#1 Sn ‘You just made the 15" annual payment on the mortgage for your house, The original mortgage principal was $110,000 and you amortized this loan over a 25- year period at an annual interest rate of 8%. Your family has increased in size and you are planning on acquiring a larger house at this time. Your existing house can be sold now for $145,000 (after commissions, legal fees, etc.) but the new house will cost $169,000 (including miscl. expenses). You intend on adding the difference in these amounts to the balance of your existing mortgage and amortizing this new loan over a 15-year period at the current annual interest rate of 6% 2.) What is the annual payment for your original mortgage? a A=PUP, 8%, 25) = t10,000 (0.04768) Fiqz01.80 | | ».) What was the amount of interest and principal paid with your 15" payment? a A] Lis =A Pp, 8%, 28-04 )i=10304,6( 7,138) ©.08) Acses.1i| Pe -A-Lg= 7 Waive fk = 10 304.80 ~ SEBS. 1q ©.) What would be the total amount of the new consolidated mortgage loan and what would be the new annual payment? he Se =B (0D, 8% , 25-5) =10307.A6.1100) 4 Dee = 164000 ~ 145000 = 24000 eee N&w Loam = 24000 + 64 145.21 f43)45.2 / A= P(AIP, 6% 15) = V3148.21 (0,004) 9590.23) Z 4.) The total price of your first house wag $125; \d you believe tht oe your 2" house at the end of the 15-year amortization period will be $200,000. What would be the equivalent uniform annual cost of owning your two houses (ignoring insurance, taxes, maint, ete.) over the full 30-year period? CE * PU 66,15) = Ceo (EBs) ae COST OF SECOND HOUSE = 49,3, 4S Cy-tg COST OF FIRST use CQ eas = F = P(E, 8% 15) = 125000(31 721) Oreos ste si2.5° LAC |#2. Your firm is considering the acquisition of a large mainframe computer having a list price of $2,000,000. The computer vendor offers two incentive plans that you could choose from in order to make purchasing their machine more attractive. Specifically, you could either: (i) finance the full list price over a 35-month period at 6% compounded monthly, through the computer firm, or, (ii) take an immediate cash discount of 10% off the purchase price and finance elsewhere. If you were to select option (ii) your firm would finance the purchase price through its own financing subsidiary at a cost of 12% compounded monthly, also over a 35-month period, 1a) Whats the effective annual interest rate being charged by the computer fim =“ in option (i)? 2 (1+ 282)" | = 0,061 K 100% =[6.1F%] 5b.) Which option is preferred from an economic perspective and what is the NPV of choosing that option over the alternative? 6%. f 7 BAC m his = P(A, 05%, a5.) = groeer(o.o3ir2h-€ bevy“ ERC Aci = Plo ae 1%,35 : Zeeeegalosyoes) E % (ia > Sr a Pus Cy |, OS %, a THO(I. org\e 1% 35.) = 1,90 Gh, Pl, - 62440. Loe Oa NE oer NE (yee BE TM i eee NPV = Got 180K) + 22(bp > 26 ~ 6128 (29.405)x i CG (b) A= 12y¢0,5- IBIS = ce <— NEC P= Alyy, 8% 10) > 2646 (6, 2100) = Faas N66 v Chas acecboof 32G877) fiaas, 60) <— @ A= Ek, 8%, 10)(é) 3.7. am considering two options for 3-month winter vacations during my retirement, First, I could purchase a condominium in Florida at a cost of $150,000, including taxes, etc, Annual condo fees, insurance, maintenance and property taxes would amount to $7k in the first year, and I anticipate that annual inflation will cause this amount to rise by 2.86% per year each year thereafter, I also believe that the condo would rise in value by an average annual compound rate of 2% per yeat. (ii}Second, I could simply lease a condo in any of a number of suitable North American locations each year for the same 3-month period. Iestimate the lease cost would amount to $10K in the first year with this amount rising in future periods by 1.89% per year due to inflation, In either case I would likely continue these winter vacations for 10 years at which time I would pursue some other alternative, “fn (a) Assuming that I could finance the purchase of the condo at an effective annual rate of interest of 8% what would be the annual equivalent cost of each of the two options? Assume my transportation costs to either the purchased or leased condo would be the same. %s (b) Since I would not be using a purchased condo for a full year I could carn revenue by renting the condo to others during the remainder of the year. How much would 1 have to earn from rent in te first year of ownership if planned on inereasing rental revenue at a rate of $500 per year each year in order that purchasing is as economically attractive as leasing? Answer: Aw ©) = 2863 be AC) ~ Ere 8%, 70) +Resltlrgf,©) ee See arg 1000S" P= Fc 1 B%, to) = 2S (2.221 ¥ to yi fo ¢ fel %,00)= 7 fp, 2: 0 GE 4, ites i wha» = a HA) 1 SG ers) 3 ee ee Srhage Jul — 150,000 (0.1133) i ‘+ = 2035s 6005.5 16ba45 o -lirgeo,s0| x i AM ‘ EMA Ren ihe 2 T2235(0, meyO -fee.50_} y fl ig PAL%, 10) a ©) EPP (7.3 400\2 A hogyal. ' ‘Your family is planning to buy a small sailboat for $35,000. You intend to keep the sailboat for five (5) years and you expect the annual maintenance, dockage, insurance and taxes to cost $325 per month during that period. Without any major additional expenditures/repairs the sailboat should have a resale price after the five-year period of $30,000. You intend to finance the purchase price of the boat at an interest rate of 6%, epuine — ‘compounded monthly. a) What is the effective annual rate of interest you would pay to finance the sailboat? Answer: a v= 6% oo LNT 5 LeQ+ ° » Oe) \ Ws YL LQ b) What would be the equivalent monthly cost of owning the éabin during the five- yyeat period? aoe Erect TONEY Cour t rye same ase Wb, gee co) Booval “Ge 60) ; aaa = OBB age E57 ee Cost Pe rom WV a ase ©) If you bought the sailboat and then immediately after making the 25" payment decided to pay off the outstanding balance of the original loan what would be the amount you would have to pay? Answer: , fe 7 me pe Vorwurss 392% (%, 03; 60) -FG96.65 ree nome | Rene Trtwrws O36 .65 (%, 05,2) ahs sc4 4 Zar To yer S4ar3siss (comer vere) Pree @ We rw 2 195.55 (% 05 5#2. To generate new vehicle sales, General Motors is offering financing of new vehicles at 20% int for 50 months. I am very interested in their offer since I was planning on buying a used 1999 Chevrolet four-wheel drive pick-up truck, which would cost $25,500 plus 7% for Provincial Sales Tax (PST). Instead, because of GM's new financing offer, Tam now considering purchasing a new 2002 version of the same truck. The new truck would cost $35,000 plus 7% PST and 7% GST (Goods & Services Tax). Segeeer sear ee If L was to purchase the new truck I would have to pay the PST and GST immediately and then pay GM the purchase price of the truck in 50 equal, end of month, payments. If purchase the used truck I would finance the full amount (including PST) over 50. ‘months at a nominal annual rate of|6%\ compounded monthly. ‘The used truck still has 15 months left on the original warranty, but I would buy an extended warranty that would give me an additional 35 months of warranty coverage, for a total coverage of 50 months. This extended warranty would cost $1,645 15 mopths from now. The new truck comes with a 35 month warranty and I would buy a 15 month extended warranty 35 months from now, at a cost of $645, to also give me a full 50 months of warranty coverage. ——=~=~S*SC*~S~S If assume that the operating and maintenance costs would be the same for both vehicles over the next 50 months, how much higher, relative to the used truck, would the salvage value of the new truck have to be in order that the two trucks would have the same ownership costs? ecest soudtoer) Answer: = At02 Cosed So r5s00 peak Pes Ba. Joo me a aaaee Com vw) ge RITE (IE G4) B= Ce daw Z wus a < ut Be Pur ues (7G. 694,229 ee =A) COPE = nn 16) L Bator (Yorlg, 92) > 441,002.46 — yor? A400 a a Lada ve To aoe: ( 1 be, i Tre Ve uu seni) A Srone Vewe of $4,062.46 KAT te = f a (te 339) [te Ey or Tue Se Yor Pees innate ei Mqsre 2 | Roxie To Vormeme#3. An agricultural equipment manufacturer is planning on introducing a new large square hay/straw baler to the market. The capital cost for a building extension and production / tooling would be $80.0M now, and these expenditures are expected to have a life of 10 ‘years, at which time salvage value is estimated to be $7.0M. Annual material, labor ‘and other production costs are anticipated to total $: in the first year but are expected to rise by 13.3% per year starting in the second year due to both cost inflation and increasés in demand, The facilities and equipment would have a capacity to build a total of 3500 units (balers) peryéar. Demand is expected to only total 700 units in the first year but this is expected to increase by an additional 700 units per year each ycar for the following four (4) years until maximum capacity is reached. Demand is expected to remain ‘constant at 3500 balers per year thereafter. The firm has a cost of capital of 10% compounded annually and has chosen a 10-year study life in assessing the opportunity. a 4 & 6 (@ Whatis the present worth of all the costs for this undertaking and what is its - ‘equivalent annual cost? - ~ 9 _4b) If the firm wants to hold the price of each new baler constant over the 10-yr. study . period what price per baler must the firm charge to eam an NPV of $150.0M? > VETTE — Fee(OE ool ey wee gave) ° et lat © Cty * Gay * Gaye G z) oe rw w ie 3. 