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 designbuild 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 mediumsize 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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 Winter '11
 bardis
 Economics, Time Value Of Money, Interest

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