Supplemental Problems For Lecture 1

Supplemental Problems for Lecture Five

At a minimum, it is recommended that you do at least 3 problems from each of the 3 categories
below (Annual Worth Problems, Problems Comparing Finite Life Alternatives, Problems
Evaluating Long Life Alternatives)

ANNUAL WORTH PROBLEMS:

PROBLEMS COMPARING FINITE LIFE ALTERNATIVES
PROBLEMS EVALUATING LONG LIFE ALTERNATIVES:
 Supplemental Problems From Chatper 7

Benefit and Cost Analysis: Single Project Example Questions

Benefit and Cost Analysis: Multiple Project Example Questions
7.X

The city of Kitchener is proposing a new roadway system. Several proposals have been made as
shown in the table below. Which proposal is the best proposal? The discount rate is 4%.

Proposal W Proposal X Proposal Y Proposal Z

Benefit $450,000 per $350,000 per $400,000 per $300,000 per
year year year year
Disbenefit $85,000 per $25,000 per year $18,000 per year $12,000 per year
year
Initial Cost $7,000,000 $3,500,000 $2,000,000 $2,500,000
Maintenance and $80,000 per $55,000 per year $75,000 per year $150,000 per
Operating Costs year year
Life of project permanent 25 years 25 years 25 years
Present Worth Calculations with Inflation:

Questions 10.14 to 10.23

Future Worth Calculations with Inflation:

Questions 10.25 to 10.37

Annual Worth Questions with Inflation:

Questions 10.39 to 10.45

UCC Question

Your Canadian company has purchased new manufacturing equipment for use in its business.
The CCA rate for the equipment is 30%. The cost of the equipment is $450,000.

a) What is the depreciation amount after 5 years from today?

b) What is the Undepreciated Capital Cost (UCC) after 5 years from today?
Supplemental Problems from Chapter 8. Break Even Analysis and Pay-Back Analysis

Single Project Break Even Analysis Problems

Multiple Project Break Even Analysis Problems
Pay Back Analysis Problems
Supplemental Problems From Lecture 6

1. You invest $100,000 today. 6 years from now your investment has grown to $200,000.
What is the Rate of Return on the investment?

2. You have $850,000 to invest over a 10 year period. Bank interest rates are 5% per year,
compounded annually.

a) Which of the two projects show in the table below has the greatest Rate of Return?

b) Considering how much money you have available for investment, which of the two
projects below is the best option (assume any un-invested money remains in the
bank)?

Project 1: Project 2:
Invest $500,000 today Invest $850,000 today
10 years from today receive $1,000,000 10 years from today receive $1,500,000
 3. You have $1,000,000 available for investing in one of the two projects show below for a
period of 5 years. Bank interest rates are 3% compounded annually. Which project
would be the best investment (assume any un-invested money remains in the bank)?

Project A: Amount of investment = $700,000

Expected Rate of Return (ROR) = 17% compounded annually

Project B: Amount of investment = $500,000

Expected Rate of Return (ROR) = 22% compounded annually

4. You have $50,000 available for investing one of the two projects show below for a
period of 7 years. Bank interest rates are 5% compounded annually. Which project
would be the best investment (assume any un-invested money will remain in the bank)?

Project A: Amount of investment = $50,000

Expected Rate of Return (ROR) = 12% compounded annually

Project B: Amount of investment = $15,000

Expected Rate of Return (ROR) = 25% compounded annually

5. You have $825,000 available for investing one of the two projects show below for a
period of 10 years. Bank interest rates are 10% compounded annually. Which project
would be the best investment?

Project A: Amount of investment = $600,000

Expected Rate of Return (ROR) = 8% compounded annually

Project B: Amount of investment = $500,000

Expected Rate of Return (ROR) = 5% compounded annually
 6. You have $500,000 available for investing in one of the two projects shown below for a
period of 8 years. Bank interest rates are 3% compounded annually. Which project
would be the best investment?

Project A: Amount of investment = $350,000

Expected Rate Of Return = 14% compounded annually

Project B: Amount of investment = $350,000

Expected Rate of Return = 12% compounded annually

7. Find the annual Rate of Return for the cash flows shown below ( a spread sheet will be
necessary for the more complicated cash flows shown below. Use Excel “Goal Seek” to
solve).

a)

$0 $0 $0 $0 $0 $40,000

YEAR 0 1 2 3 4 5

-$10,000 $0 $0 $0 $0 $0

b)

$0 $5,000 $5,000 $5,000 $5,000 $5,000

YEAR 0 1 2 3 4 5

-$10,000 $0 $0 $0 $0 $0
c)

$0 $0 $5,000 $0 $10,000 $12,000

YEAR 0 1 2 3 4 5

-$25,000 $0 $0 $0 $0 $0

d)

$0 $0 $15,000 $15,000 $15,000 $15,000

YEAR 0 1 2 3 4 5

-$25,000 -$25,000 $0 $0 $0 $0
Supplemental Questions from Chapter 9; Replacement and Retention Decisions

Note that some of these questions refer to equipment as “defenders” and “challengers”. A
defender is equipment that is already owned. A challenger is proposed equipment to replace
the existing equipment.

Economic Service Life Questions: 9.7 to 9.11

Replacement Study Questions: 9.16 to 9.22
Replacement Study with a Time line: 9.26 to 9.28
 Supplemental Problems For Lecture 12

1. A company expects to incur the cash flows as shown in the table below. The before-tax
MARR is 10%. The corporate tax rate is 26.5%

Operating Book Derpreciation Capital Capital Taxable

YEAR Gross Income Expenses Value Depreciation Recovery DR Gain CG Loss Income Taxes CFBT CFAT
0 $250,000 -$250,000 -$250,000
1 $150,000 $30,000 $212,500 $37,500 $0 $0 $0 $82,500 $21,863 $120,000 $98,138
2 $135,000 $28,000 $148,750 $63,750 $0 $0 $0 $43,250 $11,461 $107,000 $95,539
3 $110,000 $25,000 $104,125 $44,625 $195,875 $0 $0 $236,250 $62,606 $85,000 $22,394

a) What is the Present Worth of the cash flow after taxes?

b) At the end of year 3, what is the Future Worth of the cash flow after taxes?
c) What is the Annual Worth of the cash flow after taxes?
d) What is the Present Worth of the cash flow before taxes?

2. A manufacturing company has a gross income this year of $3,500,000. Expenses for the
year was $1,200,000. The company has decided to sell equipment that it purchased 4
years ago as it is no longer needed. The original purchase price of the equipment was
$850,000. The depreciation charge for the equipment this year was $106,208 and the
undepreciated capitol cost was $248,195. The corporate tax rate for this company is
26.5%. What is the cash flow after taxes if the equipment is sold this year for:

a. $300,000
b. $150,000
c. $900,000
Selected Problems From Chapter 3 Nominal And
Effective Interest Rates
Supplemental Problems From Lecture Two
Supplemental Problems From Lecture 6

1. You invest $100,000 today. 6 years from now your investment has grown to $200,000.
What is the Rate of Return on the investment?

Solution:

PW = 0 = -100,000 + 200,000(P/F,i,6)
Therefore 100,000 = 200,000/(1+i)6
Therefore 100,000(1+i)6 = 200,000
Therefore (1+i)6 = 200,000/100,000
Therefore 1+i = 2(1/6)
Therefore i = 2(1/6) – 1
= 12.246%

Therefore the Rate of Return is 12.246% per year

2. You have $850,000 to invest over a 10 year period. Bank interest rates are 5% per year,
compounded annually.

a) Which of the two projects show in the table below has the greatest Rate of Return?

b) Considering how much money you have available for investment, which of the two
projects below is the best option (assume any un-invested money remains in the
bank)?

Project 1: Project 2:
Invest $500,000 today Invest $850,000 today
10 years from today receive $1,000,000 10 years from today receive $1,500,000
Solution:

a) Project 1: PW = 0 = -500,000 + 1,000,000(P/F,i,10)

Therefore 500,000 = 1,000,000/(1+i)10
Therefore i = (1,000,000/500,000)(1/10) – 1
= 7.177%
Project 2: PW = 0 = -850,000 + 1,500,000(P/F,i,10)
Therefore 850,000 = 1,500,000/(1+i)10
Therefore i = (1,500,000/850,000)(1/10) – 1
= 5.844%

Therefore the Rate of Return for Project 2 is 5.844%

Therefore Project 1 has the greatest Rate of Return

b) Project 1: FW = $1,000,000 + ($850,000 - $500,000)(1.05)10 = $1,570,113

Project 2: FW = $1,500,000

Therefore Project 1 is the best choice.

