AFM273 Study Guide - Final Guide: Pearson Education, Net Present Value, Cash Flow
Get access
Related Documents
Related Questions
1.) An investment inmanufacturing equipment yields the following cash flows for 8years. At the end of the 8th year the equipment can be sold for$15,000. Assuming an interest rate of 14% (compounded annually),how much would you be willing to invest in this manufacturingequipment?
C=? | I=2000 | I=2000 | I=2000 | I=2000 | I=1000 | I=1000 | I=1000 | I=1000 | L=$15,000 |
0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
C:Cost, I: Income, L: SalvageValue
2.) Suppose that thenominal annual interest rate on an investment is 12%. Calculate theeffective interest rate if compounding occurs continuously.
3.)
Assume $50,000 is paidfor an asset in present time that yields annual cash flow of $6,000dollars per year in Years 1 through 10, as shown in the tablebelow. At the end of Year 10 the salvage value of the asset is$40,000. Calculate the rate of return on this investment. (In otherwords, find the value of the interest rate i that makesthe Net Present Value of the investment equal to zero - this isalso called the Internal Rate of Return.)
A hint here is thatyou will need to solve this problem either by trial and error orusing the IRR function in Excel.
C=-$50,000 | I=$6000 | I=$6000 | I=$6000 | ... | I=$6000 | L=$40,000 |
0 | 1 | 2 | 3 | ... | 10 |
Question
A company is considering replacing an existing machine (defender) with newer machine (challenger). If repaired, the defender can be used for another 5 years. After that, it cannot be used and must be replaced regardless of economic value. The current market value of the defender is $7,500 (i.e., it can be sold now for $7,500). The defender will have a salvage value after 5 years of $500. If kept, the defender will require an immediate $1,500 overhaul. The characteristics of the Defender are presented in the following table:
year | Operating Cost | Maintenance Cost | Market Value |
0 | - | 1500 | 7500 |
1 | 2000 | 200 | 4800 |
2 | 2700 | 300 | 3200 |
3 | 3800 | 500 | 2000 |
4 | 5000 | 1000 | 1200 |
5 | 6500 | 2000 | 500 |
The new machine (Challenger) has a service life of 7 years. It will cost $16,000 to purchase now. Its annual operation and maintenance cost combined is $1,600 per year in the first year. This annual operation and maintenance cost will increase by 42% per year for subsequent years. The market value of the challenger will decline by 22% every year over its service life. Use MARR equals 12%. a] Find the economic lives of: [i] the defender and [ii] the challenger. b] Determine when the defender should be replaced. Clearly show your calculations steps.