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Tutorial Chapter 4

Northern Construction and Engineering plans to open an office in Duluth that is expected to have $250,000 in positive cash flow per year for 25 years. At the end of 25 years, the office can be sold for $1 million. At an interest rate of 12%, the present worth of this cash flow is $2,019,800.

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658 views

Tutorial Chapter 4

Northern Construction and Engineering plans to open an office in Duluth that is expected to have $250,000 in positive cash flow per year for 25 years. At the end of 25 years, the office can be sold for $1 million. At an interest rate of 12%, the present worth of this cash flow is $2,019,800.

Uploaded by

mhdbad amin
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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TUTORIAL:

1. Northern Construction and Engineering plans on opening an office in Duluth. Over the next 25
years, the office is expected to have a positive cash flow of $250,000 per year. In year 25; the
office can be sold for $1M. At an interest rate of 12%, what is the equivalent present worth?

(Answers: $2,019,800)

2. A man wants to help provide a college education for his young daughter. He can afford to invest
$600/yr for the next 4 years, beginning on the girl’s 4th birthday. He wishes to give his daughter
$4000 on her 18th, 19th, 20th, and 21st birthdays, for a total of $16,000. Assuming 5% interest,
what uniform annual investment will he have to make on the girl’s 8th through 17th birthdays?

(Answer: $792.73)

3. Ernie’s Earthmoving purchase of a piece of heavy equipment with the following anticipated cost
for 5 years:

• First cost $120K

• O&M cost $30K per year

• Overhaul cost $35K in year 3

• Salvage value $40K after 5 years

a) Draw the cash flow diagram for the above


b) Calculate the present worth for the cash flow if the interest rate is 12%.
(Answer: –$230,367)

4. A company buys a machine for $12,000, which it agrees to pay for in five equal annual
payments, beginning one year after the date of purchase, at an annual interest rate of4%.
Immediately after the second payment, the terms of the agreement are changed to allow the
balance due to be paid off in a single payment the next year. What is the final single payment?

(Answer: $7778)

5. The Kelowna Go-Kart Klub has decided to build a clubhouse and track five years from now. It
must accumulate $50 000 by the end of five years by setting aside a uniform amount from its
dues at the end of each year. If the interest rate is 10 percent, how much must be set aside each
year?

(Answer: $8190 per year)

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