45000 IT Production Cost Analysis
HW 2
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1. What compound interest rate per year is equivalent to a 12% per year simple interest rate over a 15year period?
F P(1 i) compound
F P(1 ni) simple
setting both equal to each other:
n
P(1 i)n P(1 ni)
(1 i)15 1 (15)(.12)
(1 i)15 2.80
1 i 15 2.80
1 i 1.0711
i 7.11%
2. How much could Tesla-Sino Inc., a maker of superconducting magnetic energy storage systems,
afford to spend now on new equipment in lieu of spending $85,000 five years from now? The
companys rate of return is 18%.
P F (P / F ,18%,5)
85,000(0.4371)
P $37,153.50
3. French car maker Renault signed a $95 million contract with ABB of Zurich, Switzerland, for
automated underbody assembly lines, body assembly workshops, and line control systems. If ABB
will be paid in 3 years (when the systems are ready), what is the present worth of the contract at
12% per year interest?
P F (P / F ,12%,3)
95,000,000(0.7118)
P $67,621,000
4. A pulp and paper company is planning to set aside $150,000 now for possibly replacing its large
synchronous refiner motors. If the replacement isnt needed for 8 years, how much will the
company have in the account if it earns interest at a rate of 8% per year?7
F P(F / P ,8%,8)
150,000(1.8509)
F $277,635
IT 450 Production Cost Analysis
HW 2
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5. A mechanical consulting company is examining its cash flow requirements for the next 7 years. The
company expects to replace office machines and computer equipment at various times over the 7year planning period. Specifically, the company expects to spend $7000 two years from now, $9000
three years from now and $5000 five years from now. What is the present worth of the planned
expenditures at an interest rate of 10% per year?
P 7000(P / F ,10%,2) 9000(P / F ,10%,3) 5000(P / F ,10%,5)
7000(0.8264) 9000(0.7513) 5000(0.6209)
5784.80 6761.70 3104.50
P $15,651
6. A young college graduate wants to buy a first home but only can afford monthly payments of $500.
Thirty-year loans are available at 12% per year compounded monthly. With a $5000 down payment
what is the price of the most expensive house he can afford to purchase?
P 5000 500(P / A,1%,360)
5000 500(97.2183)
5000 48,609.15
P $53,609.15
7. HydroKlean, LLC, an environmental soil cleaning company, borrowed $3.5 million to finance start-up
costs for a site reclamation project. How much must the company receive each year in revenue to
earn a rate of return of 20% per year for the 5-year project period?
A P(A / P ,20%,5)
3,500,000(0.3344)
A $1,170,400
8. Southwestern Moving and Storage wants to have enough money to purchase a new tractor-trailer in
5 years at a cost of $290,000. If the company sets aside $100,000 in year 2 and $75,000 in year 3,
how much will the company have to save in year 4 in order to have the money it needs, if the money
set aside earns 9% per year?
100,000(F / P ,9%,3) 75,000(F / P ,9%,2) x(F / P ,9%,1) 290 ,000
100,000(1.2950) 75,000(1.1881) x(1.09) 290,000
129,500 89,107.50 1.09 x 290,000
1.09 x 290,000 218,607.50
1.09 71,392.50
x x $65,497.71
IT 450 Production Cost Analysis
HW 2
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9. Allen Bradley claims that its electronic overspeed detection relay modules provide customers a costeffective monitoring and control system for turbo machinery. If the equipment provides more
efficient turbine performance to the extent of $20,000 in year 1, $22,000 in year 2, and amounts
increasing by $2000 per year, how much could Mountain Power and Light afford to spend now at
10% per year interest, if it wanted to recover its investment in 5 years?
P 20,000(P / A,10%,5) 2000(P / G ,10%,5)
20,000(3.7908) 2000(6.8618)
75,816 13,723.60
P $89,539.60
10. A low-cost noncontact temperature measuring tool may be able to identify railroad car wheels that
are in need of repair long before a costly structural failure occurs. If the BSNF railroad saves
$100,000 in year 1, $110,000 in year 2, and amounts increasing by $10,000 each year for five years,
what is the equivalent annual worth of the savings, if interest is 12% per year?
A A G(A / G ,12%,5)
100,000 10,000(1.7746)
100,000 17,746
P $117,746
11. A concept car that will get 100 miles per gallon and can carry 4 persons would have a carbon-fiber
and aluminum composite frame with a 900 cc three-cylinder turbo-diesel/electric hybrid power
plant. The extra cost of these technologies is estimated to be $11,000. If gasoline savings over a
comparable conventional car would be $900 in year 1, increasing by 10% each year, what is the
present worth of the savings over a 10-year period at an interest rate of 8% per year?
1 1 g n
1 1.10 10
1 i
900 1.08
PA
i g
.08 .10
0.2014
900
0.02
900 10.0702
P $9063.21
12. Find the future worth in year 10 of an investment that starts at $8000 in year 1 and increases by 7%
each year. The interest rate is 7% per year.
n
P0 A
1 i
10
8000
1.07
8000 9.3458
P0 $74,766.36
F10 P0 (F / P ,7%,10)
74,766.36(1.9672)
F10 $147,080.37
IT 450 Production Cost Analysis
HW 2
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13. An engineer plans to retire when he has $1.6 million in his brokerage account. If he started with
$100,000 in the account, how long will it be (from the time he started) before he can retire, if the
account makes a rate of return of 18% per year?
P(F / P ,18%, n) F
100,000(F / P ,18%, n) 1,600,000
(F / P ,18%, n) 16.000
n 17 yrs
Solve for the F/P factor, then look up the closest
corresponding value in the 18% table.
14. The business plan for a start-up company that manufactures multi-gas portable detectors showed
equivalent annual cash flows of $400,000 for the first 5 years. If the cash flow in year 1 was
$320,000 and the increase thereafter was $50,000 per year, what interest rate was used in the
calculation?
A G(A / G ,12%,5) AT
320,000 50,000(A / G , i %,5) 400,000
50,000(A / G , i %,5) 80,000
(A / G , i %,5) 1.6000
i % 22.58%
Use a similar approach as above. Or, it's
easier to use the Excel interest table
from Blackboard. Look at the A/G
column at row 5. Change the interest
rate until the A/G value is 1.6000.