Cost, $
ID: 1178206 • Letter: C
Question
ASM International, an Australian steel company, claims that a savings of 40% of the cost of stainless steel threaded bar can be achieved by replacing machined threads with precision weld depositions. A U.S. manufacturer of rock bolts and grout-in fittings plans to purchase the equipment. A mechanical engineer with the company has prepared the following cash flow estimates. Determine the expected rate of return per quarter and per year (nominal). Draw Cash Flow Diagram as well.
Quarter
Savings, $
0
%u2013450,000
%u2014
1
%u201350,000
10,000
2
%u201340,000
20,000
3
%u201330,000
30,000
4
%u201320,000
40,000
5
%u201310,000
50,000
6%u201312
%u2014
80,000
Quarter
Savings, $
0
%u2013450,000
%u2014
1
%u201350,000
10,000
2
%u201340,000
20,000
3
%u201330,000
30,000
4
%u201320,000
40,000
5
%u201310,000
50,000
6%u201312
%u2014
80,000
Explanation / Answer
0 = -450,000 %u2013 [50,000(P/A,i%,5) %u201310,000(P/G,i%,5)] + 10,000(P/A,i%,5)
+10,000(P/G,i%,5) + 80,000(P/A,i%,7)(P/F,i%,5) Solve by trial and error or Excel
i = 2.36% per quarter (Excel)
= 2.36(4)
= 9.44% per year (nominal)