ME 470 Systems Design - In-class/Homework Due May 14

Corporate Finance
1. For Example 18.3 of Dieter and Schmidt, we showed in lecture (slide 12 4) how the Present Value (PV) and Net
Present Value (NPV) functions in Excel could be used to calculate the Present Value of the costs of Machine A.
Create an Excel spreadsheet that shows the annual costs and calculates the Present Value of the costs of Machine
B in example 18.3.
Do two separate calculations:
a) use the PV function to find the present value
b) use the NPV function to find present value
Make sure you get the same results. The functions work differently. Note the signs for each.

c) A recent settlement of the NFL promised a 765 million dollar payout to players and families with head injuries.
382 million was to be spent in the first three years with the remainder to be paid out over the next seventeen
years (note that the total payout time is twenty years. Determine the Net Present Value, NPV, for the NFLs
payout if the interest rate is assumed to be 3%.

2. a. Use Excel to find the NPV for a drug eluting Cardiac Stent project:
Years 1-3 development: $10M/year
Years 4-8 FDA testing, IP costs, manufacturing ramp up: $ 20M/year
Year 9 until expiration of patent
Volume: 80,000 units / year
Revenue: $1500 / unit
Costs: $700 / unit
Patent issues at start of year 8 and is enforceable for 17 years
Cost of money is 5%

b. Find the NPV if our costs increase to $900 and we only sell 65,000 units per year

c. For the original case, determine the NPV if there is a 5% probability that there is no FDA approval, a 10%
probability of $500 million intellectual property settlement in year 14 (with no other change), and a 85%
probability of business as predicted.

3. What price would you pay today for a device that reduces Aerodynamic Drag of a semi-tractor trailer by 3% such
that your break even economically?
Assume:
50% of energy for hauling a trailer goes to aerodynamic drag
30% of energy for hauling a trailer goes to rolling resistance
The nominal mileage for the semi is 6 miles/gallon
Trailer life is about 1,000,000 miles
A trailer is pulled about 500 miles per day
The fuel price is assumed to be $4.00 per gallon
The interest rate is assumed to be 5%

4. Determine the depreciation schedule for a $800,000 piece of equipment with 5 year depreciation and a $5,000
salvage value. Use Straight Line Depreciation, Declining Balance Depreciation, and Sum of the years Digits.
Personal Finance

5. Present Value and Interest Rate: Publishers Clearinghouse vs Mega Millions:
a) According to the Official Rules of the Publishers Clearinghouse - Win $10,000,000.00 from Giveaway No. 1400
and you will receive $225,000.00 a year for 29 years and a final payment of $3,475,000.00 in the 30th year.
Determine the present value of the prize for two different interest rates, 2% and 5% (Assume first payment in
year 0). Comment on the effect of interest rate assumptions.
b) According to the Powerball website, a 150 million dollar jackpot can be paid out at a cash value of $87.6million
or 30 equal annual payments (the first payment in year 0).
Determine the interest rate (discount rate) they use to establish the annuity. How do you think that the picked
this rate?

6. Interest Rate and Loan Period Sensitivity
You are planning to purchase a new car for $25,000 dollars and are wondering how hard to shop for a car loan.
Examine the sensitivity of the future value of the costs with respect to interest rate. Assume a down payment of
$2500 and annual interest rates of 5%, 6%, 7%, and 8%.
a) Use the PMT function in Excel to determine the monthly payment you would need to make at each
interest rate (assume a 48 month loan and dont forget to divide the interest rate by 12 to get the
monthly interest rate).
b) Determine the total dollar amount of interest you paid over the course of the loan (down payment +
payments cost of the car) for each interest rate.
c) Paul looks at these results and asserts that you should pay cash for a car instead of borrowing. You know
that all assertions need a justification. Justify Pauls assertion in this case (in paragraph form).
d) Paula tells Paul that he is nuts and asserts that borrowing money for the car is the best. Justify (in
paragraph form) Paulas assertion.

7. Payback and Break-Even: Hybrid v. Conventional
If we are comparing two options economically, we may look at simple payback or may look at a break even
analysis. We will compare a Honda Civic Hybrid (MSRP= $24,360, Combined fuel economy=44 mpg) vs. a Honda
Civic 4-door (MSRP =$17,965, Combined fuel economy = 33.5 mpg). We will ignore time value of money for each.
a) Payback: For payback we want to know how many years it will take to recover the higher cost of the
hybrid vehicle. To do so, we will assume that we drive 15,000 miles per year and assume fuel prices are
$3.00/gal, $4.00/gal, $5.00/gal, and $6.00/gal. Report the values in a table.
b) Break Even: Break-Even is more similar to the comparisons that were done in DFM (ME317) for different
manufacturing methods when we compare total cost of the two options and see the production numbers
required to be equivalent. In the case of the two cars we want to find the number of miles you would
have to drive for equivalent cost if fuel prices are $3.00/gal, $4.00/gal, and $5.00/gal. Report the values
in a table.

Grading:
You must show your work. A reader must be able to easily see the method, the equations, and what spreadsheet
commands were used. The use of cash flow diagrams and clear annotation of spreadsheets will go a long way to
helping with clarification. There should be sufficient text that another student in the class could understand and
explain what was done. Handwritten annotation of the spreadsheet is permissible.