Question

4(a) For the use of space, a warehouse owner has been offered the following contract: Year 1: $2,000 at the beginning of year 1 plus $2,000 at the end of year 1 Years 2 to 6: $2,000 per year (end-of-year payments) for years 2 to 6. Years 7 to 15: $3,000 for year 7 and for the following years, an increase of $1000/year (end of year payments) (i.e. year 7 payment will be $3,000, for year 8 the payment will be $4,000, etc.). If the warehouse owner can earn 6% per year on the money: (i) What is the present worth of payments to be received for years 1 to 6? (ii) What is the present worth of payments to be received for years 7 to 15? 4(b) A company is conducting a field study of delivering parcels with automated vehicles for the next 12 months. In the first month, the expenses are estimated to be $300,000. As the study progresses, the expenses are expected to increase by 5 percent each month. The company plans to pay for the experiment with income to be received from the developer of the automated vehicles, which is received in six monthly installments, starting a month after the fieldwork completion date. Determine the amount of monthly installment so that the total of the six installments will cover all expenses incurred during the field study and also will provide 10% additional money as profit. Annual nominal interest rate is 12 percent, compounded monthly.

Answer 1