Lecture 2

Homework
1. A maker of microelectromechanical systems
can reduce product recalls by 10% if it
purchases new packaging equipment. If the
cost of the new equipment is $25,000 now,
how much could the company afford to
spend in 4 years (instead of now) if it uses a
minimum attractive rate of return of 15% per
year
F = 25,000(F/P,15% 4)
= 25,000(1.7490)
= $43,725

Homework
2. How much should a mold and die design
software company be willing to spend now
for an optical communications system that
will cost $65,000 three years from now, if the
interest rate is 10% per year
P = 65,000(P/F,10%,3)
= 65,000(0.7513)
= $48,835

Homework
3. A company which uses austenitic nickelchromium alloys to manufacture resistance
heating wire is considering a new annealingdrawing process to reduce costs. If the new
process will cost $1.75 million dollars now,
how much must be saved each year to
recover the investment in 10 years at an
interest rate of 12% per year?
A = 1.75 million (A/P,12%,10)
= 1.75 million (0.17698)
= $309,715

Homework
4. Under an agreement with the Internet Service Providers
(ISPs) Association, SBC Communications reduced the price it
charges ISPs to resell its hih-speed digital subscriber line
(DSL) service from $458 to $360 per year per customer line.
A particular ISP, which has 20,000 customers, plans to pass
90% of the savings along to its customers. What is the total
present worth of these savings over a 5-year horizon at an
interest rate of 8% per year?
Savings per year = (458 360)(0.90)(20,000) = $1,764,000
P = 1,764,000(P/A,8%,5)
= 1,764,000(3.9927)
= $7,043,123

Homework
5. An independently owned moving company
wants to have enough money to purchase a
new tractor-trailer in 4 years. If the unit will
cost $250,000, how much should the
company set aside each year if the account
earns 10% per year?

A = 250,000(A/F,10%,4)
= 250,000(0.21547)
= $53,868

Homework
6. Liability insurance for a small construction
company was $10,000 four years ago. Now
the cost for similar coverage is $15,000. What
was the annual rate of increase for the
insurance?

10,000(F/P,i,4) = 15,000
(F/P,i,4) = 1.5000
From tables, i is between 10% and 11%.
Interpolate, or use formula,
i = 10.7% per year

Homework
7. If you plan to have $1,000,000 when you
retire, how long will you be able to withdraw
$100,000 per year if the account earns
interest rate at a rate of 8% per year?

1,000,000 = 100,000(P/A,8%,n)
(P/A,8%,n) = 10.000
From tables, n is between 20 and 21 years.
Interpolate, or use formula,
n = 20.9 years (or 21 years)

Homework
8. A company that manufactures automobile wiring harnesses
has budgeted $30,000 per year to pay for a plastic part over
the next 5 years. If the company expects to spend $12,000 in
year 1, how much of a uniform (constant) increase each year
is the company expecting in the cost of this part? Assume
the company uses an interest rate of 10% per year.

30,000 = 12,000 + G(A/G,10%,5)

18,000 = G(1.8101)
G = $9,944 per year

Lecture 3

Exercise
A rolled metal product company purchased a new
machine for ram cambering I-beams. The company
expects to bend 95 beams at $2,000 per beam in
each of the first 3 years, after which the company
expects to bend 125 beams per year through year 9.
If the companys minimum attractive rate of return is
20% per year, what is the PW of the expected income

P = (95) (2000) (P/A,20%,3) + (125) (2000) (P/A,20%,6) (P/F,20%,3)

= 190,000 (2.1065) + 250,000 (3.3255) (0.5787)
= $881,352

Exercise
A civil engineer decides to set aside money for
his newborn daughters college education. He
estimates that the needs will be $20,000 on
her 18th, 19th, 20th, and 21st birthdays. If he
plans to make uniform deposits through year
17, with the first deposit now, what should be
the size of each deposit, if the account earns
interest at a rate of 8% per year?
P17 = 20,000 (P/A,8%,4) = 20,000 (3.3121) = $66,242
A = 66,242 (A/F,8%,18) = 66,242 (0.02670) = $1769

Exercise
How much money would have to be deposited
each year for 8 years, starting 3 years from
now, to have $66,000 eighteen years from
now? Assume the interest rate is 8% per year.

P10 = 66,000(P/F,8%,8) = 66,000(0.5403) = $35,660

A = 35,660(A/F,8%,8) = 35,660(0.09401) = $3352

Exercise
By spending $10,000 now, $17,000 three years from
now, and $21,000 five years from now to upgrade
presently owned equipment, a plating company can
increase income by $15,000 per year in years 1
through 5 and by $17,000 per year in years 6 through
10. At an interest rate of 12% per year, what is the
net present value of the proposed upgrade?

P = 10,000 17,000(P/F,12%,3) 21,000(P/F,12%,5) + 15,000(P/A,12%,5) + 17,000(P/A,12%,5) (P/F,12%,5)

= 10,000 17,000 (0.7118) 21,000 (0.5674) + 15,000 (3.6048) + 17,000 (3.6048) (0.5674)
= $54,827

Exercise
Exxon mobile is planning to sell a number of producing oil
wells. The wells are expected to produce 100,000 barrels of oil
per year for 10 more years. If the selling price per barrel of oil
is currently $35, how much should an independent refiner be
willing to pay for the wells now, if the price of oil is expected
to decrease by $1 per barrel every year? Assume the first
decrease is expected to occur immediately after the start of
year 3. Assume that the interest rate is 12% per year and that
oil sales occur at the end of each year.
P = (35) (100,000) (P/F,12%,1) + [(35) (100,000) (P/A,12%,9) 100,000 (P/G,12%,9)] (P/F,12%,1)
= 3,500,000 (0.8929) + [3,500,000 (5.3282) 100,000 (17.3563)] (0.8929)
= $18,226,830