Reference no: EM133074630
Using Excel, solve the following questions:
1. Air conditioning for a college dormitory will cost $3.5 million to install and $125,000 per year to operate at current prices. The system should last 20 years. The real cost of capital is 7%, and the college pays no taxes. What is the equivalent annual cost?
2. Deutsche Transport can lease a truck for four years at a cost of €52,000 annually. It can instead buy a truck at a cost of €102,000, with annual maintenance expenses of €25,000. The truck will be sold at the end of four years for €29,500. Ignore taxes.
a. What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 10%?
b. Which is the better option: leasing or buying?
3. The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs:
Year Machine A Machine B
0 $57,000 $67,000
1 11,600 11,800
2 11,600 11,800
3 11,600 11,800
4 --- 11,800
Assume a 10% discount rate and ignore taxes.
- What is the equivalent annual cost of each machine?
- Which machine should the company buy?
4. Machine B is expected to produce the following real cash flows:
Cash Flows ($ thousands)
Machine C0 C1 C2 C3
B -121 132 135 155
Machine C was purchased five years ago for $200,000 and produces an annual real cash flow of $65,000. It has no salvage value but is expected to last another five years. The company can replace machine C with machine B either now or at the end of five years. The opportunity cost of capital is 12%. When should the company replace machine C, now or 5 years later?
5. A game of change offers the following odds and payoffs:
Probability Payoff
0.3 $400
0.35 200
0.35 100
a. What is the expected cash payoff?
b. Suppose each play of the game costs $100. what is the expected rate of return?
c. What is the variance of the expected returns?
d. What is the standard deviation of the expected returns?
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