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3. Your firm is considering purchasing an old office building with an estimated remaining service life of 20 years. Recently, the tenants signed a long term lease, which leads you to believe that the current rental income of $250,000 per year will remain constant for the first five years. Then the rental income will increase by 10% for every five year interval over the remaining life of the asset. That is, the annual rental income would be $275,000 for years 610,$302,500 for years 1115 and $332,750 for years 1620. You estimate that operating expenses, including income taxes, will be $80,000 for the first year and that they will increase by 5% each year there after. You also estimate that raising the building and selling the lot on which it stands will realize a net amount of $50,000 at the end of the 20 year period. What would the maximum amount you would be willing to pay for the building and lot at the present time with an interest rate of 12% per year? 5. J\&B Company is considering investing in an automated manufacturing system costing $1,500,000 and have twenty years useful economic life. It has a salvage value of 20% of the initial cost. The automated manufacturing system will reduce labor and material usage cost. The expected saving will be $300,000 during the first year and decreases by $10,000 per year during the life of the project. The expected operating and maintenance cost associated with this system would be $20,000 for the first year and increases at a rate of 5% per year during the life of the project. Use a present worth analysis to justify this investment assuming that the firm's APR is 12%. 2. A couple wants to save for their sons college expenses. Their son will enter college 16 years from now. The college fund will earn 12% compounded monthly. An annual amount of $30,000 in terms of todays dollars will be required to support the sons college expenses for four years. Assume that these college payments will be made at the beginning of each school year. The future general inflation rate is estimated to be 5% per year. a. What is the amount of the sons junior year expenses in terms of actual dollars? b. Use constant dollar analysis to find the present worth of the college expenses? c. Use the actual dollar analysis to find the present worth of the college expenses? d. What is the equal amount in actual dollars the couple must save each month until their son goes to college? 1. An airline is considering two types of engine systems for use in its planes: System A costs $200,000 and uses 40,000 gallons of fuel per 1000 hours of cperation at the average load encountered in passenger service. System B costs $300,000 and uses 35,000 gallons of fuel per 1000 hours of operation at the average load encountered in passenger service. Both engine systems have the same life and the same maintenance and repair record and both have a three year life before any major overhaul is required. Each system has a salvage value of 10% of the initial investment. The jet fuel costs $4 per gallon currently and fuel consumption is expected to increase at the rate of 5% per year because of degrading engine efficiency. Assum 2000 hours of operation per year and an interest rate of 12% a) Compute the cash flow and balance for both systems cuntam A Qsiotan R b) Which engine system should the firm install based on present worth analysis 4. The following graph shows the average cost of college over the years in USA. We assume the cost is due at the beginning of the school year. a. Compare the growth rate of the average cost of public and private colleges from 1987 to 2017. b. If the current trend continues, what would the expected average cost of colleges ( P and P) be in 2040? c. Find the equivalent average cost of public college stated in terms of 1987 dollars