ECON 106F Lecture Notes - Lecture 5: Federal Funds Rate, Cash Flow, Credit Score In The United States

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26 Apr 2016

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Indicates the total amount of interest that will be earned at the end of one year. It is also referred to as the effective annual yield (eay) or annual percentage yield (apy) You want to know what ear is to determine what you are going to earn on your money by the end of the year (depending on compounding) It is effective because it really depends on how it is compounding. Because of compounding, earning a 5% return annually is not the same as o earning 2. 5% every 6 months o o o. Example: if we want to find the half year rate using the rate of 5%: (1. 05)0. 5 -1 = . 0247= 2. 47% for 6 months. Your bank account pays interest monthly with an ear of 6%- what amount of interest do you earn per month? (1. 06)1/12 - 1 = . 4868% per month. Fv (annuity)= c * (1/r) * [(1+r)n - 1]

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1. Cash Flow Diagrams and Compounded Interest: John decides to take out a loan for $10,000 for school at an annual interest rate of 10%. He agrees to make four equal payments, but will defer these payments for four years while in school. Starting at the end of the 5^th year, he makes four equal annual payments (years 5, 6, 7 and 8). At the end of the 8^th year, the loan is paid off.

(a) Create a table that depicts the cash flow diagram for this problem. It should cover years 0 to 8, and should show the balance, interest charges, each payment, how much of that payment went towards interest and how much towards the principal. The balance should be zero at the end of the 8^th year. Use trial and error to find the required payment.

(b) Compute the annual payment using one of the built-in Excel functions discussed in class. Show that this gives the same answer as (a).

(d) Suppose interest is compounded twice per year instead of annually, but he still makes four annual payments starting at the end of the 5^th year. What is the new annual payment?

2. Kate will purchase a house for $500,000 with a 10% down payment and $10,000 in closing costs. The closing costs are included in the loan. A 10-year loan is arranged at 5% interest compounded monthly.

(a) What is the monthly payment?

(b) By choosing to include the closing costs in the loan, how much money was paid in interest on the closing costs over the life of the loan.

(c) What is the effective interest rate for this loan? (Hint: you must take into account the monthly compounding AND the closing costs.)

(d) Suppose closing costs were paid at closing. How does this change the overall cost of the loan? How does this change the effective interest rate?

(NOTE: EVERYTHING SHOULD BE DONE IN EXCEL. OTHERWISE NO POINTS. INCLUDE THE FUNCTION USED AS WELL)

greensardine434

An international Corporation purchased a jet plane for use by the firm's engineers. It has an initial cost of $1,000,000, and will be sold by $500,000 at the end of year 7. The plane will save the transportation fee of $500,000 yearly, and annual O&M costs will be $100,000. The corporation operates in a state that has a corporate tax rate of 8% and the incremental federal tax is 34%.

1.Show before-tax cash flows (BTCF) for n=0 to n=7.

2. Compute the depreciation schedule using MACRS Depreciation.

3. Determine taxable incomes for n=0 to n=7.

4. Compute the combined (federal + state) income tax rate for Wang Systems Corporation. Use this rate as after-tax effective rate and compute income taxes.

5. Show after-tax cash flows (ATCF) for n=0 to n=7.

6.Find the PW for the corporation after taxes, if MARR is 10%, and determine if this purchase is satisfactory.

1. What is the capitalized value of an infinite series of $1,000 biennial (every two years) payments? MARR = 10%

		$4,950
		$4,025
	.	$4,350
		$4,762

2. Frank West Enterpises would like to choose one of the following plans for expansion. Using present worth analysis, find the best alternative among the three alternatives and the Do-Nothing.

	Alt. A	Alt. B	Alt. C
Initial Cost	$10,000	$21,000	$8,000
EUAB	$6,000	$7,000	$4,000
EUAC	$1,500	$1,000	$2,000
Salvage Value	$2,000	$8,000	$3,000
Life	2 Years	3 Years	2 Years

Use a MARR of 10%.

	.	Do-Nothing
	.	Alt. C
	.	Alt. B
	.	Alt. A

U. S. Engineering is investigating the possibility of acquiring new automated packaging equipment at a cost of $12,000. It is expected that the equipment will have a salvage value of $1,000 at the end of its useful life of 10 years. It is determined by the plant engineering department at the company that the operation and maintenance cost will be $500 in the first year and will gradually increase every year starting year 2 at the rate of $50 until the equipment is retired. Determine the equivalent uniform annual cost (EUAC) if MARR for the company is 10%.

		$2,575.95
		$2,150.50
	.	$2,176.60
	.	$2,184.40

The cash flows given in table below are for two different alternatives. MARR =10%

Data	C	D
Initial Cost	$20,000	$80,000
Uniform Annual Benefits	$6,000	$10,000
Salvage Value	$5,000	$20,000
Useful Life in years	5	infinity

The equivalent uniform annual worth (EUAW) of alternative N is ______________.

Hint: Assume the Salvage Value is never realized since N is infinite.

		$2,000
		$1,920
		$1,762
		$2,476

Compare the following plans using a MARR of 6%.

Data	Plan X	Plan Y
Equipment First Cost	$50,000	$75,000
Annual Operation & Maintenance Cost	$3,000	$2,500
Salvage Value	$10,000	$0
Service Life, Years)	25	50

		$6,728; $7,255
		$7,255; $9,000
	.	$6,728; $7,728
	.	$6,728; $8,200

LAEP, Inc. wants to evaluate two methods of shipping their products. The following cash flows are associated with each alternative:

Data	Method
	A	B
Life (Years)	10	10
First Cost	$700,000	$1,512,000
M&O Cost	$18,000	$9,000
M&O Cost Gradient	$900	$775
Annual Benefit	$154,000	$303,000
Salvage Value	$142,000	$210,000

Annual profits are based on amount of products which can ordinarily be shipped each year as a function of the amount of vehicles or service purchased with the first cost and the M&O costs.

Using a MARR of 15%, calculate the equivalent uniform annual cash flow (EUAB - EUAC) for each alternative.

Determine the most desirable alternative based on the results.

		$389.57, $445.90; Method A
		$445.90, $389.57; Method A
	.	$445.90, $389.57; Method B
	.	$389.57, $445.90; Method B

For the cash flow diagram shown, which of the following equations properly calculates the uniform equivalent (A)?

n	0	3	6	9	12	15
Dollars	$100	$100	$100	$100	$100	$100

		A=100(A/P,i,15)+ 100(A/F,i,3)
		A=100(A/P,i,15)
		A=100(A/F,i,3) + 100(A/F,i,15)
		A=100(A/P,i,3) + 100(A/F,i,3)

Three different alternatives shown in table below are being considered by U. S. Engineering systems.

Assume that alternatives X and Z are replaced at the end of their lives.

Data	Alternative X	Alternative Y	Alternative Z
Initial Cost	$6,000	$1,000	$1,500
Uniform Annual Benefits	$810	$125	$ 230
Useful Life in Years	20	infinite	10
MARR	12%

The NPW for alternative

ECON 106F Lecture Notes - Lecture 5: Federal Funds Rate, Cash Flow, Credit Score In The United States

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