Homework Problems Chapter 2 Chapter 2_ How time and Interest affect Money Instru

Question

Homework Problems Chapter 2

Chapter 2_ How time and Interest affect Money

Instructions: Solve the following problems (1 and 2). Remember to show all your assumptions and calculations. You will not receive any credit for submitting only the answers. For the resolution you can use formulas reviewed in class or the interest Factor Tables.

1) The cost of updating an outdated production process is expected to be $81,000 four years from now. The equivalent present worth of the update at 6% per year interest is equal to:

a)         $51,230

b)         $55,160

c)         $60,320

d)         $64,160

(Blank and Tarquin, 8th edition- Problem 2.68)

2) Labco Scientific sells high-purity chemicals to universities, research laboratories and pharmaceutical companies. The company wants to invest in new equipment that will reduce shipping costs by better matching the size of the completed products with the size of the shipping container. The new equipment is estimated to cost $450,000 to purchase and install now. How much must Labco save each year for 3 years in order to justify the investment at an interest rate of 10% per year?

(Blank and Tarquin, 8th edition- Problem 2.13

Explanation / Answer

Question 1

The cost of updating an outdated production process 4 years from now (Future worth) = $81,000

Time = 4 years

Interest rate = 6%

Calculate the equivalent present worth -

P = F(P/F, i, n)

P = $81,000(P/F, 6%, 4)

P = $81,000 * 0.7921 = $64,160

The equivalent present worth is equal to $64,160

Hence, the correct answer is the option (d).

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