ClassHW_3

# ClassHW_3 - Hw-3 Solutions1(5.2 The expenses can be viewed...

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Unformatted text preview: Hw-3 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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ClassHW_3 - Hw-3 Solutions1(5.2 The expenses can be viewed...

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