A financier has a staff of three people whose

job it is to examine possible business ventures for

him. Periodically they present their findings

concerning business opportunities . On a particular

occasion, they presented the following investment

opportunities:

Project A: This is a project for the use of

commercial land the financier already owns.

There are three mutually exclusive alternatives.

Al. Sell the land for $500,000.

A2. Lease the property for a car-washing

business . An annual income, after all costs

(property taxes, etc.) of $98,700 would be

received at the end of each year for 20 years.

At the encl of the 20 years, it is believed that

the property could be sold for $750,000.

A3. Construct an office building on the land.

The building will cost $4.5 million to construct

and will not produce any net income for the

first 2 years. The probabilities of various levels

of rental income, after all expenses, for the

subsequent 18 years are as follows:

The property (building and land) probably can be

sold for $3 million at the end of 20 years.

Project B: An insurance company is seeking

to borrow money for 90 days at 133/4% per

annum, compounded continuously .

Project C: A financier owns a manufacturing

company. The firm desires addicional _working

capital to allow it to increase its inventories

of raw materials and finished product,.

An investment of $2 million will allow the

company to obtain sales that in the paSt _the

company had to forgo. The additional capital

will increase company profits by $500,000 a

year. The financier can recover this additional

investment by ordering the company to reduce

its inventories and to return the $2 million.

For planning purposes , assume the additional

investment will be returned at the end of

10 years.

Proj ect D: The owners of Sunrise magazine

are seeking a loan of $500,000 for 10 years at

a 16% interest rate.

Project E: The Galveston Bank has indicated

a willingness to accept a deposit of any sum

of money over $100,000, for any desired duration,

at a 14.06% interest rate, compounded

monthly. It seems likely that this interest rate

will be available from Galveston, or some other

bank, for the next several years.

Project F: A car rental firm is seeking a loan of

$2 million to expand its fleet. The firm offers to

repay the loan by paying $1 million at the end

of Year I and $1,604,800 at the end of Year 2.

If there is $4 mi1lion available for investment

now (or $4.5 million if the Project A land

is sold), which projects should be selected?

What is the MARR in this situation?

If there is $9 million available for investment

now (or $9.5 million if the Project A land is

sold), which projects should be selected?

Annual Rental Income $1,000,000 1,100,000 1,200,000 1,900,000 Probability 0.1 0.3 0.4 0.2 Annual Rental Income $1,000,000 1,100,000 1,200,000 1,900,000 Probability 0.1 0.3 0.4 0.2