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Final_ISE460_SP07_sol - ISE 460 FINAL Spring 2007 Problem...

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ISE 460 Spring 2007 FINAL 05/02/07 Problem No. 1 Three short questions (10 points each) a) A corporation operating in Illinois had gross revenues of $11.2M in 2006. Their expenses for the same year were $8M. What is their overall effective tax rate? Federal Rate = 34%, State rate = 7.3% Overall effective rate = 34% 7+ .3% - 34%x7.3% = 38.8% b) An urban consumer paid $72 for a particular shopping trip to the supermarket in March of 2006. How much should he/she expect to pay for the same items in March 2007? The change in CPI from the given table is 3.3%, hence 1.03 x 72 = $74.38 c) A project requires $50,000 in working capital for a three year period. The company’s expected rate of return is 20% and inflation is averaging 6% per year. What is the cost of this working capital to the company in today’s dollars? When we get our $50,000 back it has deflated by 6% per year for three years – an inflation loss of 50,000 - 50,000/(1.06)^3 = $8020. We could also have earned 20% for three years at our MARR which gives a loss of (1+.2)^3*50,000 – 50,000 = $36,400. The total cost is $44.420 Problem No. 2 Three short questions (10 points each) a) What is meant by economic service life? How would you go about calculating it?
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