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1.
Derive the six compound interest equations.
2. The cost estimate of a project is $3.5 million. Annual costs for maintaining and operating the
facility are forecast as $250,000 per year. After 8 years, it is anticipated the facility will be sold
for $2.0 million. If the owner requires a 15% return on the investment, what net annual income
must be received to recover the capital investment of the project?
3. What is the rate of return on an investment of $10,000 if the company expects to receive $2,000
each year for the next ten years?
4.
Your company is considering the option of building or leasing a new office facility. The are two
options are: A, involves constructing an office complex with other space for rent, and B, involves
constructing an office to house only your operations. Income and expenses summarized for
each of the options:
A
B
Initial Cost
1,000,000
500,000
Annual Maintenance
50,000
30,000
Income
10,000
Salvage Value
100,000
30,000
Life of Facility
MARR
10 years
10 years
18%
18%
By comparing present worth, which of these two options is more desirable?
5.
The Port Authorities of New York and New Jersey estimate that the annual net revenues for the
George Washington Bridge (GWB) will total $13M by the end of this year (t=1). At the end of
three years (t=4) you expect a toll increase of 10%. Revenues will then remain constant for the
next 6 years (year 4 through 10). Because the GWB is such an important artery for the New York
City area, the Port Authorities would like to reinvest this revenue in a comprehensive
maintenance and repair program. However, it will take two years (t=3) before plans and
specifications can be developed and contracts awarded. What is the annual amount the Port
Authorities should expect to spend for a five-year contract (uniform cash flows starting at the
end of years 3 through 8)? The Port Authorities use a MARR of 7% for all public works projects.
6. You buy a condo for $250,000. You put 20% down. Take a mortgage for $200,000 at 5.0% fixed
for 30 years.
a. What are your monthly payments?
b. After five years, what is the balance due on the Mortgage?
c.
You are thinking it over. You can rent an apartment for $1,500 per month. Based on
your mortgage monthly payment, your property taxes at 3% the value of the condo and
Income tax savings of 41% of your monthly payment, compare the annual cash flows for
renting or buying.

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