Академический Документы
Профессиональный Документы
Культура Документы
MAXIMIZE PROFIT
Problem set
BREAK EVEN
10/5/2016
PRICE DEMAND
10/5/2016
What production rate would you recommend to maximize total profits per year?
(a) 100 (b) 200 (c) 300 (d) 400 (e) 500
Costs and Casting Production Table
Table I
Table II
$1,000
100
$20.00
100
$2,600
$3,200
200
$17.00
300
$16.00
200
300
$3,900
400
$15.00
400
$4,700
500
$14.50
500
10
12
10/5/2016
COST ESTIMATION
13
14
16
10/5/2016
INTEREST RATE
Problem 13 Interest
If you borrow $3,000 at
6% simple interest per
year for seven years, how
much will you have to
repay at the end of seven
years?
(a) $3,000 (b) $4,511
(c) $1,260 (d) $1,511
(e) $4,260
18
Problem 14 Interest
When you were born, your
grandfather established a
trust fund for you in the
Cayman Islands. The account
has been earning interest at
the rate of 10% per year. If
this account will be worth
$100,000 on your 25th
birthday, how much did your
grandfather deposit on the
day you were born?
(a) $4,000 (b) $9,230
(b) (c) $10,000 (d) $10,150
(e) $10,740
19
20
10/5/2016
Problem 15 Interest
Every year you deposit
$2,000 into an account
that earns 2% interest
per year. What will be
the balance of your
account immediately
after the 30th deposit?
Problem 16 Interest
Your monthly mortgage
payment (principal plus
interest) is $1,500. If you
have a 30-year loan with a
fixed interest rate of 6%
compounded monthly,
how much did you borrow
from the bank to purchase
your house? Select the
closest answer.
22
Problem 17 Interest
Consider the following
sequence of year-end
cash flows:
EOY
Cash
Flow
$8,000
$15,000
$22,000
$29,000
$36,000
CASH FLOW
24
10/5/2016
25
Problem 20 Interest
A bank advertises
mortgages at 12%
compounded
continuously. What is
the effective annual
interest?
26
28
10/5/2016
Problem 22 Interest
If you invest $7,000 at
12% compounded
continuously, how much
would it be worth in three
years?
Problem 24 Payback
30
A specialized automatic
machine costs
$300,000 and is
expected to save
$111,837.50 per year
while in operation.
Using a 12% interest
rate, what is the
discounted payback
period?
31
32
10/5/2016
Problem 26 IRR
What is the internal rate of return in the following cash
flow?
Problem 27 Bonds
A bond has a face
value of $1,000, is
redeemable in eight
years, and pays
interest of $100 at
the end of each of
eight years.
If the bond can be
purchased for $981,
what is the rate of
return if the bond is
held until maturity?
(a) 10.65%
(b) 12.65%
(c) 10.35%
(d) 11.65%
(a) 12.95% (b) 11.95% (c) 9.05% (d) 10.05% (e) 11.05%
Year End
-3,345
1,100
1,100
1,100
1,100
33
34
Problem 28 Payback
If you invest
$5,123 in a
venture, you will
receive $1,110
per year for the
next 20 years.
Assuming 10%
interest, what is
the discounted
payback period
for your
investment?
(a)
(b)
(c)
(d)
(e)
(a) 7 (b) 8
(c) 5 (d) 9
(e) 6
35
$10,616
$131,982
$5,511
$5,235
$134,649
36
10/5/2016
Problem 31 Interest
A new machine was bought for $9,000 with a life of six years and no salvage
value. Its annual operating costs were as follows:
$7,000, $7,350, $7,717.499, , $8,933.968
If the MARR = 12%, what was the annual equivalent cost of the machine?
(a) $7,809 (b) $41,106 (c) $9,998 (d) $2,190 (e) $9,895
(a) 11.65%
(b) 11.35%
(c) 12.65%
(d) 12.35%
37
38
Problem 32 Interest
You want to deposit enough
money in a bank account for
your sons education.
You estimate that he will need
$8,000 per year for four years,
starting on his 18th birthday.
Today is his first birthday.
If you earn 12% interest, how
much lump sum should you
deposit in the bank today to
provide for his education?
