Assignment
Problem 1:
An investor seeking to borrow $200,000 to start a new venture has received two bank offers as follows. Bank A will provide the money at an interest rate of 14% per year compounded con0nuously. Bank B on the other hand, offers the loan on the stipulation that it be repaid in equal monthly installments of $5,000 per month over a 5 year period. Carefully analyze each offer and advice the investor which offer to accept and the reasons for doing so.
Problem 2:
A company plans to develop an intelligent software system over the next 10 years to facilitate its project selection process. There are three alternative proposals (A,B & C) for the system with their respective cash flows as listed below. If interest rate is 10% /year which option should be selected?
|
Alternative
|
Cost Component
|
Cost
|
|
A
|
Development
Programming
Operations
Support
|
$100,000 now, $150,000 in year1
$45,000 now, $35,000 in year1
$50,000 in years 1 thru 10
$30,000in years 1 thru 10
|
|
B
|
Development
Programming
Operations
Support
|
$10,000 now
$45,000 now, $30,000 in year 1
$80,000 in years 1 thru 10
$40,000 in years 1 thru 10
|
|
C
|
Operations
|
$150,000 in years 1 thru 10
|
Problem 3
An environmental engineer is considering 3 methods for disposing of a non-hazardous chemical sludge. The methods are Land Application, Fluidized-Bed Incineration and Private Disposal Contract. The estimated cash flows associated with each option are listed in the table below. Using the Annual worth method and a 12% per year interest rate, determine the least cost opton.
|
|
Land Application
|
Incinerator
|
Contract
|
|
1st Cost
|
$110,000
|
$800,000
|
$0
|
|
Annual Cost
|
$95,000
|
$60,000
|
$190,000
|
|
Salvage Value
|
$15,000
|
$250,000
|
$0
|
|
Life Span
|
3yrs
|
6yrs
|
2yrs
|
Problem 4
Three sites for mineral extraction have associated cash flows as shown below. Interest rate is limited to 10% and the extracton period is limited to 5years. Using the conventional Benefit/ Cost ratio method, determine which site offers the most profitable option.
|
|
Site A
|
Site B
|
Site C
|
|
Initial Cost ($m)
|
50
|
90
|
200
|
|
Annual Cost ($m/year)
|
3
|
4
|
6
|
|
Annual Benefits
|
20
|
22
|
61
|
|
Annual Disbenefits
|
0.5
|
1.5
|
2.1
|
Problem 5
An Engineer approaching retirement thinks that the market interest rate will decrease before then and therefore plans to invest in corporate bonds. Speci?cally, the plan is to buy a $50,000 bond that matures 20years from now and has a coupon rate of 12% payable quarterly. For how much should the engineer be able to sell the bond for, 5 years from now. The market interest rate is 8% per year compounded quarterly.
If during the 5 years before selling the bond, the engineer invests the quarterly dividend payments he receives in a venture yielding a 12% interest per year compounded quarterly, how much would the engineer have altogether, after selling the bond.