1.
Bonka Toys is considering a robot that will cost $20,000 to buy. After 7 years its
salvage value will be $2000. An overhaul costing $5000 will be needed in Year 4.
O&M costs will be $2500 per year. Draw the cash flow diagram.
2.
Pine Village needs some additional recreation fifields. Construction will cost
$225,000, and annual O&M expenses are $85,000. The city council estimates that
the value of added youth leagues is about $190,000 annually. In year 6 another
$75,000 will be needed to refurbish the fifields. The salvage value is estimated to
be $100,000 after 10 years. Draw the cash flow diagram.
3.
Identify your major cash flows for the current school term as first costs, O&M
expenses, salvage values, revenues, overhauls, and so on. Using a week as the
time period, draw the cash flow diagram.
4.
The U.S. recently purchased $1 billion of 30-year zero-coupon bonds from a
struggling foreign nation. The bonds yield 41/2% per year interest. The zerocoupon bonds pay no interest during their 30-year life. Instead, at the end of 30
years, the U.S. government is to receive back its $1 billion together with interest
at 41/2% per year. A U.S. senator objected to the purchase, claiming that the
correct interest rate for bonds like this is 51/4%. The result, he said, was a multimillion dollar gift to the foreign country without the approval of Congress.
Assuming the senator’s math is correct, how much will the foreign country have
saved in interest when it repays the bonds at 41/2% instead of 51/4% at the end of
30 years?
5.
The Apex Company sold a water softener to Marty Smith. The price of the unit
was $350. Marty asked for a deferred payment plan, and a contract was written.
Under the contract, the buyer could delay paying for the water softener if he
purchased the coarse salt for recharging the softener from Apex. At the end of 2
years, the buyer was to pay for the unit in a lump sum, with interest at a rate of
1.5% per quarter-year. According to the contract, if the customer ceased buying
salt from Apex at any time prior to 2 years, the full payment due at the end of 2
years would automatically become due. Six months later, Marty decided to buy
salt elsewhere and stopped buying from Apex, whereupon Apex asked for the full
payment that was to have been due 18 months hence. Marty was unhappy about
this, so Apex offered as an alternative to accept the $350 with interest at 10% per
semiannual period for the 6 months that Marty had been buying salt from Apex.
Which of these alternatives should Marty accept? Explain.