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Part 5
14.1
(a) Ottawa-Gatineau:
Toronto:
Thunder Bay:
(b)
Ottawa-Gatineau Toronto Thunder Bay
January 2009 94.04 100.00 106.72
February 2009 97.34 103.42 113.05
March 2009 102.41 107.35 110.39
April 2009 102.53 107.98 111.79
May 2009 113.18 119.65 124.46
June 2009 119.65 125.22 136.12
14-3
14.2
(a) Average price index:
92.0(1 f ) 4 117.3
f 6.262%
(c)
2001 100.0
2002 102.2
2003 104.9
2004 123.8
2005 127.5
14.3
100(1 0.05)(1 0.08) 113.40
100( F / P, f , 2) 113.40
f 6.4894%
14.4
(a) Given: = 3.14%, N = 75
F = 1(1 + 0.0314)-75
F = (1.0314)-75
F = $0.0963
F = 9.63
0.5 = (1.0314)-N
N = 22.42 years
72
Comments: If you use the Rule of 72, you may find 22.93 years , which
3.14
is very close to the actual value.
P $4,500( P / A,12%,10)
$25, 426
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.
14.6 Given: i 15%, f 8%, maintenance costs are given in constant dollars,
i ' 6.48%
th
The 20 payment in actual dollars:
14.9
(a) Constant-dollar analysis: we need to find the inflation-free interest rate.
i f
i' 5.607%
1 f
Then find the equivalent present worth of this geometric series at i ' .
g (1 0.08)(1 0.07) 1
15.56%
P $7, 000(1.07)( P / A1 ,15.56%,13%, 4)
$27, 428
14-6
14.10 Given: i 9%, f 3.8% , we find the inflation-free interest rate as follows:
First compute the equivalent present worth of the constant dollar series at i ' :
A $3,545.13( A / P,9%, 4)
$1, 094.27
0.01 0.005
i'
1 0.005
0.4975%
A ' $20, 000( A / P, 0.4975%, 60)
$386.38
14.13 Given: i ' 6%, f 5%, N 5 years, A $1.5 million in constant dollars
0.0075 0.005
i' 0.2488% per month
1 0.005
Effective inflation rate per semiannual: Since the first withdrawal is made after
six months from retirement, it is necessary to calculate the effective inflation
rate per semiannual.
1.05 1/ 2
f ( ) 1 2.4695% per semiannual
1
$168,711
$160,677
$108,753
(240 months)
0 20 Years
21 22 29 30
Equivalence calculation: To find the required equal monthly deposit amount (A),
we establish the following equivalence relationship:
M
$168, 711( P / F , 6.168%,9)
$1, 035, 236
A $1, 035, 236 / 476.08
= $2,174.52 per month
*
14.16
Given : i 2% per quarter, f 6% per year
(a)
Actual dollar analysis:
Constant dollar analysis: Given: i 2% per quarter and f =6% per year, we
need to find the inflation free interest rate (i ') per quarter. In doing so, we first
compute the equivalent inflation rate per quarter.
(1 f ) 4 1 6%
f 1.4674% per quarter
i f 0.02 0.014674
i' 0.525%
1 f 1 0.014674
(b)
Effective annual interest rate:
ia (1 0.08 / 4) 4 1 8.243%
*An asterisk next to a problem number indicates that the solution is available to students on the Companion
Website.
14-10
A G ( A / G,8.243%, 40)
$1, 000(10.3746)
$10,374
i f 0.03 0.02
i'
1 f 1 0.02
0.009804
P [$20, 000( P / A,9.804%,3) $20.000]*( P / F , 0.9804%,10)
$71,513.78
1 $26,000 6.5%
2 $26,000 7.7%
3 $26,000 8.1%
Actual Constant
n
Dollars Dollars
0 -$45,000 -$45,000
1 $26,000 26,000(0.9390) = 24,414
2 $26,000 26,000(0.8718) = 22,667
3 $26,000 26,000(0.8065) = 20,969
Conversion factors:
( P / F , 6.5%,1) 0.9390
( P / F , 7.7%,1)( P / F , 6.5%,1) 0.8718
( P / F ,8.1%,1)( P / F , 7.7%,1)( P / F , 6.5%,1) 0.8065
0 1 2
Income Statement
$114,000 $114,000
Revenues
Expenses
O & M $56,490 $59,315
CCA $8,250 $14,025
Interest $5,000 $7,381
14.20 * (a)
0 1 2 3 4 5 6
Income Statement
$152,250 $159,863 $167,856 $185,061 $194,314
Revenues $176,248
Expenses
$104,655 $109,888
O & M $86,100 $90,405 $94,925 $99,672
CCA $27,000 $41,850 $23,018 $12,660 $6,963 $3,830
Interest $10,800 $10,800
Net Cash Flow (Actual) $0 $44,010 ($68,066) $52,965 $51,010 $51,029 $66,121
* (b)
0 1 2 3 4 5 6
Income Statement
$145,000 $145,000 $145,000 $145,000
Revenues $145,000 $145,000
Expenses
O & M $82,000 $82,000 $82,000 $82,000 $82,000 $82,000
CCA $27,000 $41,850 $23,018 $12,660 $6,963 $3,830
Interest $10,800 $10,800
Net Cash Flow (Constant) $0 $42,120 ($71,940) $47,007 $42,864 $40,585 $50,204
0.18 0.05
i 12.38%
1 0.05
PW (12.38%) no inflation $88, 074
PW (18%) with inflation $93, 758
present value gain = $93,758 - $88,074
=$5,684
Comments: The present value gain is possible here due to the fact that the
firm was able to finance the project at a lower interest rate than its MARR. In
practice, the lenders would raise their lending rates under inflationary
economy, so that it is not likely to realize a significant gain.