3. You have $1,000,000 available for investing in one of the two projects show below for a
period of 5 years. Bank interest rates are 3% compounded annually. Which project
would be the best investment (assume any un-invested money remains in the bank)?

Project A: Amount of investment = $700,000

Expected Rate of Return (ROR) = 17% compounded annually

Project B: Amount of investment = $500,000

Expected Rate of Return (ROR) = 22% compounded annually

Solution:

Future Worth A = 700,000(1.175) + 300,000(1.035)= $1,882,496

Future Worth B = 500,000(1.225) + 500,000(1.035) = $1,930,991

Therefore choose B
 4. You have $50,000 available for investing one of the two projects show below for a
period of 7 years. Bank interest rates are 5% compounded annually. Which project
would be the best investment (assume any un-invested money will remain in the bank)?

Project A: Amount of investment = $50,000

Expected Rate of Return (ROR) = 12% compounded annually

Project B: Amount of investment = $15,000

Expected Rate of Return (ROR) = 25% compounded annually

Solution:

Future Worth A = 50,000(1.127) = $110,534

Future Worth B = 15,000(1.257) + 35,000(1.057) = $120,774

Therefore choose B

5. You have $825,000 available for investing one of the two projects show below for a
period of 10 years. Bank interest rates are 10% compounded annually. Which project
would be the best investment?

Project A: Amount of investment = $600,000

Expected Rate of Return (ROR) = 8% compounded annually

Project B: Amount of investment = $500,000

Expected Rate of Return (ROR) = 5% compounded annually

Solution: Neither project has a ROR greater than bank interest rates, therefore do no invest in
either project. Deposit all money in bank instead.
 6. You have $500,000 available for investing in one of the two projects shown below for a
period of 8 years. Bank interest rates are 3% compounded annually. Which project
would be the best investment?

Project A: Amount of investment = $350,000

Expected Rate Of Return = 14% compounded annually

Project B: Amount of investment = $350,000

Expected Rate of Return = 12% compounded annually

Solution: Since both projects have the same investment amount, choose project A, as it has the
higher expected Rate of Return
 7. Find the annual Rate of Return for the cash flows shown below ( a spread sheet will be
necessary for the more complicated cash flows shown below. Use Excel “Goal Seek” to
solve).

a)

$0 $0 $0 $0 $0 $40,000

YEAR 0 1 2 3 4 5

-$10,000 $0 $0 $0 $0 $0

Solution: 31.95%

b)

$0 $5,000 $5,000 $5,000 $5,000 $5,000

YEAR 0 1 2 3 4 5

-$10,000 $0 $0 $0 $0 $0

Solution: 41.04%
 c)

$0 $0 $5,000 $0 $10,000 $12,000

YEAR 0 1 2 3 4 5

-$25,000 $0 $0 $0 $0 $0

Solution: 1.91%

d)

$0 $0 $15,000 $15,000 $15,000 $15,000

YEAR 0 1 2 3 4 5

-$25,000 -$25,000 $0 $0 $0 $0

Solution: 6.33%
 Solutions to Supplemental Problems For Lecture Four

4.18 Del Medical System

PW = -$250,000 - $231,000(P/A,5%,6) - $140,000(P/F,5%,4) + $50,000(P/F,5%,6)

= -$250,000 - $231,000(5.07569) - $140,000/(1.05)4 + $50,000/(1.05)6
= -$1,500,352

Siemens System

PW = -$224,000 - $235,000(P/A,5%,6) - $26,000(P/F,5%,3) + $10,000(P/F,5%,6)

= -$224,000 - $235,000(5.07569) - $26,000/(1.05)3 + $10,000/(1.05)6
= -$1,431,785

Therefore the Siemens System is the lower X-ray cost system

4.19 Pull System

PW = -$1,500,000 - $700,000(P/A,10%,8) + $100,000(P/F,10%,8)

= -$1,500,000 - $700,000(5.33493) + $100,000/(1.10)8
= -$5,187,800

Push System

PW = -$2,250,000 - $600,000(P/A,10%,8) - $500,000(P/F,10%,3) + $50,000(P/F,10%,8)

= -$2,250,000 - $600,000(5.33493) - $500,000/(1.10)3 + $50,000/(1.10)8
= -$5,803,290

Therefore the Pull System has the lowest costs

4.20 Option A ($ million):

PW = -200 - 450(P/A,12%,20) + 75(P/F,12%,20)

= -200 - 450(7.46944) + 75/(1.12)20
= 3,553.473

Option B ($ million):

PW = -350 - 275(P/A,12%,20) + 75(P/F,12%,20)

= -350 - 275(7.46944) + 50/(1.12)20
= 2,398.913

Option C ($ million):

PW = -475 - 400(P/A,12%,20) + 90(P/F,12%,20)

= -475 - 400(7.46944) + 90/(1.12)20
= 3,453.446

Choose Option B since it has the lowest costs.

4.48 CC = -$1,000,000 - $125,000(P/A,10%,10) -$200,000(P/A,10%,∞)(P/F,10%,10)

CC = -$1,000,000 - $125,000(6.14457) –[$200,000/(.10)]/(1.10)10
CC = -$2,539,158

4.49 The effective annual interest rate is 6%

Therefore the effective rate for a 3 year period is: (1.06)3 - 1 = .191016 = 19.1016%

CC = -$1,700,000 - $350,000(P/A,19.1016%,∞)
= -$1,700,000 - $350,000/.191016
= $3,532,307
4.54 Material J1:

AWJ1 = -$55,000(A/P,10%,3) - $6,000 + $2,000(A/F,10%,3)

AWJ1 = -$55,000(.40211) - $6,000 + $2,000(.30211)
AWJ1 = -$27,511.83

Therefore, for an infinite lifetime, the cost of Material J1 would be CCJ1 where:
CCJ1 = -$27,511.83(P/A,10%,∞)
= -$27,511.83/.10
= -$275,118

Material J2:

CCJ2 = -$325,000 - $1,000(P/A,10%,∞) + $200,000(P/F,10%,∞)

= -$325,000 - $1,000/.10 + $200,000(0)
= -$335,000

Choose Material J1 since it has the lowest costs.

 Solutions to Supplemental Problems For Lecture Eight

8.1 a)

Q = FC/(r – v)
Q = 1,000,000/(9.90 – 4.50)
Q = 185,185

Therefore the manufacturer must sell 185,185 units per year to break even.

b)

R = 150,000 units x $9.90/unit

= $1,485,000

TC = FC + TC
= $1,000,000 + 150,000 units x $4.50/unit
= $1,000,000 + $675,000
= $1,675,000

Profit = R – TC
Profit = $1,485,000 - $1,675,000
Profit = -$190,000

Therefore the annual profit will be a -$190,000/year if 150,000 units/year are sold. Thus there
will be a loss of $190,000/year

c)

R = 480,000 x $9.90/unit
= $4,752,000/year

TC = FC + TC
= $1,000,000 + 480,000 units x $4.50/unit
= $1,000,000 + $2,160,000
= $3,160,000

Profit = R – TC
Profit = $4,752,000 - $3,160,000
Profit = $1,592,000

Therefore the annual profit will be a $1,592,000/year if 480,000 units/year are sold.
 8.2 FC = $16,000(A/P,8%,5) – $2,000(A/F,8%,5)
= $16,000(0.25046) - $2,000(0.17046)
= $3,666.44/year

Q = FC/(r-v)
= [$3,666.44/year]/($300/day - $65/day)
= 15.60 days per year

Therefore the photographer must work at least 16 days per year to break even.

8.3 a)

FC = $98,000(A/P,10%,5) - $66,000(A/F,10%,5)
= $98,000(0.26380) - $66,000(0.16380)
= $15,041.60/year

Q = FC/(r-v)
= [$15,041.60/year]/($0.71/mile - $0.60/mile)
= 136,742 miles/year

Therefore the truck driver must drive 136,742 miles/year in order to break even.

b)

Days to break even = [136,742 miles/year]/(550 miles/day)

= 248.62 days/year

Therefore the truck driver must drive 249 days per year in order to break even.

8.4 Let Z = the number of hours the staff must work per month to break even

Revenue per hour for all engineering staff = $90/engineer x 10 engineers = $900

Profit = $15,000/month = -$900,000(A/P,1%,120)/month – $1,100,000/month + $900Z/(hour x

month) + 1,500,000(A/F,1%,120)

$15,000 = -$900,000(0.01435) – 1,100,000 + 900Z + 1,500,000(0.00435)

Therefore Z = 1,246 hours/month
8.5 For break even, AW = 0
Salvage value = .15 x 245,000 = $36,750

Therefore:

0 = -245,000(A/P,15%,n) + 92,000 – 38,000 + 36,750(A/F,15%,n)

0 = -245,000(A/P,15%,n) + 54,000 + 46,750(A/F,15%,n)

Solve by trial and error:

At 1 year: 0 = -245,000(1.15) + 54,000 + 36,750(1.0)

0 = -191,000
Therefore break even is more than one year.

