1 What is the overall rate of return on a $130,000 investment that returns 21% on the first $70,000

and 22% on the remaining money?

$130,000 21%
70000 22%

Amount Return
$175,000 21% $33,600
$15,000 22% $3,300
$160,000 $36,900

ROR 21%

2
A start-up chemical company has an average cost of capital of 15% per year. Additionally, it has a
long-term goal of making at least a 23% per year rate of return on all investments; however,
because of market opportunity the ROR can be reduced for the current project by 3%. If the
company acquired $49,000,000 in venture capital, how much did it have to earn in the first year?

In the first year, the chemical company had to earn $

15% 35%
23% $17,150,000
3%
$49,000,000

3
Omega Instruments budgeted $410,000 per year to pay for special-order 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 the cost estimated to be in year 1 at an interest
rate of 16% per year.

B $410,000
G 10000
i 16%

A/G 16%, 5 1.706

17060
$392,940

4 Your friend is considering a new exhaust system for his Lamborghini Diablo. The estimates from
the two shops are shown in the following table. Besides installation, shop Y includes a full
replacement warranty for 4 years in the quote. Since money does not appear to be a problem for
your friend, and he asked you about the economics of the two quotes, which should he choose
based on annual worth values and an interest rate of 12% per year?
 Shop X Y 12%
Installed
-2350 -3600
cost, $
Total AOC,
-1200 -900
$/year
Salvage
175 1000
value, $
Life, years 2 4

A/P 0.5917 0.32923

A/F 0.4717 0.20923
P/F 0.7972
-1390.495 -1185.228
-1200 -900
82.5475 209.23
-$2,508 -$1,876

5 Compare two alternatives for a physical security system surrounding a power distribution
substation using annual worth analysis and a MARR of 10% per year.

System Condi Torro

First cost, $ -17000 -140000
M&O cost, $
-9500 -1700
per year
Salvage
3000 100000
value, $
Life, years 3∞

A/P 0.40211 0.1

A/F 0.30211

-6835.87 -14000
-9500 -1700
906.33
-$15,430 -$15,700

6 Will and Ben Ice Cream plans to build a new mixing plant to serve customers in Mexico. Because
the company is in good financial shape with equity funds returning 11% per year, the bank will
charge an interest rate of 8.25% per year for the loan. An MARR that is 5% over the WACC is
required to proceed with the project, which sets the MARR at 14%. What percentage of debt
financing can the company expect to meet its MARR requirement?
MARR
11% 5%
8.25% 14%

WACC 9%

-2.75% 100%
 -2%
72.73% 27.27%

7
A small analytical laboratory borrowed $38,000 (the original amount or the principal) at an interest
rate of 14% per year to purchase a used Agilent gas chromatograph. If the lab repays the loan
plus interest in 1 year, how much must it pay at the end of the year?

$38,000
14%
5320
$43,320

8
Two mutually exclusive alternatives have the estimates shown below. Use annual worth analysis to
determine which should be selected at an interest rate of 9% per year.

Q R 9%
First Cost -32000 -72000
$-6,000 in
year 1,
AOC per increasing
-5000
Year by $1,000
per year
thereafter -6000 -7000 -8000 -9000
Salvage
2000 4000
Value
Life 2 years 4 years

A/P 0.56847 0.9174

A/F 0.47847 0.8417
A/G 0.4785 0.7722
P/F 0.8417 0.7084
P/A 3.2397
-18191.04 -72000
-5000 -5504.4
956.962398 -5891.9
-$22,234 -6177.6
-6375.6
2833.6
-93115.9
-$28,742

9 Determine the overall rate of return on a $150,000 investment that returns 14% on the first
$50,000 and 35% on the remaining $100,000.

$150,000 14%
 $50,000 35%
$100,000

$7,000
$35,000
$42,000
28.00%

10 You just deposited $7,500 in an investment account and will deposit $5000 more four years from
now.

n 13 9
i 10%

P 7500
F 5000

F/P 3.4523 2.3579

25892.25 11789.5 $37,682

$25,892 $11,790 $37,682

11
Julie has a low credit rating, plus she was furloughed from her job 2 months ago. She has a new
job starting next week and expects a salary to start again in a couple of weeks. Since she is a little
short on money to pay her rent, she decided to borrow $100 from a loan company, which will
charge her only $10 interest if the $110 is paid no more than 1 week after the loan is made.

What is the nominal annual interest rate that she will pay on this loan?

100 10%
10
110 520%

12 The effective annual interest rate that she would pay

14104%

13 The Bureau of Indian Affairs provides various services to American Indians and Alaska Natives.
The Director of Indian Health Services is working with chief physicians at some of the 230 clinics
nationwide to select the better of two medical X-ray system alternatives to be located at
secondary-level

X-Ray
Del Medical Siemens
Systems 5%
First cost, $ -210000 -184000
 Annual
operating -191000 -195000
cost, $/year
Overhaul in
0 -26000
year 3, $
Overhaul in
-140000 0
year 4, $
Salvage
50000 10000
value, $
Expected life,
6 6
years

P/A 5%,6 5.0757

P/F 5%,3 0.8638
P/F 5%,4 0.8227
P/F 5%,6 0.7462

-210000 -184000
-969458.7 -989761.5
-115178 -22458.8
37310 7462
-$1,257,327 -$1,188,758

14 A-1 Mortgage makes loans with the interest charged on the loan principal rather than on the
unpaid balance. Consider a 4-year loan of $10,000 at 7% per year.

$10,000 $2,500
7% $700
4 $3,200

15 A/P 0.29523
$2,952

16 Five years ago, an alumnus of a university donated $50,000 to establish a permanent endowment
for scholarships. The first scholarships were awarded one year after the contribution. If the amount
awarded each year, that is, the interest on the endowment, is $4,500, the rate of return earned on
the fund is closest to

$50,000 $250,000
$4,500 $22,500
5
9%
17 An engineer analyzed four independent alternatives by the present worth method. On the basis of
her results, the alternative(s) she should select are

Alternative A B C D
Present -5000 -2000 -3000 -1000
Worth, $
 ALL negatives

18 The present worth of an alternative that provides infinite service is called its
Capitalized cost

19 A uniform series of payments begins in year four and ends in year 11. If you use the P/A factor
with n = 8, the P value you get will be located in year
3
20 FALSE
n the first $70,000

Additionally, it has a
nts; however,
by 3%. If the
n in the first year?

mic parts over the

y according to an
r 1 at an interest

he estimates from
ludes a full
o be a problem for
hould he choose
n Mexico. Because
ar, the bank will
er the WACC is
ntage of debt
 cipal) at an interest
repays the loan

ual worth analysis to

% on the first
re four years from

o. She has a new

Since she is a little
any, which will
oan is made.

d Alaska Natives.
of the 230 clinics
ocated at
er than on the

manent endowment
bution. If the amount
of return earned on

od. On the basis of

e the P/A factor