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Newnansm 7
Newnansm 7
7-1
$12
5
$10
$20
$30
$40
$50
$60
= $130.4
at 15%,
= $117.2
i*
7-2
$80
$80
$80
$200
$200
$80
$80
$80
$200
$80
$80
$20
0
$12
0
i* = 0.50 = 50%
Alternative Solution:
EUAB = EUAC
$80 = [$200 (P/F, i%, 2) + $200 (P/F, i%, 4) + $200 (P/F, i%, 6)] (A/P, i%, 6)
Try i = 50%
$80 = [$200 (0.4444) + $200 (0.1975) + $200 (0.0878)] (0.5481)
Therefore i* = 50%.
7-3
$5
$10
$15
$20
$25
$42.55
Rate of Return
Exact Answer:
17.38%
7-4
For infinite series: A = Pi
EUAC= EUAB
$3,810 (i) = $250 + $250 (F/P, i%, 1) (A/F, i%, 2)*
Try i = 10%
$250 + $250 (1.10) (0.4762)
= $381
$3,810 (0.10)
= $381
i = 10%
*Alternate Equations:
$3,810 (i)
= $250 + $250 (P/F, i%, 1) (A/P, i%, 2)
$3,810 (j)
= $500 - $250 (A/G, i%, 2)
= $79.99
7-5
P
A = $1,000
Yr 0
n = 10
$41
2
n=
$5,000
= ($1,000/0.15) (0.2472)
= $1,648
ROR = 15%
7-6
The algebraic sum of the cash flows equals zero. Therefore, the rate of return is 0%.
7-7
A = $300
$1,000
Try i = 5%
$1,000 =(?)
Try i = 6%
$1,000 =(?)
7-8
$400 = [$200 (P/A, i%, 4) - $50 (P/G, i%, 4)] (P/F, i%, 1)
Try i = 7%
[$200 (3.387) - $50 (4.795)] (0.9346)
= 409.03
Try i = 8%
[$200 (3.312) - $50 (4.650)] (0.9259)
= $398.08
i*
7-9
$100
(P/A, i%, 10)
i
20%
25%
= 20% + (5%) [(4.192 3.704)/(4.912 3.571)]
= 23.9%
7-10
Year
0
1
2
3
4
5
Cash Flow
-$500
-$100
+$300
+$300
+$400
+$500
$500 + $100 (P/F, i%, 1)= $300 (P/A, i%, 2) (P/F, i%, 1)
+ $400 (P/F, i%, 4) + $500 (P/F, i%, 5)
Try i = 30%
$500 + $100 (0.7692)
= $576.92
$300 (1.361) (0.7692) + $400 (0.6501) + $500 (0.2693) = $588.75
= 11.83
Try i = 35%
$500 + $100 (0.7407)
= $574.07
Cash Flow
-$223
-$223
-$223
-$223
-$223
-$223
+$1,000
+$1,000
+$1,000
+$1,000
+$1,000
The rate of return may be computed by any conventional means. On closer inspection one
observes that each $223 increases to $1,000 in five years.
$223 = $1,000 (P/F, i%, 5)
(P/F, i%, 5) = $223/$1,000 = 0.2230
From interest tables, Rate of Return
= 35%
7-12
Year
0
1
2
3
4
5
Cash Flow
-$640
40
+$100
+$200
+$300
+$300
Try i = 10%
$100 (4.378) + $300 (0.6209)
Rate of Return
7-13
Since the rate of return exceeds 60%, the tables are useless.
