Answered: A material supplier won a 5-year…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

A material supplier won a 5-year contract to supply a construction company with all their building materials needs. The contract is expected to generate a first-year profit of $12,000. This annual profit is expected to increase by $6,000 each successive year for the rest of the contract period. The profits will be invested in an account earning an interest rate of 7%per year.

(a) Assuming that the profits are deposited in the account at the end of each year, how much money will be in the account immediately after the last deposit is made?

(b) What is the equivalent uniform annual deposit?

Expert Solution

Step 1: Determine the given information:

First-year profit is equal to $12,000

The annual profit is expected to increase by $6000 each successive year.

The rate of interest is 7%.

The contract is for 5 years.

This is an example of uniform gradient series cash flow in which the first year-end cash flow is $12000 and the annual increment in cash flow is $6000.

A₁=12,000

G=6000

i=0.07

n= 5 years.

The equivalent amount at the end of the last deposit is known as the future value of this uniform gradient series.

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