chapter2A

# chapter2A - Additional Solutions Chapter Two Time Value of...

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Additional Solutions: Chapter Two: Time Value of Money 2S.1 You can assume that one month is the shortest interval of time for which the quoted rental rates and salaries apply. Assembling the batteries will require 24 person-months, and the associated rental space. To maximize the interest you receive from your savings, and minimize the interest you pay on your line of credit, you should defer this expenditure till as late in the year as possible. So you leave your money in the bank till December 1, then purchase the necessary materials and rent the industrial space. Assume that salaries will be paid at the end of the month. As of December 1, you have \$100 000(1.005) 11 = \$105 640 in the bank. You need to spend \$360 000 on materials and \$240 000 to rent space. After spending all you have in the bank, you therefore need to borrow an additional \$494 360 against your line of credit. As of December 31, you owe \$494 360(1.01) = \$499 304 to the bank, and you owe \$240 000 in salaries. So after depositing the government cheque and paying these debts, you have 1 200 000 – 499 304 – 240 000 = 460 696 dollars in the bank. This example illustrates one of the reasons why ‘Just-in-Time’ (‘JIT’) manufacture has become popular in recent years: you want to minimize the time that capital is tied up. An additional motivation for JIT would become evident if you were to consider the cost of storing the finished batteries before delivery.

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