Engineering Economic Analysis

.....---------- .-

,.

226 RATEOF RETURNANALYSIS

7-35 You spend $1000 and in return receive two payments be willing to lend AI on the proposed repayment

of $1094.60--:<>neat the end of 3 years and the other plan?

at the end of 6 years. Calculate the resulting rate of 7-41 The following advertisement appeared in the Wall

return. Street Journalon Thursday, February 9, 1995.

7-36 A mine is for sale for $240,000. It is believed the mine

will produce a profit of $65,000 the first year, but the ''There's nothing quite like the Seville

profit will decline $5000 a year after that, eventually SmartLease. Seville SLS $0 down, $599

reaching zero, whereupon the mine will be worthless. a monthj36 months."

What rate of return would this $240,000 investment

produce for the purchaser of the mine?

First month's lease payment of $599 plus $625 re-

7-37 Fred, our cat, just won the local feline lottery to the fundable security deposit and a consumer down pay-

tune of 3000 cans of "9-Lives" cat food (assorted ment of $0 for a total of $1224 due at lease signing.

flavors). A local grocer offers to take the 3000 cans Monthly payment is based on a net capitalized cost of

and in return, supply Fred with 30 cans a month for $39,264 for total monthly payments of $21,564. Pay-

the next 10 years. What rate of return, in terms of ment examples based on a 1995 Seville SLS: $43,658

nominal annual rate, will Fred realize on this deal? MSRP including destination charge. Tax, license,'

(Compute to nearest 0.01 %.) title fees, and insurance extra. Option to purcha.se at

7-38 An apartment building in your neighborhood is for lease end for $27,854. Mileage charge of $0.15 per

sale for $140,000. The building has four units, which mile over 36,000 miles.

are rented at $500 per month each. The tenants have (a) Set up the cash flows.

long-term leases that expire in 5 years. Maintenance (b)Determine the interest rate (nominal and effec-

and other expenses for care and upkeep are $8000 tive) for the lease.

annually. A new university is being built in the vicin- 7-42 After 15 years of working for one employer, you trans-

ity and it is expected that the building could be sold fer to a new job. During these years your employer

for $160,000 after 5 years. contributed (that is, she diverted from your salary)

(q) What is the internal rate of return for this $1500 each year to an account for your retirement

investment? (a fringe benefit), and you contributed a matching

(b) Should this investment be accepted if the your amount each year. The whole fund was invested at

other options have a rate of return of 12%? 5% during that time and the valu of the account now

7-39 A new machine can be purchased today for $300,000. stands at $30,000. You are now faced with two alter-

The annual revenue from the machine is calculated natives. (1) You may leave both contributions in the

to be $67,000, and the equipment will last 10 years. fund until retirement in 35 years, during which you

Expect the maintenance and operating costs to be will get the future value of this amount at 5% inter-

$3000 a year and to increase $600 per. year. The est per year. (2) You may take out the total value of

salvage value of the machine will be $20,000. What "your" contributions, which is $15,000 (one-half of

is the rate of return for this machine? the total $30,000). You can do as you wish with the

7-40 AI Larson asked a bank to lend him money on money you take out, but the other half will be lost

January 1, based on the following repayment plan: the as far as you are concerned. In other words, you can

first payment would be $2 on February 28, with sub- give up $15,000 today for the sake of getting now

sequent monthly payments increasing by $2 a month the other $15,000. Otherwise, you must wait 35 years

iI

on an arithmetic gradient. (The March 31 payment more to get the accumulatedvalue of the entire fund.

would be $4; the April 30 payment would be $6, etc.) Which alternative is more attractive? Explain your I

The payments are to continue for 11 years, making a choice.

]

total of 132 payments. 7-43 A finance company is using the following "Money

(a) Compute the total amount of money AI will pay by Mail" offer. Calculate the yearly nominal IRR

the bank, based on the proposed repayment plan. received by the company if a customer chooses the

j

(b) If the bank charges interest at 12% nominal per loan of $2000 and accepts the credit insurance (Life

year, compounded monthly, how much would it and Dis.).

I