Air conditioning for a college dormitory will cost $3.5 million to install and $125,000 per year to operate at current prices. The system should last 20 years. The real cost of capital is 7%, and the college pays no taxes. What is the equivalent annual cost?

2. Deutsche Transport can lease a truck for four years at a cost of 52,000 annually. It can instead buy a truck at a cost of 102,000, with annual maintenance expenses of 25,000. The truck will be sold at the end of four years for 29,500. Ignore taxes.

a. What is the equivalent annual cost of buying and maintaining the truck if the discount rate is 10%?

b. Which is the better option: leasing or buying?

3. The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs:

Year Machine A Machine B

0 $57,000 $67,000

1 11,600 11,800

2 11,600 11,800

3 11,600 11,800

4 --- 11,800

Assume a 10% discount rate and ignore taxes.

1. What is the equivalent annual cost of each machine?
2. Which machine should the company buy?

4. Machine B is expected to produce the following real cash flows:

Cash Flows ($ thousands)

Machine C0 C1 C2 C3

B 121 132 135 155

Machine C was purchased five years ago for $200,000 and produces an annual real cash flow of $65,000. It has no salvage value but is expected to last another five years. The company can replace machine C with machine B either now or at the end of five years. The opportunity cost of capital is 12%. When should the company replace machine C, now or 5 years later?

5. A game of change offers the following odds and payoffs:

Probability Payoff

0.3 $400

0.35 200

0.35 100

a. what is the expected cash payoff?

b. suppose each play of the game costs $100. what is the expected rate of return?

c. what is the variance of the expected returns?

d. what is the standard deviation of the expected returns?