Contemporary Engineering Economics, Fifth Edition, by Chan S. Park.

ISBN: 0-13-611848-8
2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Chapter 11 Inflation and Its Impact on Project Cash Flows

Measure of Inflation
11.1

2.5(1 + 0.08)(1 + 0.10)(1 + 0.12) = 3.3264

3.3264 = 2.5(1 + f )3
f = 9.99%

11.2
1.2(1 + f )10 = 3.62
f = 11.674%
100(1 + 0.11674)10 = 301.67

11.3
(a) Average (geometric) price index
150.6(1 + f ) 4 = 165.8
f = 2.433%
(b)
165.8(1 + 0.02433)1 = 169.83
11.4

100(1 + 0.05)(1 + 0.08) = 113.40

100( F / P, f , 2) = 113.40
f = 6.4894%

11.5

Given : f = 8%
1(1 + 0.08) n = 0.5

1.08 n = 0.5
( n) log1.08 = log 0.5
n = log 0.5 / log1.08
= 9 years
72
Comments: If you use the Rule of 72, you may find
= 9 years which is equal
8
to the actual value.

Page | 1

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Actual versus Constant Dollars

11.6 Given: i = 11%, f = 5% , 10 annuity payments in actual dollars
P = $6,500( P / A,11%,10)
= $38, 280
Comments: Since the annuity payments are made in actual dollars, we use the
market interest rate to find its equivalent lump sum amount in todays dollars.

11.7 Given: i = 13%, f = 5%, maintenance costs are given in constant dollars.

i' =

i f 0.13 0.05
=
= 7.62%
1 + 0.05
1+ f

P = $20, 000( P / F , 7.62%,1) + $25, 000( P / F , 7.62%, 2)

+$28, 000( P / F , 7.62%,3) + $34, 000( P / F , 7.62%, 4)
+$38, 000( P / F , 7.62%,5)
= $114,300
A = $114,300( A / P,13%,5)
= $32, 497
11.8 Given: i = 14%, f = 5%
n

Actual dollars

Constant Dollars

$2,500

$2,500(P/F,5%,0) = $2,500

3,500

3,500(P/F,5%,4) = 2,879

4,500

4,500(P/F,5%,5) = 3,526

5,500

5,500(P/F,5%,7) = 3,909

11.9 Given: P = $25, 000, i = 0.75% per month, f = 0.33% per month
th

20 payment in actual dollars:

A20 = $25, 000( A / P, 0.75%, 48) = $622.13

20th payment in constant dollars:
A '20 = $622.13( P / F , 0.33%, 20) = $582.07
Page | 2

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
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11.10
(a) Constant-dollar analysis: we need to find the inflation-free interest rate.
i' =

i f
= 7.477%
1+ f

Then, find the equivalent present worth of this geometric series at i ' .

P = $10, 000( P / A1 ,8%, 7.477%, 4)

= $37, 490
(b) Actual-dollar analysis
Period
1
2
3
4

Net Cash Flow

in Constant $
$10,000
10,800
11,664
12,597

Conversion
factor
(1 + 0.07)1
(1 + 0.07) 2
(1 + 0.07)3
(1 + 0.07) 4

Net Cash Flow

in Actual $
$10,700
12,365
14,289
16,512

P = $10, 700( P / F ,15%,1) + $12,365( P / F ,15%, 2)

+$14, 289( P / F ,15%,3) + $16,512( P / F ,15%, 4)
= $37, 490
Comments: As an alternative way of finding the equivalent cash flows in
actual dollars, we may use the compound growth rate (geometric growth and
inflation):

g = (1 + 0.08)(1 + 0.07) 1
= 15.56%
P = $10, 000(1.07)( P / A1 ,15.56%,15%, 4)
= $37, 490

11.11 Given: i = 9%, f = 3.8% , we find the inflation-free interest rate as follows:
i' =

i f 0.09 0.038
=
= 5.01%
1 + 0.038
1+ f

Page | 3

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

First compute the equivalent present worth of the constant dollar series at i ' :
P = $1, 000( P / A,5.01%, 4)
= $3,545.13
Then, we compute the equivalent annual payment in actual dollars using i:
A = $3,545.13( A / P,9%, 4)
= $1, 094.27
11.12 Given: i = 12%, f = 6% , bond interest rate = 9% compounded semiannually,
face value = $1,000
The 15th interest payment in actual dollars:
I15 = $1, 000(0.045) = $45
The 15th interest payment (7.5th year) in constant dollars:
I '15 = $45( P / F , 6%, 7.5) = $29.07

Equivalence Calculation Under Inflation

11.13

0.13 0.05
1 + 0.05
= 7.62%

i' =

11.14 Given: i = 1% per month, f = 0.5% per month, P = $25,000, N = 60 months

0.01 0.005
1 + 0.005
= 0.4975%
A ' = $25, 000( A / P, 0.4975%, 60)
= $482.97
i' =

