Question

of the payment, and (b) the amount of interest? what was the amount of the original loan? 1.19 A medium-size consulting engineering firm is try-1.28 A start-up company with multiple nanotechnology ing to decide whether it should remodel its office now or wait and do it one year from now. If the firm does it now, the cost will be $38,000. The interest rate is 10% per year. a. What would the cost have to be one year from products established a goal of making a rate of re turn of at least 25% per year on its investments for the first five years. If the company acquired $400 million in venture capital, how much did it have to earn in the first year? now to render the decision indifferent? 1.29 How many years does it take for an investment of 1.20 At an interest rte of 8% per year, S50.000 one 1.30 The MARR used for a project's acceptance or 1.21 Bennett Industries invested $10,000,000 in a co 1.31 An engineer told you that a project is economi- b. If the cost one year from now is $41,600 $280,000 to accumulate to at least $425,000 at 15% per year interest? should the firm remodel now or later? year hence is equivalent to how much now? rejection is set relative to what cost? venture one year ago. One year later, Bennett real- ized a profit of S1,450,000. What annual rate of return does this represent? cally acceptable when it's rate of return equals or exceeds the corporation's cost of capital. Is this correct? Explain your answer 1.22 Trucking giant Yellow Corp agreed to purchase ri val Roadway for $966 million in order to reduce Simple and Compound Interest so-called back-office costs, that is, payroll and in- 1.32 Valley Rendering, Inc. is considering the purchase surance, by $45 million per year. If the savings are realized as planned, what is the rate of return on the investment? of a new flotation system for recovering more grease. The company can finance a $150,000 sy tem at 5% per year compound interest or 5.5% per year simple interest. a. If the total amount owed is due in a single pay 1.23 If Ford Motor Company's profits increased from 22 cents per share to 29 cents per share in the April- June quarter compared to the previous quarter, what ment at the end of 3 years, which interest rate was the rate of increase in profits for that quarter? should the company select? b. How much is the difference in interest between 1.24 A broadband service company borrowed $2 mil lion for new equipment and repaid the principal of the loan plus $275,000 interest after I year. What the two schemes? 1.33 Valtro Electronic Systems, Inc. set aside a lump was the interest rate on the loan? 1.25 A design-build engineering firm completed a pipeline project wherein the company realized a profit of $2.3 million in one year. If the amount of money the company invested was $6 million, what sum investment four years ago in order to finance a plant expansion now. The money returned 10% per year simple interest. How much did the com- pany set aside if the investment is now worth $850,000? was the rate of return on the investment? 1.34 At 10% per year simple interest, how long will it 1.26 A sum of $2 million now is equivalent to $2.36 take for a deposit of $1000 now to accumulate to one year from now at what interest rate? $ 100,000? 1.27 Last year, Lee Industries decided to restructure1.35 Fill in the missing values A through D in the table for a loan of $10,000, if the interest rate is com- some of its debt by paying off one of its short-term loans. To do so, the company borrowed the money rate of 10% per year. If pounded at 10% per year.

Answer 1

Question 1.19

(a)

Cost of remodelling the office now = $38,000

Interest rate (i) = 10% per year

Time period (n) = 1 year

Calculate the cost have to be one year from now -

Cost = Cost of remodelling the office now * (1+i)ⁿ

Cost = $38,000 * (1+0.10)¹

Cost = $38,000 * (1.10)¹

Cost = $38,000 * 1.10 = $41,800

Thus,

The cost would be have to be $41,800 one year from now to render the decision indifferent.

(b)

Cost of remodelling the office one year from now = $41,600

Interest rate (i) = 10%

Time period (n) = 1 year

Calculate the present value -

PV = Cost of remodelling the office one year from now/(1+i)ⁿ

PV = $41,600/(1+0.10)¹

PV = $41,600/(1.10)¹

PV = $41,600/1.10

PV = $37,818.18

The present value of cost to be incurred one year later is $37,818.18

If firm remodel now, it will cost it $38,000.

It would be cheaper for firm to remodel the office one year later.

So,

The firm should remodel later.