Homework Answers
Solution:
Effective interest rate per quarter = 3.2%
Effective interest rate per year = (1 + r/n)n - 1, where n is the number of times the interest is calculated in an year.; r is the interest rate (here n = 4)
Effective interest rate per year, i = (1 + 0.032/4)4 - 1
= 1.032386 - 1 = 0.0324 (approx)
Thus, effective interest rate per year is 3.24% approximately.
Finding present worth of product 1:
We are given that first cost, FC = $2500
Annual operating cost, OC = $3000
Number of years, N = 8 and salvage value, SV = $2000
Present worth, PW = - FC - OC*(P/A,i,N) + SV*(P/F,i,N)
PW of product 1 = -2500 - 3000*(P/A,3.24%, 8) + 2000*(P/F, 3.24%, 8))
(P/A,3.24%,8) = ((1+0.0324)8-1)/0.0324(1+0.0324)8 = 0.290437/0.041792 = 6.94958
(P/F,3.24%,8) = (1+0.0324)-8 = 0.77493
PW = - 2500 - 3000*6.94958 + 2000*0.77493
PW = -2500 - 20848.74 + 1549.86
PW = -$21,798.88
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