Homework Exercise

1. Certain certificates of deposit accumulate interest at 10% per year simple interest. If a
company invests $24,000 now in these certificates for the purchase of a new machine
3 years from now, how much will the company have at the end of 3-year period?

2. A local bank is offering to pay compound interest of 7% per year on new savings
accounts. An e-bank is offering 7.5% per year simple interest on a 5-year certificate
of deposit. Which offer is more attractive to a company that wants to set aside
$1,000,000 now for a plant expansion 5 years from now?

3. Omega instruments has budgeted b$300,000 per year to pay for certain ceramic parts
over the next 5 years. If the company expects the cost of the parts to increase
uniformly according to an arithmetic gradient of $10,000 per year, what is it
expecting the cost to be in year 1, if the interest rate is 10% per year?

4. A start-up direct marketer of car parts expects to spend $1 million the first year for
advertising, with amounts decreasing by $100,000 each year. Income is expected to
be $4 million the first year, increasing by $500,000 each year. Determine the
equivalent annual worth in years 1 through 5 of the company’s net cash flow at an
interest rate of 16% per year.

5. A chemical engineer planning for her retirement will deposit 10% of her salary each
year into a high-technology stock fund. If her salary this year is $60,000 (i.e., end of
year 1) and she expects her salary to increase by 4% each year, what will be the
present worth of the fund after 15 years if it earns 4% per year?

6. Determine how much money would be in saving account that started with a deposit of
$2,000 in year 1 with each succeeding amount increasing by 10% per year. Use an
interest rate of 15% per year and a 7-year period.

7. The future worth in year 10 of a geometric-gradient series of cash flows was found to
be $80,000. If the interest rate was 15% per year and the annual rate of increase was
9% per year, what was the cash flow amount in year 1?

8. For an interest rate of 10% per year compounded quarterly, determine the number of
times interest would be compounded
 a) per quarter
b) per year
c) per 3 years
4.4 (a) 1 (b) 4 (c) 12

9. What effective interest rate per 6 months is equivalent to 14% per year, compounded
semiannually?

10. Two methods can be used for producing methanol. Method A costs $80,000 initially
and will have a $15,000 salvage value after 3 years. The operating cost with this
method will be $30,000 per year. Method B will have a first cost of $120,000, an
operating cost of $8,000 per year, and a $40,000 salvage value after its 3-year life. At
an interest rate of 12% per year; which method should be used on the basis of a
present worth analysis?

11. A company that manufactures amplified pressure transducers is trying to decide

between the machines shown below. Compare on the basis of their present worth
values, using an interest rate of 15% per year.

Variable Speed Dual Speed

First cost, $ 250,000 224,000
Annual operating cost, $/year 231,000 235,000
Overhaul in year 3, $ – 26,000
Overhaul in year 4, $ 140,000 –
Salvage value, $ 50,000 10,000
Life, years 6 6

12. NASA is considering two materials for use in a space vehicle. The costs are shown
below. Which should be selected on the basis of a present worth comparison at an
interest rate of 10% per year?
 Material JX Material KZ
First cost, $ 205,000 235,000
Maintenance cost, $/year 29,000 27,000
Salvage value, $ 2,000 20,000
Life, years 2 4

13. The cost of painting the Penang Bridge is $400,000. If the bridge is painted now and
every 2 years hereafter, what is the capitalized cost of painting at an interest rate of
6% per year?

14. Two processes can be used for producing a polymer that reduces friction loss in
engines. Process K will have a first cost of $160,000, an operating cost of $7000 per
month, and a salvage value of $40,000 after its 2-year life. Process L will have a first
cost of $210,000, an operating cost of $5,000 per month, and a $26,000 salvage value
after its 4-year life. Which process should be selected on the basis of an annual worth
analysis at an interest rate of 12% per year, compounded monthly?

15. Two mutually exclusive projects have the estimated cash flows shown below. Use an
annual worth analysis to determine which should be selected at an interest rate of 10
% per year.
Project A Project B
First cost, $ -42,000 -80,000
Annual cost, $/year -6,000 -7,000 year 1, increasing by
$1,000 per year
Salvage value, $ 0 4,000
Life, years 2 4

16. Barron Chemical uses a thermoplastic polymer to enhance the appearance of certain
RV panels. The initial cost of one process was $130,000 with annual costs of $49,000
and revenues of $78,000 in year 1, increasing by $1,000 per year. A salvage value of
$23,000 was realized when the process was discontinued after 8 years. What rate of
return did the company make on the process?(7.8)