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- American Philosophical Society
- Arithmetic Gradient Problems
- Capital Recovery Tables
- Impact of Intrest Rate on Profitbility of Banks
- Portland City Manager's 2015 CIP budget
- EMI Calculator
- Series 7 Suitability Exercise Secured
- tn computer advance
- Finance Test
- 100238
- Interest Rate Risk Management of Prime bank
- Consolidated Government Charter
- First Draft Article Buying Cheaperhose
- Lesson 23 Simple and Compound Interest
- AEB_SM_CH22_1
- Capital Financing (1)
- Krugman, P., 1988, “Financing vs. Forgiving a Debt Overhang”, NBER Working Paper
- shane s
- Answers Mid-Term ENGR301G
- na

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5. List three evaluation criteria besides the economic one for selecting the best

restaurant.

process.

8. Trucking giant Yellow Corp agreed to purchase rival Roadway for $966 million

in order to reduce so-called back-office costs (e.g., payroll and insurance) by $45

million per year. If the savings were realized as planned, what would be the rate

of return on investment?

per share in the April-June quarter compared to the previous quarter, what was the

rate of increase in profits for that quarter?

10. At an interest rate of 8% per year, $10,000 today is equivalent to how much (a) 1

year from now (b) 1 year ago?

replace its office furniture now or wait and do it 1 year from now. If it waits 1

year, the cost is expected to be $16,000. At an interest rate of 10% per year, what

would be the equivalent cost now?

12. Certain certificates of deposit accumulate interest at 10% per year simple interest.

If a company invests $240,000 now in these certificates for the purchase of a new

machine 3 years from now, how much will the company have at the end of the 3-

year period?

13. A local bank is offering to pay compound interest of 7% per year on new savings

accounts. An e-bank is offering 7.5% per year simple interest on a 5-year

certificate of deposit. Which offer is more attractive to a company that wants to

set aside $1,000,000 now for a plant expansion 5 years from now?

14. A company that manufactures in-line mixers for bulk manufacturing is company

borrow now or 1 year from now? Assume the total amount due will be

considering borrowing $1.75 million to update a production line. If it borrows the

money now, it can do so at an interest rate of 7.5% per year simple interest for 5

years. If it borrows next year, the interest rate will be 8% per year compound

interest, but it will be for only 4 years. (a) How much interest (total) will be paid

under each scenario, and (b) Should the paid when the loan is due in either case.

1. Define the symbols involved when a construction company wants to know how

much money it can spend 3 years from now in lieu of spending $50,000 now to

purchase a new truck, when the compound interest rate is 15% per year?

2. State the purpose for each of the following built-in Excel functions:

a. FV(i%,n,A,P)

b. IRR(first_cell:last_cell)

c. PMT(i%,n,P,F)

d. PV(i%,n,A,F)

income taxes, loan interest, salvage value, rebates to dealers, sales revenues,

accounting services, cost reductions.

4. Construct a cash flow diagram for the following cash flows: $10,000 outflow at

time zero, $3000 per year outflow in years 1 through 3 and $9000 inflow in years

4 through 8 at an interest rate of 10% per year, and an unknown future amount in

year 8.

5. Use the rule of 72 to estimate the time it would take for an initial investment of

$10,000 to accumulate to 20,000 at a compound rate of 8% per year.

6. If you now have $62,500 in your retirement when the account is worth $2 million,

estimate the rate of return that the account must earn if you want retire in 20 years

without adding any more money to the account.

recommendation on whether the company should plan on offering the new

technology to the major manufacturers and an estimate of the necessary capital

investment to enter this market early.

2. Information gathering.

a. The technology and equipment are expected to last about 10 years.

b. The inflation and income taxes are ignored for simplicity

c. The expected ROI were compound rates of 15%, 5% and 18%. And 5%

rate for enhancing an employee-safety

d. Equity capital financing beyond $5 millions is not possible. The amount of

debt financing and its cost are unknown

e. Annual operating cost 8% of first cost for major equipment

f. Increased annual training cost and salary range from $800,000 to $1.2

million

g. Another economic and non economic factors that may influence to each

alternative.

a. Alternatives A

b. Alternative B

c. Alternative C

4. Alternatives Analysis

5.

Nominal and Effective Interest Rates

Nominal interest rate, r, is an interest rate that does not include any

consideration of compounding. By definition:

Effective interest rate is actual rate that applies for a stated period of

time. The compounding of interest during the time period of the

corresponding nominal rate is accounted for by the effective interest

rate. It is commonly expressed on an annual basis as the effective

annual rate ia, but any time basis can be used.

ieff = ( 1 + r/m)m 1

r = nominal interest rate for same time period

m = number of times interest is compounded per state time

period

compounded semi-annually, is equivalent to how much

money 8 years ago?

