) = $2,000/$91.05 = 21.966
(P/A, 1%, 30) I
22.396
2
20.930
2
imo = 2% + (%) [(22.396 21.966)/(22.396 20.930)]
= 2.15% per month
Nominal ROR received by finance company = 12 (2.15%) = 25.8%
21
7-42
$3,000 = $118.90 (P/A, i*, 36)
(P/A, i*, 36) = $3,000/$118.90 = 26.771
(P/A, i%, 36) i
27.661
1 %
26.543
1 %
imo = 1 % + % [(27.661 26.771)/(27.661 26.543)]
= 1.699% per month
Nominal Annual ROR = 12 (1.699%) = 20.4%
7-43
$15,000
A = $80
$9,000
PW of Benefits PW of Cost = $0
$15,000 (P/F, i%, 4) $9,000 $80 (P/A, i%, 4) = $0
Try i = 12%
$15,000 (0.6355) $9,000 $80 (3.037) = +$289.54
Try i = 15%
$15,000 (0.5718) $9,000 $80 (2.855) = $651.40
Performing Linear Interpolation:
i* = 12% + (3%) [289.54/(289.54 + 651.40)]
= 12.92%
22
7-44
$65,000
$5,000
$240,000
7-45
(a) Total Annual Revenues = $500 (12 months) (4 apt.) = $24,000
Annual Revenues Expenses = $24,000 $8,000 = $16,000
To find Internal Rate of Return the Net Present Worth must be $0.
NPW = $16,000 (P/A, i*, 5) + $160,000 (P/F, i*, 5) $140,000
At i = 12%, NPW = $8,464
At i = 15%, NPW = $6,816
IRR
(b) At 13.7% the apartment building is more attractive than the other options.
23
7-46
NPW = $300,000 + $20,000 (P/F, i*, 10)
+ ($67,000 $3,000) (P/A, i*, 10) $600 (P/G, i*, 10)
Try i = 10%
NPW = $300,000 + $20,000 (0.3855) + ($64,000) (6.145)
$600 (22.891)
= $87,255 > $0
The interest rate is too low.
Try i = 18%
NPW = $300,000 + $20,000 (0.1911) + ($64,000) (4.494)
$600 (14.352)
= $17,173 < $0
The interest rate is too high.
Try i =15%
NPW = $300,000 + $20,000 (0.2472) + ($64,000) (5.019)
$600 (16.979)
= $9,130 > $0
Thus, the rate of return (IRR) is between 15% and 18%. By linear interpolation:
i* = 15% + (3%) [$9,130/($9,130 $17,173)]
= 16.0%
24
7-47
g = 10%
A1 = $1,100
n = 20
i=?
P = $20,000
7-48
(a) When n = , i = A/P = $3,180/$100,000 = 3.18%
(b) (A/P, i%, 100) = $3180/$100,000 = 0.318
From interest tables, i* = 3%
(c) (A/P, i%, 50) = $3, 180/$100,000 = 0.318
From interest tables, i* = 2%
The saving in water truck expense is just a small part of the benefits of the pipeline.
Convenience, improved quality of life, increased value of the dwellings, etc., all are
benefits. Thus, the pipeline appears justified.
25
7-49
$800
$400
$6,000
$9,000
Year
0
14
58
9
Cash Flow
$9,000
+$800
+$400
+$6,000
PW of Cost = PW of Benefits
$9,000 = $400 (P/A, i%, 8) + $400 (P/A, i%, 4) + $6,000 (P/F, i%, 9)
Try i = 3%
$400 (7.020) + $400 (3.717) + $6,000 (0.7664) = $8,893 < $9,000
Try i = 2 %
$400 (7.170) + $400 (3.762) + $6,000 (0.8007) = $9,177 > $9,000
Rate of Return = 2 % + (1/2%) [($9,177 $9,000)/($9,177 $8,893)]
= 2.81%
26
7-50
$12,000
$6,000
$3,000
n = 10
n = 10
n = 20
$28,000
PW of Cost = PW of Benefits
$28,000 = $3,000 (P/A, i%, 10) + $6,000 (P/A, i%, 10) (P/F, i%, 10) +
$12,000 (P/A, i%, 20) (P/F, i%, 20)
Try i = 12%
$3,000 (5.650) + $6,000 (5.650) (0.3220) + $12,000 (7.469) (0.1037)
= $37,160 > $28,000
Try i = 15%
$3,000 (5.019) + $6,000 (5.019) (0.2472) + $12,000 (6.259) (0.0611)
= $27,090 < $28,000
Performing Linear Interpolation:
i* = 15% (3%) [($28,000 $27,090)/($37,160 $27,090)]
= 15% (3%) (910/10,070)
= 14.73%
27
7-51
This is a thought-provoking problem for which there is no single answer. Two
possible solutions are provided below.