14-16
14.21 (a)
0 1 2 3 4 5
Income Statement
Revenues $15,750 $18,743 $16,207 $17,017 $17,868
Expenses
O & M $0 $0 $0 $0 $0
CCA $2,000 $3,600 $2,880 $2,304 $1,843
Interest $2,000 $3,396 $731
(b)
0 1 2 3 4 5
Income Statement
Revenues $15,000 $17,000 $14,000 $14,000 $14,000
Expenses:
O&M $0 $0 $0 $0 $0
CCA $2,000 $3,600 $2,880 $2,304 $1,843
Interest $2,000 $3,396 $731
0 1 2 3
Income Statement
$84,000 $88,200
Revenues $92,610
Expenses
O & M
$22,500 $38,250
CCA $26,775
Interest
$61,500 $49,950
Taxable Income $65,835
$24,600 $19,980
Income Taxes $26,334
$36,900 $29,970
Net Income $39,501
0 1 2 3 4 5 6 7 8
Income Statement
Revenues $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000 $20,000
Expenses
O&M $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000 $8,000
CCA $7,500 $12,750 $8,925 $6,248 $4,373 $3,061 $2,143 $1,500
Interest
Taxable Income $4,500 ($750) $3,075 $5,753 $7,627 $8,939 $9,857 $10,500
Income Taxes $1,575 ($263) $1,076 $2,013 $2,669 $3,129 $3,450 $3,675
Net Income $2,925 ($488) $1,999 $3,739 $4,957 $5,810 $6,407 $6,825
Net Cash Flow (Actual) ($60,000) $10,425 $12,263 $10,924 $9,987 $9,331 $8,871 $8,550 $22,800
(b)
0 1 2 3 4 5 6 7 8
Income Statement
Revenues $21,600 $23,328 $25,194 $27,210 $29,387 $31,737 $34,276 $37,019
Expenses
O&M $8,480 $8,989 $9,528 $10,100 $10,706 $11,348 $12,029 $12,751
CCA $7,500 $12,750 $8,925 $6,248 $4,373 $3,061 $2,143 $1,500
Interest
Taxable Income $5,620 $1,589 $6,741 $10,862 $14,308 $17,328 $20,105 $22,768
Income Taxes $1,967 $556 $2,359 $3,802 $5,008 $6,065 $7,037 $7,969
Net Income $3,653 $1,033 $4,382 $7,061 $9,300 $11,263 $13,068 $14,799
Net Cash Flow (Constant) ($60,000) $10,353 $12,919 $12,374 $12,300 $12,585 $13,149 $13,941 $39,464
0 1 2 3 4 5 6
Income Statement
Revenues $30,000 $35,000 $55,000 $70,000 $70,000 $60,000
Expenses
Rental $9,600 $9,600 $9,600 $9,600 $9,600 $9,600
O & M $15,000 $21,000 $25,000 $30,000 $30,000 $30,000
CCA $4,583 $8,403 $7,002 $5,835 $4,863 $4,052
Interest
Net Cash Flow (Actual) ($55,000) $5,155 $5,601 $16,381 $23,031 $22,739 $30,955
Net Cash Flow (Constant) ($55,000) $4,910 $5,080 $14,150 $18,947 $17,816 $23,099
14.25
(a) Real after-tax yield on bond investment:
Provincial bond:
Corporate bond:
10000
PE 10000 1200 1 0.5 P / A, i,5
1 /
5
i 6.000%
1 0.06
ccorporate 1 2.913%
1 0.03
(b) Given z 6% f 3%
0.06 1 0.5 0.03
isavings 0%
1 0.03
Engine A 0 1 2 3 4 5
Income Statement
Revenues
Expenses
O&M ($216,000) ($233,280) ($251,942) ($272,098) ($293,866)
CCA $12,500 $21,875 $16,406 $12,305 $9,229
Interest
Net Cash Flow (Constant) ($100,000) ($124,600) ($131,218) ($144,603) ($158,337) ($137,554)
Net Cash Flow (Constant) ($200,000) ($72,944) ($72,080) ($83,621) ($94,642) ($35,313)
0 1 2
Income Statement
$126,000 $132,300
Revenues
Expenses
O & M $62,400 $64,896
CCA $9,000 $15,300
Interest
0.15 0.08
i 6.48% (Inflation-free MARR)
1 0.08
Net Cash Flow (Actual) ($100,000) $56,880 $64,133 $64,309 $65,597 $67,733 $101,786
Net Cash Flow (Constant) ($100,000) $53,660 $57,078 $53,995 $51,959 $50,614 $71,755
IRR(%) = 59.24%
IRR'(%) = 50.22%
14-27
(c)
0 1 2 3 4 5 6
Income Statement
Revenues $84,800 $89,888 $95,281 $100,998 $107,058 $113,482
Expenses
O & M
