Example 1.1.
(Ex. 2.15): A firm considers buying a machine today which will result in cost
savings of 75,000 per year (starting at the end of year 1).
a) What is the maximum amount the firm is willing to pay for the machine today, if it wants to
recover its investment after 3 years and receive a rate of return of 20% per year.
b) Suppose the price of the machine (today) is 100,000. What will be the firm's profit if indeed
the details in part (a) turn out to be accurate?
Examples Handout 1
Example 1.2:
Suppose the cost of a new project will be 1,000 in year 1 and then it will increase
by 250 per year thereafter. What amount must we deposit in a bank account today such that we
cover the costs over a five year period. Assume the annual rate of interest is 6%.
Example 1.3
: Starting next year, Lisa will deposit the same amount each year in a bank
account which pays 10% per year. Bart will also open a new acount next year which offers 10%
annual interest rate. His first deposit will be 1,000 and then each subsequent deposit will
increase by 300 each year. If Lisa and Bart end up having the same amount in the bank after
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 Winter '11
 Panzer
 Time Value Of Money, Interest, bank account

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