CASH EQUIVALENT
40
10
10/5/2016
COMPARING
ALTERNATIVES
42
The Tree Top Airline (TTA) is a small feederfreight line started with very limited capital
to serve the independent petroleum
operators in the arid Southwest.
TTA has been contracting its overhaul work
to Alamo Airmotive for $40,000 per plane
per year.
TTA estimates that, by building a $500,000
maintenance facility with a life of 15 years
and a residual (market) value of $100,000
at the end of its life, they could handle
their own overhaul at a cost of only
$30,000 per plane per year.
Complete the following analysis of investment alternatives and select the preferred
alternative. The study period is three years and the MARR = 15% per year.
Alternative A
Alternative B
Alternative C
Capital Investment
$11,000 $16,000 $13,000
Annual Revenues
4,000
6,000
5,540
Annual Costs
250
300
400
Market Value at EOY 3 5,000
6,150
2,800
PW (15%)
850
???
577
44
11
10/5/2016
Complete the following analysis of cost alternatives and select the preferred
alternative. The study period is 10 years and the MARR = 12% per year.
Capital Investment
Annual Costs
Market Value at EOY 10
FW (12%)
For the following table, assume a MARR of 10% per year, and a useful life for each
alternative of six years, which equals the study period.
The rank order of alternatives from least capital investment to greatest capital
investment is Do Nothing A C B.
Complete the IRR analysis by selecting the preferred alternative.
Do Nothing A A C C B
Capital Investment
-$15,000
-$2,000 -$3,000
Annual Revenues
4,000
900
460
Annual Costs
-1,000
-150
100
Market Value
6,000
-2,220
3,350
IRR
12.7%
10.9%
???
Alt A
Alt B
Alt C
Alt D
$11,000 $16,000 $13,000 $18,000
250
300
400
100
1,000
1,300
1,750
2,000
$37,551 -$53,658
???
-$55,660
45
46
For the following table, assume a MARR of 15% per year, and a useful life for each
alternative of eight years, which equals the study period. The rank order of alternatives
from least capital investment to greatest capital investment is Z Y W X. Complete the
incremental analysis by selecting the preferred alternative. Do Nothing is not an
option.
The following mutually exclusive investment alternatives have been presented to you.
The life of all alternatives is 10 years.
After the base alternative has been identified, the first comparison to be made
in an incremental analysis should be which of the following?
Capital Investment
Annual Cost Savings
Market Value
PW (15%)
ZY
-$250
70
100
97
YW
-$400
90
50
20
WX
-$550
15
200
???
Alternatives Table
A
Capital Investment
$60,000 $90,000 $40,000 $30,000 $70,000
Annual Expenses
30,000 40,000 25,000 15,000 35,000
Annual Revenues
50,000 52,000 38,000 28,000 45,000
Market Value at EOY 10 10,000 15,000 10,000 10,000 15,000
IRR
31.5%
7.4%
???
42.5%
9.2%
47
48
12
10/5/2016
The following mutually exclusive investment alternatives have been presented to you.
The life of all alternatives is 10 years.
Using a MARR of 15%, the present worth of the investment in B when
compared incrementally to A is most nearly:
Alternatives Table
Capital Investment
$60,000 $90,000 $40,000 $30,000 $70,000
Annual Expenses
30,000 40,000 25,000 15,000 35,000
Annual Revenues
50,000 52,000 38,000 28,000 45,000
Market Value at EOY 10 10,000 15,000 10,000 10,000 15,000
IRR
31.5%
7.4%
???
42.5%
9.2%
Capital Investment
$60,000 $90,000 $40,000 $30,000 $70,000
Annual Expenses
30,000 40,000 25,000 15,000 35,000
Annual Revenues
50,000 52,000 38,000 28,000 45,000
Market Value at EOY 10 10,000 15,000 10,000 10,000 15,000
IRR
31.5%
7.4%
???
42.5%
9.2%
(a) -$69,000 (b) -$21,000 (c) $80,000 (d) $31,000 (e) $53,000
(a) 30%
(e) 20%
49
50
Capital Investment
$60,000 $90,000 $40,000 $30,000 $70,000
Annual Expenses
30,000 40,000 25,000 15,000 35,000
Annual Revenues
50,000 52,000 38,000 28,000 45,000
Market Value at EOY 10 10,000 15,000 10,000 10,000 15,000
IRR
31.5%
7.4%
???