5 Ro Cees + HOF OBO) = eee Pa ase. & an ve Chuo * im Gaxous] = {S00 € ves) \SO cee coe rex C2 BQ Cre oe EW OAE AG! Byer F Pice ~ Free Ieap Ole, Cla)+ OBR 6 eT Teck B5e0p CP/M 16,8) COLE 15/5) = SOP NESE © “TeetelL. Two years go you purchased a 28 ft. sailboat for $50,000.00. You made a down Payment 0f $20,000.00 (your “equity”) and financed the balance through your bank at “nominal annual rate of 12%, compounded monthly, over a 5 year period 2 @)_ What is your mionthly loan payment? % ©) What is the remaining balance immediately after making the 24th payment? 3 (©) How much interest did you pay and what was the principle repayment during the 23rd payment period? ‘7 @ Fortunately for you, the market value of your boat has increased by 7% per year during the Past two years due to ising demand. On that basis, how much equity do you now have in your boat? 41 (©) Set up the equation to determine the anmnal compound rate of return you have gamed on your beginning equity over the past two years based on your findings in @), above: ANSWER: “RL 1% Shed be siadeaded tabs panche } , ! ) gst aa & Bue ACPIS i, W-n) = G67. <0 (ola, 1%, bo-24) = 6623 [oe at. 20558 .53 ea nG o”} Chek. 2e. 1 as2 24+ 665.90 7 A (ein, Women CS le, 4, Daysdy The balance shill Yemaining now ix Bigs #200Q6 3 The walt ef Ho beak is SP000 (He, #%, 2) = 9Boeo( 1.1448) 957245 The Eqily ts now FSF2AS - 2007. He: H3F148.24 ® tihel Equiys f50000~ #30000=#epeeo if N= Pea sag, Cie) Cua? S000 - 40000 = 200 \ ieee + GF14B.24) O jq Solve for i (te teog) I ast \ seas ses eeeeaeEEe) dont wed fo solve Hus equakion, bad job fo chu 20000 = (374824) (ed BFE A J gs 94 ae Cty? leis tiger = 1.3029 [Rok= 36.2%#2, A wealthy industrialist died and his will specified that $5 million of his estate mast 80 to the University of Manitoba(U of M) to fund the construction of a small caginecting laboratory building as well as 15 graduate scholarships per-year during the next 20 years. Bach scholarship is to have a value of $12,000 per year for the {ist year and must increase at a rate of $1500 per year over the following 19 years U of M also requires that the $5 million bequest. provides for annual building Maintenance costs over the 20 year period These costs are estimated to be $15,000, Starting with the third year, rising by $2,000 per year cach year thereafter, Assuming that a 10% annual interest rate is used for such analysis, determine how much will be available from the $5 million to fund the initial construction of the engineering lab. 10 Answer: then volte are not mene be be he t Seale THs ter Lough! bs read wien crt dawn encereity | _ indCPle, is) S5r= x4 19(I20004 GAG, DVR 4 (17000 « 6, CO, nF, on , ol amnee Har re ae cost of mainknaree i oo & SICAL, 9%, 18) (PIA, for, <8) 54> x = IS(Ir000 + (1s00)(AIG,10%, co P)(AIA, 10%,20) + (19000 + (200 ns BSM~ 5 Bltrooa « mechnsoediQ.ni3s) + (spss “Too (hered)(8.29 De -See4s) HSM~ K+ 244906181 + 19321 F HeM= «+ 21622a Ia ¥+ $2,033,222. 82 tether will be $2,079,222.62 be ho | inihal conshuchen of the eagineacing lab ees#3. When [retire I intend to purchase a used 53-foot Hatteras Motor Yacht, anchor it off a Carribean island, and use it for winter vacations. I expect that the boat will cost $300K, including taxes, and that annual operating costs, including fuel, maintenance, dockage and insurance, should cost approximately $10K in the first year. L anticipate that this amount would rise by 3.85%/year each year thereafter. As an alternative T could simply rent a condo in the Bahamas for the winter months, at an estimated cost of $12K in the first year of my retirement; this amount would likely increase at a rate of 1.89%/year. In either case, I would likely continue these winter vacations for 15 years at which time I would pursue some other alternative. During this period I expect the value of the yacht to decline by an average of 2% per year. 10 (a) Assuming my cost of capital will be 8% what would be the Annual Equivalent, Cost of each of the two options? 5 —— (b) [believe I could earn income each year by renting the boat to others when T am not using it. In order for the “purchase boat” option to have the same effective cost as the “rent condo” option, how much rental income would I have to eam in the first year if I planned on increasing the rental rates sufficiently each year to realize an annual increase in revenue of $600 each — year? ANSWER: = ISycars wlan f geeks Soonae = 2*blysee Wy cael casks M800 160% U Cagilal costs 300000 tpuahny ots Jov00 +9 ose Blyer DEW G ganar * woos QL TE 03216, EA ne Leet doroee RD Cele, eyw)= (loose) (eta, 46,15) 8 (OPO 5B 26 UD (pe ®= 300000 Q- ‘ Pus 200000 + 107-058.26=$407 078.26 evaqcues A= PWCA)P, 8%, 15) 4ot0@.2(0.1164s) BAITS. CZlyee - ce 1 aPelyear “t [ire ke 106 6% (E18, 77,8) = 20009 form, gues guigses.35 ee chee gishes/4t a~ valle 3%, 5) = 4395.35 Co. Meea}-Al33¢3. 41VW) EAC prchayes AFSSO. 62 EAC 4 = UBRERAL G= boo a= CA ¢ GCO/s, 1,8) fs 4955b.62-17263 44 PB 21 34193. 21 = A's (bosd(AIs, Q%, is} 3412.21 > ATs (bod Gor143) Al=f30836 63 Hi aaa Rental pevencics must be Peoeey. 63 tn te Best yew