(a) Assuming the MS degree is obtained by attending graduate school at night while
continuing with a full-time job:
MS
Degree
A = $3,000
n = 10
$1,500 $1,500
28
7-52
The problem requires an estimate for n- the expected life of the infant. Seventy or
seventy-five years might be the range of reasonable estimates. Here we will use 71
years.
The purchase of a $200 life subscription avoids the series of beginning-of-year
payments of $12.90. Based on 71 beginning-of-year payments,
A = $12.90
.
n = 70
$200
7-53
Year Case 1 (incl. Deposit)
0
$39,264.00
1
+$599.00
2
+$599.00
3
+$599.00
4
+$599.00
5
+$599.00
6
+$599.00
7
+$599.00
8
+$599.00
9
+$599.00
10
+$599.00
11
+$599.00
12
+$599.00
+$599.00
33
+$599.00
34
+$599.00
35
+$599.00
36
+$27,854.00 $625.00 = +$27,229.00
IRR = 0.86%
Nominal IRR = 10.32%
Effective IRR =10.83%
29
7-54
The number of months between August 15 and January 15 is 5.
Month
0
1
2
3
4
5
Annual
Permit
$100
0
0
0
0
0
Semester
Permit
$65
0
0
0
0
65
To solve for the monthly interest rate set the two PWs equal to each other, so,
100 65
0.53846 .
100 = 65 65 (P/F, i, 5) . Thus, (1 i) 5
65
Solving get i = 0.1318 or 13.18% and ia = (1 + 0.1318)12 1 = 3.418 or 342%.
Unless the student is graduating in January or just doesnt have the $100, it is
clearly better to buy the permit a year at a time.
7-55
Details will vary by university, but is solved like Problem 7-54.
7-56
Annual
Quarter Payment
0
$65,000
1
0
2
0
3
0
Quarter
Payment
$18,000
18,000
18,000
18,000
To solve for the monthly interest rate set the two PWs equal to each other, so,
65000 = 18000 18000 (P/A, i, 3) . Thus, (P/A, i, 3) = 2.611 and interpolating
2.624 2.611
i = 7% + (1%)
= 7.28%, so, r = 4 x 0.0728 = 0.2912 or 29.1% and
2.624 2.577
ia = (1 + 0.0728)4 1 = 0.3246 or 32.5%. This is a high rate of return, but some firms
use an even higher hurdle rate for projects.
30
7-57
$65,000 = $18,000( 1 + (P/A, i , 3))
The amount that the series of future payments is worth is:
65000 + 18000 = 47000 = 18000*(P/A, i , 3)
Using the end-of-period designation (default) in RATE (Excel) yields:
RATE(3,18000,-47000) = 7.2766%
One could also solve with quarterly payments at the beginning of the period:
RATE(4,18000,-65000,0,1) = 7.2766%
7-58
Insurance payments must be paid in advance, here on the first of the month or year.
Annual
Monthly
Month Basis
Basis
0
$1,650
$150
1
0
150
2
0
150
3
0
150
4
0
150
5
0
150
6
0
150
7
0
150
8
0
150
9
0
150
10
0
150
11
0
150
To solve for the monthly interest rate set the PWs of the two cash flows equal to
each other. Thus, 1650 = 150 150 (P/A, i, 11), so, (P/A, i, 11) = 10.0.
Interpolating
10.071 10.0
= 1.624%. Next, ia = (1 + 0.01624)12 1 = 0.2133
i = 1.5% + (0.25%)
10.071 9.928
or 21.3%. This is a relatively high rate of return, but the student might prefer to pay
monthly if there is a significant chance of wrecking the car before the year is up.
7-59
Details will vary by student, but solved like Problem 7-58.