Page | 4

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

11.15 Given: i ' = 6%, f = 5%, N = 5 years, A = $2.2 million in constant dollars
Market interest rate:

i = 0.06 + 0.05 + (0.06)(0.05) = 11.3%

Actual dollar analysis:

Period

1
2
3
4
5

Net Cash
Flow
in Constant $
$2,200,000
2,200,000
2,200,000
2,200,000
2,200,000

Net Cash Flow

in Actual $

Equivalent
Present Worth

$2,310,000
2,425,500
2,546,775
2,674,114
2,807,819

$2,075,472
1,957,992
1,847,162
1,742,606
1,643,968

$9, 267, 200

P = $2,310, 000( P / F ,11.3%,1)
+ " + $2,807,819( P / F ,11.3%,5)
= $9, 267, 200
11.16 Given: i = 12%, f = 5%, g = 7%, N = 5 years, A1 = $5, 000 in constant dollars
Actual dollar analysis:

Period

1
2
3
4
5

Net Cash
Flow
in Constant $
$5,000
5,350
5,725
6,125
6,554

Net Cash Flow

in Actual $

Equivalent
Present Worth

$5,250
5,898
6,627
7,445
8,365

$4,688
4,702
4,717
4,732
4,746

$23,584
P = $5, 250( P / F ,12%,1)
+ " + $8,356( P / F ,12%,5)
= $23,584
Page | 5

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

11.17 Given: i = 0.75% per month, f = 0.5% per month, P = $8, 000, N = 24 months
(a) Inflation-free interest rate:
0.0075 0.005
= 0.2488% per month
1 + 0.005
i ' = 3.0263% per year
im ' =

(b) Equal monthly payment in constant dollars:

A ' = $8, 000( A / P, 0.2488%, 24)
= $343.79

11.18 Given: i = 6% compounded monthly, f = 5% compounded annually, number

of months to deposit = 240 months, number of annual withdrawals = 10, first
withdrawal = 6 months after retirement.

Effective inflation rate per semiannual: Since the first withdrawals is made after 6
months from retirement, it is necessary to calculate the effective inflation rate per
semiannual.
1/ 2

1.05
f =
1 = 2.4695% per semiannual
1
Annual withdrawals in actual dollars: On semiannual basis, the first withdrawal
will be made after 41 semiannual periods. Then, we can calculate the equivalent
amount of this withdrawals in actual dollars using this formula
Actual dollar = Constant dollar (F/P, f , N )
Then, the conversion of constant dollar to actual dollar is as follows:

N
41
43
45
47
49
51
53
55
57
59

Actual
dollars
$135,941
$142,738
$149,875
$157,368
$165,237
$173,498
$182,173
$191,282
$200,846
$210,888
Page | 6

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Equivalence calculation: To find the required equal monthly deposit amount (A),
we establish the following equivalence relationship:
1

0.06
im = 1 +
1 = 0.5%
12(1)
12

0.06
ia = 1 +
1 = 6.168%
12

A( F / A, 0.5%, 240)( F / P, 0.5%, 6) = $135,941 + $142, 738( P / F , 6.168%,1)

+$149,875( P / F , 6.168%, 2) +
+$210,888( P / F , 6.168%,9)
A = $1, 294, 043.01/ 476.08

= $2, 718.12 per month.

$210,888
$200,846

$135,941
(240 months)

Years

20

21

22

29

30

Monthly Deposits (A)

11.19 Given : i = 2% per quarter, f = 6% per year

(a)
Actual dollar analysis:
A( F / A, 2%,160) = $1, 000, 000( F / P, 6%, 40)
(1,138.5) A = $10, 285, 718
A = $9, 034.45
Page | 7

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(b)
Effective annual interest rate:
ia = (1 + 0.08 / 4) 4 1 = 8.243%
Equivalent value of $1,000,000 in actual dollars at the end of 65th birthday:
$1, 000, 000( F / P, 6%, 40) = $10, 285, 718
Conversion of gradient series to equivalent uniform series:

A = G ( A / G,8.243%, 40)
= $1, 000(10.3746)
= $10,374
Amount of the first deposit ( A1 ) :
( A1 + $10,374)( F / A,8.243%, 40) = $10, 285, 718
( A1 + $10,374)(276.21) = $10, 285, 718
A1 + $10,374 = $37, 237
A1 = $26,862

11.20 Given: i = 8% per year, f = 6% per year

(a) Freshman-year expense in actual dollars:
$40, 000( F / P, 6%,10) = $71, 634
(b) Equivalent single-sum amount at n = 0
i f
= (0.08 0.06) / (1 + 0.06)
1+ f
= 0.01887
P = [$40, 000( P / A,1.887%,3) + $40, 000]( P / F ,1.887%,10)
= $129, 077 in today's dollars
i' =

(c) Required annual deposit in actual dollars:

A = $129, 077( A / P,8%,10) = $19, 236
Page | 8

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Effects of Inflation on Project Cash Flows

11.21 Consider the following projects after-tax cash flow and the expected annual
general inflation rate during the project period:
End of
year
0
1
2
3

