HSE BOY CHR adcbon 2oc HW Ch 4. Interest Rate and Rate of Return 1.13. US Filler received a contract for a smal water desalting plant whereby the com- pany expected to make a28% rate of return ‘onils investment. I the company invested $8 million in equipment the first year, what was the amount of the profit in thet year? 1.14 A publicly traded construction company reported that it just paid off a loan that it ropeived | year earlier. If the fotal amount ‘of money the company paid was $1.6 mi Tion and the interest rate on the loan was 10% per year, how much money did the ‘company borrow 1 year ago? 1.15 A start-up chemical company has estab- lished a goal of making at least a 35% per year rate of return on ils investment. If the company acquired $50 million in venture capital, how much did it have to eam in the first year? equivalence 117 A. medium-size consulting engineering firm is trying 10 decide whether it should replace its office furniture now or wait and it year from now. IFitwaits | yea, the cost is expected to be $16,000. At an iter- fest rate of 10% per year, what woul! be the equivalent cost now’? 1.19 At what interest rate would $100,000 now be equivalent 10 $80,000 one year ago? Simple and Compound Interest 1,21 Allocal bank is offering to pay compound interest of 7% per year on new savings accounts. Av e-bank is offering 7.5% pet 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? 1.22 Badger Pamp Company invested '5500,000 five years ago in a new product Tine that is now worth $1,000,000. What rate of return did the company earn (a) on a simple interest basis and (b) on a com- pound interest basis? 1,24 A company that manufactures regenera tive thermal oxidizers made an investment 10 years ago that is now worth $1,300,000, How much was the initial investment at ‘an interest rate of 15% per year (a) simple jnterest and (b) compound interest? 1,26 Accompany that manufactures in-ine mix- ess for bulk manufacturing is considesing borrowing $1.75 million to update a pro- duction lie, If t borrows the money now, it can do so at an interest rate of 7.5% per year simple interest for 5 years. Fit 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 (Cota) will be paid under each scenario, and (b) should the company borrow now or 1 year from now? Assume the total amount due will be paid when the loan is due in either case. Cash Flows 1.39 Construct a cash flow diagram for the fol- owing cash flows: $10,000 outflow at time zero, $3000 per year outflow in years 1 through 3 and $9000 inflow in yoars 4 through 8 at at interest rate of 10% por yeat, and an unknown future amount in year 8 1.40 Construct a cash flow diagram to find the present worth of a future outflow of {$40,000 in year 5 at an interest rate of 15% per yearMSE B04 C4 adition toc HW Ch.2 Determination of F, P, and A 2.2 The U.S, Border Patrol is considering the purchase of a new helicopter for aerial surveillance of the New Mexico~Texas border with Mexico. A similar helicopter ‘was porchased 4 years ago at a cost of $140,000. At an interest rate of 7% per ‘year, What would be the equivalent value {oday of that $140,000 expenditure? 24 Petroleum Products, Ine..'is a pipeline company that provides petroleum prod- tacts to wholesalers in the northern United States and Canada, The company is con- sidering purchasing insertion turbine flowmeters to allow for better :nonitoring of pipeline integrity. I these meters would prevent one major disruption (through early detection of product loss) valued at ‘$600,000 four years from’ now, how much cconld the company afford to spend now at ‘an interest rate of 12% per year? 2.12 V-Tok Systems is a manufacturer of verti- cal compactors, and itis examining its cash flow requirements for the next 5 years ‘The company expects to replace office ‘machines and computer equipment at vari- ous times over the 5-year planning period, Specifically, the company expects to ‘spend $9000 two years from now, $8000 three years from now, and $5000 five years from now. What is the present worth of the planned expenditures at an interest rate of 10% per year? 2.13 A proximity sensor attached! to the tip of fan endoscope could reduce risks during ye surgery by alerting surgeons to the lo- cation of critical retinal tissue. Ifa certain eye surgeon expects: that by using. this technology, he will avoid lawsuits of $1.25 and $0.5 million 2 and 5 years from now, respectively, how much could he afford t0 spend now if his out-of-pocket costs for the lawsuits would be only 10% of the total amount of each suit? Use an in- tereat rate of 8% per year Arithmetic Gradient 232 Income from cardboard recycling at Fort Bliss has been increasing at a constant ‘ate of $1000 in each of the lat 3 years, If this year’s income (i.e, end of year 1) is expected to be $4000 and the increased income trend continues through year 5, (@) what wil) the income be 3. years from now (ic., end of year 3) and () what is the present worth of the income over that S-year period at om interest rate of 10% per year? 234 West Coast Marine and RV is considering replacing its wired pendant controllers on its heavy-duty cranes with new portable infrared keypad controllers. The company ‘expects 10 achieve cost savings of $14,000 the first year and amounts increasing by $1500 cach year thereafter for the next 4 years. At an interest rate of 12% per year, what is the equivalent annual worth of the savings? 2.35 Ford! Motor Company was able to reduce by 80% the cost required for installing data acquisition instrumentation on test vehicles by using MTS-developed spin- ning wheel force transducers. (a) IF this ‘year’s cost (i¢., end of year 1) is expected to be $2000, what was the cost the year be- fore installation of the transducers? (6) If the costs are expected to inerease by $250 each year for the next 4 years (i.e. through year 5), what is the equivalent annual ‘worth of the costs (years 1 through 5) at an interest rate of 18% per year’? 2.37 A major drug company anticipates that in future years it could be involved io litigation regarding perceived side effects ‘of one of its antidepressant drugs. To pre- pare a "war chest” the company wants to hhave money available 6 years from now that has 2 present worth today of $50 mit lion. The company expects to set aside $6 million the frst year and uniformly in- creasing amounts in each of the next 5 years. Ifthe company ean earn 12% per ‘year on the money it sets aside, by how much must it increase the amount set aside each year to achieve its goal? 2.38 A starl-up direct marketer of car parts ex- pects to spend $1 million the first year for advertising, with amounts decreasing by {$100,000 each yea Income is expected to be $4 million the first year, increasing by {$500,000 each year, Determine the equiv- ‘alent annual worth in years } through 5 of the company’s net cash flow al an interest rate of 16% per year Geometric Gradient 2.40. chemical engineer planning for her 1e- tirement will deposit 10% of her salary each year into @ high-technology stock fund, If her salary this year is $60,000 (ie., end of year 1) and she expects her to inerease by 4% each year, what will be the present worth of te fund after 15 years if it earns 4% per year?2.42 Hughes Cable Systems plans to offer its employees a salary enhancement package that has revenne: sharing as its main com ponent. Specifically. the company. will set aside 1% of total sales for yearend omuses for all its employees. ‘The sales are expected to be $5 million the first year, $6 million the second yeat, and amounts increasing by 20% each year for the next 5 years, At an interest rate of 10% per year, what is the equivalent annual worth in years 1 through 5 of the bonus package? 2.46 Find the preseat worth of a series of investments that starts at $1000 in year | and increases by 10% per year for 20 years. Assume the interest 1aie is 10% per year.