31
7-60
Year
0
1 3
Computed ROR
A
$2,000
+$800
9.7%
B
$2,800
+$1,100
8.7%
(B- A)
$800
+$300
6.1%
The rate of return on the increment (B- A) exceeds the Minimum Attractive Rate of
Return (MARR), therefore the higher cost alternative B should be selected.
7-61
Year
0
1
2
3
4
Computed ROR
X
$100
+$35
+$35
+$35
+$35
15.0%
Y
$50
+$16.5
+$16.5
+$16.5
+$16.5
12.1%
X- Y
$50
+$18.5
+$18.5
+$18.5
+$18.5
17.8%
7-62
Year
0
1- 10
Computed ROR
A
$100.00
+$19.93
15%
B
$50.00
+$11.93
20%
32
(B- A)
$50.00
+$8.00
9.61%
7-63
Year
0
1
2
3
4
Computed ROR
X
$5,000
$3,000
+$4,000
+$4,000
+$4,000
16.9%
Y
$5,000
+$2,000
+$2,000
+$2,000
+$2,000
21.9%
X- Y
$0
$5,000
+$2,000
+$2,000
+$2,000
9.7%
7-64
(a) Present Worth Analysis- Maximize NPW
NPWA = $746 (P/A, 8%, 5) $2,500
= $746 (3.993) $2,500 = +$479
NPWB = $1,664 (P/A, 8%, 5) $6,000 = +$644
Select B.
(b) Annual Cash Flow Analysis- Maximize (EUAB- EUAC)
(EUAB- EAUC)A = $746 $2,500 (A/P, 8%, 5)
= $746 $2,500 (0.2505)
= +$120
(EUAB EUAC)B = $1,664 $6,000 (A/P, 8%, 5)
= +$161
Select B.
(c) Rate of Return Analysis: Compute the rate of return on the B- A increment of
investment and compare to 8% MARR.
Year A
B
B- A
0
$2,500 $6,000 $3,500
15 +$746
+$1,664 +$918
$3,500 =$918 (P/A, i%, 5)
Try i = 8%, $918 (3.993) = $3,666 > $3,500
Try i = 10%, $918 (3.791) = $3,480 < $3,500
Rate of Return = 9.8%
Since ROR > MARR, B- A increment is desirable. Select B.
33
7-65
Year
Alt. A
Alt. B
A-B
0
-12000
-3000
-9000
-3000
3000
-3000
3000
-3000
3000
-3000
3000
-3000
3000
-3000
3000
-3000
3000
8
1200
1200
IRR of A B stream = IRR (the A B values for the Years 08) = 27.90%
Since ROR > MARR (15%),
choose the higher initial cost alternative, A (purchasing the equipment).
7-66
First Cost
Maintenance &
Operating Costs
Annual Benefit
Salvage Value
B
$300,000
$25,000
A
$615,000
$10,000
A- B
$315,000
$15,000
$92,000
$5,000
$158,000
$65,000
$66,000
$70,000
NPW = $315,000 + [$66,000 ($15,000)] (P/A, i*, 10) + $70,000 (P/F, i*, 10) = $0
Try i = 15%
$315,000 + [$66,000 ($15,000)] (5.019) + $70,000 (0.2472) = $108,840
ROR > MARR (15%)
The higher cost alternative A is the more desirable alternative.
34
7-67
Year
0
120
Computed ROR
$80,000
+$8,000
7.75%
(B- A)
$40,000
+$3,000
4.22%
The rate of return in the incremental investment (B- A) is less than the desired 6%.
In this situation the lower cost alternative (A) Gas Station should be selected.
7-68
MARR = 5%
P = $30,000 n = 35 years
35
7-69
(a)
$150
A = $100
.
n = 20
$2,000
7-70
(a) Salvage = 0.15 x $380,000 = $57,000 and firms interest rate = 12%.
Year
Purchase
Lease
0
1
2
3
4
5
6
$380,000
0
0
0
0
0
57,000
$60,000
60,000
60,000
60,000
60,000
60,000
0
Purchase
Lease
$320,000
60,000
60,000
60,000
60,000
60,000
57,000
36
(b) The firm receives $65,000 more than it spends on operating and maintenance
costs.