42.5%
9.2%
DEPRECIATION AND
TAX
(a) Do Nothing (b) Alt. A (c) Alt. B (d) Alt C (e) Alt D (f) Alt E
51
52
13
10/5/2016
54
56
14
10/5/2016
A company is considering
changing its depreciation from
the MACRS method to the
standard straight line (for five
years) method on an office
computer system having a cost
basis of $50,000 and a class life
of five years.
The expected salvage value of
the system is $5,000. What is
the difference in the amount of
depreciation that would be
claimed in year three?
(a) $255 (b) $360 (c) $400
(d) $600 (e) $1,000
58
59
60
15
10/5/2016
62
64
16
10/5/2016
66
68
17
10/5/2016
69
70
(a) Alternative A
(b) Alternative B
(c) Neither
71
72
18
10/5/2016
REPLACEMENT COST
(a) $2.13 (b) $1.44
(c) $1.20 (d) $0.95
73
74
75
76
19
10/5/2016
77
78
SENSITIVITY ANALYSIS
79
80
20
10/5/2016
81
82
A supermarket chain buys loaves of bread from its supplier at $0.50 per loaf. The chain
is considering two options to bake its own bread. Neither machine has a market value at
the end of seven years, and the MARR is 12% per year.
What is the minimum number of loaves that must be sold per year to justify installing
Machine A instead of buying the loaves from the supplier?
A supermarket chain buys loaves of bread from its supplier at $0.50 per loaf. The chain
is considering two options to bake its own bread. Neither machine has a market value at
the end of seven years, and the MARR is 12% per year.
What is the minimum number of loaves that must be sold per year to justify installing
Machine B instead of buying the loaves from the supplier?
Machine A Machine B
Capital Investment
$8,000
$16,000
Useful Life (years)
7
7
Annual Fixed Cost
$2,000
$4,000
Variable Cost per Loaf
$0.26
$0.16
Capital Investment
Useful Life (years)
Annual Fixed Cost
Variable Cost per Loaf
(a) 7,506 (b) 22,076 (c) 37,529 (d) 75,059 (e) 15,637
Machine A Machine B
$8,000
$16,000
7
7
$2,000
$4,000
$0.26
$0.16
(a) 37,529 (b) 15,637 (c) 22,076 (d) 75,059 (e) 7,506
83
84
21
10/5/2016
Capital Investment
Useful Life (years)
Annual Fixed Cost
Variable Cost per Loaf
Machine A Machine B
$8,000
$16,000
7
7
$2,000
$4,000
$0.26
$0.16
85
86
The city council of Morristown is considering the purchase of one new fire truck.
The options are Truck X and Truck Y. The appropriate financial data are as follows:
The purchase is to be financed by money borrowed at 12% per year. Both Machine
A and Machine B are capable of meeting annual demand.
What is the conventional B-C ratio for Truck X?
Truck X Truck Y
Capital Investment
$50,000 $64,000
Maintenance Cost per Year
$6,000
$5,000
Useful Life
6 years 6 years
Reduction in Fire Damage per Year $20,000 $22,000
The city council of Morristown is considering the purchase of one new fire truck. The
options are Truck X and Truck Y. The appropriate financial data are as follows:
The purchase is to be financed by money borrowed at 12% per year. Both Machine A and
Machine B are capable of meeting annual demand.
Which fire truck should be purchased?
Truck X Truck Y
Capital Investment
$50,000 $64,000
Maintenance Cost per Year
$6,000
$5,000
Useful Life
6 years
6 years
Reduction in Fire Damage per Year
$20,000 $22,000
(a) Neither Truck X nor Truck Y (b) Truck X (c) Truck Y (d) Both Truck X & Y
(a) 1.41 (b) 0.87 (c) 1.64 (d) 1.10 (e) 1.15
87
88
22
10/5/2016
A flood control project with a life of 16 years will require an investment of $60,000
and annual maintenance costs of $5,000. The project will provide no benefits for
the first two years, but will save $24,000 per year in flood damage starting in the
third year. The appropriate MARR is 12% per year.
What is the conventional B-C ratio for the flood control project?
(a) 1.53 (b) 1.33 (c) 1.76 (d) 2.20 (e) 4.80
90
91
23