Cash flow
in actual dollars
-$45,000
32,000
32,000
32,000

Expected general
inflation rate
3.5%
4.2%
5.5%

(a) The average annual general inflation rate:

(1 + 0.035)(1 + 0.042)(1 + 0.055) = 1.1378
(1 + f )3 = 1.1378
f = 4.40%

(b) Constant dollars:

Actual
dollars
-$45,000
32,000
32,000
32,000

0
1
2
3

Constant
dollars
-$45,000
32,000(0.9662) = 30,918
32,000(0.9272) = 29,670
32,000(0.8789) = 28,125

Conversion factors:
( P / F ,3.5%,1) = 0.9662
( P / F , 4.2%,1)( P / F ,3.5%,1) = 0.9272
( P / F ,5.5%,1)( P / F , 4.2%,1)( P / F ,3.5%,1) = 0.8789
(c) The project is still profitable in an inflationary economy.
P = $45, 000 + $30,918( P / F ,5%,1)
+$29, 670( P / F ,5%, 2) + $28,125( P / F ,5%,3)
= $35, 653 > 0

Page | 9

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

11.22 (a) and (b)

0

Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest

$
$
$

56,490
11,000
5,000

$
$
$

59,315
8,800
2,619

Taxable Income
Income Taxes

$
$

41,510
16,604

$
$

43,266
17,306

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Working capital
Gains Tax
Loan repayment

24,906

25,960

$
$

24,906
11,000

$
$
$
(600) $
$
(23,810) $

25,960
8,800
29,768
12,600
2,173
(26,190)

($17,000)
($17,000)

$11,496
$10,949

$53,110
$48,172

PW (18%) = $
IRR (%) =

30,885
103.59%

Net Cash Flow (actual)

Net Cash Flow (constant)

$114,000

$
$
$

(55,000)
(12,000) $
50,000

$114,000

Page | 10

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

11.23 (a) and (b)

(a) Project Cash Flows with Inflation
0

Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest

$152,250

$159,863 $167,856 $176,248 $185,061 $194,314

$ 86,100 $ 90,405 $ 94,925 $ 99,672 $ 104,655 $ 109,888

$ 24,000 $ 38,400 $ 23,040 $ 13,824 $ 13,824 $ 6,912
$ 10,800 $ 10,800

Taxable Income
Income Taxes (40%)

$31,350
$12,540

$20,258
$8,103

$49,891
$19,956

$62,752
$25,101

$66,582
$26,633

$77,514
$31,006

Net Income

$18,810

$12,155

$29,935

$37,651

$39,949

$46,508

$18,810
$24,000

$12,155
$38,400

$29,935
$23,040

$37,651
$13,824

$39,949
$13,824

$46,508
$6,912

Cash Flow Statement

Cash from operation
Net Income
Depreciation
Cash from investing activities:
Investment / Salvage
$ (120,000)
Gains Tax
Working Capital
Cash from financing activities:
Loan repayment
$ 120,000
Net Cash Flow (actual)

$0

$ 20,101
$ (8,041)

$ (120,000)
$42,810

($69,445)

$52,975

$51,475

$53,773

$65,481

PW(18%) = $92,959

(c) Present value gain (or loss) due to inflation:

0.18 0.05
= 12.38%
1 + 0.05
= $87, 429

i =
PW (12.38%) no inflation

PW (18%) with inflation = $92,958

present value gain = $92,958 - $87,429
=$5,529

Page | 11

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

Project Cash Flows without Inflation

0

Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest

$145,000

$145,000 $145,000 $145,000 $145,000 $145,000

$ 82,000 $ 82,000 $ 82,000 $ 82,000 $ 82,000 $ 82,000

$ 24,000 $ 38,400 $ 23,040 $ 13,824 $ 13,824 $ 6,912
$ 10,800 $ 10,800

Taxable Income
Income Taxes

$28,200
$11,280

$13,800
$5,520

$39,960
$15,984

$49,176
$19,670

$49,176
$19,670

$56,088
$22,435

Net Income

$16,920

$8,280

$23,976

$29,506

$29,506

$33,653

$29,506
$13,824

$29,506
$13,824

$33,653
$6,912

Cash Flow Statement

Cash from operation
Net Income
$16,920
$8,280 $23,976
Depreciation
$24,000 $38,400 $23,040
Cash from investing activities:
Investment / Salvage
$ (120,000)
Gains Tax
Working Capital
Cash from financing activities:
Loan repayment
$ 120,000
$ (120,000)
Net Cash Flow (actual)

$0

PW (12.38%) =

$40,920

($73,320) $47,016

$ 15,000
$ (6,000)

$43,330

$43,330

$49,565

$87,429

Note: Amount of interest payments remain unchanged with or without inflation.