Year
Purchase
Lease
0
1
2
3
4
5
6
$380,000
65,000
65,000
65,000
65,000
65,000
65,000
57,000
$60,000
60,000
60,000
60,000
60,000
60,000
0
Purchase
Lease
$320,000
125,000
125,000
125,000
125,000
125,000
122,000
37
7-71
(a) Salvage = $50,000 and communitys interest rate = 8%.
Year
Purchase
Lease
0
1
2
3
4
5
6
7
8
9
10
$480,000
0
0
0
0
0
0
0
0
0
50,000
$70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
0
Purchase
Lease
$410,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
50,000
NPW = 0 = 410000 +70000 (P/A, IRR , 9) + 50000 (P/A, IRR, 10) and
interpolating
12405
Purchase
Lease
0
1
2
3
4
5
6
7
8
9
10
$480,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
80,000
50,000
$70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
70,000
0
Purchase
Lease
$410,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
130,000
38
NPW = 0 = 410000 + 150000 (P/A, IRR, 9) + 130000 (P/F, IRR, 10) and
interpolating
52275
7-72
Year
0
1
2
3
4
A
$9,200
+$1,850
+$1,850
+$1,850
+$1,850
5
6
7
8
+$1,850
+$1,850
+$1,850
+$1,850
B
$5,000
+$1,750
+$1,750
+$1,750
+$1,750
$5,000
+$1,750
+$1,750
+$1,750
+$1,750
A- B
$4,200
+$100
+$100
+$100
+$5,100
NPW at 7%
$4,200
+$93
+$87
+$82
+$3,891
NPW at 9%
$4,200
+$92
+$84
+$77
+$3,613
+$100
+$100
+$100
+$100
Sum
+$71
+$67
+$62
+$58
+$211
+$65
+$60
+$55
+$50
$104
ROR 8.3%
Choose Alternative A.
39
7-73
Year
0
1
2
Zappo
$56
$56
$0
Kicko
$90
$0
$0
Kicko Zappo
$34
+$56
$0
7-74
Year
0
1
2
3
4
5
6
7
8
A
$9,200
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
B
$5,000
+$1,750
+$1,750
+$1,750
+$1,750 $5,000
+$1,750
+$1,750
+$1,750
+$1,750
A- B
$4,200
+$100
+$100
+$100
+$100 +$5,000
+$100
+$100
+$100
+$100
Sum
Rates of Return
A: $9,200 = $1,850 (P/A, i%, 5)
Rate of Return = 11.7%
B: $5,000 = $1,750 (P/A, i%, 4)
Rate of Return = 15%
AB: $4,200 = $100 (P/A, i%, 8) + $5,000 (P/F, i%, 4)
RORA-B = 8.3%
Select A.
40
7-75
Year
0
1- 10
11- 15
15
Computed ROR
A
$150
+$25
+$25
+$20
14.8%
B
$100
+$22.25
$0
$0
18%
A- B
$50
+$2.75
+$25
+$20
11.6%
7-76
This is an unusual problem with an extremely high rate of return. Available interest
tables obviously are useless.
