Final_ISE460_SP08_sol

# Final_ISE460_SP08_sol - ISE 460 FINAL 05/09/08 Spring 2008...

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ISE 460 Spring 2008 FINAL 05/09/08 Problem No. 1 Determine whether one would invest in the following three year project if one wanted to earn at least 15% annually on one’s investments. Include the effects of depreciation, inflation and income taxes. (40 points). I have attached a grid for your convenience. The initial investment is \$250,000. 25% of this is borrowed at 8%. MACRS is three years and we will keep the equipment for three years. Annual expenses are \$60,000 and income is \$120,000 in the first year, \$150,000 in year 2, \$65,000 in year 3. Salvage value is \$35,000. The annual inflation rate of 5% applies to expenses only, based on year 0. The company operates in a state with no income taxes. Do not invest! 2
ISE 460 Spring 2008 FINAL 05/09/08 Problem No. 2 This problem is based on the analyses shown on the two pages following the questions. The individual questions are independent of each other. a) What percentage of the funds has been borrowed? (2 points) 100,000/150,000 = 67% b) In the case with inflation, what will be the net present value if we borrowed an additional \$25,000? (10 points) We have to calculate the payment, the part of the payment that is interest for each period, and the principal repayment portion. We then recalculate the taxes and the cash flow and find the NPV Payment = 125,000(A/P, 12%, 5) = 34,676

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## This note was uploaded on 01/20/2009 for the course ISE 460 taught by Professor Bottlik during the Fall '06 term at USC.

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Final_ISE460_SP08_sol - ISE 460 FINAL 05/09/08 Spring 2008...

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