problemset01an

problemset01an - ECN801: Problem Set 1 Answers 1. Trucking...

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ECN801: Problem Set 1 Answers 1. Trucking giant Yellow Corp agreed to purchase rival Roadway for $966 mil. In order to reduce costs by $45 mil. per year. If the savings were realized as planned, what would be the rate of return on investment. (textbook 1.9) Rate of return = (45/966)(100) = 4.65% (It is implied that the firm will be getting 45 mil every year forever, starting next period to eternity, i.e., a perpetuity. ) 2. A design-build engineering firm completed a pipeline project wherein the company realized a profit of $2.3 mil. in 1 year. If the amount of money the company had invested was $6 mil., what was the rate of return on the investment? (text 1.12) This is simple because we are dealing with a “single payment”: The ROR is the interest rate viewed from the inverstor’s or lender’s point of view so we have F = P ( 1 + ROR) => ROR = F/P -1 = (6+2.3)/6 – 1 = .383 or 38.3% Or simply ROR = I / P where I = profit = 2.3 and so ROR = 2.3/6 = 38.3% 3. A medium-size consulting engineering firm is trying to decide whether it should replace its office furniture now or wait and do it 1 year from now. If it waits 1 year, the cost is expected to be $16,000. At an interest rate i=10% per year, what would be the equivalent cost now? (text 1.17) Here we want to find the present value of 16,000 one year later at i=10%. Therefore, equivalent cost now is
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problemset01an - ECN801: Problem Set 1 Answers 1. Trucking...

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