One may write:
PW of Cost = PW of Benefits
$0.5 = $3.5 (1 + i)1 + $0.9 (1 + i)2 + $3.9 (1 + i)3 + $8.6 (1 + i)4 +
For high interest rates only the first few terms of the series are significant:
Try i = 650%
PW of Benefits = $3.5/(1 + 6.5) + $0.9/(1 + 6.5)2 + $3.9/(1 + 6.5)3 + $8.6/(1 + 6.5)4 +
41
7-77
$52,000.00
3.00%
10.00%
15
4.00%
income
income gradient
% deposit
horizon (years)
savings rate
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Cumulative
Salary
Deposit
Savings
$52,000.00 $5,200.00 $5,200.00
53,560.00 5,356.00 10,764.00
55,166.80 5,516.68 16,711.24
56,821.80 5,682.18 23,061.87
58,526.46 5,852.65 29,836.99
60,282.25 6,028.23 37,058.70
62,090.72 6,209.07 44,750.12
63,953.44 6,395.34 52,935.46
65,872.04 6,587.20 61,640.09
67,848.21 6,784.82 70,890.51
69,883.65 6,988.37 80,714.50
71,980.16 7,198.02 91,141.09
74,139.57 7,413.96 102,200.69
76,363.75 7,636.38 113,925.10
78,654.67 7,865.47 126,347.57
7-78
$55,000.00
2.00%
10.00%
40
5.00%
income
income gradient
% deposit
horizon (years)
savings rate
42
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
Salary
$55,000.00
56,100.00
57,222.00
58,366.44
59,533.77
60,724.44
61,938.93
63,177.71
64,441.27
65,730.09
67,044.69
68,385.59
69,753.30
71,148.36
72,571.33
74,022.76
75,503.21
77,013.28
78,553.54
80,124.61
81,727.11
83,361.65
85,028.88
86,729.46
88,464.05
90,233.33
92,038.00
93,878.76
95,756.33
97,671.46
99,624.89
101,617.38
103,649.73
105,722.73
107,837.18
109,993.93
112,193.80
114,437.68
116,726.43
119,060.96
Deposit
$5,500.00
5,610.00
5,722.20
5,836.64
5,953.38
6,072.44
6,193.89
6,317.77
6,444.13
6,573.01
6,704.47
6,838.56
6,975.33
7,114.84
7,257.13
7,402.28
7,550.32
7,701.33
7,855.35
8,012.46
8,172.71
8,336.16
8,502.89
8,672.95
8,846.40
9,023.33
9,203.80
9,387.88
9,575.63
9,767.15
9,962.49
10,161.74
10,364.97
10,572.27
10,783.72
10,999.39
11,219.38
11,443.77
11,672.64
11,906.10
Cumulative
Savings
$5,500.00
11,385.00
17,676.45
24,396.92
31,570.14
39,221.09
47,376.04
56,062.61
65,309.87
75,148.37
85,610.26
96,729.33
108,541.13
121,083.02
134,394.30
148,516.30
163,492.43
179,368.38
196,192.15
214,014.22
232,887.65
252,868.19
274,014.49
296,388.16
320,053.97
345,080.01
371,537.81
399,502.57
429,053.33
460,273.15
493,249.29
528,073.49
564,842.14
603,656.52
644,623.07
687,853.61
733,465.67
781,582.72
832,334.50
885,857.33
7-79
$55,000.00
2.00%
11.29%
40
5.00%
income
income gradient
% deposit
horizon (years)
savings rate
Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Salary
$55,000.00
56,100.00
57,222.00
58,366.44
59,533.77
60,724.44
61,938.93
63,177.71
64,441.27
65,730.09
67,044.69
68,385.59
69,753.30
71,148.36
72,571.33
74,022.76
75,503.21
77,013.28
78,553.54
80,124.61
81,727.11
83,361.65
85,028.88
86,729.46
88,464.05
90,233.33
92,038.00
93,878.76
95,756.33
97,671.46
99,624.89
Deposit
$6,209.50
6,333.69
6,460.36
6,589.57
6,721.36
6,855.79
6,992.91
7,132.76
7,275.42
7,420.93
7,569.35
7,720.73
7,875.15
8,032.65
8,193.30
8,357.17
8,524.31
8,694.80
8,868.70
9,046.07
9,226.99
9,411.53
9,599.76
9,791.76
9,987.59
10,187.34
10,391.09
10,598.91
10,810.89
11,027.11
11,247.65
Cumulative
Savings
$6,209.50
12,853.67
19,956.71
27,544.12
35,642.69
44,280.61
53,487.55
63,294.69
73,734.84
84,842.51
96,653.98
109,207.41
122,542.93
136,702.73
151,731.17
167,674.90
184,582.96
202,506.90
221,500.94
241,622.06
262,930.15
285,488.19
309,362.36
334,622.23
361,340.94
389,595.33
419,466.18
451,038.40
484,401.21
519,648.38
556,878.45
44
32
33
34
35
36
37
38
39
40
101,617.38
103,649.73
105,722.73
107,837.18
109,993.93
112,193.80
114,437.68
116,726.43
119,060.96
11,472.60
11,702.05
11,936.10
12,174.82
12,418.31
12,666.68
12,920.01
13,178.41
13,441.98
596,194.97
637,706.78
681,528.21
727,779.44
776,586.73
828,082.74
882,406.90
939,705.66
1,000,132.92
7-80
Details will vary by student, but solved like Problem 7-79.
45
46