At 5 years: 0 = -245,000(0.29832) + 54,000 + 36,750(0.14832)

0 = -13,638
Therefore break even is more than five years.

At 10 years: 0 = -245,000(0.19925) + 54,000 + 36,750(0.04925)

0 = 6,994
Therefore break even is between 5 and 10 years.

At 7 years: 0 = -245,000(0.24036) + 54,000 + 36,750(0.09036)

0 = -1,567

At 8 years: 0 = -245,000(0.22285) + 54,000 + 36,750(0.07825)

0 = 2,277

Therefore break even is between 7 and 8 years

Using linear interpolation:

y = y1 + [(y2 – y1)/(x2 – x1)](x – x1)

y = 7 + [(8 - 7)/(2,277 + 1,567)](0 + 1,567)

y = 7.41

Therefore break even is approximately 7.41 years

8.6 Q = FC/(r-v)
= 850,000/(3.25 – 1.95)
= 653,846

Therefore the call center must place 653,846 call per year in order to break even.

653,846 /1,500,000 = .436 = 43.6%

Therefore the call center must use 43.6% of its capacity in order to break even.

8.12 Let Z = the minimum number of cars to justify acquiring a repair facility.

Let AWc = the annual cost of using a contract service.

Therefore AWc = -700Z

Let AWr = the annual cost of acquiring repair facilities.

Therefore AWr = -300,000(A/P,10%,15) - 300Z + 40,000(A/F,10%,15)

To find the break even point, let AWc = AWr and solve for Z.

Therefore: -700Z = -300,000(A/P,10%,15) – 300Z + 40,000(A/F,10%,15)

Therefore: 300,000(0.13147) – 40,000(0.03147) = 700Z – 300Z
Therefore: 38,182.20 = 400Z
Therefore: Z = 95.46

Therefore the car rental agency must repair at least 96 cars per year to justify
purchasing a repair facility.
8.13 Let Z = the cost per mile of installing an asphalt road.

Let AWa = the annual cost per mile of an asphalt road

Therefore AWa = -Z(A/P,8%,10) – 774

Let AWc = the annual cost per mile of a concrete road

Therefore AWc = -2,300,000(A/P,8%,20) - 483

Find the maximum justifiable asphalt cost by letting AWa = AWc

Therefore: - Z(A/P,8%,10) – 774 = -2,300,000(A/P,8%,20) – 483

Therefore: -Z(0.14903) – 774 = -2,300,000(0.10185) – 483
Therefore: Z = $1,569,912/mile

If Z is greater than $1,569,912/mile than AWa will be more costly than AWc.

Therefore the maximum justifiable expenditure for an asphalt road is $1,569,912/mile

8.16 Let Z = the number of square yards of resurfacing per year

Let AWm = the annual cost of micro-surfacing

AWm = -109,000 – 2.75Z

Let AWr = the annual cost of regular resurfacing

AWr = -225,000(A/P,8%,15) – 13Z

To find the number of square yards that make each process the same in annual costs, let
AWm = AWr

Therefore: -109,000 – 2.75Z = -225,000(A/P,8%,15) – 13Z

Therefore: -109,000 – 2.75Z = -225,000(0.11683) – 13Z
Therefore: Z = 8,070

Therefore the two systems have identical annual costs if 8,070 square meters of
roadway are resurfaced each year.
8.45 a)

Let AW = 0 to find payback period

Therefore: AW = -200,000/n - 50,000 + 90,000 = 0
Therefore: n = 5 years

b)

Let AW = 0 to find payback period

Therefore: AW = -200,000(A/P,12%,n) - 50,000 + 90,000 = 0
Therefore: (A/P,12%,n) = (50,000 - 90,000)/(-200,000)
Therefore: (A/P,12%,n) = 0.20000

By referring to the interest tables we find that:

(A/P,12%,8) = 0.20130
(A/P,12%,9) = 0.18768

Therefore the payback period is slightly more than 8 years.

Using linear interpolation:

y = y1 + [(y2 – y1)/(x2 – x1)](x – x1)

y = 8 + [(9 - 8)/(0.18768 – 0.20130)](0.2 – 0.20130)

y = 8.095

Therefore the payback period is approximately 8.095 years

8.50 a)

Let Z = the annual net cash flow the farmer needed to receive.

For a 3 year payback:

AW = 0 = -55,000(A/P,5%,3) + Z
Therefore: Z = 55,000(0.36721)
= $20,197/year
Therefore for a 3 year payback, the farmer needs to receive a net cash flow of
$20,197 per year

For a 5 year payback:

AW = 0 = -55,000(A/P,5%,5) + Z
Therefore: Z = 55,000(0.23097)
= $12,703/year
Therefore for a 5 year payback, the farmer needs to receive a net cash flow of
$12,703 per year

For a 8 year payback:

AW = 0 = -55,000(A/P,5%,8) + Z
Therefore: Z = 55,000(0.15472)
= $8,510/year
Therefore for an 8 year payback, the farmer needs to receive a net cash flow of
$8,510 per year

For a 10 year payback:

AW = 0 = -55,000(A/P,5%,10) + Z
Therefore: Z = 55,000(0.12950)
= $7,123/year
Therefore for a 10 year payback, the farmer needs to receive a net cash flow of
$7,123 per year

b)

Let Y = the amount the farmer should have paid for the tractor.

0 = -Y(A/P,5%,10) + 6,000
Therefore Y = 6,000/(0.12950)
= $46,332

Therefore the farmer should have paid nor more than $46,332 for the tractor in
order to realize a 10 year payback.
 Solutions to Supplemental Problems For Lecture Eleven

12.8 B = $170,000
n=3
S = $20,000
t=2

D = (B – S)/n

Therefore: D = ($170,000 – $20,000)/3

= $50,000

BVt = B – t x D
= $170,000 – 2 x $50,000
= $70,000

Therefore the depreciation charge for year two is $50,000

Therefore the book value for year two is $70,000

12.9 D = (B – S)/n
Therefore: $27,500 = (B – S)/4
Therefore: B = 4 x $27,500 + S

BVt = B – t x D
Therefore: $65,000 = [ 4 x $27,500 + S ] – 2($27,500)
Therefore: S = $10,000

Therefore: B = 4 x $27,500 + $10,000

= $120,000

a) Therefore the assets salvage value if $10,000

b) Therefore the assets basis is $120,000
12.10 BV2 = B – t x D

Therefore $296,000 = B – 2 x D
Therefore B = $296,000 + 2D

BV3 = B – t x D
Therefore $224,000 = B – 3 x D
Therefore B = $224,000 + 3D

Therefore:

$296,000 + 2D = $224,000 + 3D
Therefore D = $72,000

Since $224,000 = B – 3D
Therefore B = $224,000 + 3 x $72,000
= $440,000

D = (B – S)/n
Therefore $72,000 = ($440,000 - S)/5
Therefore S = $80,000

a) Therefore the asset’s salvage value is $80,000

b) Therefore the asset’s basis is $440,000

12.11 S = 0.25B

D = $18,900 = (B-S)/n
N=8

Therefore $18,900 = (B – 0.25B)/8

Therefore B = $201,600
12.15 BVt = B(1-d)t
d = 2/n
n=5
Therefore d = 2/5 = 0.40

Therefore BV3 = B(1-0.40)3

Therefore $25,000 = B(0.60)3
Therefore B = $115,741

Therefore the original Basis was $115,741

12.16 S = 0.25B

d= 2/5 = 0.40

BVt = B(1-d)t

When Book Value = Salvage Value = 0.25B

Therefore: 0.25B = B(1-0.40)t
Therefore: 0.25 = (1-.40)t
Therefore: log(0.25) = t x log(0.60)
Therefore: t = log(0.25)/log(0.60)
= 2.714

Therefore after 3 years for the book value will be less than the salvage
value

12.17 d = 2/n = 2/5 = 0.40

BVt = B(1-d)t
Therefore: BV5 = B(1-0.40)5
Therefore: BV5 = B(0.07776)

Therefore the Book Value after 5 years will be 7.776% of the first cost.
 12.18

part a)

150% DB DDB (Double Declining Balance)

n = 12 n = 12
d = 1.5/n = 1.5/12 = 0.125 d = 2.0/n = 2.0/12 = 0.166667
B = $180,000 B = $180,000

BVt = B(1-d)t BVt = B(1-d)t

Therefore: BV12 = $180,000(1 - 0.125)12 Therefore: BV12 = $180,000(1 – 0.166667)12
= $36,255 = $20,188

part b)

Estimated salvage is $30,000

• The 150% DB method better approximates the estimated salvage value.
• The estimated salvage value is between the two book value calculated
using 150% DB and DDB

part c)

The DDB method writes off more of the first cost vs the 150% DB method.

