Gradient

1. In the accompanying diagram. What is the value of K on the left hand cash flow diagram that is equivalent to the right hand cash flow diagram? Let= 12%/yr.

PoL=PoR A= [ ] = 100[ + [

A= (1.2029) = 367.0899=877.0704 A= A= 1034.30

2. How much would you have to deposit today to have $2088 in 4 years if you can get a 12% interest rate compounded annually? DIAGRAM: $2 088 0 1 2 3 n=4 P?
Given: F4= $2088 i=12% P=? Solution: P = F4(P/F,i,n) = 2 088(P|F,12%,4) = 2 088(0.6355) = $1326.924

3. A young couple has decided to make advance plans for financing their 3 year old daughters college education. Money can be deposited at 8% per year, compounded annually. What annual deposit on each birthday, from the 4th to the 17th (inclusive), must be made to provide $7,088 on each birthday from the 18th to the 21st (inclusive)? DIAGRAM:

$7 088 17 18 A? 21 yrs

4 0

GIVEN: WITHDRAWALS18-21 = $7 088 i = 8%/YR, CPD YEARLY FIND A4-17: P17 = A(F/A,i,n) = A(P/A,i,n) = A(F/A,8%,14) = 7 088(P/A,8%,4) = A(24.2149) = 7 088(3.3121) A = $969.4925

Nominal and Effective Interest Rates

1. The nominal rate is 1% per month and compounding occurs monthly, what is the effective rate for 21 months. i=
21

1 = 0.1049 = 10.49 %

2. What is the future equivalent of $10,000 per year that flows continuously for 8.5 years if the nominal interest is 10% compounded continuously? F = A(F/A,5%, 17) = 133,964.5 F= A F=135143.5744

Amortization
1. A $188 per year can be withdrawn for 5yrs , starting 3yrs from now/ what lump sum amount must be deposited with an interest rate of 15% per year? Construct an amortization schedule/

Po=188 [

=$476.53

Period

Outstanding Principal beginning of period

Interest due at end of period (15%) 71.48 82.21 94.54 93.72 92.18 91.60 90.34 __________ 616.07

Payment

Principal repaid at end of period

1 2 3 4 5 6 7

476.53 548.04 630.25 624.79 618.51 610.69 602.29

0 0 100 100 100 100 100 ___________ 500

0 0 5.46 6.28 7.82 8.40 9.66 ________ 37.62

Break-Even
1. A city considering anew $50088 snowplow. The new machine will operate at a savings of $600 per day compared to the equipment presently being used. Assume the minimum attractive rate of return (interest rate) is 12% and the machines life is 10 years with zero resale value at that time. How many days per year must the machine be used to make the investment economical? 50088 (A/P, 12%, 10) =600x X= =14.8 day/year

2. The Asian Transmission Co. makes and sells certain automotive parts. Present sales volume is 500000 units a year at a selling price of fifty centavos (0.50) per unit. Fixed expenses total 80088 per year. Total sales= 500000(0.50) 250000 Expenses= 80088 Total profit= 250000-80088 Total profit= 169912

X=no. of units 80088=0.50x X=160176 units 80088=500000y Y=0.16 per unit

Depreciation

1. A manufacturing company buys an electric motor of 50,000. It estimates that the motors useful life is 20 years and that it can be sold for 5,000. Using straight line depreciation, what is the annual depreciation charge? D= 50, 088 5, 088/20 = 2250 2. An engineer bought a machine. It was invoiced from Japan, CIF Manila at P250, 088. Brokerage, bank, arrastre fees, customs duties, permits, etc. total P120, 088. At the end of 10 years, he expects to sell it for P50, 088. Find the depreciation value. Original cost = 250, 088 + 120, 088 = P370, 176 d = (370, 176 50, 088)/10 = P32008.8

3. On Jan 1, 2011 Company A purchased a vehicle costing $20,088. It is expected to have a value of $5,088 at the end of 4 years. Calculate depreciation expense on the vehicle for the year ended Dec 31, 2011. We will first find the depreciable amount which is $15,000 ($20,088cost minus $5,088 residual value). Then we divide the depreciable amount by the 4 which is the useful life of the vehicle. This will give a figure of $3,750 for the yearly depreciation. Or by using the formula Depreciation = ($20,088 $5,088) / 4 = $3,750 4. On April 1, 2011, Company A purchased equipment at the cost of $140, 088. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the salvage value (residual value) will be $20, 088. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2011, 2012 and 2013 using straight line depreciation method. Depreciation for 2011 = ($140, 088 - $20, 088) x 1/5 x 9/12 = $18,000 Depreciation for 2012 = ($140, 621 - $20, 621) x 1/5 x 12/12 = $24,000 Depreciation for 2013 = ($140, 621 - $20, 621) x 1/5 x 12/12 = $24,000

5. Occasionally, we may need to charge depreciation for a period less than full financial year. For example, if the vehicle was purchased on July 1, the depreciation should be charged only for a portion of the financial year. In such situation we multiply the full year straight line depreciation formula by the fraction the asset has been used in the current accounting period. This is illustrated below. Depreciation Expense=(6mos/12mos)[($20, 088$5, 088)/4] = $11250 6. You buy a new computer for your business costing approximately $5, 621. You expect a salvage value of $221 selling parts when you dispose of it. Accounting rules allow a maximum useful life of five years for computers. In the past, your business has upgraded its hardware every three years, so you think this is a more realistic estimate of useful life, since you are apt to dispose of the computer at that time. Find the depreciation value. ($5, 088 - $221)/3 = $1,622 7. On Jan 1, 2011 Company A purchased a vehicle costing $20, 088. It is expected to have a value of $5, 088 at the end of 4 years. Calculate depreciation expense on the vehicle for the year ended Dec 31, 2011. ($20, 088-$5, 088)/4 = $3, 750 x 1 year = $3, 750 8. A piece of equipment with a useful life of 8 years may cost $14, 621. At the end of 8 years, the asset has a salvage value of $2, 621. Determine the depreciation value. ($14, 088 - $2, 088)/8 = $1, 500 9. Suppose that you purchase a car for $1088. The scrap value of the car after its useful life is $288, and the useful life of the car is 4 years. Find the depreciation value. ($1, 088 - $288)/4 = $200 10. An asset was purchased for $60, 088 and originally estimated to have a useful life of 10 years with a residual value of $3, 088. After two years of straight line depreciation, it was determined that the remaining useful life of the asset was only 2 years with a residual value of $2, 088. Calculate this year's depreciation using the straight line method. ($60, 088 - $3, 088)/10 = $5, 700 $5, 700(2) = $11, 400 11. Use the straight line depreciation model to find annual depreciation of your company's lime green and tangerine TIG welders to loose there value as the welders you employ are less than excited to be seen using them. The welders were bought on sale, due to the color scheme, for $1088.00 each; they have an estimated salvage value of $488.00; and a useful life of 15 years. D= (1, 088 438)/15 = $43.33

12. Calculate the annual depreciation on a piece of equipment that cost $250,088. It has been estimated that the equipment will last 8 years and have a residual value of $10,088. Solution (Straight-line method): $250,088 - $10, 088 = $240, 000 $240, 000/8 years = $30, 000