Work sheet on Chapter one

1. Construct a cash flow diagram for the following cash flows: $10,000 outflow at time zero,
$3000 per year outflow in years I through 3 and $9000 inflow in years 4 through 8 at an
interest rate of 10% per year, and an unknown future amount in year 8.
2. Construct a cash flow diagram to find the present worth of a future outflow of $40,000 in
year 5 at an interest rate of 15% per year.
3. How long will it take for an investment to double at 5% per year a) Simple interest and b)
Compound interest?
4. Companies frequently borrow money under an arrangement that requires them to make
periodic payments of only interest and then pay the principal of the loan all at once. A
company that manufactures odor control chemicals borrowed $400,000 for 3 years at 10%
per year compound interest under such an arrangement. What is the difference in the total
amount paid between this arrangement (identified as plan 1) and plan 2, in which the
company makes no interest payments until the loan is due and then pays it off in one lump
sum?
5. A company that manufactures regenerative thermal oxidizers made an investment 10 years
ago that is now worth $1,300,000. How much was the initial investment at an interest rate of
15% per year (a) simple interest and (b) compound interest?
6. A company that manufactures in-line mixers for bulk manufacturing is considering
borrowing $1.75 million to update a production line. If it borrows the money now, it can do
so at an interest rate of 7.5% per year simple interest for 5 years. If it borrows next year, the
interest rate will be 8% per year compound interest, but it will be for only years. (a) How
much interest (total) will be paid under each scenario, and (b) should the company borrow
now or 1 year from now? Assume the total amount due will be paid when the loan is due in
either case.
7. Find the correct numerical value for the following factors from the interest tables.
a. (F/P,8%,25)
b. (P/A ,3%,8)
c. P/G,9%,20)
d. (F/A , 15%,18)
e. (A/P,30%,15)
8. To improve crack detection in aircraft, the U.S. Air Force combined ultrasonic inspection
procedures with laser heating to identify fatigue cracks. Early detection of cracks may reduce
 repair costs by as much as $200,000 per year. What is the present worth of these savings over
a 5-year period at an interest rate of 10% per year?
9. Omega Instruments has budgeted $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?
10. Income from cardboard recycling at Fort Bliss has been increasing at a constant rate of $1000
in each of the last 3 years. If this year's income (i.e., end of year 1) is expected to be $4000
and the increased income trend continues through year 5, (a) what will the income be 3 years
from now (i.e , end of year 3) and (b) what is the present worth of the income over that 5-
year period at an interest rate of 10% per year?
11. Determine how much money would be in a savings account that started with a deposit of
$2000 in year I with each succeeding amount increasing by 10% per year. Use an interest
rate of 15% per year and a 7-year period.
12. A northern California consulting firm wants to start saving money for replacement of
network servers. If the company invests $3000 at the end of year 1 and increases the amount
invested by 5% each year, how much will be in the account 4 years from now if it earns
interest at a rate of 8% per year?
13. You were told that a certain cash flow sequence started at $3000 in year 1 and increased by
$2000 each year. How many years were required for the equivalent annual worth of the
sequence to be $12,000 at an interest rate of 10% per year?
14. Amalgamated Iron and Steel purchased a new machine for ram cambering large I-beams. The
company expects to bend 80 beams at $2000 per beam in each of the first 3 years, after
which the company expects to bend 100 beams per year at $2500 per beam through year 8. If
the company's minimum attractive rate of return is 18% per year, what is the present worth of
the expected income?
15. Find the value of x below such that the positive cash flows will be exactly equivalent to the
negative cash flows, if the interest rate is 14% per year.