UCC Question Solution:

a) After 1 year, Depreciation = 0.5 x 0.3 x $450,000 = $67,500

After 1 year, UCC = $450,000 - $67,500 = $382,500

After 2 years, Depreciation = 0.3 x $382,500 = $114,750

After 2 years, UCC = $382,500 - $114,750 = $267,750

After 3 years, Depreciation = 0.3 x $267,750 = $80,325

After 3 years, UCC = $267,750 - $80,325 = $187,425

After 4 years, Depreciation = 0.3 x $187,425 = $56,227.50

After 4 years, UCC = $187,425 - $56,227.50 = $131,197.50

After 5 years, Depreciation = 0.3 x $131,197.50 = $39,359.25

After 5 years, UCC = $131,197.50 - $39,359.25 = $91,838.25
 Solutions to Supplemental Problems For Lecture Five

5.1 AW = -$7,000,000(A/P,15%,3) - $860,000

= -$7,000,000(.43798) - $860,000
= -$3,925,860

There annual revenue of $3,925,860 is required.

5.2 Salvage value = .20 x $560,000,000 = $112,000,000

AW = -$560,000,000(A/P,18%,15) - $430,000 + $112,000,000(A/F,18%,15)

= -$560,000,000(0.19640) - $430,000 + $112,000,000(0.01640)
= -$108,577,200

Therefore the company must make $108,577,200/year to recover the cost of

investment.

5.3 The Future Value of the annual payments the company must make is F, where:
F = $3,800,000(F/P,20%,4) - $500,000
F = $3,800,000(1.20)4 -$500,000
F = $7,379,680

Therefore the annual payments the company needs to receive is A, where:

A = $7,379,680(A/F,20%,4)
A = $7,379,680(0.18629)
A = $1,374,761

5.4 AW = $13,000,000(A/P,15%,10) + ($10,000,000/1.15)(A/P,15%,10) + $1,200,000

= $13,000,000(0.19925) + ($10,000,000/1.15)(0.19925) + $1,200,000
= $5,522,859

Therefore the company must realize an annual revenue of $5,522,859

5.5 The interest rate per 6 month period is 5%
The number of 6 month periods = 2 x 3 = 6
Initial Cost = $20,000
Maintenance cost per 6 month period = $300
Salvage value = $1,500

A = -$20,000(A/P,5%,6) - $300 + $1,500(A/F,5%,6)

= -$20,000(0.19702) - $300 + $1,500(0.14702)
= -$4,020

Therefore the company must realize additional income of $4,020 per 6 month period in
order to cover the costs of the new software.

5.6 Total cost of new equipment = $1,100,000 + $275,000 = $1,375,000

Salvage value of equipment is $1,375,000(0.25) = $343,750

AW = -$1,375,000(A/P,10%,5) – 13($100,000) + $343,750(A/F,10%,5)

= -$1,375,000(0.26380) - $1,300,000 + $343,750(0.16380)
= -$1,606,419/year

5.11 Machine X:

AW = -$300,000(A/P,10%,4) - $60,000 + $70,000(A/F,10%,4)

= -$300,000(0.31547) - $60,000 + $70,000(0.21547)
= -$139,558

Machine Y:

AW = -$430,000(A/P,10%,6) - $40,000 + $95,000(A/F,10%,6)

= -$430,000(0.22961) - $40,000 + $95,000(0.12961)
= -$126,419

Choose Machine Y since it has the lowest annual costs.

5.12 Type 1:

Gasoline cost per year = $4/gallon x gallon/22 miles x 21,000 miles/year

= $3,818.18/year

AW = -$27,000(A/P,6%,5) - $3,818.18 + $10,000(A/F,6%,5)

= -$27,000(0.23740) - $3,818.18 + $10,000(0.17740)
= -$8,453.98

Type 2:

Gasoline cost per year = $4/gallon x gallon/25 miles x 21,000 miles/year

= $3,360/year

AW = -$29,500(A/P,6%,5) - $3,360 + $12,000(A/F,6%,5)

= -$29,500(0.23740) - $3,360 + $12,000(0.17740)
= -$8,234.50

Therefore choose Type 2 since it has the lowest costs.

5.13 Required amount of liner material = 110 acres x 43,560 ft2/acre = 4,791,600 ft2

Plastic Liner:
Initial Cost = $.90/ft2 x 4,791,600 ft2 = $4,312,440
AW = -$4,312,440(A/P,8%,20)
= -$4,312,440(0.10185)
= -$439,222

Rubber Liner:
Initial Cost = $2.20/ft2 x 4,791,600 ft2 = $10,541,520
AW = -$10,541,520(A/P,8%,30)
= -$10,541,520(0.08883)
= -$936,403

Therefore choose the plastic liner as it has the lowest annual costs.
5.14 Method 1:

AW = -$550,000(A/P,10%,3) - $160,000 + $125,000(A/F,10%3)

= -$550,000(0.40211) - $160,000 + $125,000(0.30211)
= -$343,397/year

Method 2:

Salvage value after 3 years = 1.35 x $240,000 = $324,000

AW = -$830,000(A/P,10%,3) - $120,000 + $324,000(A/F,10%,3)

= -$830,000(0.40211) - $120,000 + $324,000(0.30211)
= -$355,868/year

Therefore choose Method 1 as it has the lowest annual costs.

5.15 a)

Land Application:

AW = -$150,000(A/P,10%,4) - $95,000 + $25,000(A/F,10%,4)

= -$150,000(0.31547) - $95,000 + $25,000(0.21547)
= -$136,934/year

Incineration:

AW = -$900,000(A/P,10%,6) - $60,000 + $300,000(A/F,10%,6)

= -$900,000(0.22961) - $60,000 + $300,000(0.12961)
= -$227,766/year

Contract:

AW = -$170,000/year

Therefore choose the Land Application as it has the lowest costs.

b)

To compare the projects based on Present Worth, all project must have the same
lifetime. Choose the 12 years as the least common multiple

Land Application PW = -$136,934(P/A,10%,12)

= -$136,934(6.81369)
= -$933,026

Incineration PW = -$227,766(P/A,10%,12)
= -$227,766(6.81369)
= -$1,551,923

Contract PW = -$170,000(P/A,10%,12)
= -$170,000(6.81369)
= -$1,158,327
5.21 AW = -$1,000,000(A/P,10%,∞) – ($1,000,000/1.103)(A/P,10%,∞)
= -$1,000,000(.10) - $751,315(.10)
= -$175,132

5.22 PW = -$5,000,000 - $2,000,000/(1.10)10 - $100,000(P,A,10%,∞)/(1.10)10

= -$5,000,000 - $2,000,000/(1.10)10 – ($100,000/.10)/(1.10)10
= -$6,156,630

Therefore AW = -$6,156,630(A/P,10%,∞)
= -$6,156,630(.10)
= -$615,663/year

5.23 Alternative A:

AW = -$60,000(A/P,10%,3) - $30,000 + $10,000(A/F,10%,3)

= -$60,000(0.40211) - $30,000 + $10,000(.30211)
= -$51,106/year

Alternative B:

AW = -$380,000(A/P,10%,∞) - $5,000 + $25,000(A/F,10%,∞)

= -$380,000(.10) - $5,000 + $25,000(0)
= -$43,000/year

Therefore Alternative B is the lowest cost alternative.

5.24 Alternative X:

The interest rate per month is 1%, the number of compounding periods is 12 x 3 = 36

AW = -$90,000(A/P,1%,36) - $30,000 + $7,000(A/F,1%,36)

= -$90,000(0.03321) - $30,000 + $7,000(0.02321)
= -$32,826/month

Alternative Y:

The interest rate per month is 1%, the number of compounding periods is 12 x 10 = 120

AW = -$400,000(A/P,1%,120) -$20,000 + $25,000(A/F,1%,120)

= -$400,000(0.01435) -$20,000 + $25,000(0.00435)
= -$25,631/month

Alternative Z:

The interest rate per month is 1%, the number of compounding periods is infinite,
except for the overhaul that occurs every 10 years. The number of compounding
periods for the overhaul is 10 x 120 = 120

AW = -$900,000(A/P,1%,∞) - $13,000 - $80,000(A/F,1%,120) + $200,000(A/F,1%,∞)

= -$900,000(.01) - $13,000 - $80,000(0.00435) + $200,000(0)
= -$22,348

Choose Alternative Z since it has the lowest costs.

