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Economics
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5 Apr 2019

1 Two sets of cash flows are shown in the table below. If these sets are equal at 8% interest rate, determine the unknown value, X.

Year 0 1 2 3 4 5
Cash Flow, Series I $125 $100 $75 $50 $25 $0
Cash Flow, Series II $X $2X $3X $4X $5X $7X

2 A deposit of $10,000 now at a interest rate of 10% per year will accumulate in 20 years to an amount equal to _______________.

A.

$54,600
B.

$61,500
C.

$67,280
D.

$51,900

3 Which of the following relationships between compound interest factors is not correct?

A.

Single Payment Compound Amount Factor and Single Payment Present Worth Factor are reciprocals.
B.

Sinking Fund Factor and Uniform Series Compound Amount Factor are reciprocals.
C.

Capital Recovery Factor and the Sinking Fund Factor are reciprocals.
D.

Capital Recovery Factor and Uniform Series Present Worth Factor are reciprocals.

4 What is the present worth of a series of ten deposits of $200 per year at 6% made at the end of each year?

A.

$1,672
B.

$1,072
C.

$1,272
D.

$1,472

5 Determine the net present worth (NPW) of the following cash flows using an interest rate of 7%.

Year

0

1

2

3

4

5

6

7

8

Cash Flow,$

-12,000

2,000

2,000

2,000

2,000

2,000

2,500

3,000

3,500

A.$2,771.05

B.$2,500
C.$1,500
D.$1,771.05

6 At Kal Tech Manufacturing Inc, the time required to make the first unit of an engineered product is 64.1 minutes. Determine the time required for 16th unit if the learning curve percentage is 90%.

A.

42.1 minutes
B.

29.53 minutes
C.

36.45 minutes
D.

20.89 minutes

7 A sum of $994.62 deposited at time

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You purchase a duplex on April 15, 2000. You plan to live in one side and rent the other side. The rental side is placed in service the day you buy it. Depreciation only applies to the rental half so the remaining numbers correspond to that portion. The purchase price for the rental protion was $60,000. In your research, you determine the land is worth $12,000 of that amount and the appliances and carpeting are worth $3000 of the purchase price. When doing your taxes, you may use IRS Publication 527 to determine the appropiate depreciation amount each year. Assume your marginal income tax rate is 25% every year (capital gains rate is then15%). Assume taxes are refunded or paid on April 15th each year, so that the savings from April through Dec of 2000 is realized on April 15, 2001 (EOY 1). You continue to rent until you sell on April 15, 2007 for $75,000. Use an MARR of 6%.


A. For each Year, EOY 1-EOY 8 calculate the following: the depreciation amount of each asset class, the total depreciation each year, the book value for the property at the end of each year, and the amount of tax saved using the deprecication expense to reduce income each year.


B. When the property is sold, you realize a capital gain from two protions: First, the book value was lowered by the total depreciation taken to date. Calculate the capital gain due to the total depreciation amount and the capital gain tax owed due to this amount. Second, the rest of the gain comes because the sale price was higher than the purchase price. Calculate the capital gain and the tax owed on this portion of the gain.


C. Draw a cash flow diagram for just the tax amount due to the depreciaiton, including the gain from this portion at EOY 8. Calculate the present worth of this cash flow. This is the amount gained by depreciating the property.


D. Draw the cash flow diagram for all the amounts, including the purchase (EOY 0), the tax saved each year, the sale (EOY 7), the capital gain tax (EOY8). Calculate the present worth of this cash flow. Calculate the annual worth of this cash flow. This is the amount of net rental income (rent-expense) needed each year to make the property a good investment.

You purchase a duplex on April 15, 2000. You plan to live in one side and rent the other side. The rental side is placed in service the day you buy it. Depreciation only applies to the rental half so the remaining numbers correspond to that portion. The purchase price for the rental protion was $60,000. In your research, you determine the land is worth $12,000 of that amount and the appliances and carpeting are worth $3000 of the purchase price. When doing your taxes, you may use IRS Publication 527 to determine the appropiate depreciation amount each year. Assume your marginal income tax rate is 25% every year (capital gains rate is then15%). Assume taxes are refunded or paid on April 15th each year, so that the savings from April through Dec of 2000 is realized on April 15, 2001 (EOY 1). You continue to rent until you sell on April 15, 2007 for $75,000. Use an MARR of 6%.


A. For each Year, EOY 1-EOY 8 calculate the following: the depreciation amount of each asset class, the total depreciation each year, the book value for the property at the end of each year, and the amount of tax saved using the deprecication expense to reduce income each year.


B. When the property is sold, you realize a capital gain from two protions: First, the book value was lowered by the total depreciation taken to date. Calculate the capital gain due to the total depreciation amount and the capital gain tax owed due to this amount. Second, the rest of the gain comes because the sale price was higher than the purchase price. Calculate the capital gain and the tax owed on this portion of the gain.


C. Draw a cash flow diagram for just the tax amount due to the depreciaiton, including the gain from this portion at EOY 8. Calculate the present worth of this cash flow. This is the amount gained by depreciating the property.


D. Draw the cash flow diagram for all the amounts, including the purchase (EOY 0), the tax saved each year, the sale (EOY 7), the capital gain tax (EOY8). Calculate the present worth of this cash flow. Calculate the annual worth of this cash flow. This is the amount of net rental income (rent-expense) needed each year to make the property a good investment.

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