F = P (1 + i)n
$4,500 = $500 (1 + i)4
(1 + i)4 = $4,500/$500
=0
(1 + i) = 91/4 = 1.732
i* = 0.732 = 73.2%
7-14
$3,000 = $119.67 (P/A, i%, 30)
(P/A, i%, 30) = $3,000/$119.67 = 25.069
Performing Linear Interpolation:
(P/A, i%,
30)
25.808
24.889
i
i
1%
1.25%
= 1% + (0.25%)((25.808-25.069)/(25.808-24.889))
= 1.201%
.
n = 36
$12,375
= 28.846
= 1.25 x 12
= 15%
= (1 + 0.0125)12 1 = 16.08%
7-16
1991 1626 = 365 years = n
F = P (1 + i)n
12 x 109 = 24 (1 + i)365
(1 + i)365
= 5.00 x 108
= (F/P, i%, 100) (F/P, i%, 100) (F/P, i%, 100) (F/P, i%, 65)
Try i = 6%
(F/P, 6%, 365)
= (339.3)3 (44.14)
= 17.24 X 108
(i too high)
Try i = 5%
(F/P, 5%, 365)
= (131.5)3 (23.84)
= 0.542 X 108
(i too low)
n = 10
$92
5
PW of Cost = PW of Benefits
$925
Try i = 5%
$925 = $40 (7.722) + $1,000 (0.6139)
= $922.78
(i too high)
Try i = 4.5%
$925 = $40 (7.913) + $1,000 (0.6439)
= $960.42
(i too low)
i*
4.97%
7-18
$1,000
A = $40
n = 40 semiannual periods
$715
PW of Benefits PW of Costs = 0
$20 (P/A, i%, 40) + $1,000 (P/F, i%, 40) - $715 = 0
Try i = 3%
$20 (23.115) + $1,000 (0.3066) - $715
= $53.90
i too low
Try i = 3.5%
$20 (21.355) + $1,000 (0.2526) - $715
= -$35.30
i too high
= 3.30%
Nominal i* = 6.60%
7-19
$6,000
$12,000
$3,000
n = 10
$28,000
n = 10
n = 20
PW of Cost = PW of Benefits
$28,000 = $3,000 (P/A, i%, 10) + $6,000 (P/A, i%, 10) (P/F, i%, 10)
+ $12,000 (P/A, i%, 20) (P/F, i%, 20)
Try i = 12%
$3,000 (5.650) + $6,000 (5.650) (0.3220) + $12,000 (7.469) (0.1037)
= $37,160 > $28,000
Try i = 15%
$3,000 (5.019) + $6,000 (5.019) (0.2472) + $12,000 (6.259) (0.0611)
= $27,090 < $28,000
Performing Linear Interpolation:
i*
7-20
$15,000
A = $80
$9,000
PW of Benefits PW of Cost
= $0
$15,000 (P/F, i%, 4) - $9,000 - $80 (P/A, i%, 4) = $0
Try i = 12%
$15,000 (0.6355) - $9,000 - $80 (3.037) = +$289.54
Try i = 15%
$15,000 (0.5718) - $9,000 - $80 (2.855) = -$651.40
Performing Linear Interpolation:
i*
7-21
The problem requires an estimate for n- the expected life of the infant. Seventy or seventyfive years might be the range of reasonable estimates. Here we will use 71 years.
The purchase of a $200 life subscription avoids the series of beginning-of-year payments of
$12.90. Based on 71 beginning-of-year payments,
A = $12.90
.
n = 70
$200
$200 - $12.90
(P/A, i%, 70)
6% < i* < 8%,
= 14.50
By Calculator: i* = 6.83%
7-22
$1,000
A = $30
.
n = 2(2001 1998) + 1 = 27
$875
PW of Benefits PW of Cost
= $0
$30 (P/A, i%, 27) + $1,000 (P/F, i%, 27) - $875 = $0
Try i = 3 %
$30 (17.285) + $1,000 (0.3950) - $875 = $38.55 >$0
Try i = 4%
$30 (16.330) + $1,000 (0.3468) - $875 = -$38.30 < $0
i* = 3.75%
Nominal rate of return = 2 (3.75%) = 7.5%
7-23
A = $110
.
n = 24
$3,500 - $1,200
= $2,300
7-24
A = $100
.
n = 36
$3,168
PW of Cost
= PW of Benefits
$100 (P/A, i%, 36)= $3,168
(P/A, i%, 36)
= $3,168/$100 = 31.68
Performing Linear Interpolation:
(P/A, i%,
36)
32.871
21.447
i*
I
%
%
= 12 (0.71%) = 8.5%
7-25
This is a thought-provoking problem for which there is no single answer. Two possible
solutions are provided below.