5.25 a)

Let Z = the amount that must be deposited each year.

Z(F/A,8%,20) = $24,000(P/A,8%,∞)
Therefore: Z = ($24,000/.08)/(F/A,8%,20)
= ($24,000/.08)/(45.76196)
= $6,555.66/year

b)

Let Z = the amount that must be deposited each year.

Z(F/A,8%,20) = $24,000(P/A,8%,30)
Therefore: Z = $24,000(P/A,8%,30)/(F/A,8%,20)
= $24,000(11.25778)/(45.76196)
= $5,904.18/year

c)

$6,555.66 - $5,904.18 = $651.48

Therefore when the withdrawal horizon decreased from infinity to 30 years, the
amount of money that needs to be deposited in the fund decreases by
$651.48/year
 Solutions to Supplemental Problems For Lecture Nine

9.7 ESL of existing equipment is 3 years with an Annual Worth of -$85,000

ESL of proposed equipment is 7 years with an Annual Worth of -$86,000

Since the Annual Worth of the existing equipment is less than that of the proposed
equipment, you should keep the existing equipment.

9.9 ESL existing equipment (defender) 4 years (with an Annual Worth of -$39,321).
ESL of proposed equipment (challenger) is 5 years (with an Annual Worth of -$38,000)

9.10 AW if equipment kept for 1 year = -$165,000 - $36,000 + $99,000 = -$102,000

AW if equipment kept for 2 years = -$86,429 - $36,000 + $38,095 = -$84,334
AW if equipment kept for 3 years = 60,317 - $42,000 + $18,127 = -$84,190
AW if equipment kept for 4 years = -$47,321 - $43,000 + $6,464 = -$83,857
AW if equipment kept for 5 years = -$39,570 - $48,000 + $3,276 = -$84,294

Therefore the ESL is 4 years.

9.11 a) Let AWs = the Annual Worth of the salvage value after two years.

AW if equipment kept for 1 years = -$88,000 - $45,000 + $50,000 = -$83,000

AW if equipment kept for 2 years = -$46,095 - $46,000 + AWs = ?
AW if equipment kept for 3 years = -$32,169 - $51,000 + $6,042 = -$77,127
AW if equipment kept for 4 years = -$25,238 - $59,000 + 3,232 = -$81,006
AW if equipment kept for 5 years = -$21,104 - $70,000 + $1,638 = -89,466

In order for the ESL to be 2 years, the AW of the equipment if kept for two years must be
greater than $-77,127

Therefore let -$46,095 - $46,000 + AWs = -$77,127

Therefore AWs = $14,968
Therefore AWs must be greater than $14,968 in order for the ESL to be 2 years.

b) Let salvage value after 2 years = S

S(A/F,10%,2) = $14,968
Therefore S = $14,968/0.47619 = $31,433

Therefore the salvage value after two years must be greater than $31,433 in order for the ESL
to be 2 years.
9.16 Let the AW of the proposed equipment = AWp

AWp = -$80,000(A/P,12%,3)/year - $19,000/year + $10,000(A/F,12%,3)

= -$80,000(0.41635)/year - $19,000/year + $10,000(0.29635)/year
= -$49,345/year

With a a $10,000 trade-in value, let the AW of the existing equipment if retained be AWe10

AWe10 = -$10,000(A/P,12%,3)/year - $15,000/year - $31,000/year + $9,000(A/F,12%,3)/year

= -$10,000(0.41635)/year - $46,000/year + $9,000(0.29635)/year
= -$47,496/year

With a a $20,000 trade-in value, let the AW of the existing equipment if retained be AWe20

AWe20 = -$20,000(A/P,12%,3)/year - $15,000/year - $31,000/year + $9,000(A/F,12%,3)/year

= -$20,000(0.41635)/year - $46,000/year + $9,000(0.29635)/year
= -$51,660/year

Therefore, it is best to keep the existing equipment if only $10,000 can be realized on a trade in.
Therefore, it is best accept the proposed equipment if $20,000 can be realized on a trade in.

9.17 Let AWe = the annual worth of the existing equipment.

AWe = -$7000(A/P,10%,3)/year - $22,000(A/P,10%,3)/year - $27,000/year + $12,000(A/F,12%,3)/year
AWe = -$7000(0.40211)/year - $22,000(0.40211)/year - $27,000/year + $12,000(0.30211)/year
AWe = -$35,036

Let AWp = the annual worth of the proposed equipment.

AWp = -$65,000(A/P,10%,3)/year - $14,000/year + $23,000(A/F,10%,3)/year
AWp = -$65,000(0.40211)/year - $14,000/year + $23,000(0.30211)/year
AWp = -$33,189/year

Therefore it is best to purchase the proposed equipment.

9.22 Machine X: Let the Annual Worth of Machine X be AWx
Let the trade-in value of Machine X be M.

AWx = -M(A/P,8%,3) - $60,000/year + $15,000(A/F,8%,3)

= -M(0.38803) - $60,000/year + $15,000(0.30803)
= -M(0.38803) -$55,380/year

Machine Y: Let the Annual Worth of Machine Y be AWy

AWy = -$80,000(A/P,8%,5) – $40,000/year - $2,000(A/G,8%,5)/year + $20,000(A/F,8%,5)/year

= -$80,000(0.25046) - $40,000/year - $2,000(1.846472)/year + $20,000(0.17046)
= -$60,321/year

To Find M, let AWx = AWy

Therefore: -M(0.38803) -55,380 = -60,321

Therefore: M = $12,734

Therefore the if the trade-in value of Machine X is $12,734, the Annual Worth of Machine X will be
the same as the Annual Worth of Machine Y.

9.26 Existing Machine:

AW = -$40,000(A/P,10%,3)/year - $55,000/year + $11,000(A/F,10%,3)/year
= -$40,000(0.40211) - $55,000/year + $11,000(0.30211)
= -$67,761/year

Proposed Machine:
AW = -$80,000(A/P,10%,3)/year - $37,000/year + $20,000(A/F,10%,3)/year
= -$80,000(0.40211) - $37,000 + $20,000(0.30211)
= -$63,127

Therefore it is best to purchase the proposed machine.

9.28 Existing equipment:

AWe = -($70,000 + $40,000)(A/P,15%,3)/year - $85,000/year + $30,000(A/F,15%,3)/year

AWe = -($70,000 + $40,000)(0.43798)/year - $85,000/year + $30,000(0.28798)/year
AWe = -$124,538/year

Proposed equipment:

AWp = -$220,000(A/P,15%,3)/year - $65,000/year + $50,000(A/F,15%,3)/year

AWp = -$220,000(0.43798)/year - $65,000/year + $50,000(0.28798)/year
AWp = -$146,957/year

Therefore it is best to keep the existing equipment.

 Solutions to Supplemental Problems For Lecture One

1.24 Interest Rate = 275,000/2,000,000

= .1375
= 13.75%

1.25 Rate of Return = 2,300,000/6,000,000

= .383333
= 38.333%

1.26 let i = the interest rate

2,000,000(1+i) = 2,360,000
Therefore 1+ i = 2,360,000/2,000,000
Therefore i = (2,360,000/2,000,000) - 1
= .18
= 18%

1.29 After one year investment will accumulate to $280,000 x 1.15 = $322,000
After Two years the investment will accumulate to $322,000 x 1.15 = $370,300
After Three years the investment will accumulate to $370,300 x 1.15 = $425,845

Therefore it will take 3 years for the investment to grow to at least $425,000

1.32 a) If the company borrows $150,000 at 5% per year compound interest, the
total amount due after 3 years is Fc where:

Fc = $150,000(1.05)(1.05)(1.05) = $173,644

If the company borrows $150,000 at 5.5% simple interest, the total amount due
after 3 years is Fs where:

Fs = $150,000 + $150,000(3)(.055) = $174,750

Therefore it is best to finance the loan using 5% compound interest.

b) The difference between the two schemes is $174,750 - $173,644 = $1,106

1.33 Let the money set aside = M

M + M(.10)(4) = $850,000
Therefore: M(1+0.4) = $850,000
Therefore: M = $607,143

1.34 Let Y = the number of years required to grow investment to $100,000

Therefore $1,000 + $1000(.10Y) = $100,000

Therefore 1000(.10Y) = 99,000
Therefore .10Y = 99
Therefore Y = 990 years

1.36 Let M = the initial amount of money borrowed.

Therefore M(1 + 3(.07)) = $35,000

Therefore M = $35,000/(1.21)
= $28,925.62

1.38 a) let i = the interest rate on the loan

Therefore: $6,000,000( i ) = $900,000

Therefore: i =900,000/6,000,000
= .15
= 15%

b) After two years the interest charge will be C where:

C = ($6,000,000 + $900,000)(.15) = $1,035,000

1.40 Let Y = number of years required.

Let P = original investment

Therefore P(1+.20Y) = 3P
Therefore 1 + .20Y = 3
Therefore Y = (3-1)/.20 = 10 years
 Solutions to Supplemental Problems For Lecture Seven

7.7 B/C = ($2,740,000 - $380,000)/$2,000,000) = 1.18

7.8 a)

Initial Cost = $9,000,000(A/P,6%,20)

= $9,000,000(0.08718)
= $784,260/year

B/C = (820,000 – 135,000)/784,260

= 0.87

b) If dis-benefits are not considered:

B/C = 820,000/784,260
= 1.05

Therefore the project can only be justified if dis-benefits are not considered.

