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Unformatted text preview: Hw3 Solutions1. (5.2) The expenses can be viewed as an annuity of $42,000 for 8 years, with an increasing revenue stream starting at EOY 4 till EOY 8. This increasing revenue stream forms a uniform gradient series with G = $4,000. The PW of this revenue stream will be at EOY 2, so it has to be discounted further to find PW. PW = – 640,000 (capital investment) + 180,000 (P/A,12%,8) (revenue) – 42,000 (P/A,12%,8) + 4,000 (P/G,12%,6)(P/F,12%,2) (expenses) + 20,000 (P/F,12%,8) = $82,083Since PW > 0, accept the project. 2. (5.10) Face value = redemption price = $10,00 Interest received per year = 14% of $1,000 = $140 Yield investor wants is 10% (like MARR) So, price = PW of cash flows = 1,000 (P/F,10%,10) + 140 (P/A,10%,10)= $1,245.743. (5.20) Tax savings per year = Tax paid in Ohio – tax paid in Tennessee = (12%  8.6%) of $50,000 = $1,700 So FW of tax savings = 1,700 (F/A,12%,10) = $29,8334. (5.27) There are two interpretations to the question with regards to working capital....
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 Fall '08
 Vincent,G
 Net Present Value, PW, salvage value

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