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The government is considering paving a highway with a newly developed "wear-proof" material. Paving the highway the traditional way would cost $1 billion today, but the annual projected maintenance is $400 million in each of the next 10 years. Paving the highway using the newly developed wear-proof material would cost $4 billion today, but using the new wear-proof material means there are no maintenance costs for the next 10 years. Only consider the current cost and maintenance costs for the next 10 years when evaluating this project.

(a) Use the concept of present value to determine which method is best if the government can borrow at an interest rate of 4%.

(b) Is it worth it if the interest rate is 0%?

(c) Is it worth it if the interest rate is 8%?

(d) A politician says to you, " don't care what the interest rate is. The new wear-proof material is clearly a good investment: it more than pays for itself in only 8 years, and all the rest is money in the bank." What's wrong with this argument, and why does the interest rate matter?

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Kristelle Balando
Kristelle BalandoLv10
29 Sep 2019

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Related questions

a) A compnay signs a contract with a supplier to buy $2M worth of services now to be followed by 10 more. What is the present worth of the contract, assuming a MARR of 7%? Answer in millions of dallars


b) A 6% coupon rate bond has a face value of $1,000, pays interest semi-annually and matures in 10 years. If the current market rate is 8%, compounded semi-annually, what is the bond's value today?


c)A company wants to set up a perpetual care fund to cover future expenses for 75 years expenses for 75 years. The initial cost is $5,000 and routine maintenance will cost $200 per year. Every 5thyear, a major cleaning must be done, at an extra cost of $300. The bath is to be demolished after 75 years, with the last $500 covering the demolition costs. If the MARR is 8%, what is the capitalized cost of this project?


d) A B C D

Cost 75K 50K 15K 90K

Annual Benefit 18.8K 13.9K 4.5K 23.8K

Each alternative has a five-year useful life, no salvage value and the MARR is 10%. What is the best option, using Payback? Answer in years to 1 decimal place

P.S Please show me the full solution too Thank you.

Marginal cost

New York & Co. is considering a limited edition denim jacket. Because it is so special, the first few will sell for a very high price, the next for less, and so on. A curve on a graph is used to estimate the price of each jacket. It says that jacket n will be priced at $1500 / n. So the first jacket will be $1500, the second $750, and the third $500.

a. The manufacturing equipment costs $7,000, but the marginal cost of each jacket (labor and material) is only $8. How many jackets should the company produce?

b. What if a less automated system is selected so that the equipment costs $5000 and the marginal cost of a jacket is $10?

1. Cash Flow Diagrams and Compounded Interest: John decides to take out a loan for $10,000 for school at an annual interest rate of 10%. He agrees to make four equal payments, but will defer these payments for four years while in school. Starting at the end of the 5th year, he makes four equal annual payments (years 5, 6, 7 and 8). At the end of the 8th year, the loan is paid off.

(a) Create a table that depicts the cash flow diagram for this problem. It should cover years 0 to 8, and should show the balance, interest charges, each payment, how much of that payment went towards interest and how much towards the principal. The balance should be zero at the end of the 8th year. Use trial and error to find the required payment.

(b) Compute the annual payment using one of the built-in Excel functions discussed in class. Show that this gives the same answer as (a).

(c) Compute the present worth and future worth of this investment.

(d) Suppose interest is compounded twice per year instead of annually, but he still makes four annual payments starting at the end of the 5th year. What is the new annual payment?

2. Kate will purchase a house for $500,000 with a 10% down payment and $10,000 in closing costs. The closing costs are included in the loan. A 10-year loan is arranged at 5% interest compounded monthly.

(a) What is the monthly payment?

(b) By choosing to include the closing costs in the loan, how much money was paid in interest on the closing costs over the life of the loan.

(c) What is the effective interest rate for this loan? (Hint: you must take into account the monthly compounding AND the closing costs.)

(d) Suppose closing costs were paid at closing. How does this change the overall cost of the loan? How does this change the effective interest rate?



(NOTE: EVERYTHING SHOULD BE DONE IN EXCEL. OTHERWISE NO POINTS. INCLUDE THE FUNCTION USED AS WELL)

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