INEN 303: Engineering Economic Analysis

Spring 2006: Group Quiz II

The best 6 out of 8 will be graded (Group 1 must do all questions).

Remember: cash flow diagram, formulas, then answers!!!

1. Harry Osborn has given $10 million dollars to create a permanent endowment at Empire State University to award scholarships. The awards are to be made beginning 5 years after the lump-sum donation is made. If the interest from the endowment is to fund 100 students each year in the amount of $10,000 each, what annual rate of return must the endowment fund earn? (Hint: 6 £ i* £ 9)

2. Happy Gilmore Golf Clubs are considering a project to produce a new club called Chubbs. The 15-year project has an initial investment of $950,000 and is projected to result in extra revenues of $450,000 in year 11, $500,000 in year 12, and amounts increasing by $50,000 per year through year 15. What is the rate of return for this project? (Hint: 6 £ i* £ 9)

3. In order to have $85,000 four years from now, Stuart Scott has set aside money in a savings account. If the account earns interest at a rate of 6% per year, compounded continuously, how much money must Stuart invest?

4. An industrial engineer, Cory Morrow, is considering two robots fro puchase by a fiber-optic manufacturing company. Robot X will have a first cost of $85,000, a semiannual maintenance and operation (M&O) cost of $15,000, and a $40,000 salvage value at the end of its 4 year life. Robot Y will have a first cost of $97,000, a semiannual M&O cost of $13,500, and a $48,000 salvage value at the end of its 3 year life. Which should be selected based upon their annual worth at an interest rate of 12% per year, compounded semiannually?

5. A philanthropist, Wade Bowen, working to set up a permanent endowment wants to deposit money each year, starting now and making 10 more (i.e. 11) deposits, so that money will be available for research related to underwater basket-weaving. If the size of the first deposit is $1 million and each succeeding deposit is $100,000 larger than the previous one, how much will be available each year forever beginning in year 11, if the funds earns interest at a rate of 10% per year?

6. The Cowardly Lion and the Scarecrow have both proposed plans to fix the yellow brick road. Cowardly Lion’s 2-year plan will require an initial investment of $75,000 and will have a semiannual operating cost of $27,000 with no savage value. Scarecrow’s 3-year plan will require an initial investment of $125,000, semiannual costs of $12,000 and a salvage value of $40,000. At and interest of 10% per year, compounded semiannually, which plan should Oz use on the basis of present worth analysis?

7. Since the New Orleans Saints are returning to New Orleans next year, San Antonio is planning to build a new football stadium in their hopes of obtaining an NFL expansion franchise. The new stadium will cost $250 million and annual upkeep is expected to amount to $800,000 per year. The grass-turf field of the stadium will have to be replaced every 10 years at a cost of $950,000 and painting the stadium every will cost $75,000 every 5 years. If San Antonio expects to maintain the stadium indefinitely, what will be its capitalized cost at an interest rate of 8% per year?

8. The Port Arthur Independent School District need to raise money to refurbish its existing schools and to build a new one, UGK Elementary. The bonds will pay interest semiannually at a rate of 8%, and they will mature in 30 years. Brokerage fees for setting up the bonds are $2.5 million. If the interest rate in the marketplace rises to 10% per year, compounded semiannually, before the bonds are issued, what is the net revenue for the school district once the bonds are issued if the face value of the bonds is $250 million?