The makers of Lifestraw, a filter designed to allow the user to drink water safely from a stream, have a financial decision to make. Implementing an au- tomated assembly process will cost $5000 per year for the next 6 years. The interest rate is 15% per year and the inflation rate is 5% per year. (a) What is the amount they can spend now in lieu of these future costs? Solve using factors and a spread- sheet. (b) If only $12,000 is available now, what is the maximum equivalent amount that can be spent for each of the 6 years? How does this compare with the $5000 estimate?

The makers of Lifestraw, a filter designed to allow the user to drink water safely from a stream, have a financial decision to make. Implementing an au- tomated assembly process will cost $5000 per year for the next 6 years. The interest rate is 15% per year and the inflation rate is 5% per year. (a) What is the amount they can spend now in lieu of these future costs? Solve using factors and a spread- sheet. (b) If only $12,000 is available now, what is the maximum equivalent amount that can be spent for each of the 6 years? How does this compare with the $5000 estimate?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Suppose you have opened an MRI clinic and you are able to purchase a new MRI machine for $1 million. You plan to see 2000 patients per year, and you have determined that your MRI machine at that rate of use should last 10 years. Given a 5% rate of interest, use an annuity calculation to estimate the annual cost of an MRI per patient. Suppose that you could use the machine for 3 years and then sell it for $500,000. What would your annual cost per patient be in that case? Suppose you know that inflation is going to be 10% per year and that you will use the machine for 3 years and then be able to sell it for $800,000 (note that the $800,000 is measured in units of dollars 3 years from now). What then is your annual cost per patient and is your answer in dollars today or dollars three years from now?
Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of $90000 and will generate net cash inflows of $21000 per year for 11 years. What is the internal rate of return? Should it be accepted? Why or why not?
Skyline Industries will need $2.2 million in 4.5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 3.6 percent interest, compounded annually. How much money must the company deposit to fully fund the equipment purchase? Can the calculator and excel solution be provided?
A new computer system will require an initial outlay of $17,500, but it will increase the firm’s cash flows by $3,500 a year for each of the next 8 years. How high can the discount rate be before you would reject the project?
Nemo Haulers is considering whether to purchase a new mini tractor for moving furniture within its warehouse. Nemo calculates that its current mini tractor generates $3100 of cash flow per year. A new mini tractor would cost $3000 and would provide cash flow of $4000 per year for five years. What is the equivalent annual cash flow for the new mini tractor (round to the nearest dollar), and should Nemo purchase the new tractor? Assume the cost of capital for Nemo is 10 per cent. $4000, purchase the new tractor $3000, do not purchase the new tractor $3209, purchase the new tractor $12 163, purchase the new tractor
It is estimated that a specific piece of equipment can save $20,000 per year (as the money goes into your pocket) in maintenance. This equipment has an expected life of five years and no market value (meaning you cannot sell it for extra income) at the end of the fifth year. If the interest rate for this purchase is 8% per year, how much could be justified (money out of your pocket) now to purchase this piece of equipment? Please draw the cash flow diagram and use Excel macro to find the answer. Write down the known values in the blank area below.
A new computer system will require an initial outlay of $19, 250, but it will increase the firm's cash flows by $4, 100 a year for each of the next 7 years. Calculate the NPV and decide if the system is worth installing if the required rate of return is 10%.
Chevrolet Corporation is considering replacing an obsolete machine with a new machine. The new machine would cost P250,000 and would have a ten-year useful life. The new machine would cost P12,000 per year to operate and maintain, but would save P55,000 per year in labor and other costs. The old machine can be sold now for P10,000. The simple rate of return on the new machine is closest to: A. 17.9% B. 7.5% C. 22.0% D. 7.2%
PLEASE USE EXCEL, SHOW FORMULAS, AND INCLUDESPiderplot HiTek Manufacturing is purchasing a large tract of land for a new facility. Its loan is for $3 million, but this may vary by plus or minus 10%. The loan will be paid off in 15 years using annual payments, but this could be as low as 10 years or as high as 30 years. If the interest rate is 10% (between 8% and 12%), How much is each payment? Construct a spiderplot. Which change would be most significant?
Arrowroot Ltd is considering whether to invest in a machine that produces soft drink bottles now or in one year’s time. The machine costs $2 million and the bottles will be ready for sale immediately after the machine is purchased. The machine is expected to produce 1 million bottles per year forever. Currently, the bottle can be sold for $0.4 each but next year the price will change. If there is a high demand, the price for one bottle will be $0.6. If the demand is normal, the price will be $0.3 per bottle. If the demand is low, the price will be $0.1 per bottle. The probability of high demand is 0.3, the probability of normal demand is 0.2 and the probability of low demand is 0.5. The price will remain at this new level forever. Assume no taxes and the company’s cost of capital is 10 percent per annum. Should the company invest in the machine now or delay it by one year? Show all calculations. What is the value of the option to delay?
You are considering buying a 10-year-old machine for $280, or a new fuel-efficient machine for$600. The new machine will save you $5 per month on your fuel bill, and you will be able to sellit for $300 in 10 years. The used machine will have no resale value at that time. Assume theinterest rate is 3% per year. According to the information given, which machine will you buy?

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