MME 3113: Engineering Management ASSIGNMENT #2

(Concept of simple and compound interest, Cash-flow diagram and Rule of 72)
Total Marks: 50 Prob #1 [4]: A start-up chemical company has established a goal of making at least a 25% per year rate of return on its investment. If the company acquired $40 million in venture capital, how much did it have to earn in the first year. Prob #2 [4]: An investment of $40,000 made one year ago and $50,000 one year from now are equivalent at what interest rate? Prob #3 [4]: How long will it take for an investment of $100,000 to accumulate to $200,000 at an interest rate of 10% per simple interest? Prob #4 [10]: A company that manufactures in-line mixers for bulk manufacturing is considering borrowing $1.75 million to update a production line. If it borrows the money now, it can do so at an interest rate of 10% per simple interest for 5 years. If it borrows next year, the interest rate will be only 8% per year, but the interest rate will be compound interest for 4 years. (a) How much interest (total) will be paid under each scenario? (b) Should the company borrow now or 1 year from now? Assume the total amount due will be paid when the loan is due in either case. Prob #5 [3]: Rank the following from the lowest to the highest interest rate: Cost of capital, acceptable rate of return on an investment, minimum attractive rate of return on a safe investment. Prob #6 [5]: Construct a cash flow diagram for the following cash flows: $10,000 outflow at time zero, $3000 per year inflow in years 1 through 5 at an interest of 10% per year, and an unknown future amount in year 5.

Prob #7 [5]: Construct a cash flow diagram to find the present worth for the following situation at an interest rate of 20% per year:

Year 0 1-7

Cash Flows $-50,000 $ -8,000

Prob #8 [5]: Construct a cash flow diagram that represents the amount of money that would be accumulated in 15 years from investment of $20,000 now at an interest rate of 8% per year. Prob #9 [5]: Estimate the time it would take for money to quadruple in value at a compound interest rate of 8%. (Use the rule of 72). Prob #10 [5]: Use the rule of 72 to estimate the interest rate that would be required for $5000 to accumulate to $10,000 in 5 years.

Note:

Date of Submission: 8/10/2012 (for Section 1) and 10/10/2012 (for section 2), Delay will cost @ 10% marks per day No need of submission after 5 days from the due date.

Tips for submission: o o o o o Solve the problems yourself for deeper understanding. Use a cover page. Write down your matric number, name, section, course title, assignment number etc. Put the Due date of Submission and the Date of Submission You can print the cover page if you want. Other part has to be hand written. Mind that Only hand written submission is acceptable .