The four elements are cash flows, time of occurrence of cash flows, interest rates, and
measure of economic worth.
1.2 (a) Capital funds are money used
... [Show More] to finance projects. It is usually limited in the amount
of money available.
(b) Sensitivity analysis is a procedure that involves changing various estimates to see if/how
they affect the economic decision.
1.3 Any of the following are measures of worth: present worth, future worth, annual worth, rate
of return, benefit/cost ratio, capitalized cost, payback period, economic value added.
1.4 First cost: economic; leadership: non-economic; taxes: economic; salvage value: economic;
morale: non-economic; dependability: non-economic; inflation: economic; profit: economic;
acceptance: non-economic; ethics: non-economic; interest rate: economic.
1.5 Many sections could be identified. Some are: I.b; II.2.a and b; III.9.a and b.
1.6 Example actions are:
• Try to talk them out of doing it now, explaining it is stealing
• Try to get them to pay for their drinks
• Pay for all the drinks himself
• Walk away and not associate with them again
1.7 This is structured to be a discussion question; many responses are acceptable. It is an ethical question, but also a guilt-related situation. He can justify the result as an accident; he can feel justified by the legal fault and punishment he receives; he can get angry because it WAS an accident; he can become tormented over time due to the stress caused by accidently causing a child’s death.
1.8 This is structured to be a discussion question; many responses are acceptable. Responses can vary from the ethical (stating the truth and accepting the consequences) to unethical (continuing to deceive himself and the instructor and devise some on-the-spot excuse).
Lessons can be learned from the experience. A few of them are:
• Think before he cheats again.
• Think about the longer-term consequences of unethical decisions.
• Face ethical-dilemma situations honestly and make better decisions in real time.
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Alternatively, Claude may learn nothing from the experience and continue his unethical
practices.
1.9 i = [(3,885,000 - 3,500,000)/3,500,000]*100% = 11% per year
1.10 (a) Amount paid first four years = 900,000(0.12) = $108,000
(b) Final payment = 900,000 + 900,000(0.12) = $1,008,000
1.11 i = (1125/12,500)*100 = 9%
i = (6160/56,000)*100 = 11%
i = (7600/95,000)*100 = 8%
The $56,000 investment has the highest rate of return.
1.12 Interest on loan = 23,800(0.10) = $2,380
Default insurance = 23,800(0.05) = $1190
Set-up fee = $300
Total amount paid = 2380 + 1190 + 300 = $3870
Effective interest rate = (3870/23,800)*100 = 16.3%
1.13 The market interest rate is usually 3 – 4 % above the expected inflation rate. Therefore,
Market rate is in the range 3 + 8 to 4 + 8 = 11 to 12% per year
1.14 PW = present worth; PV = present value; NPV = net present value; DCF = discounted cash
flow; and CC = capitalized cost
1.15 P = $150,000; F = ?; i = 11%; n = 7
1.16 P = ?; F = $100,000; i = 12%; n = 2
1.17 P = $3.4 million; A = ?; i = 10%; n = 8
1.18 F = ?; A = $100,000 + $125,000?; i = 15%; n = 3
1.19 End-of-period convention means that all cash flows are assumed to take place at the end of
the interest period in which they occur.
1.20 fuel cost: outflow; pension plan contributions: outflow; passenger fares: inflow;
maintenance: outflow; freight revenue: inflow; cargo revenue: inflow; extra bag charges:
Inflow; water and sodas: outflow; advertising: outflow; landing fees: outflow; seat
preference fees: inflow.
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1.21 End-of-period amount for June [Show Less]