MODULE PROBLEMS COMPOUND INTEREST 1. A nominal annual rate of interest of 14%, compounded continuously, has an effective annual interest rate of: ANNUITY 2. Find the value after 20 years, in pesos, of an annuity of P20,000 pesos payable annually for 8 years with the first payment at the end of 2 years if money is worth 5%. PERPETUITY 3. An engineering school has just completed a new engineering complex worth $50 million dollars. A campaign targeting alumni, is planned to raise funds for the future maintenance costs, estimated at $2 million per year. Any unforeseen above $2 million per year would be obtained by raising tuition. Assuming that the school can create a trust fund that earns 8% interest annually, how much has to be raised now to cover the perpetual string of $2 million annual costs? [Hint: P = A/i] DEPRECIATION 4. A truck for hauling coal has an estimated net cost of $50,000 and is expected to give service for 250,000 miles, resulting in a zero salvage value. Compute the allowed depreciation amount for the truck usage of 30,000 miles. 5. Given: Original cost = P5000 Salvage value = P500 Life n=5 Compute the depreciation of the equipment on the 3rd year only using MARCS Method. 6. A machine is to be purchased for P155,000; it has an estimated life of 8 years and a salvage value of P6,000. A sinking fund is to be established so money will be available to purchase a replacement when the first machine wears out at the end of 8 years. An amount of P13,030 is to be deposited at the end of each year during the lifetime of the first machine into the sinking fund. The interest rate (%) this fund must earn to produce sufficient fund to purchase the replacement machine at the end of eight years is closest to: ANNUAL COST / CAPITALIZED COST / COMPARISON OF ALTERNATIVES 7. A bridge just constructed costs $1,000,000. It is estimated that the same bridge should be renovated every 50 years at a cost of $800,000. Annual repairs and maintenance are estimated to be $30,000 per year. If interest rate is 5%, determine the capitalized cost of the bridge. [HINT: Note that the effective interest rate for a 50-year cycle is (1.05)5° - 1 = 10.4674] 8. Jones Construction Company needs a temporary office building at a construction site. Two types of heating schemes are considered. The first method is to use “bottled gas” for floor type furnaces. The second method is to install electric radiant panels in the walls and ceiling. This temporary building will be used for 5 years before being dismantled Bottled Gas Electric Panels Investment Cost $6000 $8500 Service Life 5 years 5 years Salvage Value 0 $1000 Annual O&M cost $2000 $1000 Estimated extra expenses for $220 income taxes Compare the alternatives based on the present value worth criterion at i = 10%. Which is the best option? [Hint: Please see table below. INTEREST RATE FACTORS (10% Single Payment Equal Payment Series Gracient Series Compound Present Compound Sinking Present Capital Gradient Gradient Amount Worth Amount Fund Worth Recovery Uniform Present Factor Factor Factor Factor Factor Factor Series Worth N (FPN) ~~ (PIF,N) —(FIAJN) = (A/FN)— (PYAIN) = (APN) = (GAN) (PIG N) 5 1.6105 0.6209 6.1051 0.1638 3.7908__—0.2638_—— 1.8101 6.8618DEPLETION 9. An investor pays P1,100,000 for a mine which will yield a net income of x pesos at the end of each year for 10 years and then will become valueless. He accumulates a replacement fund to recover his capital by annual investments at 4.5%. Find x if he desires 11.5% return on his investment. BOND 10. A man wants to make 14% nominal interest compounded semi-annually on a bond investment. How much should the man be willing to pay now for a 12%, P40,000 bond that will mature in 10 years and pays interest semi- annually? BREAKEVEN ANALYSIS 11. A local company assembling stereo radio cassette produces 300 units per month at a cost of P800 per unit. Each stereo radio cassette sells for P1,200. If the firm makes a profit of 10% on its 10,000 shares with a per value of P200 per share and the total cost per month is P20,000. Which of the following gives the break-even point? PRESENT ECONOMY 12. An equipment installation job of Dakay Construction in the completion stage can be completed in 40 days of 8 hours per day of work with 40 men working. With contract expiring in 30 days, the contractor decided to add 10 men on the job, overtime not being