$3.5 million building expansion for manufacturing its

powerful Lumix DMC digital zoom camera. If the company

uses an interest rate of 20% per year compounded

quarterly, for all new investments, what is the uniform

amount per quarter the company must make to recover its

investment in 3 years?

electronic commerce. A modest e-commerce package is

available for $20,000. If the company wants to recover the

cost in 2 years, what is the equivalent amount of new

income that must be realized every 6 months, if the interest

rate is 3% per quarter?

1. An engineer deposit $300 per month into a savings account that pays interest at a

rate of 6% per year, compounded semi-annually. How much will be in the

account at the end of 15 years? Assume no inter-period compounding.

the account at the end of year 3 if the interest rate is 8% per year,

compounded semi-annually. Assume no inter-period compounding.

Withdrawal,

$/Quarter $/Quarter

1 900

2-4 700

7 1000 2600

11 - 1000

Continuous Compounding

i% = er 1

e = 2.71828

equivalent to a nominal rate of 13% per year?

rendered a gasoline pipeline between El Paso and

Phoenix subjects to longitudinal weld seam failures.

Therefore, pressure was reduced to 80% of the design

value. If the reduced pressure results in delivery of

$100,000 per month less product, what will be the value

of the lost revenue after a 2-year period at an interest

rate of 15% per year, compounded continuously?

3. Because of a chronic water shortage in Santa Fee, new athletic fields must

use artificial turf or xeriscape landscaping. If the value of water saved

each month is $6000, how much can a private developer afford to spend

on artificial turf if he wants to recover his investment in 5 years at an

interest rate of 18% per year, compounded continuously?

equivalent to what effective rate per year?

5. In N Out Payday Loans advertises that for a fee of only $10, you can

immediately borrow up to $200 for one month. If a person accepts the

offer, what are (a) the nominal interest rate per year and (b) the effective

rate per year?

12 years from now if you deposit $5000 now and $7000 five years from

now? The account earns interest at rate of 18% per year, compounded

quarterly.

1. How much money could the maker of fluidized bed scrubbers afford to spend

now instead of spending $150,000 in year 5 if the interest rate is 10% per year in

years 1 through 4 and 1% per month in years 5 through 8?

2. For the cash flows shown below, determine (a) the future worth in year 5 and (b)

the equivalent A value for years 0 through 5.

0 5000 12

14 6000 12

5 9000 20

PRESENT WORTH ANALYSIS (PW ANALYSIS)

EQUIVALENT VALUE NOW HAS A PW THAT ALWAYS LESS

THAN ACTUAL CASH FLOW, FOR ANY INTEREST RATE > 0.

o P/F factor < 1

o PW values are often referred to as DCF (Discounted Cash Flow)

o Interest Rate = Discounted Rate

o PW = PV = NPV

o Identify mutually exclusive and independent projects

o Define a service and a revenue alternative

o Select the best equal-life alternatives using PWA

o Select the best different-life alternatives using PWA

o Select the best alternative using FWA

o Select the best alternative using CC calculations

o Determine the payback period at i = 0% and i > 0%

o Perform a life-cycle cost analysis for the acquisition & operation phases

of the system

o Calculate the PW of a bond investment

o Develop spreadsheet that use PWA, including payback period

Mutually exclusive project: only one of the viable projects can be selected

Independent project: more than one viable project may be selected

Example.

Perform a PWA of equal-service machines, if MARR is 10%/year

Revenues for all three alternatives are expected to be the same

First Cost, $ -2500 -3500 -6000

AOC, $ -900 -750 -50

Salvage Value, $ 200 350 100

Life, Years 5 5 5

Answer:

PWG = -3500 750(P/A, 10%, 5) + 350(P/F, 10%, 5) = $ -5936

PWS = -6000 50(P/A, 10%, 5) + 100(P/F, 10%,5) = $ -6127

If there are different life alternatives

o Compare the alternatives over a period of time equal to the LCM (Least Common

Multiple) of their lives

o The service provided by alternatives will be needed for the LCM of years or more

o The selected alternative will be repeated over each life cycle of the LCM in

exactly the same manner

o The cash flow estimates will be the same in every life-cycle

Example.

A project engineer with EnvironCare is assigned to start up a new office in a city where a

6-year contract has been finalized to take and analyze ozone-level readings. There are

two options:

Location A Location B

First Cost, $ -15,000 -18,000

Annual Cost, $ -3,500 -3,100

Deposit Return, $ 1000 2000

Lease Time, years 6 9

(a) Determine which lease option should be selected on the basis of PW, if MARR is

15%/year

(b) If a study period of 5 years is used, which location should be selected ?

(c) If a study period of 6 years is used, and the deposit return of alternative B is

estimated to be $ 6000 after 6 years, which location should be selected?

