Suggested problems for Chapter 5 - Solutions
1.
(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)
= $82,083
Since 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)
= $1,245.74
3. (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)
= $29,833