1. Ross Recreations Company, LLC operates a summer camp in Monterey, Tennessee.

The
cost data for a 12-week summer camp are as follows.
Charge per camper = $400/week
Variable cost per = $220/week
camper
Fixed costs = $240,000 per summer season
Capacity per week = 200 campers

Determine
(a) The total number of campers to break even for the season.
(b) The profit if the camp is operated at 90% capacity.
(c) The additional profit that can be made if a discount of $100 per week is given for
another 10 campers.

Ans:
(a) To break even, Total costs = Total revenue
240,000 + 220(12) X = 400(12) X
X = 240,000/ {(400 - 220) (12)} = 111 campers

(b) At 90% capacity

Number of campers = 0.90(200) = 180
Profit = 180(400)12- {240,000 + 180(12) (220)} = $188,800
(c) Additional profit = 10(12) (400 -100) - 10(12) (220) = $9,600

2. Lucas & Lindsay Co.. makes a consumer product for which the following cost data are
available.
Fixed cost/ year = $120,000
Variable costs/ unit = $15
i. Determine the breakeven volume if each unit can be sold for $40.
ii. If a net profit of $100,000 is required, determine the number of units that needed to be
sold.

Ans: i. Let the breakeven volume be “X”.

40X = 120,000 + 15X
(40 - 15)X =120,000 25X = 120,000 X = 120,000/25 = 4,800
The breakeven volume is 4,800 units.
ii. Profit desired = $100,000
Let the volume be “Y”.
100,000 = 40Y - (120,000 + 15Y)
25Y = 220,000 Y = 220,000/25 = 8,800 Units

1
3. An entrepreneur is considering opening a coffee shop in downtown Cookeville. The
building that he is considering will have a monthly lease payment of $3200 and basic utility
costs of $600 per month. Two employees will be hired at $10.00/hour/employee (including
overhead and benefits). Each employee will work an average of 170 hours per month. The
average revenue per customer is estimated at $7.00. The variable cost of serving each
customer is estimated at $2.00.
(a) Calculate how many customers per month it will take for the coffee shop owner to breakeven.
(b) How many customers would need to be served per month to achieve a monthly profit of
$5,000?

Ans: (a) At breakeven, TC = TR

TC = 3,200 + 600 + 2(10) (170) + 2X TR = 7X
Setting TC = TR.
3,200 + 600 + 2(10) (170) + 2X = 7X 7,200 + 2X = 7X
7,200 = 5X X = 1,440 customers/month
(b) TR - TC = 5,000
7X - (3,200 + 600 + 2(10) (170) + 2X) = 5,000
7X - 7,200 -2X = 5,000 5X = 12,200
X = 2,440 customers/month

Chapter 3

4. Diana borrowed $3,000 from Pam and promised to pay her $3,405 after 1.5 years. What
simple interest rate did she have in mind?

Ans: P = $3,000 F = $3,405 n = 1.5 Years

Interest earned = F - P = $3,405 - $ 3,000 = $405
For simple interest rate, interest earned = Pin
405 = 3,000 (i) (1.5)
i= $ 405/$4,500 = 0.09 = 9% per year

5. I need to have an accumulation of $100,000 twelve years from today, how much does John
Dean need to invest in a mutual fund that pays ¾% per month?

Ans: F = $100,000 n = 12(12) = 144 periods i = ¾% monthly period

P = F (P/F, i, n) = $100,000(P/F, ¾%, 96) (P/F, ¾%, 48) = 100,000(0.4881)
(0.6986) = $34,098.67

2
6. John loans a friend $10,000 at 12% interest for 5 years. At the end of five years, John will
get the principal and the accrued simple interest. Determine
i. the interest rate if compounded yearly.
ii. the interest rate if compounded quarterly.

Ans: i. Accrued simple interest for 5 years = $10,000 (0.12) (5) = $6,000
F = Principal + Accrued interest = 10,000 + 6,000 = $16,000
P = F (1 + i) - n
10,000 = 16,000(1+ i)-5
i = 0.0986 (or) 9.86% compounded annually
ii. Accrued interest is still the same.
10,000 = 16,000(1 + i )-20
(1 + i )20 = 1.6
i = 0.02378 per quarter
Nominal interest rate / year = 0.02378 × 4 = 0.0951 or 9.51% per year

Chapter 4

7. Zac Weber makes a $350 monthly car payment, which is based on 12% annual interest,
compounded monthly.
i. Determine the amount of car bought if John made down payment of $3,000 and the
financed the rest of the amount for 5 years.
ii. Determine the pay off at the time the 31st payment is due.

