Problems:
1. What is the uninflated present worth of $2000 in 2 years if the average inflation rate is
6% and i is 10%?
2. It costs $75 per year to maintain a cemetery plot. If the interest rate is 6.0%, how much
must be set aside to pay for maintenance on each plot without touching the principal?
3. It costs $1000 for hand tools and $1.50 labor per unit to manufacture a product.
Another alternative is to manufacture the product by an automated process that costs
$15,000, with a $0.50 per-unit cost. With an annual production rate of 5000 units, how
long will it take to reach the break-even point?
4. A loan of $10,000 is made today at an interest rate of 15%, and the first payment of
$3000 is made 4 years later. The amount that is still due on the loan after the first
payment is most nearly
5. A machine is purchased for $1000 and has a useful life of 12 years. At the end of 12
years, the salvage value is $130. By straight-line depreciation, what is the book value of
the machine at the end of 8 years?
6. The maintenance cost for an investment is $2000 per year for the first 10 years and
$1000 per year thereafter. The investment has infinite life. With a 10% interest rate, the
present worth of the annual disbursement is most nearly
7. If funds equal to the present worth of the cost of purchasing and using machine A over
20 years were invested at 10% per annum, the value of the investment at the end of 20
years would be most nearly.
8. How much money would have to be placed in a sinking fund each year to replace
machine B at the end of 25 years if the fund yields 10% annual compound interest and if
the first cost of the machine is assumed to increase at a 6% annual compound rate?
(Assume the salvage value does not change.)
9. How many kilometers must a car be driven per year for leasing and buying to cost the
same? Use 10% interest and year-end cost. Leasing: $0.15 per kilometer Buying: $5000
purchase cost, 3-year life, salvage $1200, $0.04 per kilometer for gas and oil, $500 per
year for insurance EUAC (leasing)
10. Book Value The assumed value of the asset after j years. The book value (BV j ) is the
initial cost minus the sum of the depreciations out to the j th year. Example (FEIM): What
is the book value of the asset in the previous example after 3 years using straight-line
depreciation? Using ACRS depreciation?
11. An asset is purchased that costs $9000. It has a 10-year life and a salvage value of $200.
Find the straight-line depreciation and ACRS depreciation for 3 years
12. Benefit Analysis Project is considered acceptable if B C 0 or B/C 1. Example (FEIM): The
initial cost of a proposed project is $40M, the capitalized perpetual annual cost is $12M,
the capitalized benefit is $49M, and the residual value is $0. Should the project be
undertaken?
13. How much should be put in an investment with a 10% effective annual rate today to
have $10,000 in five years?
14. What factor will convert a gradient cash flow ending at t= 8 to a futurevalue? The
effective interest rate is 10%.
