ECN801, V. Bardis
Problem Set 5
1.
(5.24) Determine the capitalized cost of an expenditure of $200,000 at time 0, $25,000 in years 2 through 5,
and $40,000 per year from year 6 on. Use an interest rate of 12% per year.
2.
(5.27) If you want to be able to withdraw 80,000 per year forever beginning 30 years from now, how much
will you have to have in your retirement account (that earns 8% per year interest) in (a) year 29 and (b) year 0?
3.
(5.30) Compare the following alternatives on the basis of their capitalized cost at an interest rate of 10% per
year.
Petroleum-
Based Feedstock
Inorganic- Based Feedstock
First cost, $
–250,000
–110,000
Annual operating cost,
–130,000
–65,000
$/year
Annual revenues,
400,000
270,000
$/year
Salvage value, $
50,000
20,000
Life, years
6
4
14. (5.33) Compare the alternatives shown below on the basis of their capitalized costs, using an interest rate 12%
per year, compounded quarterly.
Alternative
E
Alternative F
Alternative G
First cost, $
–200,000
–300,000
–900,000
Quarterly income $quarter,
30,000
10,000
40,000
Salvage
value, $
50,000
70,000
100,000
Life, years
2
4
∞
15. (5.47) What is the face value of a municipal bond that has a bond interest rate of 4% per year with semiannual
interest payments of $800?