(d) Present value gain due to borrowing:

n
0
1
2

Net Financing Cost

Net
Principal Interest (A/T) Loan Flow
+$120,000
+$120,000
-(1-0.4)(10,800)
-$6,480
-$120,000 -(1-0.4)(10,800) -$126,480

PW (18%) Loan = +$120, 000 $6, 480( P / F ,18%,1)

$126, 480( P / F ,18%, 2)
= $23, 673

Page | 12

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

11.24 Effects of inflation on cash flows:

(a) Project Cash Flows with Inflation
0
Income Statement
Revenue
Expenses:
Depreciation
Interest

$23,100

$20,948

$17,364

$18,233

$19,144

$4,000
$2,000

$6,400
$1,396

$3,840
$731

$2,304

$1,152

Taxable Income
Income Taxes

$17,100
$6,840

$13,152
$5,261

$12,793
$5,117

$15,929
$6,371

$17,992
$7,197

Net Income

$10,260

$7,891

$7,676

$9,557

$10,795

$10,260
$4,000

$7,891
$6,400

$7,676
$3,840

$9,557
$2,304

$10,795
$1,152
$2,553
($100)

$20,000

($6,042)

($6,647)

($7,311)

$0

$8,218

$7,644

$4,205

$11,861

$14,401

Cash Flow Statement

Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Loan repayment
Net Cash Flow (actual)
PW (20%) =

($20,000)

$26,098

(b) Income Statement (without inflation)

0
1
Income Statement
Revenue
$22,000
Expenses:
Depreciation
4,000
Interest
2,000

$19,000

$15,000

$15,000

$15,000

6,400
1,396

3,840
731

2,304

1,152

Taxable Income
Income Taxes

$16,000
$6,400

$11,204
$4,482

$10,429
$4,172

$12,696
$5,078

$13,848
$5,539

$9,600

$6,723

$6,257

$7,618

$8,309

$9,600
$4,000

$6,723
$6,400

$6,257
$3,840

$7,618
$2,304

$8,309
$1,152
$2,000
$122

$20,000

($6,042)

($6,647)

($7,311)

$0

$7,558

$6,476

$2,786

$9,922

$11,582

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Loan repayment
Net Cash Flow (actual)
PW (14.29%) =

($20,000)

$25,191

PW gains due to inflation = $907

Page | 13

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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11.25 (a), (b), and (c); The project is acceptable

Income Statement
0
Income Statement
Revenue (Labor Savings)
Expenses:
O&M
Depreciation
Interest

inflation
5%

$84,000

21,435 $

$88,200

36,735 $

$92,610

13,118

Taxable Income
Income Taxes (40%)

$62,565
$25,026

$51,465
$20,586

$79,493
$31,797

Net Income

$37,539

$30,879

$47,696

$37,539
$21,435

$30,879
$36,735

$47,696
$13,118

Cash Flow Statement

Cash from operation
Net Income
Depreciation
Cash from investing activities:
Investment / Salvage
Gains Tax
Working capital
Cash from financing activities:
Loan repayment
Net Cash Flow (actual)
Net Cash Flow (constant)

$
8%

(150,000)
(10,000) $

($160,000)
($160,000)
PW (20%) =
$
PW (14.29%) = $

(800) $

$58,174
$55,404

$
$
(864) $

$66,750
$60,544

80,000
(515)
11,664

$151,962
$131,270

22,773
22,773

Therefore, the project is acceptable.

Page | 14

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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Rate of Return Analysis under Inflation

11.26
(a) Project's IRR with no inflation
0
Income Statement
Revenue
Expenses:
O&M
Depreciation

1
$22,000
$
$

$22,000

$22,000

$22,000

$22,000

$22,000

$22,000

$22,000

9,500 $ 9,500 $ 9,500 $

8,860 $ 15,184 $ 10,844 $

9,500 $
7,744 $

9,500 $
5,537 $

9,500 $
5,530 $

9,500 $
5,537 $

9,500
2,765

Taxable Income
Income Taxes

$3,640
1,274

($2,684)
(939)

$1,656
580

$4,756
1,665

$6,963
2,437

$6,970
2,439

$6,963
2,437

$9,735
3,407

Net Income

$2,366

($1,744)

$1,077

$3,092

$4,526

$4,530

$4,526

$6,328

Cash Flow Statement

Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Working capital
Net Cash Flow

$
$
$

(62,000)

(10,000)
($72,000)

PW (12.38%)=

2,366 $ (1,744) $ 1,077 $

8,860 $ 15,184 $ 10,844 $

$11,226
($12,340.64)

$13,439

$11,920
IRR (%)

3,092 $
7,744 $

$10,835
=

4,526 $
5,537 $

$10,063

4,530 $
5,530 $

$10,061

4,526 $ 6,328
5,537 $ 2,765
$ 5,000
$ (1,750)
$ 10,000
$10,063

$22,343

7.47%

Page | 15

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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(b) Project's IRR with inflation

Income Statement
0

$23,760

$25,661

$27,714

$29,931

$32,325

$34,911

$37,704

$40,720

10,070
8,860

10,674
15,184

11,315
10,844

11,994
7,744

12,713
5,537

13,476
5,530

14,284
5,537

15,142
2,765

Taxable Income
Income Taxes

$4,830
1,691

($197)
(69)

