INDE 301 Midterm, Spring 2017

16 INDE 301 Final Exam 05/14/ Return this question sheet with the answer booklet 120 minutes, closed-book = Name | Problem 1 (20 Points) : duct (Purchasing) A company has offered you two different payment plans for purchasing @ product, * Option A. 15% down payment (of the total price) and 10 annual payments of $ 1,200. * Option B. No down payment and 12 annual payments of $ 1,500, Treat the down payment as occurring at Year 0. Assume an interest rate of 5% per year. pay elie a. What is the down payment of Option A? b. What is the price paid for the product under Option A? ¢. What is the price paid for the product under Option B? d, Which payment option should be selected, A or B? e. Briefly explain why someone might choose the option that has the larger sale price. Problem 2 (25 points) ea rs : (Replacement) Suppose you have Machine A that you are considering replacing with Machine B. Machi s bought two years ago for $25,000. [t was appraised recently, and it was found 10 be worth about $18.0) Tt has a remaining life of three_years with an increasing maintenance and operation (M&O) cost every year, and its marginal cots aré not increasing. The momic service life (ESL) analysis for Machine A over ils remaining life is given in the Howing. fable. In this table, 44%" is the annual cost if Machine A is replaced after k years. shine B zht for $30,000, and the seller is willing to buy your current machine ee ne ee eg 520,500. With the rapidly growing market in alah Machine B is expected to drop in value by 40% each year. It has an expected life of a and a maintenance and operation (M&O) cost of $1000 in the first six months, — is expected io dncrease by $600 every six months, The interest rate is 8% per year compounded monthly. a. Find the ESL for Machine B? (Take into account the trade-in-value of Machine A.) b. Should Machine A be replaced by Machine B now? If not now, when? Problem 3 (15 points) (ROR 0) A one-time investment of $2,000 (now) pays $100 for the first year, $200 for se second year, and $300 for the third year. The revenue cycle repeats indefinitely. The mean pays $100 in the fourth year, $200 in the fifth year, and $300 in the sixth year, = so on. Cas flows in Years 0, 1, 2, 3, ..., are as -2000, 100, 200, 300, 100, 200, 300, 100, 200, 300, ... If the annual inflation rate is 3%, what is the real rate of return of this investment? (Where Not To Go) A group of fresh AUB graduates have been working on extending their final-year project. The project is on developing a Lebanese GPS system, WNTG, which runs as a smart phone app, and provides driving directions focusing on avoiding hassles and dangers, telated, to incomprehensible traffic jams, road-blocks due to civil unrest, and roads which may be considered unsafe in the event of a security threat. (WNTG would recommend staying home on many days ©.) Anyhow, the group has now finished the programming of WNTG — Beta, and has secured funding. A company, WNTG LLC, may be started. Ee a years. It involves an initial investment of $50,000, split into $40,000 to buy desktops an “yervers, and office furniture, and $10,000 for security deposit ($2000), legal fees, and other administrative costs related fo the not-too-casy process of a starting a company in Lebanon, The security deposit will be returned at the end. ofthe planning horizon. WNTG is estimated to make no.sales in its first three months (first quarter) of operations. An initial demand of 1,000 app downloads per month is expected in the second quarter (next three months). Demand is expected to increase steadily with 100 more app downloads per month, every month thereafter. The app is expected to sell for $20. Re i —_ : -> ' ee é a Computer hardware and office furniture will undergo straight line depreciation. (No significant salvage value is anticipated at the end of the two-year planning horizon.) At the end of each month, WNTG expects to have the following costs, (1) salaries, $10,000, {ii) rent, $2,000, (iii) utilities and high-speed internet, $1,000, (iy) lawyer and accountant fees, $1,000, software license and hardware warranty, $1,000, and (v) other minar expenses, $1,000, Financing comes from a local bank that agreed on providing a $36-0004ean at an interest rate of 18% per year, peepeeined smeihly, — 8 priup support group that will provide another $20,000 at an pee eee compounded monthly. WNTG founders require a 5% (per year) nsicmargin and a 270 (per year) “profit margin,” in addition to covering the financing charges, Lebanon's corporate income tax Tate is 15%. Loan | nierest is nol exempted from tax under the Lebanese law. To sunplity the analysis, a quarter may be used as payment period. The needed assumptions of end-of-period accounting are justified here, 4 Problem 4 (40 points) Should WNTG LLC be started? Bonus questions (PROF. MADDAH STUDENTS ON a. What i, s the name of the professor talking in the flaw of averages video (FAV)? Sen dp b. According to FAY, what is the chance of a meeting attended by 10 people to start on time, if each person has only a 1% chance of being late? c. FAV advocates a new method abbreviated SIP. What does SIP stand for? ie yb a in ee ve LY, 3 points)