cost analysis

| September 29, 2018

Name:
_______________________________________________ Score: _______

1. (20
points) You are offered a zero coupon bond worth $10,000 in face value 20 years
from now. Assume that you believe inflation over this time period would average
1.25% per year and that you believe the stock market might yield a 10% per year
return, but would also have a 6.25% risk premium over this bond. What price
would you be willing to pay for this bond today?

2. (20
points) You look over the balance sheet for your company and see the following
key figures:
Assets:
$ 6,000,000
Liabilities:
$ 2,000,000
Inventory:
$ 4,000,000
Sales
per year: $ 3,650,000
Accounts
Receivable: $ 1,000,000
Based
on the Inventory-Turnover Ratio, the Current Ratio, the Quick Ratio, and the
DSO Ratio, how well would you say the business is doing?

Is
there any particular group or groups in the organization that need to be yelled
at for not doing a better job? Sales? Marketing? Engineering? Production?
Accounting? Who, if any, and why.

3. (20
points) You purchase a building lot for $30,000 and build a $110,000 duplex
apartment on it. You paid cash for the lot, the bank wouldn’t give you a loan
to buy land. However, they are willing to waive the down payment requirement
for the building loan, based on the land as security. You take out a 10 year
loan at an APR of 5.5%
What
is your monthly loan payment? What is your yearly loan payment?
What
is your yearly depreciation? What is the book value of the property at the end
of ten years?
Assume
that real estate taxes are $5,000 per year and fire insurance costs $1,000 per
year. Also assume the property is occupied 87% of the time. What is the minimum
you believe you need to charge for rent, and why that amount?
Assume
you sell the property at the end of ten years for a net price of $156,650, what
is your capital gain on the sale, subject to income tax? If your capital gain
tax rate is 20%, how much tax do you owe? How much do you have left after
taxes? What was the annual percentage yield of this investment over the 10
years you owned it? (consider what you invested and what you earned on that
investment)

4. (20
points) You bought a truck three years ago for $150,000. You took out a 5 year
loan at 4% and you assumed the salvage value at the end of 10 years would be
$25,000. The yearly operating costs for fuel, maintenance, licensing, etc. is $86,000.

Today,
you have the opportunity to buy a new truck for $160,000 using another 5 year
loan at 4.5%, and assuming the salvage value 7 years from now would be $55,000.
The new truck gets much better gas mileage and the operating costs would be only
$66,000 per year.

Neglecting
calculations for depreciation or trade-in value, should you drive the truck you
have for another 7 years, or buy the new truck? Assume your company MARR=12%.

5. (20
points) Your town has a proposal to install solar panels on the roof of the
combined City Hall-Police Station-Fire Station building. The offer is to
install a 10 kW system for $30,000 and it would be financed by the installing
company for 10 years at 4% APR. It would deliver, on average, 100 kW-hr per day
of electricity. Electricity currently costs $0.08 per kW-hr and the city uses
6% as the discount rate for financial decisions.
Using
Benefit-Cost analysis, should the city accept this proposal?
The
installer then offers to install even more solar panels such that for an additional
$10,000 you would get an additional 75 kW-hr per day of electricity.
Using
Benefit-Cost analysis, should the city accept this new proposal?

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