$5,555
1,944

$10,193
3,568

$14,075
4,926

$15,905
5,567

$17,883
6,259

$22,814
7,985

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Working capital
Loan repayment

$3,140

($128)

$3,611

$6,626

$9,149

$10,338

$11,624

$14,829

$3,140
$8,860

($128)
$15,184

$3,611
$10,844

$6,626
$7,744

$9,149
$5,537

$10,338
$5,530

$11,624
$5,537

($10,000)

($800)

($864)

($933)

($1,008)

($1,088)

($1,175)

($1,269)

$14,829
$2,765
$7,387
($2,586)
$17,138

($72,000)
($72,000)

$11,199
$10,666

$14,192
$12,872

$13,522
$11,680

$13,362
$10,993

$13,597
$10,654

$14,693
$10,964

$15,891
$11,293

$39,534
$26,758

Income Statement
Revenue
Expenses:
O&M
Depreciation

Net Cash Flow (in actual $)

Net Cash Flow (in constant $)

($62,000)

PW (18%)=
($10,303)
The project is not acceptable.

IRR' (%)

8.49%

Page | 16

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

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11.27

Income Statement
0
Income Statement
Revenue
Expenses:
O&M
Rent
Depreciation

$35,000

$38,000

$55,000

$60,000

$70,000

$60,000

$16,000
$10,080
$11,000

$21,000
$10,584
$17,600

$23,000
$11,113
$10,560

$32,000
$11,669
$6,336

$33,000
$12,252
$6,336

$33,000
$12,865
$3,168

Taxable Income
Income Taxes

($2,080) ($11,184) $10,327

($624) ($3,355) $3,098

$9,995
$2,999

$18,412
$5,524

$10,967
$3,290

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Working capital

($1,456)

($7,829)

$7,229

$6,997

$12,888

$7,677

($1,456)
$11,000

($7,829) $7,229
$17,600 $10,560

$6,997
$6,336

$12,888
$6,336

$7,677
$3,168
$13,401
($4,020)

$13,333
$10,969

$19,224
$15,063

$20,226
$15,093

5%

($55,000)

Net Cash Flow (Actual Dollar)

Net Cash Flow (Constant Dollar)

($55,000)
($55,000)

$9,544
$9,090

$9,771
$8,863

$17,789
$15,367
IRR' (%) =

8.57%

Note that we can determine IRR by

0.139944 0.05
= 0.08566 (or 8.57%)
1.05
where IRR = 13.9944%.
i' =

Page | 17

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
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11.28
(a) Real after-tax yield on bond investment:
Nontaxable municipal bond:
0.09 0.03
= 5.825%
1 + 0.03
Taxable corporate bond:

imunicipal
=

=
icorporate

0.12(1 0.3) 0.03

= 5.243%
1 + 0.03

(b) Given i = 6%, and f = 3%

isavings
= 2.91%

> 2.91% , both bond investments are better

> 2.91% and icorporate
Since imunicipal
than the savings account. The real return is best with the municipal bond because
the initial investment is the same in both cases, $10,000. But of course if MARR
is high enough, one or both bonds may be unacceptable and then it is time to seek
a better investment.
11.29 (a), (b), and (c)
Engine A
0

Income Statement
Revenue
Expenses:
O&M
Depreciation

$183,600
$12,000

$198,288
$12,000

$214,151
$12,000

$231,283
$12,000

$249,786
$12,000

Taxable Income
Income Taxes

($195,600)
($78,240)

($210,288)
($84,115)

($226,151)
($90,460)

($243,283)
($97,313)

($261,786)
($104,714)

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax

($117,360)

($126,173)

($135,691)

($145,970)

($157,071)

($117,360)
$12,000

($126,173)
$12,000

($135,691)
$12,000

($145,970)
$12,000

($157,071)
$12,000
$40,000

($100,000)

($105,360)

($114,173)

($123,691)

($133,970)

($105,071)

PW (20%)=

($445,500)

AE (20%)=

($148,966)

FW (20%)=

($1,108,547)

Net Cash Flow

($100,000)

Page | 18

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
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Engine B
0

Income Statement
Revenue
Expenses:
O&M
Depreciation

$117,504
$24,000

$126,904
$24,000

$137,057
$24,000

$148,021
$24,000

$159,863
$24,000

Taxable Income
Income Taxes

($141,504)
($56,602)

($150,904)
($60,362)

($161,057)
($64,423)

($172,021)
($68,808)

($183,863)
($73,545)

Net Income

($84,902)

($90,543)

($96,634)

($103,213)

($110,318)

Cash Flow Statement

Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax

($84,902)
$24,000

($90,543)
$24,000

($96,634)
$24,000

($103,213)
$24,000

($110,318)
$24,000
$80,000

($200,000)

($60,902)

($66,543)

($72,634)

($79,213)

($6,318)

