EXERCISE 1 – TIME EQUIVALENCE OF MONEY

Dr. Eng. Mia Wimala

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Tutorial 1

1. The U.S. Border Patrol is considering the purchase of a new helicopter for aerial surveillance of
the New Mexico – Texas border with Mexico. A similar helicopter was purchased 4 years ago at
a cost of $140,000. At an interest rate of 7% per year, what would be the equivalent value today
of that $140,000 expenditure?
2. Petroleum Products, Inc. is a pipeline company that provides petroleum products to
wholesalers in the northern U.S. and Canada. The company is considering purchasing insertion
turbine flowmeters to allow for better monitoring of pipeline integrity. If these meters would
prevent one major disruption (through early detection of product loss) valued at $600,000 four
years from now, how much could the company afford to spend now at an interest rate of 12%
per year?
3. To improve crack detection in aircraft, the U.S Air Force combined ultrasonic inspection
procedures with laser heating to identify fatigue cracks. Early detection of cracks may reduce
repair costs by as much as $200,000 per year. What is the present worth of these savings over a
5 year period at an interest rate of 10% per year?

4. How much money could RTT Environmental Services borrow finance a site reclamation project
if it expects revenues $280,000 per year over 5-year cleanup period? Expenses associated with
the project are expected to be $90,000 per year. Assume the interest rate is 10% per year.

5. V-Tek Systems is a manufacture of vertical compactors, and it is examining its cash flow
requirements for the next 5 years. The company expects to replace office machines and
computer equipment at various time over the 5 year planning period. Specifically, the company
expects to spend $9000 two years from now, $8000 three years from now, and $5000 five years
from now. What is the present worth of the planned expenditures at an interest rate of 10% per
year?

6. Damson Iron Work, Inc. manufactures angular contact ball bearing for pumps that operate in
harsh environments. If the company invested $2.4 million in a process that resulted in profits of
$760,000 per year for 5 years, what rate of return did the company make on its investment?

7. A small company that specializes in powder coating expanded its building and purchased a new
oven that is large enought to handle automobile frames. The building and oven cost $125,000,
but new business from hot-rodders has increased the annual income to $520,000. If operating
expenses for gas, materials, labor, etc., amount to $470,000 per year, what rate of return will be
made on the investment if only the cash flows that occur over the next 4 years are included in
the calculation?
8. The business plan for a start-up company that manufactures multigas portable detectors
showed equivalent annual benefits of $400,000 for the first 5 years. If the cost in year 1 was
$320,000 and the increase thereafter was $50,000 per year, what interest rate was used in the
calculation?

9. A company that manufactures plastic control valves has a fund for equipment replacement that
contains $500,000. If the company spends $75,00 per year on new equipment, how many years
will it take to reduce the fund to less than $75,000 at an interest rate of 10% per year?

10. An engineer plans to retire when has has $1.6 million in his bank account. If he started with
$100,000 in the account, how long will it be from the time he started before he can retire if the
account makes a rate of return on 18% per year?

11. How many years will i take for a uniform annual deposit of size A to accumulate 10 times the
size of a single deposit if the rate of return is 10% per year?
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Tutorial 2

12. Income from cardboard recycling at Fort Bliss has been increasing at a constant rate of $1000 in
each of the last 3 years. If this year’s income (i.e. end of year 1) is expected to be $4000 and the
increase income trend continues through year 5, (a) what will the income be 3 years from now
(i.e. end of year 3), and (b) what is the present worth of the income over the 5 year period at an
interest rate of 10% per year.
13. A start up direct marketer of car parts expects to spend $1 million the first year for advertising,
with amounts decreasing by $100,000 each year. Income is expected to be $4 million the first
year, increasing by $500,000 each year. Determine the equivalent annual worth in years 1
through 5 of the company’s net cash flow at an interest rate of 16% per year.
14. Determine how much money would be in a savings account that started with a deposit of $2000
in year 1 with each succeeding amount increasing by 10% per year. Use an interest rate of 15%
per year and a 7-year period.
15. The future worth is year 10 of a geometric gradient series of cash flows was found to be
$80,000. If the interest rate was 15% per year, and the annual rate of increase was 9% per year,
what was the cash flow amount in year 1.
16. An engineer planning for her retirement will deposit 10% of her salary each year into a high
technology stock fund. If her salary this year is $60,000 (i.e. end of year 1) and she expects her
salary to increase by 4% each year, what will be the present worth of the fund after 15 years if it
earns 4% per year?
17. The business plan for a start-up company that manufactures multigas portable detectors shows
equivalent annual investment of $400,000 for the first 5 years. If the benefit from this
production was expected to be $320,000 in year 1, and the increase thereafter was $50,000 per
year, what interest rate was used in the calculation?
18. You were told that a certain cash flow sequence started at $3000 in year 1, and increased by
$2000 each year. How many years were required for the equivalent annual worth of the
sequence to be $12,000 at an interest rate of 10% per year?
19. How many years would it take for an investment of $10,000 in year 1 with increases of 10% per
year to have a present worth of $1,000,000 at an interest rate of 7% per year?
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Tutorial 3 & 4

