Finance Problems

finance_problems.docx

Finance Problems

Note: The following problems covers Chapter 7, 8, and 9. The attached notes covers

chapter 7, and 8 only. Textbook: Niall M. Fraser and Elizabeth M. Jewkes, Engineering

Economics: Financial Decision Making for Engineers, Fifth Edition

Instructions: Show as much of your work as possible.

Problem 1. A piece of machinery costs $7,500 and has no salvage value after it is installed. The

manufacturer’s warranty will pay the first year’s maintenance and repair costs. In the second

year, maintenance costs will be $900, and they will increase by $900 in subsequent years. Also,

operating expenses for the machinery will be $500 in the first year and will increase by $400 in

the following years. If interest rate is 8%, find economic life of the machinery and the associated

equivalent annual cost.

Problem 2. A construction company subject to 27% corporate tax rate purchased a new

bulldozer for $220,000. The CCA rate associated with this equipment is 30%. The expected

annual revenue is $324,400, and operating costs are $96,000 per year. Find the amount paid in

taxes in the first 2 years as well as the present worth of the overall after-tax profit (net income)

earned under MARR = 5%.

Problem 3. A 15-year $50,000 bond with a dividend of 10% per year, payable semi-annually, is

currently for sale. If the expected rate of return of the purchaser is 8% per year, computed semiannually,

and if the inflation rate is expected to be 2.5% each 6-month period, what is the bond

worth now?

(a) without an adjustment for inflation;

(b) with an adjustment for inflation

Problem 4. A self-employed engineer is on contract with Dow Chemical, currently working in a

relatively high-inflation country. She wishes to calculate a project’s present worth with estimated

costs of $35,000 now and $7,000 per year for 5 years beginning one year from now with

increases of 12% per year thereafter for the next 8 years. Use a real interest rate of 15% per year

to make the calculations:

(a) without an adjustment for inflation