PW (20%)=

($379,735)

AE (20%)=

($126,976)

FW (20%)=

($944,903)

Net Cash Flow

($200,000)

11.30 (a) & (b) Actual and constant dollar analysis:

0

Income Statement
Revenue
Expenses:
O&M
Depreciation

$126,000

$132,300

$62,400
$12,000

$64,896
$9,600

Taxable Income
Income Taxes

$51,600
$15,480

$57,804
$17,341

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Working capital
Gains Tax

$36,120

$40,463

$36,120
$12,000

$40,463
$9,600
$40,000
$5,200
($480)

Net Cash Flow (actual)

Net Cash Flow (constant)

($60,000)
($5,000)

($65,000)
($65,000)
IRR'(%)

($200)

$47,920
$44,370

$94,783
$81,261

51.04%

(c) Given f = 8%, i = 15%

0.15 0.08
= 6.48% (Inflation-free MARR)
1 + 0.08
Since IRR> 6.48%, the project is a profitable one.

i =

Page | 19

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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11.31 (a) & (b) Project cash flows in actual and constant dollars:

0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest

$84,800

$89,888

$95,281

$100,998

$107,058

$113,482

20,000

32,000

19,200

11,520

11,520

5,760

Taxable Income
Income Taxes

$64,800
$25,920

$57,888
$23,155

$76,081
$30,432

$89,478
$35,791

$95,538
$38,215

$107,722
$43,089

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Working capital
Loan repayment

$38,880

$34,733

$45,649

$53,687

$57,323

$64,633

38,880
20,000

34,733
32,000

45,649
19,200

53,687
11,520

57,323
11,520

$58,880
$55,547

$66,733
$59,392

$64,849
$54,448

$65,207
$51,650

$68,843
$51,443

Net Cash Flow (actual $)

Net Cash Flow (constant $)

(100,000)

($100,000)
($100,000)
PW (18%) =
IRR'(%) =

64,633
5,760
42,556
(17,022)

$95,927
$67,625

$136,553
51.53%

Page | 20

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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(c) The effects of project financing under inflation:

0

Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest

$84,800

$89,888

$95,281

$100,998

$107,058

$113,482

20,000
12,000

32,000
10,521

19,200
8,865

11,520
7,010

11,520
4,933

5,760
2,606

Taxable Income
Income Taxes

$52,800
21,120

$47,367
18,947

$67,216
26,886

$82,468
32,987

$90,605
36,242

$105,116
42,046

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Working capital
Loan repayment

$31,680

$28,420

$40,330

$49,481

$54,363

$63,070

31,680
20,000

28,420
32,000

40,330
19,200

49,481
11,520

54,363
11,520

63,070
5,760
42,556
(17,022)

(12,323)

(13,801)

(15,457)

(17,312)

(19,390)

(21,717)

$39,357
$37,130

$46,619
$41,491

$44,072
$37,004

$43,688
$34,605

$46,493
$34,743

$72,646
$51,213

(100,000)

100,000

Net Cash Flow (actual $)

Net Cash Flow (constant $)

$0
$0
PW (18%) =

$163,425

Page | 21

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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(e) The present value loss due to inflation:

0
Income Statement
Revenue
Expenses:
O&M
Depreciation
Interest

$80,000

$80,000

$80,000

$80,000

$80,000

$80,000

20,000

32,000

19,200

11,520

11,520

5,760

Taxable Income
Income Taxes

$60,000
24,000

$48,000
19,200

$60,800
24,320

$68,480
27,392

$68,480
27,392

$74,240
29,696

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Investment / Salvage
Gains Tax
Working capital
Loan repayment

$36,000

$28,800

$36,480

$41,088

$41,088

$44,544

36,000
20,000

28,800
32,000

36,480
19,200

41,088
11,520

41,088
11,520

$56,000

$60,800

$55,680

$52,608

$52,608

Net Cash Flow (actual $)

(100,000)

($100,000)
PW (11.32%) =

44,544
5,760
30,000
(12,000)

$68,304

$140,656

Present value loss = $136,553 - $140,656 = ($4,103)

(e) Required additional before-tax annual revenue in actual dollars (equal amount) to make-up the inflation loss.

$4,103( A / P,18%, 6)
= $1,955
1 0.40

Page | 22

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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Short Case Studies

ST 11.1 Based on 2009 data, we may compute the average inflation rates as follows:
C o n su m e r P u rc h a se s

2003

2009

184
$ 1 7 0 ,0 0 0

2 1 3 .2
$ 2 1 5 ,9 0 0

A v g . in f la t io n
ra te
2 .4 9 %
4 .0 6 %

$ 1 9 ,5 6 0

$ 2 0 ,1 2 5

0 .4 8 %

$ 1 .6 1

$ 2 .3 2

6 .2 8 %

P a ir o f Je a n s
G a p s E a sy F it, sto n e w a sh e d , n a tio n a l p ric e