Ans: i. The amount of car bought = 350 (P/A, 1%, 60) + 3,000 = 350(44.955) + 3,000 =
$18,734.25
ii. Payoff amount at the time 31st payment = 350 + 350 (P/A, 1%, 29) = 350 +
350(25.066) = $9,123.10

8. A machine at a cost of $5,000 was purchased 3 years ago. It can be sold now for $3,000. If
the machine is kept, the annual operating and maintenance costs will be $1,500. If it is kept
and operated for next five years, determine the amount at time 0 (now) equivalent to the cost
of owning and operating the machine for the next five-year period. It is anticipated that the
machine can be sold for $1,000 at the end of the five-year period. Use an interest rate of
10%

Ans: P = $3,000 Operating and maintenance costs / year = $1,500 n = 5 years

Salvage value = $1,000 Interest rate = 10%
PW of costs = 3,000 + 1,500 (P/A, 10%, 5) - 1,000(P/F, 10%, 5) = 3,000 + 1,500
(3.791) -1,000(0.6209)
= $8,065.60

3
9. Given the cash flow diagram below, determine the unknown value using an interest rate of
9%.

Ans: First, find the present worth of all the positive cash flows and then find an
equivalent uniform amount.
P = 600(P/A, 9%, 3) -200(P/G, 9%, 3) + {200(P/A, 9%, 3) + 200(P/G, 9%, 3)}
(P/F, 9%, 4)
= 600(2.531) -200(2.386) + {200(2.531) + 200(2.386)} (0.7084) = $1,738.04
A= 1,738.04 (A/P, 9%, 7) = 1,738.04(0.1987) = $345.35

Chapter 5

10. A student wants to purchase a laptop computer for use during the 4 1/2 years that she plans
to study engineering at Texas Tech (Now that's good planning!). After looking around a bit,
she finds that a well-equipped laptop with software can be purchased for $1,800 and that it
should have a market value of at least $300 if she wants to sell it when she graduates after 4
1/2 years. Assume that maintenance and supplies will cost $100 each six months. Use an
interest rate of 12% with monthly compounding, and determine the present cost of owning
and operating the computer.

Ans: Initial cost = $1,800 Salvage value = $300 M&Osa = $100, n = 4.5 years
nsa = 4.5 × 2 = 9 (semi-annual periods)
i = 12% isa = (1 + 0.12/12)6 - 1 = 6.152%
PWC = P - {S (P/F, i, n)} + {M&O (P/A, i, n)}
= 1,800-{300(1 + 0.06152)-9} + [100 × {1 - (1 +
0.06152)-9}/0.06152]
= 1,800 - 175.29 + 675.69 = $2,300.40

4
11. You have saved $2,500 toward a new car and you believe that you can afford monthly
payments of $250.
(a) If your bank offers financing terms of 60 months at a nominal 12% interest, what is
the most you can pay for a car?
(b) The dealer offers 9% financing but the loan is for only 36 months. What is the most
you can pay for a car on this basis?

Ans: Part (a): i = 12%/12 = 1% per month

P = 250(P/A, 1%, 60) + 2,500 = $13,738.75
Part (b): i = 9%/12 = 0.75% per month
P = 250 (P/A, 0.75%, 36) + 2,500 = $10,361.75

12. Determine the capitalized equivalence of an infinite series of 5-year period payments. Use
a 12% nominal annual interest rate. In each 5-year period, $100 will be paid at the end of
years one and five, $200 at the end of years two and four, and $300 at the end of year three.
Use as few interest factors as possible.

Ans: i = 12%
The cash flows for each of the five years are as follows.
A1 = $100 A2 = $200 A3 = $300 A4 = $200 A5 = $100
Capitalized Cost, P0 = A/i
= [100 + {100 (P/G, i, 3) + 100 (P/F, i, 4)} {(A/P, i, 5)}] / i
= [100 + {100 (2.221) + 100 (0.6355)} {0.2774}] / 0.12 = $1,493.66

13. Two bridge designs have been proposed to cross river pleasant to Shepherd. A bridge
constructed from wood will cost $6,000 (mucho Rio!) and will last for eight years. A
bridge constructed from steel will cost $11,000 and will last for twenty years. Either
bridge will have a zero salvage value at the end of its life. Use an interest rate of 8% and
determine whether the increased life of the steel bridge justifies its increased cost

Ans: EUAC (wood) = {P (A/P, i, n)} + A - {S (A/F, i, n)} = 6,000 (A/P, 8%, 8) + 0 + 0 =
$1,044
EUAC (steel) = P (A/P, i, n) = 11,000 (A/P, 8%, 20) = $1,120.90
Choose wood for the construction material, since it has the lowest equivalent
uniform annual cost.