7.10 a)

B/C = [3,800 – 6,750(A/F,10%,20)]/[13,000(A/P,10%,20) + 400]

= [3,800 – 6,750(0.017460)]/[13,000(0.11746) + 400]
= 1.91

b)

Let FC = the first cost

1 = [3,800 – 6,750(A/F,10%,20)]/[FC(A/P,10%,20) + 400]

= [3,800 – 6,750(0.017460)]/[FC(0.11746) + 400]

Therefore FC(0.11746) + 400 = 3,800 – 6,750(0.017460)

Therefore FC = 27,943

Therefore if the FC exceeds $27,943,000 the project is not justified.

7.12 PW of benefits = 5/1.08 + 5/1.082 + 2.8/1.083 +1.12(P/A,8%,27)/1.083
= 5/1.08 + 5/1.082 + 2.8/1.083 +1.12(10.93516)/1.083
= 20.86142

Therefore the AW of the benefits is AWb where:

AWb = 20.86142(A/P,8%,30)
AWb = 20.86142(0.08883)
= 1.85312

The Annual Worth of the initial costs are AWc where:

AWc = 22(A/P,8%,30)
= 22(0.08883)
= 1.95426

B/C = 1.85312/(1.95426 + 2.1)

= 0.46

Therefore the project is not justified.

7.15 The Annual Worth of the initial costs are AW where:

AW = 150,000(A/P,6%,20)
= 150,000(0.08718)
= $13,077/year

Annual Benefits = 20,000 persons x 2 hours/person x $0.50/hour = $20,000/year

B/C = 20,000/(13,077 + 12,000)

= .80

Therefore the project is not justified.

7.16 let IC = the IC of the project.

Therefore: 1.3 = 500,000/[IC(A/P,7%,50) + 200,000]

Therefore: IC(0.07246) + 200,000 = 500,000/1.3
Therefore: IC = (384,615 – 200,000)/0.07246
= 2,547,819

Therefore the initial cost was $2,547,819

7.20 Initial Costs = 2,300,000(A/P,6%,∞)
= 2,300,000(.06)
= $138,000/year

a) Using the Conventional B/C ratio:

B/C = (340,000 – 40,000)/(138,000 + 120,000)
= 1.16

b) Using the Modified B/C ratio:

B/C = (340,000 – 40,000 – 120,000)/138,000
= 1.30

7.23 Alternative One:

B/C = 1,020,000/840,900 = 1.21

Alternative Two:

B/C = 1,850,000/1,780,000 = 1.04

Ranking of Project by costs (from lowest to highest): Alternative One, Alternative Two

∆B two – one = (1,850,000 - 1,020,000)/(1,780,000 – 840,900)

∆C two –one

= 0.88

Therefore the best alternative is Alternative One.

7.25 Pond System = W:

Initial Cost = 58(A/P,6%,40)

= 58(0.06646)
= 3.85468/year

B/C = 11.1/(3.85468 + 5.5)

= 11.1/9.35468
= 1.19

Expand Plant = X:

Initial Cost = 76(A/P,6%,40)

= 76(0.06646)
= 5.05096/year

B/C = 12.0/(5.05096 + 5.3)

= 12.0/10.35096
= 1.16

Advanced Primary = Y:

Initial Cost = 2(A/P,6%,40)

= 2(0.06646)
= 0.13920/year

B/C = 2.7/(0.13920 + 2.1)

= 2.7/2.23920
= 1.21

Partial Secondary = Z:

Initial Cost = 48(A/P,6%,40)

= 48(0.06646)
= 3.19008/year

B/C = 8.3/(3.19008 + 4.4)

= 8.3/7.59008
= 1.09

Solution continued on next page…

 7.25 continued from previous page

Rank from Lowest to highest C: Y, Z, W, X

∆B Z – Y = (8.3 – 2.7)/(7.59008 – 2.23920)

∆C Z –Y

= 1.05

Therefore Y is eliminated

∆B W – Z = (11.1 – 8.3)/(9.35468 – 7.59008)

∆C W –Z

= 1.59

Therefore Z is eliminated

∆B X – W = (12.0 – 11.1)/(10.35096 – 9.35468)

∆C X –W

= .90

Therefore X is eliminated.

Therefore the best proposal is proposal W, the Pond System

7.28 Site N

Initial Cost = $11,000,000(A/P,6%,∞)

= $11,000,000(.06)
= $660,000/year

B/C = (990,000 – 120,000)/(660,000 + 100,000)

= 870,000/760,000
= 1.14

Site S

Initial Cost = $27,000,000(A/P,6%,∞)

= $27,000,000(.06)
= $1,620,000/year

B/C = (2,100,000 – 300,000)/(1,620,000 + 90,000)

= 1,800,000/1,710,000
= 1.05

Ranking: Site N, Site S

∆B S – N = (1,800,000 – 870,000)/(1,710,000 – 760,000)

∆C S –N

= 0.98

Therefore Site N is the best choice.

7.X

W: (A/P,4%,∞) = .04

B = $450,000 - $85,000 = $365,00

C = $7,000,000(.04) + $80,000 = $360,000
B/C = 365,000/360,000 = 1.014

X: (A/P,4%,25) = .06401

B = $350,000 - $25,000 = $325,000

C = $3,500,000(.06401) + $55,000 = $279,035
B/C = 325,000/279,035 = 1.165

Y: (A/P,4%,25) = .06401

B = $400,000 - $18,000 = $382,000

C = $2,000,000(.06401) + $75,000 = $203,020
B/C = 382,000/203,020 = 1.882

Z: (A/P,4%,25) = .06401

B = $300,000 - $12,000 = $288,000

C = $2,500,000(.06401) + $150,000 = $310,025
B/C = 288,000/310,025 = 0.929

Since B/C for Z is less than 1, we eliminate Z

Rankings according to cost from lowest to highest:

Y, X, W

∆BX-Y = 325,000 – 382,000 = -57,000

∆CX-Y = 279,035 – 203,020 = 76,015
Therefore ∆BX-Y/∆CX-Y = -57,000/76,015 = -0.750

Therefore Y is preferred to X

∆BW-Y = 365,000 – 382,000 = -17,000

∆CW-Y = 360,000 – 203,020 = 156,980
Therefore ∆BW-Y/∆CW-Y = -17,000/156,980 = -0.108

Therefore Y is preferred to W

Therefore the best project is project Y.

 Solutions to Supplemental Problems For Lecture Ten
10.14 MARRf = MARR + f + MARR x f
= .25 + .05 + .25 x .05
= .3125
= 31.25%

10.15 MARR = ( MARRf – f )/( 1 + f )

= ( .40 - .08 )/( 1 + .08 )
= .2963
= 29.63%

10.19 Salvage value in 5 years = S = .20 x $150,000 = $30,000

if = i + f + i x f
if = .10 + .07 + .10 x .07
if = .177
= 17.7%

PW = -$150,000 - $60,000(P/A,17.7%,5) + $30,000(P/F,17.7%,5)

(&'(.&**), -&
= -$150,000 – $60,000 + $30,000/(1+ 0.177)5
(.&**(&'(.&**),
= -$150,000 - $60,000(3.14854) + $13,281
= -$325,631

10.20 Years until granddaughter is 25 years old = 25 – 2 = 23

Let P = the amount of money to be deposited in bank today
Let F = the required amount of money in the future.
F = $2,000,000( 1 + .04 )23 = $4,929,431
Therefore $4,929,431 in 23 years has the same purchasing power as $2,000,000 today.