A.
A = $3,000
n = 10
$1,500 $1,500
= 15%
The rate of return exceeds 60% so the interest tables are not useful.
F
$25,000
(1 + i)
i*
= P (1 + i)n
= $5,000 (1 + i)3
= ($25,000/$5,000)1/3 = 1.71
= 0.71
Rate of Return
= 71%
7-28
This is an unusual problem with an extremely high rate of return. Available interest tables
obviously are useless.
One may write:
PW of Cost = PW of Benefits
$0.5 = $3.5 (1 + i)-1 + $0.9 (1 + i)-2 + $3.9 (1 + i)-3 + $8.6 (1 + i)-4 +
For high interest rates only the first few terms of the series are significant:
Try i = 650%
PW of Benefits
Try i = 640%
PW of Benefits
i* 642%
(Calculator Solution: i = 642.9%)
7-29
g = 10%
A1 = $1,100
n = 20
i=?
P = $20,000
7-30
(a) Using Equation (4-39):
F = Pern
$4,000 = $2,000er(9)
2 = er(9)
9r = ln 2 = 0.693
r = 7.70%
(b) Equation (4-34)
ieff = er 1 = e0.077 1 = 0.0800
= 8.00%
7-31
(a) When n = , i = A/P = $3,180/$100,000
= 3.18%
= 0.318
= 0.318
(d) The saving in water truck expense is just a small part of the benefits of the pipeline.
Convenience, improved quality of life, increased value of the dwellings, etc., all are
benefits. Thus, the pipeline appears justified.
7-32
F = $2,242
A = $50
n=4
P = $1,845
Set PW of Cost
= PW of Benefits
Try i = 8%
450 (3.312) + $2,242 (0.7350)
Rate of Return
7-33
(a)
F = $5
P = $1
n=5
F
= P (1 + i)n
$5
= $1 (1 + i)5
(1 + i) = 50.20 = 1.38
i* = 38%
(b) For a 100% annual rate of return
F = $1 (1 + 1.0)5 = $32, not $5!
Note that the prices Diagonal charges do not necessarily reflect what anyone will pay a
collector for his/her stamps.
7-34
$800
$400
$6,000
$9,000
Year
0
1- 4
5- 8
9
Cash Flow
-$9,000
+$800
+$400
+$6,000
PW of Cost = PW of Benefits
$9,000 = $400 (P/A, i%, 8) + $400 (P/A, i%, 4) + $6,000 (P/F, i%, 9)
Try i = 3%
$400 (7.020) + $400 (3.717) + $6,000 (0.7664) = $8,893 < $9,000
Try i = 2 %
$400 (7.170) + $400 (3.762) + $6,000 (0.8007) = $9,177 > $9,000
Rate of Return
7-35
Year
0
3
6
Cash Flow
-$1,000
+$1,094.60
+$1,094.60
7-36
$65,000
$5,000
$240,000
7-37
3,000 = 30 (P/A, i*, 120)
(P/A, i*, 120) = 3,000/30 = 100
Performing Linear Interpolation:
(P/A, i%, 120)
103.563
100
90.074
i*
I
%
i*
%
7-38
(a) Total Annual Revenues = $500 (12 months) (4 apt.) = $24,000
Annual Revenues Expenses = $24,000 - $8,000 = $16,000
To find Internal Rate of Return the Net Present Worth must be $0.
NPW = $16,000 (P/A, i*, 5) + $160,000 (P/F, i*, 5) - $140,000
At i = 12%,
At i = 15%,
IRR
NPW = $8,464
NPW = -$6,816
(b) At 13.7% the apartment building is more attractive than the other options.