Answer.

Since the lease have different term, the LCM(6,9) is 18

15%,12) + 1000(P/F, 15%, 12) + 1000(P/F, 15%, 18) 3,500(P/A, 15%,18) = $ -

45,036

PWB = -18,000 18,000(P/F, 15%,9) + 2000(P/F, 15%, 9) + 2,000(P/F, 15%,18)

- 3100(P/A, 15%, 18) = $ -41,384

Location B is selected, because the PWB value is numerically larger than PWA

o PWB = -18,000(P/F, 15%, 12)3,100(P/A,15%,5)+2,000(P/F,15%,5) = $ - 27,397

(c) For 6 year study period,

o PWA = -15,000 3,500(P/F, 15%,6) + 1000(P/F, 15%, 6) = $ 27,813

o PWB = -18,000(P/F, 15%, 6)3,100(P/A,15%,6)+6,000(P/A,15%,6) = $ - 27,397

determining the FW value, or multiplying the PW by the F/P factor, at the

established MARR.

o FW analysis is applicable to large capital investment decision when a prime goal

is to maximize the future wealth of a corporations stockholders.

o FW analysis is often utilized if the asset might be sold or traded at some time after

its start-up, but before the expected life is reached.

o CC is present worth of an alternative that will last forever

Bridges (Suramadu)

Dams (Asahan)

Irrigation Systems (Jatiluhur)

Rail Road (Jabodetabek) and Toll Road (Cipularang)

Step 1. Draw cash flow diagram showing all non-recurring (one-time) cash-flows

and at least two cycles of all recurring cash-flows.

Step 2. Find the PW of all non-recurring amounts . This is their CC value

Step 3. Find the equivalent uniform AW (annual worth/value) through one life

cycle of all recurring amounts.

Step 4. Divide the AW in step 3 by i to obtain a CC value.

Step 5. Add CC values obtained in step 2 and 4.

The payback period np is the estimated time (in years), it will take for the estimated

revenues and other economic benefits to recover the initial investment and a stated rate of

return.

np

If the stated rate i>0%, then 0 = -P + NCFt (P/F, i, t)

t=1

Where: P : is the initial investment (first cost)

NCFt : Net Cash Flow for each year t = receipt disbursement

If NCF values are expected to be equal each year: 0 = - P + NCF (P/F, i, np)

If the NCF series are uniform: np = P/NCF

Typical applications for LCC are

Buildings

New product lines

Manufacturing plants

Commercial Aircraft

New Automobile models

Defense Equipment Systems

Generally, LCC estimates may be categorized into simplified format for the major phases

of acquisition and operation as following:

A. Acquisition Phase

Requirement definition Stage:

(a) Determination of user need

(b) Anticipated system

(c) Preparation and documentation

Preliminary design

(a) Feasibility Study

(b) Conceptual

(c) Early Stage Plans

Detail Design. Detail Plan & Resources

(a) Capital, human, facilities, information system, marketing

(b) Some acquisition of assets

B. Operation Phase

All activities are functioning, products & services are available

Construction & implementation, testing and preparation

Usage Stage: to generate products and services

Phase Out & Disposal Stage

Equity Financing: The corporation uses its own funds from cash on hand, stock sales,

or retained earning. The individuals can use their own cash, savings or investment.

Debt Financing: The corporation borrows from outside sources and repays the

principal and interest. Sources of dept capital may be bonds, loans, mortgages, venture

capita pools. Individuals can utilize debt sources, such as credit card or from a credit

union.

A time-tested method of raising capital is through the issuance of IOU (I owe you), which

is financing through debt. One form of IOU is bond.

to finance major project.

Bonds are usually issued in face value amounts of $100, $1000, $5000 or $10,000.

Bond Interest I (also called bond dividend) is paid periodically

The bond interest is paid c times per year.

The stated interest rate is called the bond coupon rate b

1. Determine I, the interest per payment period

2. Construct the cash flow diagram

3. Establish the required MARR or rate of return

4. Calculate the PW value of the bond interest payments and the face value at

i=MARR

Example.

Determine the purchase price you should be willing to pay now for a 4.5% $5000 10-year

bond with interest paid semiannually. Assume your MARR is 8% per year compounded

quarterly.

Solution..

The nominal semiannual MARR is r = 8%/2 = 4%

Effective I = ( 1 + 0.04/2)2 1 = 4.04% per 6 months

The PW of the bond is determined for n = 2(10) = 20 semiannual period

PW = $112.50(P/A,4.04%,20) + 5000(P/F,4.04%,20) = $3788

Problems

5.9, 5.11, 5.14, 5.16, 5.26, 5.28, 5.38, 5.39, 5.42, 5.49, 5.50

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