Deck 8: Price Changes and Exchange Rates

Question 1

Two advanced thermal insulating and anti- condensation protection alternatives have been proposed for new Antarctica marine vessels subject to the harsh marine environment. One alternative must be selected. Estimated savings from reduced total installation and maintenance costs over conventional insulation are the following: Which alternative should be recommended based on the present worth method and an actual- dollar analysis? Use an inflation- free MARR of 8%, an inflation rate of 8% per year, and a study period of 7 years. Assume negligible salvage values.

Answer 1

PWDelta- T) = - $29,136.50 PWAlpha- B) = - $25,191.10
Therefore Alpha- B should be recommended.

Question 2

Buckeye Manufacturing expects to generate additional revenue from its recently won government contract. Buckeye forecasts that the revenue will be $40 million in the first year, but will decline by $10.5 million every year for the next 3 years. What is the future worth of total revenue at the end of 3 years in actual dollars if the real interest rate is 2% per year and the average rate of inflation is 11.25% per year?

Answer 2

$103,988,036.03

Question 3

Determine the real rate of return of an investment that yields 10.5% per year when the inflation rate is 8.5% per year.

Answer 3

1.84%

Question 4

Find the annual worth equivalent in actual- dollars from year 1 to 8 of an investment of
$28,000 now, if the inflation rate is 5.5% and the inflation- free interest rate is 15% per year.

Question 5

Healthcare costs have risen an average of 85% per year over the past 5 years. What is the average annual percentage increase over time? If the inflation rate was 7% per year, how many percentage points over the inflation rate was the annual healthcare cost increase?

Question 6

Falcon Industries set aside $21,500 now) in an investment account that earns 6.5% per year, compounded monthly. Determine the future worth equivalent in real- dollars of this investment 12 years from now, if the inflation rate is 3.5% per year.

Question 7

A Caribbean cruise line has purchased a new cruise ship for $35 million and expects to realize a net revenue of $210,000 each year for the next 10 years. The estimated salvage value of the ship at the end of its useful life of 10 years is $134,000. Assume an effective federal tax rate of 40%, a state income tax rate of 7% per year, and an after- tax
inflation- free MARR of 8% per year. Calculate the actual dollar present worth of ATCF if straight- line depreciation is used and the average rate of inflation is 4% per year.

Question 8

An engineer wants to estimate the annual inflation- free cost of owning an aerobic digester system with a capacity of 195 million gallons per day MGD) for the first 8 years of operation. Company records show that the cost of a similar system with a capacity of 75 MGD was $8 million five years ago. The equipment cost index has increased 26% per year since then, and the future general inflation rate is forecast to be 2% per year. He estimates that the annual operating expenses of the new system would be $440,000 per year for the first two years and increase to $441,500 per year thereafter, due to the increase in maintenance costs. Calculate the annual inflation- free cost of owning the 295- MGD system for the first 8 years. Use a cost- capacity exponent of 0.14 for the system and a market- based MARR of 8% per year.

Question 9

A dentist is deciding between two X- ray machines for his new office. Estimated costs for each machine are given below. Which machine should be recommended based on the annual worth method and an actual- dollar analysis? Use an inflation- free MARR of 14%, an inflation rate of 6.5% per year, and a study period of 10 years.

Question 10

How much would equipment cost 7 years from now, if the cost today is $1000 and the deflation rate is 14.75% per year?

Question 11

If the real interest rate is 7% per year and the inflation rate is 36.75% per year, what is the inflation- adjusted interest rate?

Question 12

Calculate the implied annual inflation rate from a market interest of 15.75% per year and a real interest rate of 15.67% per year.

Question 13

If the Chinese Yuan is worth 14.3045 Japanese Yen and the Yen trades for 0.0091 U.S. dollars, determine how much $400 is worth in Chinese Yuan.

Question 14

TransAtlantic Petroleum Corp. plans to seek two additional production licenses from the Romanian government. The company estimates the costs to drill, acquire the seismic data, and conduct technical studies for these new fields will be $14.2 billion, 7 years from now.
The company plans to establish a fund in a Romanian bank. The fund earns a rate of
return of 5% per year a rate relative to the Romanian New Lei- RON). How much will the company have to set aside now in U.S. dollars if it is estimated that U.S. dollars will be devalued at an average of 2.25% per year and the present exchange rate is 2.57 RON per
U.S. dollar?

Question 15

Aggie Satellite Corp. issued 10,000 debenture bonds with a face value of $32,000 each and a bond interest rate of 14% per year, payable quarterly. The bonds have a maturity date of 13 years. If the inflation- free interest rate is 17% per year, and the inflation rate is 7.5%, what is the present worth of one bond to a person who wants to purchase it?