(a) A city is spending $10 million on building a new sewage system. Suppose the annual operating expenses for the system are projected to be $6,000 for each year, starting in year one and continuing forever. And maintenance expense of $20,000 starts in year five, repeating every five years thereafter and continuing forever. If the city’s MARR is 10% per year, what is the capitalized worth of the system?
b. Alice deposits $2,000 in a savings account now which offers a variable rate of interest. She plans to withdraw all her money in 5 years. During the period, the annual interest rate paid on her deposits in this account changes each year. How much will Alice receive upon withdrawing her money after 5 years?
The interest rates which will be offered by the savings account in the next 5 years are stated as follows:
|
Year |
Interest Rate |
|
Year 1 |
8% |
|
Year 2 |
10% |
|
Year 3 |
9% |
|
Year 4 |
10% |
|
Year 5 |
10% |
c. )
Consider two mutually exclusive alternatives A and B. Assume MARR = 10% per year, the alternatives are repeatable and the study period is 20 years, which alternative would you choose? Use both AW and PW methods of analysis.
|
Alternative A |
Alternative B |
|
|
Capital investment |
$50,000 |
$20,000 |
|
Operating costs |
$5,000 at end of year 1 and increasing by $500 per year thereafter |
$10,000 at end of year 1 and increasing by $1,000 per year thereafter |
|
Overhaul costs |
$5,000 every 5 years |
None |
|
Life |
20 years |
10 years |
|
Salvage value |
$10,000 |
Negligible |
d. John has purchased a bond that was issued by ABC Medical. The bond has a face value of $10,000 and will mature in eight years. The coupon rate of the bond is 8% per year, and interest payments are made to the bondholder every quarter. John bought the bond five years ago at the face value and he wants to sell it now for a price that will allow him to earn an annual yield of 12% compounded quarterly. How much does John need to sell the bond for to earn his desired return?
In: Accounting
A bonus package pays an employee $1,000 at the end of the first year, $1,500 at the end of the second year, $2,000 at the end of the third year, and so on, continuing to increase by $500 every year for the first nine years of employment. What is the present value today of the bonus package at 9% interest?
In: Finance
A person is paying back a loan at 5% effective rate, with payments at the end of each year for 10 years, such that the payment the first year is $200, the second year is $190, etc. until it reaches $110, on the 10th year.
In: Finance
A person is paying back a loan at 5% effective rate, with payments at the end of each year for 10 years, such that the payment the first year is $200, the second year is $190, etc. until it reaches $110, on the 10th year.
In: Finance
Assume you have an adjustable rate mortgage with interest rates of 6% for year 1, 7% for year 2, 5% for year 3 and 4% for the remaining years of a 10 year mortgage. What is the rate of return if the original mortgage at time 0 is $700,000 and payments are made annually?
In: Finance
A project has the following cash flows. This project is of average risk and the WACC is 0.1. Find the Net Present Value. Round your answer to two decimal places.
Year 0 Year 1 Year 2 Year 3
Cash Flow -$91 $50 $40 $7
In: Finance
In: Finance
A. $8,585
B. $8,426
C. $8,363
In: Finance
Given the following cash flows, what is the project's payback for an initial investment of $100,000?
Year 1 - $25,000
Year 2 - $40,000
Year 3 - $45,000
Year 4 - $50,000
a. 2.8 years
b. 2 years
c. Answer cannot be determined.
d. 4 years
In: Accounting
Sadik Industries must install $1 million of new machinery in its Texas plant. It can obtain a bank loan for 100% of the required amount. Alternatively, a Texas investment banking firm that represents a group of investors believes that it can arrange for a lease financing plan. Assume that these facts apply:
The equipment falls in the MACRS 3-year class. Estimated maintenance expenses are $56,000 per year. The firm's tax rate is 37%. If the money is borrowed, the bank loan will be at a rate of 13%, amortized in six equal installments at the end of each year. The tentative lease terms call for payments of $280,000 at the end of each year for 3 years. The lease is a guideline lease. Under the proposed lease terms, the lessee must pay for insurance, property taxes, and maintenance. Sadik must use the equipment if it is to continue in business, so it will almost certainly want to acquire the property at the end of the lease. If it does, then under the lease terms it can purchase the machinery at its fair market value at Year 3. The best estimate of this market value is $220,000, but it could be much higher or lower under certain circumstances. If purchased at Year 3, the used equipment would fall into the MACRS 3-year class. Sadik would actually be able to make the purchase on the last day of the year (i.e., slightly before Year 3), so Sadik would get to take the first depreciation expense at Year 3 (the remaining depreciation expenses would be at Year 4 through Year 6). On the time line, Sadik would show the cost of the used equipment at Year 3 and its depreciation expenses starting at Year 3.
_
Year 3-year MACRS 1 33.33 % 2 44.45 % 3 14.81 % 4 7.41 %
_
To assist management in making the proper lease-versus-buy decision, you are asked to answer the following questions:
What is the net advantage of leasing?
Should Sadik take the lease? Do not round intermediate calculations. Round your answer to the nearest dollar.
Net advantage of leasing:_______
In: Finance