• Draw the necessary Cash Flow Diagram(s)
• Round your answers to the nearest dollar unless otherwise specified
• Show your work
1) To help reduce the national debt, the President is proposing to reduce the number of
federal employees by offering bonuses of $75K to retire early. If 4,000 employees
accept the bonus in Year 1; 3,000 employees accept the bonus in Year 2; and 6,000
employees accept the bonus in Year 3, what was the equivalent annual cost of the
program over the three-year period at an interest rate of 11% per year. (10)
2) A metallurgical engineer is considering three methods for processing of materials.
Determine which has the least cost on the basis of an annual worth comparison at 8%
per year, compounded quarterly. (10)
| | Machine A | Machine B | Contractor |
|-----------------|-----------|-----------|------------|
| First Cost, $ | 1,500,000 | 9,000,000 | 0 |
| AOC, $ | 950,000 | 600,000 | 1,700,000 |
| Salvage Value, $ | 250,000 | 3,000,000 | 0 |
| Life, years | 4 | 6 | 2 |
3) Calculate the infinite-life equivalent annual cost of $3M in Year 0, $8M in Year 4, and
$500,000 in Years 11 through infinity. The interest rate is 14% per year. (10)
4) Hardrocker Cycle sells and services motorcycles. Grubby wants you to perform an
annual worth evaluation of in-house repair versus a contractor at 20% per year.
| | In-House | Contractor |
|-----------------|----------|------------|
| First Cost, $ | 2M | 0 |
| Annual Cost, $ | 400,000 | 100,000 |
| Annual Revenue, $ | 800,000 | 250,000 |
| Life, Years | $\infty$ | 5 |
