Midterm Exam Version A: Problems

Compose your work using Excel (or other software as appropriate) and save it frequently to your computer. Each problem should be represented on a separate tab in your Excel file.  Save your file using your last name, first name and assignment number (For example, DoeJohnM1A1).  When you're ready to submit your work, click Browse My Computer and find your file. Once you've located your file click Open and, if successful, the file name will appear under the Attached files heading. Scroll to the bottom of the page, click Submit and you're done. Be sure to check your work and correct any spelling or grammatical errors before you post it.

Problem 1: A farmer must decide what combination of seed, water, fertilizer, and pest control will be most profitable for the coming year. The local agricultural college did a study of this farmer's situation and prepared the following table.

The last page of the college's study was torn off, and hence the farmer is not sure which plan the agricultural college recommends. Which plan should the farmer adopt? Explain.

Problem 2: A new machine comes with 100 free service hours over the ?rst year. Additional time costs $75 per hour.

What are the average and marginal costs per hour for the following quantities?

(a) 75

(b) 125

(c) 250

Problem 3: Bonka Toys is considering buying a robot that will cost $20,000. After seven years its salvage value will be $2,000. An overhaul costing $5,000 will be needed in Year 4. O&M costs will be $2,500 per year. Draw the cash flow diagram.

Problem 4: You and your spouse are planning a second honeymoon to the Cayman Islands this summer and would like to have your house painted while you are away. Estimate the total cost of the paint job from the information given below, where:
Cost total = Cost paint + Cost labor + Cost ?xed

Paint information: Your house has a surface area of 6,000 ft2. One can of paint can cover 300 ft2.

You are estimating the cost to put on two coats of paint for the entire house.

Number of Cans Purchased             Cost per Can
First 10 cans purchased                   $15.00
Second 15 cans purchased              $10.00
Up to next 50 cans purchased          $7.50

Labor information: You plan to hire ?ve painters who will each paint for 10 hours per day. You estimate that the job will require 4.5 days of their painting time. The painter's rate is $8.75 per hour.

Fixed cost information: The painting company charges $1,200 per job to cover travel expenses, clothing, cloths, thinner, administration, and so on.

Problem 5: A woman borrowed $2,000 and agreed to repay it at the end of three years, together with 10% simple interest per year. How much will she pay three years hence?

Problem 6: An inheritance will be $20,000. The interest rate for the time value of money is 7%. How much is the inheritance worth now, if it will be received

(a) in 5 years?

(b) in 10 years?

(c) in 20 years?

(d) in 50 years?

Problem 7: A student is buying a new car. The car's price is $16,500, the sales tax is 8%, and the title, license, and registration fee is $450, to be paid in cash. The dealer offers to ?nance 90% of the car's price for 48 months at a nominal interest rate of 9% per year, compounded monthly.

(a) How much cash is paid when the car is purchased?

(b) How much is the monthly payment?

Problem 8: Francisco believes in planning ahead. He decides to ?nd out how much he can draw from a retirement account each year for 30 years if he invests exactly $1,000 each year in the account. Suppose that he can earn 5% on this long-term account, that he will make 40 deposits, and that he will make the ?rst withdrawal one year after the last deposit. How big can Francisco's withdrawals be?

Problem 9: IBP Inc. is considering establishing a new machine to automate a meatpacking process. The machine will save $50,000 in labor annually. The machine can be purchased for $200,000 today and will be used for 10 years. It has a salvage value of $10,000 at the end of its useful life. The new machine will require an annual maintenance cost of $9,000. The corporation has a minimum rate of return of 10%. Do you recommend automating the process?

Problem 10: An of?ce building should last 60 years, but this owner will sell it after 20 years for 40% of its construction cost. For the ?rst 20 years it can be leased as Class A space, which is all this owner operates. When the building is sold, the land's cost will be recovered in full.

$2.2M           Land
$4.1M           Building
$640,000      Annual operating and maintenance
4%                 Annual property taxes and insurance (% of initial investment)

(a) If the owner wants a 12% rate of return, what is the required monthly leasing cost?

(b) Assuming that the building is vacant 5% of the time, what is the required monthly lease?

(c) What is an example monthly cost per square foot for Class A space in your community?