P = $4,929,431(P/F,8%,23)
= $4,929,431/(1.08)23
= $839,557

Therefore $839,557 must be deposited today. This will provide the granddaughter with
the same purchasing power as $2,000,000 today, when she turns 25 years of age.
10.22 Let P = the present value of Vendor A’s offer.
MARRf = MARR + f + MARR x f
= .12 + 0.04 + .12 x 0.04
= 0.1648
= 16.48%

P = $2,100,000(P/F,16.48%,2)
= $2,100,000/1.16482
= $1,547,806

Vendor B is offering the equipment for $2,100,000 - $400,000 = $1,700,000.

Therefore Vendor A has the better offer.

10.23 MARRf = MARR + f + MARR x f

MARRf = 0.12 + 0.03 + 0.12 x 0.03
= 0.1536
= 15.36%

P = F(P/F,15.36%,4)
= $75,000/(1.1536)4
= $42,349

Therefore the manufacturer can afford to spend $42,349 today.

10.25 F Value of all deposits made = F

F = $5,000x1.1517 + $8,000x1.1514 + $9,000x1.1513 + $15,000x1.1510 + $16,000x1.156 + $20,000
= $283,479

The purchasing power in today’s dollars is P where:

P = $283,479/1.0317 = $171,509
10.28 a)

Let F = the amount of money in the account after 5 years.

F = $10,000(F/P,10%,5)
= $10,000(1.10)5
= $16,105

b)

The purchasing power is P where:

P = $16,105/(1.05)5
= $12,619

c)

if = i + f + i x f where i = the real rate of return

Therefore i = ( if – f )/( 1 + f )
= ( .10 - .05 )/( 1 + .05)
= 0.4762
= 4.762%

10.29 a)

Let F = the cost of the coolers in 3 years.

F = $45,000(F/P,3.7%,3)
= $45,000(1.037)3
= $50,182

b)

Let P = the amount of money needed to be reserved today to make the purchase in 3 years.
P = $50,182(P/F,8%,3)
= $50,182/(1.08)3
= $39,836

c)

Let F = the future value of the money set aside today.

F = $45,000(F/P,8%,3)
= $45,000(1.08)3
= $56,587
10.31 Let P = the buying power of the money in today’s dollars

P = $1,800,000(P/F,3.8%,20)
= $1,800,000/(1.038)20
= $853,740

10.32 Let P = the present cost of the equipment if purchased 3 years from now.

MARRf = MARR + f + MARR x f

MARRf = 0.15 + 0.04 + 0.15 x 0.04
= 0.196
= 19.6%

P = $128,000(P/F,19.6%,3)
= $128,000/ (1.196)3
= $74,820

Since $74,820 < $80,000, it is best to wait 3 years before purchasing the equipment.

10.35 Let F = the future amount of money

F = $150,000(F/P,10%,5)
= $150,000(1.10)5
= $241,577

10.36 Let F = the future amount of money the company will have set aside after 7 years.

A = the amount of money set aside each year

A = .005 x $15,200,000
= $76,000

F = $76,000(F/A,9%,7)
= $76,000(9.20043)
= $699,233
10.37 The purchasing power of $6,000 two years from now is P where:
P = $6,000/(1.04)2
= $5,547

The purchasing power of $9,000 three years from now is P where:

P = $9,000/(1.04)3
= $8,001

The purchasing power of $5,000 six years from now is P where:

P = $5,000/(1.04)6
= $3,952

10.39 Let A = the required annual return.

MARRf = MARR + f + MARR x f

MARRf = 0.22 + 0.05 + 0.22 x 0.05
= 0.281000
= 28.1%

A = $500,000(A/P,28.1%,5)
(./0&(&'(./0&),
= $500,000
(&'(./0&), -&
= $500,000(0.395721)
= $197,861

Therefore the investors must receive $197,861 per year in order to recover their investment
plus a real return of 22%
10.40 MARRf = MARR + f + MARR x f
MARRf = 0.15 + 0.05 + 0.15 x 0.05
= 0.207500
= 20.75%

Process X:

A = -$65,000(A/P,20.75%,5) - $40,000
(./(*1(&'(./(*1),
= - $65,000 - $40,000
(&'(./(*1), -&
= -$62,094

Process Y:

A = -$90,000(A/P,20.75%,5) - $34,000 + $10,000(A/F,20.75%,5)

(./(*1(&'(./(*1), (./(*1
= - $90,000 - $34,000 + $10,000
(&'(./(*1), -& (&'(./(*1), -&
= -$30,592 - $34,000 + $1,324
= -$63,268

Therefore Process X has the lower costs.

10.41 MARRf = MARR + f + MARR x f

MARRf = 0.15 + 0.06 + 0.15 x 0.06
= 0.219000
= 21.90%

A = 183,000(A/P,21.90%,5)
(./&6((&'(./&6(),
A = $183,000
(&'(./&6(), -&
A = $63,768

Therefore the equivalent annual expenditure is $63,768/year

10.42 a)

The future cost of the equipment = F where:

F = $5,000,000(1.05)4
= $6,077,531

b)

A = $6,077,531(A/F,10%,4)
A = $6,077,531(0.21547)
A = $1,309,526

Therefore the research lab must make an annual deposit of $1,309,526/year

10.43 MARRf = MARR + f + MARR x f

MARRf = 0.10 + 0.04 + 0.10 x 0.04
= 0.144000
= 14.40%

A = - $40,000(A/P,14.40%,3) - $24,000 + $6,000(A/F,14.40%,3)

(.&88(&'(.&88)9 (.&88
= - $40,000 - $24,000 + $6,000
(&'(.&88)9 -& (&'(.&88)9 -&
= -$17,345 - $24,000 + $1,738
= -$39,607

Therefore the equivalent annual cost is $39,607 per year.

10.44 MARRf = MARR + f + MARR x f
MARRf = 0.12 + 0.04 + 0.12 x 0.04
= 0.164800
= 16.48%

P = -$80,000 - $90,000(P/F,16.48%,3)
= -$80,000 - $90,000/(1.1648)3
= -$136,949

A = -$136,949(A/P,16.48,5)
(.&:80(&'(.&:80),
= -$136,949
(&'(.&:80), -&
= -$42,295

Therefore the equivalent annual cost of the maintenance is $42,295/year

10.45 MARRf = MARR + f + MARR x f

MARRf = 0.10 + 0.028 + 0.10 x 0.028
= 0.130800
= 13.08%

F = $12,000(F/A,13.08%,20)
(&'(.&;(0)<= -&
= $12,000
(.&;(0
= $980,491

A = $980,491(A/P,13.08%,10)
(.&;(0(&'(.&;(0)>=
= $980,491
(&'(.&;(0)>= -&
= $181,272

Therefore you can withdraw $181,272 per year for 10 years.

 Solutions to Supplemental Problems For Lecture Three

3.1 a) 2% x 2 = 4%
b) 2% x 4 = 8%
c) 2% x 8 = 16%

3.2 a) effective
b) effective
c) effective
d) nominal
e) effective
f) effective
g) nominal
h) effective
i) nominal
j) nominal

3.3 a) quarterly
b) monthly
c) weekly
d) semiannually
e) monthly
f) annually

3.7 a) 2% per quarter

b) 1.333% per 2 month period
c) 16% per 2 year period
d) 8% per year
e) 4% per half year

3.8 a) Effective rate = (1+.02)3 – 1 = 6.1208%

b) Effective rate = (1+.02)12 – 1 = 26.8242%
3.17 Effective interest rate for an account that pays 18% per year compounded monthly = i
i = .18/12 = 1.5% compounded monthly

If you deposit $20,000,000 into an account that pays 1.5% interest compounding
monthly, after one year the amount of money in the account is Fc where:

Fc = $20,000,000(1.015)12 = $23,912,363

If you deposit $20,000,000 into an account that pays 18% simple interest yearly, the
amount of money in the account after one year would be Fs where:

Fs = $20,000,000(1.18) = $23,600,000

Therefore the difference would be $23,912,363.42 - $23,600,000 = $313,363

3.18 The effective interest rate is: 10%/2 = 5% per semi-annual period

P = $15,000,000/(1.05)(3 x 2) = $11,193,231

3.19 The effective interest rate is i, where:

i = .06/4 = .015 =1.5%
The future worth (in millions of dollars) is F, where:
F = (54 + 14 + 10)(1.015)(3 x 4) = 93.2582

3.20 The effective interest rate is 12%/12 = 1% per month

The number of compounding periods is 2 x 12 = 24

Therefore P = 260,000/(1.01)24 = $204,767

Therefore the company can spend $204,767 today.

