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Tutorial Questions (Module 2)

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37 views

Tutorial Questions (Module 2)

Uploaded by

Ayush Raj
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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DEPARTMENT OF PRODUCTION & INDUSTRIAL ENGINEERING

BIRLA INSTITUTE OF TECHNOLOGY, MESRA, RANCHI - 835215

Tutorial Questions (Module 2)


Subject: PE338 Production Economics and Financial Management

1. Briefly explain the concept of “Time value of Money” with suitable example?
2. What do you mean by the term ‘cash flow diagram’? With suitable example explain the
concept of cash flow diagram from borrower and lender viewpoint.
3. Differentiate between present worth, future worth and annual equivalent series value.
4. How do we convert an annual equivalent series of cash flows to present and future worth
equivalent?
5. Determine the relationship between nominal and effective rate of interest.
6. What is continuous compounding? Explain with suitable example.
7. An electrical engineer wants to deposit an amount P now such that she can withdraw an equal
annual amount of A1 = $2000 per year for the first 5 years, starting 1 year after the deposit,
and a different annual withdrawal of A2 = $3000 per year for the following 3 years. How
would the cash flow diagram appear if i = 8.5% per year?
8. A rental company spent $2500 on a new air compressor 7 years ago. The annual rental
income from the compressor has been $750. The $100 spent on maintenance the first year
has increased each year by $25. The company plans to sell the compressor at the end of next
year for $150. Construct the cash flow diagram from the company’s perspective and indicate
where the present worth now is located.
9. Five annual deposits are made into a fund that pays interest at a rate of 8% compounded
annually, the first, second, third, fourth and fifth deposits are Rs.800, Rs.700, Rs.600, Rs.500
and Rs.400 respectively. Determine the amount in the fund immediately after the firth
deposit.
10. In multiple compounding periods within a year the interest is 8% compounded quarterly, if
someone borrows Rs.1000 for one year, how much must be repaid?
11. An individual borrowed Rs 1000 paid off the loan with interest after 4.5 years. The amount
paid was Rs. 1250. What was the effective annual interest rate for this transaction?
12. A father, on the day of his son is born wishes to determine the amount he would have to
deposit in to an account bearing at 5% compounded annually to provide payment of Rs.2000
on each of the sons 18th, 19th,20th,and 21st birthdays.
13. A coal-fired power plant has upgraded an emission control valve. The modification costs
only $8000 and is expected to last 6 years with a $200 salvage value. The maintenance cost is
expected to be high at $1700 the first year, increasing by 11% per year thereafter. Determine
the equivalent present worth of the modification and maintenance cost at 8% per year.

Dr. Sanjiv Kumar Tiwari Page 1


14. If Laurel made a $30,000 investment in a friend’s business and received $50,000 5 years
later, determine the rate of return.
15. Pyramid Energy requires that for each of its offshore wind power generators $5000 per year
be placed into a capital reserve fund to cover unexpected major rework on field equipment.
In one case, $5000 was deposited for 15 years and covered a rework costing $100,000 in year
15. What rate of return did this practice provide to the company?
16. How much money should be deposited now in a saving bank account so as to have a one
withdrawal of Rs. 300 at the end of third year and fourth deposits of Rs. 300, Rs.200. Rs.400
and Rs.200 at the end of first, fourth, sixth and eight year respectively? Find also the amount
of the money in the bank after eight years. Assume an interest rate of 6% per interest period.
17. Abby purchased 100 shares of her dad’s favorite stock for $25.80 per share exactly 1 year
ago, commission free. She sold it today for a total amount of $2865. She plans to invest the
entire amount in a different corporation’s stock today but must now pay a $50 commission
fee. If she plans to sell this new stock exactly 1 year from now and realize the same return as
she has just made, what must be the total amount she receives next year? Include the
commission fee as a part of the purchase price but neglect any tax effects.
18. Construct a cash flow diagram that represents the amount of money that will be accumulated
in 7 years from an initial investment of $20,000 now and $3,500 per year for 7 years at an
interest rate of 8% per year.
19. A publicly traded construction company reported that it just paid off a loan that it received 1
year earlier. If the total amount of money the company paid was $1.6 million and the interest
rate on the loan was 10% per year, how much money had the company borrowed 1 year ago?
20. The Department of Traffic Security of a city is considering the purchase of a new drone for
aerial surveillance of traffic on its most congested streets. A similar purchase 4 years ago cost
$1,200,000. At an interest rate of 7% per year, what is the equivalent value today of the
previous $1,200,000 expenditure?
21. Solar Hydro manufactures a revolutionary aeration system that combines coarse and fine
bubble aeration components. This year (year 1) the cost for check valve components is
$9,000. Based on closure of a new contract with a distributor in China and volume discounts,
the company expects this cost to decrease. If the cost in year 2 and each year thereafter
decreases by $560, what is the equivalent annual cost for a 5-year period at an interest rate of
10% per year?
22. Apple Computer wants to have $2.1 billion available 5 years from now in order to finance
initial production of a device that, based on your behavior, will learn how to monitor and
control nearly all of the electronic devices in your home, such as thermostat, coffee pot, TV,
sprinkler system, etc. using Internet of Things (IOT) technology. The company expects to set
aside uniformly increasing amounts of money each year to meet its goal. If the amount set

Dr. Sanjiv Kumar Tiwari Page 2


aside at the end of year 1 is $100 million, how much will the uniform increase, G, have to be
each year? Assume the investment funds grow at a rate of 18% per year.
23. El Paso Water (EPW) purchases surface water for treatment and distribution to EPW
customers from the County Water Improvement District during the irrigation season. A new
contract between the two entities resulted in a reduction in future price increases in the cost
of the water from 8% per year to 4% per year for the next 20 years. The cost of water next
year (which is year 1 of the new contract) will be $260 per acre-ft. Using an interest rate of
6% per year,
i) Determine the present worth of the savings (in terms of $/acre-ft) to EPW between
the old and the new contracts.
ii) Determine the total present worth of the savings over the life of the contract if EPW
uses 51,000 acre-ft per year.
24. Find the F, P, and A values for the negative cash flows shown in the diagram.

Dr. Sanjiv Kumar Tiwari Page 3

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