accounting

Course Instructor: Engr. Syed Kazim Ali Date: 24-12-2013

Assignment # 4

Solve the following numerical:

1. Apple Computer wants to have $2.1 billion available 5 years from now to finance

production of a handheld “electronic brain” that, based on your behavior, will learn how

to control nearly all the electronic devices in your home, such as the thermostat, coffee

pot, TV, and sprinkler system. The company expects to set aside uniformly increasing

amounts of money each year to meet its goal. If the amount set aside at the end of year 1

is $50 million, how much will the constant increase G have to be each year? Assume the

investment account grows at a rate of 18% per year.

2. Five years ago a consulting engineer purchased a building for company offices

constructed of bricks that were not properly fi red. As a result, some of the bricks were

deteriorated from their exposure to rain and snow. Because of the problem with the

bricks, the selling price of the building was 25% below the price of comparable,

structurally sound buildings. The engineer repaired the damaged bricks and arrested

further deterioration by applying an extra-strength solvent-based RTV elastomeric

sealant. This resulted in restoring the building to its fair market value. If the depressed

purchase price of the building was $600,000 and the cost of getting it repaired was

$25,000, what is the equivalent value of the “forced appreciation” today, if the interest

rate is 8% per year?

3. El Paso Water Utilities (EPWU) purchases surface water for treatment and distribution to

EPWU customers from El Paso County Water Improvement District during the irrigation

season. A new contract between the two entities resulted in a reduction in future price

increases in the cost of the water from 8% per year to 4% per year for the next 20 years.

If the cost of water next year (which is year 1 of the new contract) will be $260 per acre-

foot, what is the present worth of the savings (in $/acre-ft) to the utility between the old

and the new contracts? Let the interest rate equal 6% per year.


4. A person’s credit score is important in determining the interest rate on a home mortgage.

According to Consumer Credit Counseling Service, a homeowner with a $100,000

mortgage and a 520 credit score will pay $110,325 more in interest charges over the life

of a 30-year loan than a homeowner with the same mortgage and a credit score of 720.

How much higher would the interest rate per year have to be in order to account for this

much difference in interest charges, if the $100,000 loan is repaid in a single lump-sum

payment at the end of 30 years?

5. An engineer who was contemplating retirement had $1.6 million in his investment

portfolio. However, a severe recession caused his portfolio to decrease to only 55% of the

original amount, so he kept working. If he was able to invest his money at a rate of return

of 9% per year after the recession ended, how many years did it take for his account to

get back to the $1.6 million value?

6. Standby power for water utility pumps and other electrical devices is provided by diesel-

powered generators. As an alternative, the utility can use natural gas to power the

generators, but it will be a few years before the gas is available at remote sites. The utility

estimates that by switching to gas, it will save $22,000 per year, starting 3 years from

now. At an interest rate of 8% per year, determine the present worth in year 0 of the

projected savings that will occur in years 3 through 10.

7. Stadium Capital Financing Group is a Chicago company that conceived the so-called

sports mortgage wherein fans agree to pay a relatively large amount of money over a 10-

to 30-year period for the right to buy top seats for football games for up to the next 50

years. In return, season ticket prices stay locked in at current year prices, and the package

can be sold in the secondary market, while taking a tax write-off for donating to a school.

Assume a fan buys a sports mortgage at West Virginia University for $150,000 that is to

be paid over a 10-year period with the right to buy two season tickets for $300 each for

the next 30 years. The first payment is made now (i.e., beginning-of-year payment), and

an additional nine payments are to be made at the end of each year for the next 9 years.

Assume the fan also purchases the two season tickets (also beginning-of-year payments).


What is the total amount of the payment each year in years 0 through 9 ? Use an interest

rate of 10% per year.

8. For the cash flow diagram shown, determine the value of W that will render the

equivalent future worth in year 8 equal to $-500 at an interest rate of 10% per year.

9. A foursome of entrepreneurial electrical engineering graduates has a plan to start a new

solar power equipment company based on STE (solar thermal electric) technology. They

have recently approached a group of investors with their idea and asked for a loan of $5

million. Within the agreement, the loan is to be repaid by allocating 80% of the

company’s profits each year for the first 4 years to the investors. In the fifth year, the

company will pay the balance remaining on the loan in cash. The company’s business

plan indicates that they expect to make no profit for the first year, but in years 2 through

4, they anticipate profits to be $1.5 million per year. If the investors accept the deal at an

interest rate of 15% per year, and the business plan works to perfection, what is the

expected amount of the last loan payment (in year 5)?


10. Find the present worth in year 0 for the cash flows shown. Let i=10% per year.

Note:

The submission date of the assignment is 10th

January 2014, till 5 pm.

No assignment would be accepted after due date/time.

All the assignments must be hand written and submit in a file properly.

Everyone must submit the assignments to CR and CR will bring all the assignments to the

instructor.

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