permitted. If the liquidated damages is P20,000 per day of delay and the men are paid P580 per day, compute the total cost if he will add 10 more men to finish the job. RECOVERY PERIOD Fixed Capital + Working Capital Se eee Net Annual Profit 13. A fixed capital investment of P10,000,000 is required for a proposed manufacturing plant and an estimated working capital of P2,000,000. Annual depreciation is estimated to be 10% of the fixed capital investment. Which of the following gives the recovery period in years if the annual profit is P2.5M? RATE OF RETURN eee Profit are ONTO Fixed Capital + Working Capital Net income Rate of return = ——__~_— Capital Fixed Capital P. t Period = @€$-AN—AaW_____—________ aes Annual Profit + Annual Depreciation 14. A fixed capital investment of P10,000,000 is required for a proposed manufacturing plant and an estimated working capital of P2,000,000. Annual depreciation is estimated to be 10% of the fixed capital investment. If the annual profit is P2500000. What is the rate of return? BENEFIT COST RATIO . . Present Worth of Benefits Benefit Cost Ratio (B/C Ratio) = "Present Worth of Costs” 15. A small entrepreneur invested a capital of P80,000 for a buy and sell business. He estimated to have a gross income of P25,000 annually and an operating cost of P6000 annually. It is assuming the business to have a life of 10 years. If the rate of interest is 12%. Compute the benefit cost ratio.PRACTICE PROBLEMS 1. An engineer promised to pay P36,000 at the end of 90 days. He was offered a 10% discount if he pays in 30 days. Find the rate of interest. ANS. 66.67% 2. If money is invested at a nominal rate of interest of 8% for a period of 4 yrs., what is the value of the compound amount factor if it is compounded continuously? ANS. 1.377 3. Compute the interest for an amount of P200,000 for a period of 8 yrs. if it was made at 16% compounded continuously. ANS. 519,328 4. With interest rate of 9% compounded continuously, what is the present worth of perpetuity of P8,000 payable monthly? ANS. P1,062,699 5. A contractor has 50 men of the same capacity at work on a job. They can complete the job in 30 days, the working day being 8 hours but the contract expires in 20 days. He decided to put 20 additional men. If all the men get P3 per day for a full or part day and the liquidated damages are P100 for every full or part day he requires over his contract, how many days could he finish the job? ANS. 22 days 6. The cost of equipment is P500,000 and the cost of installation, labor, taxes, and miscellaneous expenses is P30000. If the salvage value is 10% of the cost of equipment at the end of its life of 5 years, compute the book value at the end of the 3rd year using MARCS Method. ANS. 152,640 1. A broadcasting corporation was formed duly approved by the Securities and Exchange office has a working capital of P20 M and a fixed capital of P80 M. Annual depreciation amounts to Pd M and expected annual profit is P16 M. Determine the recovery period in years. ANS. 6.25 8. A businessman wishes to earn 7% on his capital after payment of taxes. If the income from an available investment will be taxed at an average rate of 42% what minimum rate of return before payment of taxes must the investment offer to be justified? ANS. 12.1% 9. An equipment cost P480,000 and has a salvage value of 10% of its cost at the end of its life of 36,000 operating hours in a period of 5 yrs. In the first year of service, it was used for 12,000 hours. If at the end of the 2"4 year, it was used for 15,000 hours, find the depreciation at the end of the 2nd year. ANS. 180,000 10. A construction firm is considering establishing an engineering computing center. This center will be equipped with three engineering workstations that would cost $50,000 each, and each has a service life of 5 years. The expected salvage value of each workstation is $5000. The annual operating and maintenance cost would be $12,000 for each workstation. Ata MARR of 20%, determine the equivalent annual cost for operating the engineering center. ANS. $84,141 11. A telephone company purchased a microwave equipment for P6 million with a salvage value of P600,000 over a period of 5 years and pay a lump sum of P400,000 for the maintenance cost. Minimum attractive rate of return is 16% annually. Compute the annual cost of investment of purchasing the microwave equipment. ANS. 1,870,000