1. You are a buyer for a battery company and are investigating the purchase of lithium from an African company for $100 per barrel and $14 to process and packaging it before shipping. this particular source requires a 15 month lead time with material and packaging costs paid up front ( at time of order is placed). Transportation is $4 per barrel and paid when received. if the risk free annual interest rate is 12%, what is the value per barrel after received in the U.S.? If it is received 3 months late, how much is invested per barrel when it is received? Assume monthly compounding.
2. Maria had a rich uncle who left her a trust fund of $200,000 that earns interest at an effective annual rate of 5% .
a If she receives $10,000 annually until the funds are gone, how many payments including the final partial payment, will she receive.
b If she take out $30,000 immediately to buy a car but no more, how much will she have in the fund at the end of 45 years when she retires?
c If she wants the fund to be worth $1,000,000 in 30 years, how much can she withdraw today (single payment)?
d What is the maximum amount that she can withdraw annually for 30 years, starting at the end of the coming year?
3. Allied Electrons must purchase a new automatic soldering machine to meet increased demand for its electronic goods. Of all the machines considered, management has narrowed the choices to the following three mutually exclusive machines. Allied uses a planning horizon of four years (all three can last this long) and a MARR of 10%. The initial cost is in Year 0 and the payments are in years 1-4. Determine the present worth, future worth, and annual worth for when a) the salvage value is in year 4, and b) the salvage value is in year 5.
Machine 1 Machine 2 Machine 3
Initial Cost (in Year 0) $800,000 $650,000 $575,000
Annual Operating Cost $50,000 $90,000 $105,000
Salvage value (in Year 4) $40,000 $32,500 $28,750
Salvage value (in Year 5) $40,000 $32,500 $28,750
4. Reputable Payday Loans (RPL) quoted Joe three loan arrangements for a $1,000 loan. The first is to pay back the loan in equal weekly payments 0.5% interest per week. A second is to pay it back in equal semi-monthly payments (on the 15th and 30th) at 1% semi-monthly interest. A third option is to pay it back in equal monthly payments at 2% monthly interest. Compounding of interest is weekly, semi-monthly and monthly respectively for each arrangement. What is the effective annual rate for each alternative? What is the annual percentage rate for each arrangement?
5. You are considering investing in a gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment so $ 250 million. Once this investment is made, the mine is expected to produce revenues of $ 30 million per year for the next 20 years. It will cost $ 10 million per year to operate the mine. After 20 years, the gold will be depleted. The mine must then be stabilized on an ongoing basis, which will cost $ 5 million per year in perpetuity. Calculate the PW of this investment, if the yearly interest rate is 5%.
6. You are saving to make a down payment on a house. You have $ 10,050 saved already. You can afford to save an additional $ 5000 per year at the end of each year. If you earn 7.25% per year on your savings, how long will it take you to save $ 60,000?
7. Joe is 55 and plans to retire and move to Aruba where he could live comfortably on a beach with retirement funds of $750,000. He recently inherited $400,000 that he safely invested at 6% annual interest compounded monthly. At what age can he retire and start his Aruba retirement assuming he makes no additional investments in his retirement fund? How much would he have to invest monthly to retire at age 60?
8. You are considering constructing a new plant to manufacture a new product. You anticipate that the plant will take a year to build and cost $100 million upfront. Once built, it will generate cash flow of $15 million at the end of every year over the life of the plant. The plant will wear out 20 years after its completion. At that point you expect to get $10 million in salvage value for the plant. Using a cost of capital (interest rate) of 12%, calculate the present Worth of the plant. Calculate the IRR.
9. Solve problem 4.91 at page 202 (our text), on Bond evaluation.
The Photo Film Company’s bonds have four years remaining to maturity. Interest is paid annually,
the bonds have a $1,000 par value, and the coupon interest rate is 8.75%.
a) What is the yield to maturity at a current market price of $1,108?
b) Would you pay $935 for one of these bonds if you thought that the market
rate of interest was 9.5% ?
2. Maria had a rich uncle who left her a trust fund of $200,000 that earns interest at an effective annual rate of 5% .
a If she receives $10,000 annually until the funds are gone, how many payments including the final partial payment, will she receive.
b If she take out $30,000 immediately to buy a car but no more, how much will she have in the fund at the end of 45 years when she retires?
c If she wants the fund to be worth $1,000,000 in 30 years, how much can she withdraw today (single payment)?
d What is the maximum amount that she can withdraw annually for 30 years, starting at the end of the coming year?
3. Allied Electrons must purchase a new automatic soldering machine to meet increased demand for its electronic goods. Of all the machines considered, management has narrowed the choices to the following three mutually exclusive machines. Allied uses a planning horizon of four years (all three can last this long) and a MARR of 10%. The initial cost is in Year 0 and the payments are in years 1-4. Determine the present worth, future worth, and annual worth for when a) the salvage value is in year 4, and b) the salvage value is in year 5.
Machine 1 Machine 2 Machine 3
Initial Cost (in Year 0) $800,000 $650,000 $575,000
Annual Operating Cost $50,000 $90,000 $105,000
Salvage value (in Year 4) $40,000 $32,500 $28,750
Salvage value (in Year 5) $40,000 $32,500 $28,750
4. Reputable Payday Loans (RPL) quoted Joe three loan arrangements for a $1,000 loan. The first is to pay back the loan in equal weekly payments 0.5% interest per week. A second is to pay it back in equal semi-monthly payments (on the 15th and 30th) at 1% semi-monthly interest. A third option is to pay it back in equal monthly payments at 2% monthly interest. Compounding of interest is weekly, semi-monthly and monthly respectively for each arrangement. What is the effective annual rate for each alternative? What is the annual percentage rate for each arrangement?
5. You are considering investing in a gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment so $ 250 million. Once this investment is made, the mine is expected to produce revenues of $ 30 million per year for the next 20 years. It will cost $ 10 million per year to operate the mine. After 20 years, the gold will be depleted. The mine must then be stabilized on an ongoing basis, which will cost $ 5 million per year in perpetuity. Calculate the PW of this investment, if the yearly interest rate is 5%.
6. You are saving to make a down payment on a house. You have $ 10,050 saved already. You can afford to save an additional $ 5000 per year at the end of each year. If you earn 7.25% per year on your savings, how long will it take you to save $ 60,000?
7. Joe is 55 and plans to retire and move to Aruba where he could live comfortably on a beach with retirement funds of $750,000. He recently inherited $400,000 that he safely invested at 6% annual interest compounded monthly. At what age can he retire and start his Aruba retirement assuming he makes no additional investments in his retirement fund? How much would he have to invest monthly to retire at age 60?
8. You are considering constructing a new plant to manufacture a new product. You anticipate that the plant will take a year to build and cost $100 million upfront. Once built, it will generate cash flow of $15 million at the end of every year over the life of the plant. The plant will wear out 20 years after its completion. At that point you expect to get $10 million in salvage value for the plant. Using a cost of capital (interest rate) of 12%, calculate the present Worth of the plant. Calculate the IRR.
9. Solve problem 4.91 at page 202 (our text), on Bond evaluation.
The Photo Film Company’s bonds have four years remaining to maturity. Interest is paid annually,
the bonds have a $1,000 par value, and the coupon interest rate is 8.75%.
a) What is the yield to maturity at a current market price of $1,108?
b) Would you pay $935 for one of these bonds if you thought that the market
rate of interest was 9.5% ?
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