20. Compute the value of D in the diagram below, if i = 10% per year.
a.
300
200
100

D D D D

b.
100 100 100 100 100

D D D D

c.
4D
3D
2D
D

800
d.
500
400 400
300 300

D
21. Perusahaan MWS membeli sebuah mesin seharga $15.000 dengan nilai sisa sebesar $5.000.
Biaya operasi mesin adalah $1300 per tahun. Perbaikan mesin dilakukan setiap 5 tahun sekali
dengan biaya $2500. Berapa nilai sekarang yang ekivalen dengan pengeluaran tersebut apabila
diketahui umur ekonomis dari mesin tersebut 14 tahun dan tingkat suku bunga 15% per tahun.
22. Sebuah perusahaan manufaktur membeli sebuah mesin semi otomatis seharga $13.000. Biaya
operasi tahunan mesin adalah $1700. Lima tahun setelah pembelian awal, perusahaan
memutuskan untuk membeli unit tambahan seharga $7100 agar mesin tersebut menjadi
otomatis penuh. Biaya operasi selanjutnya menjadi $900 per tahun. Apabila perusahaan
menggunakan mesin tersebut selama 16 tahun, dan menjualnya seharga $1800, berapa nilai
tahunan ekivalen dari mesin tersebut dengan tingkat suku bunga 9% per tahun?

23. Engineers at Sea World, a division of Busch Gardens, Inc. have completed an innovation on an
existing water sports ride to make it more existing. The modification costs only $8000 and is
expected to last 6 years with a $1300 salvage value for the solenoid mechanisms. The
maintenance cost is expected to be high at $1700 the first year, increasing by 11% per year
after. Determine the equivalent present worth of the modification and maintenance cost. The
interest rate is 8% per year.

24. A small company that specializes in powder coating expanded its building and purchased a new
oven that is large enough to handle automobile frames. The building and oven cost $125,000,
but new business from hot rodders has increased annual income by $520,000. If operating
expenses for gas, materials, labor, etc. amount to $470,000 per year, what rate of return will be
made on the investment if only the case flows that occur over the next 4 years are included in
the calculation?

25. A chemical engineer planning for her retirement will deposit 10% of her salary each year into a
high technology stock fund. If her salary this year is $60,000 (i.e. end of year 1), and she expects
her salary to increase by 4% each year, what will be the present worth of the fund after 15
years if it earns 4% per year?

26. For the cash flow shown below, determine the value of G that will make the future worth in year
4 equal to $6000 at an interest rate of 15% per year.

Year 0 1 2 3 4
Cash flow 0 $2000 $2000-G $2000-2G $2000-3G

27. If Laurel can make an investment in a friend’s business of $3000 now in order to receive $5000
five years from now, determine the rate of return. If Laurel can receive 7% per year interest on
a certification of deposit, which investment should be made?

28. Danson Iron Works, Inc. Manufactures angular contact ball bearings for pumps that operate in
harsh environments. If the company invested $2.4 million in a process that resulted in profits of
$760,000 per year for 5 years, what rate of return did the company make on its investment?
29. A company that manufactures ultrasonic wind sensors invested $1.5 million 2 years ago to
acquire part ownership in an innovative chip making company. How long would it take (from
the date of the initial investment) for its share of the chip company to be worth $3 million if that
company is growing at a rate of 20% per year?