7-39
NPW = -$300,000 + $20,000 (P/F, i*, 10)
+ ($67,000 - $3,000) (P/A, i*, 10) - $600 (P/G, i*, 10)
Try i = 10%
NPW= -$300,000 + $20,000 (0.3855) + ($64,000) (6.145)
- $600 (22.891)
= $87,255 > $0
The interest rate is too low.
Try i = 18%
NPW = -$300,000 + $20,000 (0.1911) + ($64,000) (4.494)
- $600 (14.352)
= -$17,173 < $0
The interest rate is too high.
Try i = 15%
NPW = -$300,000 + $20,000 (0.2472) + ($64,000) (5.019)
- $600 (16.979)
= $9,130 > $0
Thus, the rate of return (IRR) is between 15% and 18%. By linear interpolation:
i* = 15% + (3%) [$9,130/($9,130 - $17,173)]
= 16.0%
7-40
(a) First payment = $2, Final payment = 132 x $2
= $264
Average Payment = ($264 + $2)/2 = $133
Total Amount = 132 payments x $133 average pmt = $17,556
Alternate Solution: The payments are same as sum-of-years digits form
SUM = (n/2) (n + 1) = (132/2) (133) = 8,778
33
34
35
36
IRR
Nominal IRR
Effective IRR
= 0.86%
= 10.32%
= 10.83%
7-42
MARR = 5%
P = $30,000
n = 35
years
= P (1 + i)n
= $30,000 (1.05)35
= $30,000 (5.516015)
= $165,480.46
Therefore:
$15,000 = $165,480.46 (1 + i)-35
$15,000 (1 + i)35 = $165,480.46
(1 + i) = [(165,480.46/$15,000)]1/35
i = 1.071 1 = 7.1002% > 5%
Unless $15,000 can be invested with a return higher than 7.1%, it is better to wait for 35
years for the retirement fund. $15,000 now is only equivalent to $165,480.46 35 years from
now if the interest rate now is 7.1% instead of the quoted 5%.
7-43
$2,000 = $91.05 (P/A, i*, 30)
(P/A, i*, 30) = $2,000/$91.05 = 21.966
(P/A, i%,
30)
22.396
20.930
i
2
2
= 12 (2.15%) = 25.8%
7-44
$3,000 = $118.90 (P/A, i*, 36)
(P/A, i*, 36) = $3,000/$118.90
(P/A, i%,
36)
27.661
26.543
= 26.771
i
1 %
1 %
= 12 (1.699%) = 20.4%
$150
A = $100
.
n = 20
$2,000
($2,000 - $150)
(P/A, i%, 20)
i
(B- A)
-$40,000
+$3,000
4.22%
The rate of return in the incremental investment (B- A) is less than the desired 6%. In this
situation the lower cost alternative (A) Gas Station should be selected.
7-47
Year
0
1- 3
Computed ROR
A
-$2,000
+$800
9.7%
B
-$2,800
+$1,100
8.7%
(B- A)
-$800
+$300
6.1%
The rate of return on the increment (B- A) exceeds the Minimum Attractive Rate of Return
(MARR), therefore the higher cost alternative B should be selected.
7-48
Year
0
1
2
3
4
Computed ROR
X
-$100
+$35
+$35
+$35
+$35
15.0%
Y
-$50
+$16.5
+$16.5
+$16.5
+$16.5
12.1%
X- Y
-$50
+$18.5
+$18.5
+$18.5
+$18.5
17.8%
The ROR on X- Y is greater than 10%. Therefore, the increment is desirable. Select X.
7-49
The fixed output of +$17 may be obtained at a cost of either $50 or $53. The additional $3
for Alternative B does not increase the benefits. Therefore it is not a desirable increment of
investment.
Choose A.
