Review Answers

A ^ sign in the answers indicates exponentiation

 

 

 

 

 

 

 

 

 

 

 

 

1.

 

 

Price after 4 years = 100 * [ 1 + (5/100)]^4 = $121.55.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2.

 

 

 

Year 1: 200(1.07)^1 = $214

Year 2: 200(1.07)^2 = 229

...

Year 5: (500+200)(1.07)^5 = $981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.

 

 

Because all cash flows inflate at the general inflation rate, the estimated cash flow is in real dollars.

NPW can be worked using the estimated return and the real MARR.

NPW = -1000 + 200(P/A, 0.1, 5) + 500(P/F, 0.1, 5) = $68.

The ROR of the cash flow is 12.2% and we compare it with the real MARR.

With either method, the investment should be accepted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4.

 

 

Since the cash flow does not change with inflation, the estimated amounts are in actual dollars. To compute the present worth, use an interest rate of 17.7%.

 

NPW = -1000 + 200(P/A, 0.177, 5) + 500(P/F, 0.177, 5) = -149.

Reject the project.

The ROR of the actual-dollar cash flow is still 12.2%, but we must compare it with the actual-MARR or 17.7%. Of course, we again reject the investment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5.

 

In actual dollars the cash flows are as follows.

Year
BTCF
Depr.
Tax. Inc.
Tax
ATCF
0
-1000
1
214
100
114
46
153
2
229
100
129
52
147
3
245
100
145
58
140
4 262 100 162 65 135
5 281 100 140 72 129
5 Salvage
701
BV = 500 201 81 385

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6.

 

 

The SYD method because it provides more depreciation in the earlier years when the value of the depreciation is greater.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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