$ 3 9 .5 0

$ 3 9 .5 0

0 .0 0 %

In t e r n e t S e r v i c e
A v e ra g e m o n th ly su b sc rip tio n fo r u se o f c a b le se rv ic e fro m C o m c a st, sta n d a rd tie r

$ 4 2 .9 5

$ 4 2 .9 5

0 .0 0 %

$130

$151

2 .5 3 %

$ 2 .2 2

$ 2 .3 9

1 .2 4 %

$189

$212

1 .9 3 %

$ 8 .0 8

$ 8 .5 2

0 .8 9 %

$246

$235

-0 .7 6 %

$ 1 ,1 6 2

$ 1 ,3 1 5

2 .0 8 %

H o sp ita l S ta y
A v e ra g e c o st o f o n e d a y in a se m ip riv a te ro o m , in c lu d in g a n c illa ry se rv ic e s e x c e p t p riv a te
p h y sic ia n s fe e (C le v e la n d )

$ 3 ,8 8 9

$ 4 ,8 4 8

3 .7 4 %

B irth
A v e ra g e h o sp ita l c o st fo r m o th e r a n d c h ild , e x c lu d in g p riv a te p h y sic ia n s fe e (C le v e la n d )

$ 6 ,6 9 6

$ 7 ,9 0 7

2 .8 1 %

$ 1 5 ,4 4 1

$ 1 7 ,7 9 9

2 .4 0 %

$ 6 ,3 6 6

$ 6 ,7 2 5

0 .9 2 %

N ew C P I
S in g le -F a m ily H o m e
M e d ia n re sa le p ric e
T o y o ta C a m ry
S tic k e r p ric e , p lu s d e stin a tio n c h a rg e , fo r L E 5 -sp e e d
U n le a d e d G a so lin e
A v e ra g e n a tio n a l p ric e p e r g a llo n fo r a ll g ra d e s c o m b in e d , in c lu d in g a ll ta x e s, se lf-se rv ic e

T a x P re p a ra tio n
A v e ra g e c o st o f fe d e ra l, sta te , a n d lo c a l ta x -re tu rn p re p a ra tio n b y H & R B lo c k
M c D o n a ld s B ig M a c
A v e ra g e re c o m m e n d e d p ric e
C le a rin g C lo g g e d S in k
R o to -R o o te r se w e r a n d d ra in se rv ic e , re sid e n tia l (n a t l a v g .)
M o v ie T ic k e t
A d u lt tic k e t; first-ru n th e a te r; e v e n in g , n a tio n a l a v e ra g e
A irlin e T ic k e t
D o m e stic ro u n d trip , b a se d o n a 2 ,0 0 0 -m ile trip , e x c lu d in g a v ia tio n ta x e s
V a c a tio n
O n e w e e k fo r a n a d u lt a t C lu b M e d s P u n ta C a n a re so rt, in c lu d in g a irfa re fro m N e w Y o rk

A Y e a r in C o lle g e
In - s t a t e , i n c l u d i n g r o o m a n d b o a r d a n d f e e s , u n d e r g r a d u a t e s t u d e n t a t P e n n S t a t e
F u n e ra l
N a tio n a l a v e ra g e , e x c lu d in g c e m e te ry c o sts

Page | 23

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

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ST.11.2
(a) & (b) The project cash flows and IRR with no inflation:
Income Statement
Revenue
Expenses:
O&M
Labor
Material
Energy
Depreciation :
Building
Milling machine
Jigs & dies

1
$80,000

2
$80,000

3
$80,000

4
$80,000

5
$80,000

6
$80,000

7
$80,000

8
$80,000

9
$80,000

10
$80,000

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$3,000
$15,000
$9,000
$4,500

$15,719
$3,333

$26,939
$4,445

$19,239
$1,481

$13,739
$741

$9,823
$0

$9,812
$3,333

$9,823
$4,445

$4,906
$1,481

$0
$741

$0
$0

Taxable Income
Income Taxes

$29,448
$10,307

$17,116
$5,991

$27,780
$9,723

$34,020
$11,907

$38,677
$13,537

$35,355
$12,374

$34,232
$11,981

$42,113
$14,740

$47,759
$16,716

$48,500
$16,975

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Building
Milling machine
Jigs & dies
Investment / Salvage
Building
Milling machine
Jigs & dies
(Replacement)
Gains Taxes:
Building
Milling machine
Jigs & dies

$19,141

$11,125

$18,057

$22,113

$25,140

$22,981

$22,251

$27,373

$31,043

$31,525

$19,141

$11,125

$18,057

$22,113

$25,140

$22,981

$22,251

$27,373

$31,043

$31,525

$15,719
$3,333

$26,939
$4,445

$19,239
$1,481

$13,739
$741

$9,823
$0

$9,812
$3,333

$9,823
$4,445

$4,906
$1,481

$0
$741

$0
$0

Net Cash Flow

($110,000)
($10,000)

$10,000
$300
($10,000)

$300

($3,500)
($105)

($105)
($120,000)

$38,193

PW (11.32%)

