GE 359

An investor seeking to borrow $200,000 to start a new venture has received two bank offers as follows. Bank A will provide the money at an interest rate of 14% per year compounded con nuously. Bank B on the other hand, offers the loan on the stipulation that it be repaid in equal monthly installments of $5,000 per month over a 5 year period. Carefully analyze each offer and advice the investor which offer to accept and the reasons for doing so.

Ques on # 2:

A company plans to develop an intelligent so ware system over the next 10 years to facilitate its project selection process. There are three alternative proposals (A,B & C) for the system with their respective cash flows as listed below. If interest rate is 10% /year which option should be selected?

Alternative Cost Component Cost

A Development $100,000 now, $150,000 in year1

Programming $45,000 now, $35,000 in year1

Operations $50,000 in years 1 thru 10

Support $30,000in years 1 thru 10

B Development $10,000 now

Programming $45,000 now, $30,000 in year 1

Operations $80,000 in years 1 thru 10

Support $40,000 in years 1 thru 10

C Operations $150,000 in years 1 thru 10

Ques on # 3

An environmental engineer is considering 3 methods for disposing of a non-hazardous chemical sludge. The methods are Land Application, Fluidized–Bed Incineration and Private Disposal Contract. The

estimated cash flows associated with each option are listed in the table below. Using the Annual worth method and a 12% per year interest rate, determine the least cost op on.

Land Application Incinerator Contract

1st Cost $110,000 $800,000 $0

Annual Cost $95,000 $60,000 $190,000

Salvage Value $15,000 $250,000 $0

Life Span 3yrs 6yrs 2yrs

Ques on # 4

Three sites for mineral extraction have associated cash flows as shown below. Interest rate is limited to 10% and the extrac on period is limited to 5years. Using the conventional Benefit/ Cost ratio method, determine which site offers the most profitable option.

Site A Site B Site C

Initial Cost ($m) 50 90 200

Annual Cost ($m/year) 3 4 6

Annual Benefits 20 22 61

Annual Disbenefits 0.5 1.5 2.1

Ques on # 5

An Engineer approaching retirement thinks that the market interest rate will decrease before then and therefore plans to invest in corporate bonds. Specifically, the plan is to buy a $50,000 bond that matures 20years from now and has a coupon rate of 12% payable quarterly. For how much should the engineer be able to sell the bond for, 5 years from now. The market interest rate is 8% per year compounded quarterly.

If during the 5 years before selling the bond, the engineer invests the quarterly dividend payments he receives in a venture yielding a 12% interest per year compounded quarterly, how much would the engineer have altogether, after selling the bond?

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