CCA $15,000 $25,500 $17,850 $12,495 $8,747 $6,123
Interest $12,000 $10,521 $8,865 $7,010 $4,933 $2,606
Net Cash Flow (Actual) $0 $37,357 $44,019 $43,532 $44,078 $45,384 $78,505
Net Cash Flow (Constant) $0 $35,243 $39,177 $36,551 $34,914 $33,914 $55,343
PW(18%), Actual Dollars: $161,421
FW(18%), Actual Dollars: $435,766
AE(18%), Actual Dollars: $46,152
PW(18%), Constant Dollars: $133,582
FW(18%), Constant Dollars: $360,611
AE(18%), Constant Dollars: $38,192
14-28
(d)
0 1 2 3 4 5 6
Income Statement
Revenues $80,000 $80,000 $80,000 $80,000 $80,000 $80,000
Expenses:
O & M
CCA $15,000 $25,500 $17,850 $12,495 $8,747 $6,123
Interest
Net Cash Flow (Actual) ($100,000) $54,000 $58,200 $55,140 $52,998 $51,499 $74,163
PW(11.32%) Actual Dollars: $139,049; IRR(%) = 51.19%; Present Value Loss = $139,049 - $134,549 = ($4,500)
(e) Required additional before-tax annual revenue in actual dollars (equal amount) to make-up the inflation loss.
$4500( A / P,18%, 6)
$2,144
1 0.40
14-29
0 1 2 3 4 5 6 7 8 9 10
Income Statement
Revenues $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000 $80,000
Expenses
O & M $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000 $3,000
Labour $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
Material $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 $9,000 $9,000
Energy $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500 $4,500
CCA
Equipment $16,500 $28,050 $19,635 $13,745 $9,621 $6,735 $4,714 $3,300 $2,310 $1,617
Tools $5,000 $5,000 $0 $0 $0 $5,000 $5,000 $0 $0 $0
Taxable Income $27,000 $15,450 $28,865 $34,756 $38,879 $36,765 $38,786 $45,200 $46,190 $46,883
Income Taxes $9,450 $5,408 $10,103 $12,164 $13,608 $12,868 $13,575 $15,820 $16,166 $16,409
Net Income $17,550 $10,043 $18,762 $22,591 $25,271 $23,897 $25,211 $29,380 $30,023 $30,474
Net Cash Flow (Actual) ($120,000) $39,050 $43,093 $38,397 $36,336 $25,087 $35,632 $34,925 $32,680 $32,334 $40,107
Taxable Income $31,265 $24,313 $42,685 $53,917 $63,794 $67,879 $76,574 $90,175 $98,901 $107,920
Income Taxes $10,943 $8,510 $14,940 $18,871 $22,328 $23,758 $26,801 $31,561 $34,615 $37,772
Net Income $20,322 $15,804 $27,745 $35,046 $41,466 $44,121 $49,773 $58,614 $64,286 $70,148
Net Cash Flow (Actual) ($120,000) $41,822 $48,854 $47,380 $48,790 $41,282 $55,856 $59,488 $61,914 $66,596 $79,781
Net Cash Flow (Constant) ($120,000) $39,455 $43,480 $39,781 $38,646 $30,849 $39,376 $39,563 $38,846 $39,418 $44,549
PW(18%), Actual Dollars: $108,671
FW(18%), Actual Dollars: $568,764
AE(18%), Actual Dollars: $24,181
IRR(%) = 38.52%
(e) Economic loss (or gain) in present worth due to inflation = $108,671 $91,127 = $17,544
14-33
Land ($1,500,000)
Building ($1,000,000) ($4,000,000)
Equipment ($8,500,000)
Disposal Tax Effect
Land
Building
Equipment
Working Capital ($1,000,000) ($1,425,000)
Loan Repayment
Building $3,000,000
Equipment $1,500,000
Disposal Tax Effect
Land ($560,000)
Building $398,130
Equipment $57,150
Working Capital ($1,496,250) ($1,571,063) ($1,649,616) ($1,732,096) ($8,874,025)
Loan Repayment
Note: If the firm decides not to invest in the project, the firm could write off the R&D expenditure.
This results in an opportunity cost in the amount of (0.40)($1,500,000) = $600,000.