Reference no: EM131439990
Assignment
Problem 1:
An investor seeking to borrow $200,000 to start a new venture has received two bank offers as follows. Bank A will provide the money at an interest rate of 14% per year compounded con0nuously. Bank B on the other hand, offers the loan on the stipulation that it be repaid in equal monthly installments of $5,000 per month over a 5 year period. Carefully analyze each offer and advice the investor which offer to accept and the reasons for doing so.
Problem 2:
A company plans to develop an intelligent software system over the next 10 years to facilitate its project selection process. There are three alternative proposals (A,B & C) for the system with their respective cash flows as listed below. If interest rate is 10% /year which option should be selected?
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Alternative
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Cost Component
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Cost
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A
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Development
Programming
Operations
Support
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$100,000 now, $150,000 in year1
$45,000 now, $35,000 in year1
$50,000 in years 1 thru 10
$30,000in years 1 thru 10
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B
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Development
Programming
Operations
Support
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$10,000 now
$45,000 now, $30,000 in year 1
$80,000 in years 1 thru 10
$40,000 in years 1 thru 10
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C
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Operations
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$150,000 in years 1 thru 10
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Problem 3
An environmental engineer is considering 3 methods for disposing of a non-hazardous chemical sludge. The methods are Land Application, Fluidized-Bed Incineration and Private Disposal Contract. The estimated cash flows associated with each option are listed in the table below. Using the Annual worth method and a 12% per year interest rate, determine the least cost opton.
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Land Application
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Incinerator
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Contract
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1st Cost
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$110,000
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$800,000
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$0
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Annual Cost
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$95,000
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$60,000
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$190,000
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Salvage Value
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$15,000
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$250,000
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$0
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Life Span
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3yrs
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6yrs
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2yrs
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Problem 4
Three sites for mineral extraction have associated cash flows as shown below. Interest rate is limited to 10% and the extracton period is limited to 5years. Using the conventional Benefit/ Cost ratio method, determine which site offers the most profitable option.
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Site A
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Site B
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Site C
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Initial Cost ($m)
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50
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90
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200
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Annual Cost ($m/year)
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3
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4
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6
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Annual Benefits
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20
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22
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61
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Annual Disbenefits
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0.5
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1.5
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2.1
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Problem 5
An Engineer approaching retirement thinks that the market interest rate will decrease before then and therefore plans to invest in corporate bonds. Speci?cally, the plan is to buy a $50,000 bond that matures 20years from now and has a coupon rate of 12% payable quarterly. For how much should the engineer be able to sell the bond for, 5 years from now. The market interest rate is 8% per year compounded quarterly.
If during the 5 years before selling the bond, the engineer invests the quarterly dividend payments he receives in a venture yielding a 12% interest per year compounded quarterly, how much would the engineer have altogether, after selling the bond.
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