Finance

Problem #1 Two types of machine tools are available for performing a particular task in a manufacturing firm. The estimated cost and salvage values are given as follows: Machine A Machine B Investment $40,000 $50,000 Annual operating cost $4000 $2000 Annual revenues $6000 $7000 Salvage value $5000 $3000 Service life 5 years 8 years Depreciation method MACRS-GDS 5 years MACRS-GDS 5 years Before tax MARR 20% 20% Effective income tax 40% 40% Make a comparison between the 2 machine by developing the after-tax cash flow table on excel. a. For each machine: Calculate the AW, PW, FW, IRR. Which machine should be selected? b. For machine A Calculate the book value at year 5 and the gain/loss on disposal c. for machine B calculate the book value at year 7 and the gain/loss d comment on the results of part b and a

EXPERT ANSWER

What is the amount of 10 equal annual deposits that can provide five annual withdrawals when a first withdrawal of $5,000 is made at the end of year 11 and subsequent withrawals incease at the rate of 8% per year over the previous years withdrawals if the interest rate is 9% compounded annually?

a. $1,500 b. $1,298 c. $1,482 d. $1,389 EXPERT ANSWER Present value at the end of year 10=5000/1.09^1+(5000*1.08^1)/1.09^2+(5000*1.08^2)/1.09^3+(5000*1.08^3)/1.09^4+(5000*1.08^4)/1.09^5 =22518.78 now 22518.78=A(F/A,9%,10)=15.1929A A=1482

Suppose that an oil well is expected to produce 100,000 barrels of oil during its first year in production. However, its subsequent production is expected to decrease by 10% over the previous year’s productionl. The oil well has proven reserve of 1,000,000 barrels. Suppose that the price of oil is expected to start at $60 per barrel during the first year but it will increase at the rate of 5% over the previous year’s price. What would be the present worth of the anticipated revenue stream at an interest rate of 12% compounded annually over the next 7 years?

EXPERT ANSWER Year Barrels Price Revenues 1 100,000 $60.00 $     6,000,000 2     90,000 $63.00 $     5,670,000 3     81,000 $66.15 $     5,358,150 4     72,900 $69.46 $     5,063,452 5     65,610 $72.93 $     4,784,962 6     59,049 $76.58 $     4,521,789 7     53,144 $80.41 $     4,273,091 PW $23,847,896.70 Forecast the no. of barrels and …

Suppose that an oil well is expected to produce 100,000 barrels of oil during its first year in production. However, its subsequent production is expected to decrease by 10% over the previous year’s productionl. The oil well has proven reserve of 1,000,000 barrels. Suppose that the price of oil is expected to start at $60 per barrel during the first year but it will increase at the rate of 5% over the previous year’s price. What would be the present worth of the anticipated revenue stream at an interest rate of 12% compounded annually over the next 7 years? Read More »

Five annual deposits in the amounts of ​$14,000​, $13,000​,​$12,000​, $11,000​, and $10,000​, in that​ order, are made into a fund that pays interest at a rate of 9​% compounded annually. Determine the amount in the fund immediately after the fifth deposit. Immediately after the fifth deposit there will be​ $ ()in the account. ​(Round to the nearest​ dollar.)

EXPERT ANSWER Determine the amount in the fund immediately after the fifth deposit =14000*1.09^4+13000*1.09^3+12000*1.09^2+11000*1.09^1+10000 =72844.72 or 72845 the above is the answer

Anderson Manufacturing​ Co., a small fabricator of​ plastics, needs to purchase an extrusion molding machine for ​$200,000. Kersey will borrow money from a bank at an interest rate of 13​% over five years. Anderson expects its product sales to be slow during the first​ year, but to increase subsequently at an annual rate of 11​%. Anderson therefore arranges with the bank to pay off the loan on a​ “balloon scale,” which results in the lowest payment at the end of the first year and each subsequent payment being just 11​% over the previous one. Determine the five annual payments.(1,2,3,4,5)

EXPERT ANSWER The annual loan payments increasing at a rate of 11% shall form a growing annuity with growth rate of 11%. The annual payments shall be calculated in such a manner that the present value of all the five payments discounted at the interest rate of 13% shall add up to the loan amount. …

Anderson Manufacturing​ Co., a small fabricator of​ plastics, needs to purchase an extrusion molding machine for ​$200,000. Kersey will borrow money from a bank at an interest rate of 13​% over five years. Anderson expects its product sales to be slow during the first​ year, but to increase subsequently at an annual rate of 11​%. Anderson therefore arranges with the bank to pay off the loan on a​ “balloon scale,” which results in the lowest payment at the end of the first year and each subsequent payment being just 11​% over the previous one. Determine the five annual payments.(1,2,3,4,5) Read More »

How much do you have to deposit now in your savings account that earns a 6% annual interest if you want to withdraw the annual payment series in the figure below?

EXPERT ANSWER Present value = Future value/(1+r)^t where r=6%, t is the time perid Year 1 2 3 4 5 Cash flow 1000 1250 1500 1750 2000 Present value 943 1112 1259 1386 1495 Sum of present values 6196 P = 6196 You have to deposit 6196 now in your savings account to be able …

How much do you have to deposit now in your savings account that earns a 6% annual interest if you want to withdraw the annual payment series in the figure below? Read More »

What is the present value of the following series of payments: $100 made at the end of every year starting in year 1 and ending in year 20 EXCEPT there will be no payment of any kind at the end of year 15? Interest is 8% annual rate compounded annually.

EXPERT ANSWER Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate =$100[1-(1.08)^-20].0.08 =$100*9.818147407 =$981.81(Approx) Present value of cash flows=Cash flows*Present value of discounting factor(rate%,time period) =$100/1.08^15 =$100*0.315241705 =$31.52(Approx). Hence present value=981.81-31.52 =$950.29(Approx).

What is the future value at the end of year 5 of a series of 3 deposits? The first deposit occurs at the end of year 3 and is $700. The remaining deposits increase by $140/year (so the last deposit will be $980 and will occur at the end of year 5) . Assume i = 8.8% compounded annually.

EXPERT ANSWER We use the formula:A=P(1+r/100)^nwhereA=future valueP=present valuer=rate of interestn=time period. Year Cash flow at future year 3 700(1.088)^2=$828.6208 4 (700+140)(1.088)=$913.92 5 (700+140+140)=$980 Total =$2722.5408