3.35 The effective interest rate is 16%/4 = 4% per quarter

The number of compounding periods is: 4 x 2 = 8
The amount of money saved per quarter is: ($250 - $150)(3,000) = $300,000

Therefore the Present Worth of the money saved is P, where:

P = $300,000(P/A,4%,8)
= $300,000(6.73274)
= $2,019,822
3.36 The effective interest rate is 20%/4 = 5% per quarter
The number of compounding periods is: 3 x 4 = 12

The amount of money the company must realize each quarter is A where:
A = $3,500,000(A/P,5%,12)
= $3,500,000(0.11283)
= $394,905

3.53 Effective interest rate per year is: (1 +.01)12 – 1 = .126825 = 12.6825%

P = $300,000(P/A,12.6825%,5) - $25,000(P/G,12.6825%,5)

!"#.!%&'%( ) *! (!"#.!%&'%()) * ( #.!%&'%( *!

P = $300,000 - $25,000
#.!%&'%((!"#.!%&'%()) #.!%&'%(- (!"#.!%&'%())

P = $300,000(3.544651) - $25,000(6.247996)
P = $907,195

Therefore the Future Worth is F, where:

F = $907,195(1.126825)5 = $1,648,098

3.60 The effective interest rate is 8%/2 = 4% per semi-annual period.

The amount of money deposited per compounding period is $1,200 x 6 = $7,200
The number of compounding periods is 2 x 25 = 50

Therefore the amount of money in the account after 25 years is F, where:

F = $7,200(F/A,4%,50)
= $7,200(152.66708)
= $1,099,203

3.61 The effective interest rate is 6%/4 = 1.5% per quarter

The number of compounding periods is 4 x 5 = 20
The amount of money deposited per compounding period is $1,500 x 3 = $4,500

Therefore the amount of money in the account after 5 years is F, where:

F = $4,500(F/A,1.5%,20)
= $4,500(23.12367)
= $104,057
3.62

The actual deposits and withdrawls are show below:

$900 $700 $700 $700 $1,000

0 1 2 3 4 5 6 7 8 9 10 11 12 quarters

-$2,600 -$1,000

The equivalent deposits and withdrawals are shown below:

i = 4% per semi-annual period

$1,600 $1,400 $1,000

0 1 2 3 4 5 6 semi-annual periods

-$2,600 -$1,000

The effective interest rate is 8%/2 = 4% per semi-annual period

Therefore the amount of money in the account after 3 years is F, where:

F = $1,600(1.04)5 + $1,400(1.04)4 + $1,000(1.04)2 - $2,600(1.04)3 - $1,000(1.04)

= $701.40
 Solutions To Supplemental Problems For Lecture Two

2.2 F = $30,000/(1+.10)8 = $13,995.22

2.7 F = $3,000(1.10)12 + $5,000(1.10)8 = $20,133.23

2.8 Let M = the amount of money that must be added.

Therefore: ($15,000,000 + M)(1.10)5 = $30,000,000
Therefore: $15,000,000 + M = $30,000,000/(1.10)5
Therefore: M = $30,000,000/(1.10)5 - $15,000,000
Therefore: M = $3,627,639.69

2.9 F = $280,000(1.12)2 = $351,232

2.10 A = $12,700,000(A/P,20%,8)
A = $12,700,000(.26061)
A = $3,309,747/year

2.11 P = $6,000(P/A,10%,10)
P = $6,000(6.14457)
P = $36,867.42

2.12 A = $60,000(A/P,8%,5)
A = $60,000(.25046)
A = $15,027.60/year

2.49 P = $26,000(P/A,10%,5) + $2,000(P/G,10%,5)

P = $26,000(3.79079) + $2,000(6.86180)
P = $112,284.14

2.50 A = $72,000 + $1,000(A/G,8%,5)

A = $72,000 + $1,000(1.846472)
A = $$73,846.47/year

2.51 a) $84,000 = $15,000 + G(A/G,10%,5)

G(1.81016) = $69,000
G = $38,118.18

b) The annual increase in repair costs is much larger than the repair costs budgeted
for the first year.
2.52 A = $9,000 - $560(A/G,10%,5)
A = $9,000 - $560(1.81016)
A = $7,986.31/year

2.88 F = 450(1.10)7 – 40(1.10)6 + 200(F/A,10%,6)

F = 450(1.10)7 – 40(1.10)6 + 200(7.71561)
F = 2,349.18

2.89 First find Present Worth, then find Annual Worth.

P = 850 + 300/1.10 + 400/(1.10)2 + 400/(1.10)3 + 400/(1.10)4 + 500/(1.10)5
P = 2,337.498

A = 2,337.498(A/P,10%,5)
A = 2,337.498(.26380)
A = 616.63

2.93 First find Present Worth, then find Annual Worth

P = $4,000,000 + $4,000,000(P/A,10%,3) + $5,000,000(P/A,10%,4)/(1.10)3
P = $4,000,000 + $4,000,000(2.48685) + $5,000,000(3.16987)/(1.10)3
P = $25,855,251

A = $25,855,251(A/P,10%,7)
A = $25,855,251(0.20541)
A = $5,310,927
 Supplemental Problems For Lecture 12

1. A company expects to incur the cash flows as shown in the table below. The before-tax
MARR is 10%. The corporate tax rate is 26.5%

Operating Book Derpreciation Capital Capital Taxable

YEAR Gross Income Expenses Value Depreciation Recovery DR Gain CG Loss Income Taxes CFBT CFAT
0 $250,000 -$250,000 -$250,000
1 $150,000 $30,000 $212,500 $37,500 $0 $0 $0 $82,500 $21,863 $120,000 $98,138
2 $135,000 $28,000 $148,750 $63,750 $0 $0 $0 $43,250 $11,461 $107,000 $95,539
3 $110,000 $25,000 $104,125 $44,625 $195,875 $0 $0 $236,250 $62,606 $85,000 $22,394

a) What is the Present Worth of the cash flow after taxes?

b) At the end of year 3, what is the Future Worth of the cash flow after taxes?
c) What is the Annual Worth of the cash flow after taxes?
d) What is the Present Worth of the cash flow before taxes?

Solution:

After tax MARR = Before Tax MARR x (1 – Te)

= .10 x (1-.265)
= .0735

a) PW = -250,000 + 98,138/(1.0735) + 95,539/(1.0735)2 + 22,394(1.0735)3

= -57,575.11

b) FW = -57,575.11(1.0735)3 = -71,226.39

c) AW = -57,575.11(A/P,7.35%,3)
= -57,575.11(0.383491)
= -22,079.54

d) PW = -250,000 + 120,000(.909090) +107,000(.826446) +85,000(.751315)

= -11,382.30
 2. A manufacturing company has a gross income this year of $3,500,000. Expenses for the
year was $1,200,000. The company has decided to sell equipment that it purchased 4
years ago as it is no longer needed. The original purchase price of the equipment was
$850,000. The depreciation charge for the equipment this year was $106,208 and the
undepreciated capitol cost was $248,195. The corporate tax rate for this company is
26.5%. What is the cash flow after taxes if the equipment is sold this year for:

a. $300,000
b. $150,000
c. $900,000
Solution:

a) DR = SP – BV
= 300,000 – 248,195
= 51,805

CG = 0
TI = GI – E – D + DR +[CG –CL]
= 3,500,000 – 1,200,000 – 106,208 + 51,805
= 2,245,597

TAXES = TI x Te
= 2,245,597 x 0.265
= 595,083.21

CFBT = GI – E – P +S
= 3,500,000 – 1,200,000 - 0 + 300,000
= 2,600,000

CFAT = CFBT – TAXES

= 2,600,000 – 595,083.21
= 2,004,916.79

b) DR = 0

CG = 0
TI = GI – E – D + DR +[CG –CL]
= 3,500,000 – 1,200,000 – 106,208 + 0
= 2,193,792

TAXES = TI x Te
 = 2,193,792 x 0.265
= 581,354.88

CFBT = GI – E – P +S
= 3,500,000 – 1,200,000 - 0 + 150,000
= 2,450,000

CFAT = CFBT – TAXES

= 2,450,000 – 581,354.88
= 1,868,645.12

c) DR = P – BV = 850,000 – 248,195
= 601,805

CG = SP - P
= 900,000 – 850,000
= 50,000

TI = GI – E – D + DR +[CG –CL]
= 3,500,000 – 1,200,000 – 106,208 + 601,805 + 50,000
= 2,845,597

TAXES = TI x Te
= 2,845,597 x 0.265
= 754,083.21

CFBT = GI – E – P +S
= 3,500,000 – 1,200,000 - 0 + 900,000
= 3,200,000

CFAT = CFBT – TAXES

= 3,200,000 – 754,083.21
= 2,445,916.79