14. Compute the rate of return to the nearest second decimal place for the cash flows given in
the table below.

Ans: The cycle repeats every 2 years. Therefore, it is sufficient to look at one cycle.
130(1 + i) = 182
i = (182/130) - 1 = 0.4 or 40%

5
15. A transportation engineer received a request to install dynamic traffic signals to replace
static vehicle control devices at an intersection. The engineer must prepare an estimate of
an operating budget for ten years if the signals are installed. The initial cost of the signals
is $35,000, and the installation costs are $12,000. The estimated energy cost to operate the
signals for the first year is $1,000. The energy cost is expected to increase each year
uniformly by 1.5% of the first year's energy cost. Assume an interest rate of 8%. What is
the EUAC for the operating budget? Salvage value at the end of the ten-year period is
negligible.

Ans: P = 35,000 + 12,000 = $47,000 G = 1.5% × 1,000 = $15

EUAC = {P (A/P, i, n)} + M&O + {G (A/G, i, n)}
= {47,000 (A/P, 8%, 10)} + 1,000 + {15 (A/G, 8%, 10)}
= (47,000 × 0.149) + 1,000 + (15 × 3.871) = 7,003 + 1,000 + 58.07 =
$8,061.07

16. An investment pays interest at the rates of 10%, 12%, 11%, 8%, and 9%, respectively, for
five years. What is the equivalent uniform interest rate for this investment?
If Sam made a $10,000 investment on this deal, how much would he have at the end of 5
years?

Ans: (1 + i)5 = (1+ 0.10) (1+ 0.12) (1+ 0.11) (1+ 0.08) (1+ 0.09) = 1.6098
i = 1.60981/5 – 1 = 0.10 or 10%
F = 10,000(1.6098) = $16,098

17. The accounting department is involved in a little wager. The accountants believe that an
engineer cannot correctly determine which alternative should be chosen using equivalent
uniform annual cash flow analysis. As a means of proving this statement, the accountants
have provided you with the following data.
Data Alt. A Alt. B
Useful Life, Years 9 10
First Cost (FC) $121,000 $137,000
Annual Benefit (AB) $63,000 $83,000
M&O Gradient (M&OG) $2,900 $4,000
M&O $23,000 $32,000
The accounting department has chosen Alternative B. Calculate the equivalent uniform
annual cash flow of each alternative using a MARR of 12%. State whether or not you
agree with the accounting department.

Ans: Alt. A
EUAB - EUAC = 63,000 - [121,000 (A/P, 12%, 9) + 23,000 + 2,900 (A/G, 12%, 9)]
= 63,000 - [22,711.70 + 23,000 + 9,445.30] = $7,843
Alt. B
EUAB - EUAC = 83,000 - [137,000 (A/P, 12%, 10) + 32,000 + {4,000 (A/G, 12%,
= 83,000 - [24,249 + 32,000 + 14,340] = $12,411
The best economic choice is Alternative B. Agree with the accounting
department. 6
18. An individual approaches the Loan Shark Agency for $1,000 to be repaid in 24 monthly
installments. The agency advertises an interest rate of per month. They proceed to
calculate his monthly payment in the following manner.
Amount $1,000
requested
Credit $25
investigatio
n
Credit risk $5
insurance
Total $1,030

Interest: ($1,030) (24) (0.015) = $371

Total owed: $1,030 + $371 = $1,401
Payment = $1,401/24 = $58.50
i. What is the nominal interest rate?
ii. What is the effective interest rate?

Ans: The actual borrowed is only $1,000

Therefore, 1,000 = 58.5(P/ A, i, 24)
(P/A, i, 24) = 1,000/58.5 = 17.094
i (P/A, i, 24)
2.5% 17.885
3% 16.936

19 A transportation agency is considering a highway project that will cost $1.5 million
dollars. The annual benefits are expected to be $99,000 per year over a twenty year
analysis period. Reusable material will be valued at $300,000 at the end of the useful life.
If the discount rate is 8% per annum, should the project be constructed? Use benefit-cost
analysis.

Ans: PW (B) = {A (P/A, i, n)} + {S (P/F, i, n)}

= (99,000) (P/A, 8%, 20) + (300,000) (P/F, 8%, 20)}
= (99,000) (9.818) + (300,000) (0.2145)
= 971,982 + 64,350 = $1,036,332
PW (C) = $1,500,000
B/C = PW (B)/PW (C) = 1,036,332 / 1,500,000 = 0.69
B/C is less than 1 and therefore, do not build.

7
20. Your division is considering the purchase of a Cramit packaging machine for
$200,[Link] project that the operating and maintenance costs (OMC) will be $50,000
this year and that they will increase by $20,000 per year. The salvage value is expected to
be $150,000 at any time you sell the machine for the next several years. Your MARR is
10%. What is the optimum economic life you predict for the machine? Your old
packaging machine will have a EUAC of $128,000, if you keep it for its optimum
economic life. Should you buy the Cramit?