$90,992

$42,509

$38,777
IRR (%) =

$36,593
28.40%

$25,158

$36,126

$36,519

$33,760

$31,784

$38,220

Page | 24

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

(c), (d) & (e): The economic gain in present worth due to inflation = $108,404 - $90,988 = $17,416.
0

1
$85,600

2
$91,592

3
$98,003

4
$104,864

5
$112,204

6
$120,058

7
$128,463

8
$137,455

9
$147,077

10
$157,372

3,090
15,750
9,360
4,635

3,183
16,538
9,734
4,774

3,278
17,364
10,124
4,917

3,377
18,233
10,529
5,065

3,478
19,144
10,950
5,217

3,582
20,101
11,388
5,373

3,690
21,107
11,843
5,534

3,800
22,162
12,317
5,700

3,914
23,270
12,810
5,871

4,032
24,433
13,322
6,048

15,719
3,333

26,939
4,445

19,239
1,481

13,739
741

9,823
0

9,812
3,333

9,823
4,445

4,906
1,481

0
741

0
0

Taxable Income
Income Taxes

$33,713
11,800

$25,979
9,093

$41,599
14,560

$53,181
18,613

$63,592
22,257

$66,468
23,264

$72,021
25,207

$87,088
30,481

$100,470
35,165

$109,537
38,338

Net Income
Cash Flow Statement
Cash from operation
Net Income
Depreciation
Building
Milling machine
Jigs & dies
Investment / Salvage
Building
Milling machine
Jigs & dies
(Replacement)
Gains Taxes:
Building
Milling machine
Jigs & dies

$21,913

$16,887

$27,040

$34,568

$41,335

$43,204

$46,814

$56,607

$65,306

$71,199

21,913

16,887

27,040

34,568

41,335

43,204

46,814

56,607

65,306

71,199

15,719
3,333

26,939
4,445

19,239
1,481

13,739
741

9,823
0

9,812
3,333

9,823
4,445

4,906
1,481

0
741

0
0

Revenue
Expenses:
O&M
Labor
Material
Energy
Depreciation :
Building
Milling machine
Jigs & dies

Net Cash Flow (actual $)

Net Cash Flow (constant $)

(110,000)
(10,000)

10,000
300
(10,000)

300

(3,500)
(105)

(105)
($120,000)
($120,000)
PW (18%) =

$40,965
$38,647
$108,407

$48,271
$42,960

$47,760
$40,100
IRR' (%) =

$49,048
$38,850

$41,353
$30,899

$56,349
$39,724

$61,082
$40,620

$62,994
$39,523

$66,047
$39,093

$77,894
$43,496

30.53%

Page | 25

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8

2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This material is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ 07458.

ST.11.3
(a) & (b): Assumption: The building will be placed in service in January.
Expenses:
Fixed costs
Variable costs
Depreciation :
Building
Equipment
Amortization
Taxable Income
Income Taxes
Net Income
Cash Flow Statement
Operating Avtivities:
Net Income
Depreciation
Amortization
Investment activities
Opportunity cost*
Land
Building
Equipment
Gains Taxes
Land
Building
Equipment
Working capital
Net Cash Flow (actual)
Net Cash Flow (constant)

$5,000,000
$114,000,000

$5,250,000
$119,700,000

$5,512,500
$125,685,600

$5,788,125
$131,968,800

$6,077,531
$138,567,600

$6,381,408
$145,496,400

$122,863
$1,214,650
$250,000
$69,412,487
$27,764,995

$128,205
$2,081,650
$250,000
$72,090,145
$28,836,058

$128,205
$1,486,650
$250,000
$76,413,045
$30,565,218

$128,205
$1,061,650
$250,000
$80,751,220
$32,300,488

$128,205
$759,050
$250,000
$85,163,614
$34,065,446

$122,863
$379,100
$250,000
$89,864,229
$35,945,692

$41,647,492

$43,254,087

$45,847,827

$48,450,732

$51,098,168

$53,918,537

$41,647,492
$1,337,513
$250,000

$43,254,087
$2,209,855
$250,000

$45,847,827
$1,614,855
$250,000

$48,450,732
$1,189,855
$250,000

$51,098,168
$887,255
$250,000

$53,918,537
$501,963
$250,000

($600,000)
($1,500,000)
($1,000,000)

($4,000,000)
($8,500,000)

$2,000,000
$3,000,000
$1,500,000

($1,000,000)

($1,425,000)

($1,496,400)

($1,570,800)

($1,649,700)

($1,732,200)

($200,000)
$496,581
$6,900
$8,874,100

($2,100,000) ($1,000,000) ($13,500,000) $41,810,005

($2,100,000)
($952,381) ($12,244,898) $36,117,055
IRR" =
PW (20%) =
137.08%

$44,217,542
$36,377,881
$98,365,719

$46,141,882
$36,153,372

$48,240,887
$35,998,093

$50,503,223
$35,891,698

$70,348,082
$47,614,351

(c) The project is acceptable.

Page | 26