2023W2 Assignment 2 - for release

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University of British Columbia *

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481

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Accounting

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Apr 3, 2024

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Assignment 2 EECE/CPEN 481 Instructor: Jeff Carmichael 1. Problem 1 (1.5 points) 2. Problem 2 3. Problem 3 (1.5 points) 4. Problem 4 5. Problem 5 6. Problem 6
Assignment 2 1. Problem 1 A pump has failed in a facility that will be completely replaced in three years. You could buy and install a brass pump for $7,000, which would last three years. However, a used stainless-steel pump that should also last three more years has been sitting in the maintenance shop for a while. The pump cost $13,000 when it was new. The accountants say the pump is now worth $7,000. The maintenance supervisor says that it will cost $1,800 to reconfigure and install the old pump, or that he could sell it used (as is) for $4,500. (a) What is the net benefit or net cost of installing the stainless-steel pump? Of installing the brass pump? (b) Which option is better? (c) What is the opportunity cost for this set of options? (d) How much cheaper or more expensive would it be to use the stainless-steel pump rather than a new brass pump? 2. Problem 2 Julie bought a house for $1,200,000 and made a $240,000 down payment. She obtained a 25-year loan for the remaining amount. Payment were made monthly, and interest is compounded monthly. The nominal annual interest rate was 4.5%. After 10 years (120 payments) she decided to pay the remaining balance on the loan. (a) What was her monthly loan payment, rounded to the nearest dollar? (b) How much is the remaining balance on her loan, after the last payment in the 10 th year is complete, rounded to the nearest dollar? 3. Problem 3 Mark saves a fixed percentage of his salary at the end of each year. This year he saved $1,500. For the next five years, he expects his salary to rise at an 8% annual rate, and he plans to increase his savings at the same 8% annual rate. He invests his savings in the stock market. Thus there will be six end-of-year investments (the initial deposit, which occurs right away (in year zero), plus five more). (a) How much will the investments be worth at the end of the fifth year if their value increases at a 10% annual rate? (b) How much will Mark have at the end of the fifth year if his stock market investments increase in value only at 8% annually? In both cases, round your answer to the nearest dollar. 4. Problem 4 IBP Inc. is considering establishing a new machine to automate a meat-packing process. The machine will save $50,000 in labour annually. The machine can be bought for $200,000 today and will be used for 10 years. It has a salvage value of $10,000 at the end of its useful life. The new machine will require an annual maintenance cost of $9,000. The corporation has a minimum rate of return of 10%. Determine the net present worth of the potential decision. Do you recommend automating the process?
5. Problem 5 Gail has won a lottery that pays her $100,000 at the end of this year, $110,000 at the end of the next year, $120,000 the following year, and so on, for 30 years. Leon has offered Gail $2,500,000 today in exchange for all of the money she will receive. If Gail thinks she can get 8 percent interest on her savings, is this a good deal? 6. Problem 6 A bank offers a personal loan called “The Eight Percent Plan.” The bank adds 8 percent to the amount borrowed; the borrower pays back 1/12 of this total at the end of each month for a year. On a loan of $500, the monthly payment is 540/12 = $45. There is also an administrative fee of $45, payable right away. What is the actual monthly interest rate on the loan? What is the actual effective annual interest rate on the loan? Round each answer to the nearest tenth of a percent (x.x%).
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