Ans: 1 Year: EUAC = {200,000 (A/P, 10%, 1)} - {150,000 (A/F, 10%, 1)} + 50,000 =
$120,000
2 Years: EUAC = {200,000 (A/P, 10%, 2)} - {150,000 (A/F, 10%, 2)} + 50,000 +
{(20,000) (A/G, 10%, 2)}
= $103,330
3 Years: EUAC = {200,000 (A/P, 10%, 3)} - {150,000 (A/F, 10%, 3)} + 50,000 +
{(20,000) (A/G, 10%, 3)}
= $103,845
The economic life of the Cramit is 2 years and its EUAC is less than that of the
packing machine currently in use. The Cramit should be purchased as soon as
possible.

21. A company is considering buying a new machine. Two different models are available on
the market. MARR is 10%.

Data Model- I Model -II Remark

Useful Life , 20 25
Years
First Cost, $ 80,000 $100,000
Salvage 20,000 25,000
Value, $
Annual Operating 18,000 15,000 Years 1 through 10,
Costs, $ 20,000 years 11 through 25.

a. Assuming sum-of-years digits depreciation, what book value will Model -I have after
two years?
b. Assuming double declining balance depreciation, what book value will Model- II have
after three years?
c. What salvage value (S) must Model -I have after 20 years in order for the equivalent
uniform annual cost to equal $26,500?

8
Ans: Part (a)
Sum of the years digits = N (N + 1) / 2 = 20 (20+1) / 2 = 210.
Depreciation in year 1 = (20 / 210) 60,000 = $5,714.3
Depreciation in year 2 = (19 / 210) 60,000 = $5,429
Book value at the end of year 2 = 80,000 - (5,714 + 5,429) = $68,857

Part (b)
dDDB = 2/n = 2/25 = 0.08 k = 1 - d = 0.92.
BVt = kt × FC = ( 0.923 ) (100,000) = $77,868.80

Part (c):
26,500 = {80,000 (A/P, 10%, 20)} - {SV (A/F, 10%, 20)} + 18,000.
SV = $51,428.57.

An asset purchased three years ago for $20,000 can be replaced by a new type of equipment.
The market value of the old machine is currently $13,000 and will be $9,000, $8,000, $6,000,
$2,000, and $0 at the end of each of the next five years. The annual operating costs (AOC) for
each of the next five years will be $2,500, $2,700, $3,000, $3,500, and $4,500. How much
longer should the defender be kept, if the MARR is 10%?

Ans:
Year Salvage Annual
Value Operating
Cost
0 $13,000
1 9,000 $2,500
2 8,000 2,700
3 6,000 3,000
4 2,000 3,500
5 0 4,500

9
Keep 1 year:
EUAC = {13,000 (A/P, 10%, 1)} - {9,000 (A/F, 10%, 1)} + 2,500 = $7,800
Keep 2 years:
EUAC = {13,000 (A/P, 10%, 2)} + [{2,500 (F/P, 10%, 1)} + 2,700 - 8,000] (A/F,
10%, 2) = $6,276.29
Keep 3 years:
EUAC = {13,000 (A/P, 10%, 3)} + [{2,500 (F/P, 10%, 2) + {2,700 (F/P, 10%, 1)}
+ 3,000 - 6,000] (A/F, 10%, 3)
= $6,132.09
Keep 4 years:
EUAC= {13,000 (A/P, 10%, 4)} + [{2,500 (F/P, 10%, 3)} + {2,700 (F/P, 10%, 2)}
+ {3,000 (F/P, 10%, 1)} + 3,500 - 2,000] (A/F, 10%, 4) = $6,557.01
Keep the machine for three more years to minimize the equivalent uniform annual
cost.

Your division is considering purchasing a Cramit packaging machine for $200,000. You project
that the operating and maintenance costs (OMC) will be $50,000 this year and that they will
increase by $20,000 per year. The salvage value is expected to be $150,000 at any time you sell
the machine for the next several years. Your MARR is 10%. What is the optimum economic
life you predict for the machine? Your old packaging machine will have a EUAC of $128,000 if
you keep it for its optimum economic life. Should you buy the Cramit?

Ans: 1 Year: EUAC = {200,000 (A/P, 10%, 1)} - {150,000 (A/F, 10%, 1)} + 50,000 =
$120,000

2 Years: EUAC = {200,000 (A/P, 10%, 2)} - {150,000 (A/F, 10%, 2)} + 50,000 +
{(20,000) (A/G, 10%, 2)}
= $103,330

3 Years: EUAC = {200,000 (A/P, 10%, 3)} - {150,000 (A/F, 10%, 3)} + 50,000 +
{(20,000) (A/G, 10%, 3)}
= $103,845

The economic life of the Cramit is 2 years, and its EUAC is less than that of the
packing machine currently in use. The Cramit should be purchased as soon as
possible.

10