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FINAL EXAM REVIEW

FINAL EXAM REVIEW. Spring 2014. Nominal and Effective Interest Rates Payment Period  Compounding Period Mortgages and Car Loans MARR and WACC Present Worth and Annual Worth Capitalized Cost Cost Projects with Unequal Lives Revenue Projects with Unequal Lives

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FINAL EXAM REVIEW

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  1. FINAL EXAM REVIEW Spring 2014

  2. Nominal and Effective Interest Rates Payment Period  Compounding Period Mortgages and Car Loans MARR and WACC Present Worth and Annual Worth Capitalized Cost Cost Projects with Unequal Lives Revenue Projects with Unequal Lives Internal Rate of Return Modified Internal Rate of Return Incremental ROR Analysis Bond Yields True Cost of a Loan Benefit/Cost Ratio Incremental B/C Analysis Breakeven Analysis Depreciation

  3. Nominal & Effective Interest Nominal Interest Rate Example = APR r = i × m Effective Interest Rate Example = APY ie = (1+i)n – 1

  4. PP  CP When using (P|A,i%,n), etc.i and n must agree w.r.t. time ie= (1+i)n – 1

  5. Mortgages and Car Loans Monthly payment amount isB0 (A|P,i%,n) Remaining balance at any time(including Time 0) is equal to thePW of the remaining payments.

  6. Capitalized Cost Present worth when n =  (P|A,i%,) = 1/i (A|P,i%,) = i

  7. Revenue Projects w/ Unequal Lives “Do Nothing” is an Option “Implicit Reinvestment Assumption” Study Period = Longest Project Life Choose project with highest PW Implicitly assumes profits reinvested at MARR

  8. Cost Projects w/ Unequal Lives “Do Nothing” is NOT an Option “Repeatability Assumption” Study Period = LCM of Project Lives Choose option with least negative AW or lowest EUAC Implicitly assumes cash flows are repeated to LCM

  9. Internal Rate of Return The interest rate that makes the PW = 0

  10. Modified Internal Rate of Return Draw the net cash flow diagram Compound all positive cash flows to Time n Discount all negative cash flows to Time 0 Solve for the external rate of return: F = P (1 + ERR)n

  11. Incremental ROR Analysis Start with lowest-cost project (which is“do nothing” for revenue projects) andaccept a more expensive project only if i* > MARR

  12. Bond Yields Yield to Maturity Purchase price depends on market Coupon rate and YTM are both APRs Coupons paid twice a year (usually) Bond redeemed for face value at maturity Calculate the IRR of the cash flows Zero-Coupon Bonds Bond purchased at a deep discount Bond redeemed for face value at maturity

  13. True Cost of a Loan Calculate the IRR of the cash flows

  14. Benefit/Cost Ratio

  15. Benefit/Cost Ratio

  16. Incremental B/C Analysis Start with lowest-cost project (based onthe denominator of the B/C formula) andaccept a more expensive project only if B/C > 1

  17. Breakeven Analysis One Project Set PW = 0 and solve for x Two Projects Set PWA = PWB and solve for x

  18. Straight-Line Depreciation

  19. MACRS Depreciation

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