7-50
Year
0
1- 10
Computed ROR
A
-$100.00
+$19.93
15%
B
-$50.00
+$11.93
20%
(B- A)
-$50.00
+$8.00
9.61%
Y
-$5,000
+$2,000
+$2,000
+$2,000
+$2,000
21.9%
X- Y
$0
-$5,000
+$2,000
+$2,000
+$2,000
9.7%
X
-$5,000
-$3,000
+$4,000
+$4,000
+$4,000
16.9%
(c) Rate of Return Analysis: Compute the rate of return on the B- A increment of investment
and compare to 8% MARR.
Year
0
1- 5
A
-$2,500
+$746
B
-$6,000
+$1,664
B- A
-$3,500
+$918
Rate of Return
= 9.8%
B- A
+$12,000
-$3,000
-$3,000
-$3,000
-$3,000
-$3,000
-$3,000
-$3,000
-$4,200
Note: Internal Rate of Return (IRR) equals the interest rate that makes the PW of costs
minus the PW of Benefits equal to zero.
$12,000 - $3,000 (P/A, i*, 7) - $4,200 (P/F, i*, 8) = $0
Try i = 18%
$12,000 - $3,000 (3.812) - $4,200 (0.2660)
= -$553 < $0
Try i = 17%
$12,000 - $3,000 (3.922) - $4,200 (0.2848)
= $962 > $0
i*
The contractor should choose Alternative B and lease because 17.62% > 15% MARR.
7-54
First Cost
B
A
A- B
$300,000 $615,000 $315,000
$25,000
$10,000
-$15,000
$92,000
-$5,000
$158,000 $66,000
$65,000
$70,000
NPW = -$315,000 + [$66,000 (-$15,000)] (P/A, i*, 10) + $70,000 (P/F, i*, 10)
= $0
Try i = 15%
-$315,000 + [$66,000 (-$15,000)] (5.019) + $70,000 (0.2472) = $108,840
ROR > MARR (15%)
The higher cost alternative A is the more desirable alternative.
7-55
Year
0
1
2
3
4
A
-$9,200
+$1,850
+$1,850
+$1,850
+$1,850
5
6
7
8
+$1,850
+$1,850
+$1,850
+$1,850
B
-$5,000
+$1,750
+$1,750
+$1,750
+$1,750
-$5,000
+$1,750
+$1,750
+$1,750
+$1,750
A- B
-$4,200
+$100
+$100
+$100
+$5,100
NPW at 7%
-$4,200
+$93
+$87
+$82
+$3,891
NPW at 9%
-$4,200
+$92
+$84
+$77
+$3,613
+$100
+$100
+$100
+$100
Sum
+$71
+$67
+$62
+$58
+$211
+$65
+$60
+$55
+$50
-$104
ROR 8.3%
Choose Alternative A.
7-56
Year
0
1
2
Zappo
-$56
-$56
$0
Kicko
-$90
$0
$0
Kicko Zappo
-$34
+$56
$0
A- B
0
1
2
3
4
5
6
7
8
-$9,200
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
+$1,850
-$5,000
+$1,750
+$1,750
+$1,750
+$1,750 -$5,000
+$1,750
+$1,750
+$1,750
+$1,750
-$4,200
+$100
+$100
+$100
+$100 +$5,000
+$100
+$100
+$100
+$100
Sum
Rates of Return
A:
$9,200 = $1,850 (P/A, i%, 5)
Rate of Return = 11.7%
B:
$5,000 = $1,750 (P/A, i%, 4)
Rate of Return = 15%
A- B: $4,200 = $100 (P/A, i%, 8) + $5,000 (P/F, i%, 4)
RORA-B = 8.3%
Select A.
7-58
Year
0
1- 10
11- 15
15
Computed ROR
A
-$150
+$25
+$25
+$20
14.8%
B
-$100
+$22.25
$0
$0
18%
A- B
-$50
+$2.75
+$25
+$20
11.6%