Test Bank For Engineering Economy 16th Edition By Sullivan

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Edition:  16th Edition

Format: Downloadable ZIP Fille

Resource Type: Test bank

Duration: Unlimited downloads

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Test Bank For Engineering Economy 16th Edition By Sullivan

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. Answer the question.

1) You are given $7700 as a graduation gift and you are looking into two high interest
investment options. The first option is a bond with a maturity date three years from now
that offers 12.25% per year interest, payable annually. The interest can be withdrawn only
at the end of year 3. Another option is a tax-free market savings account that offers 11.5%
per year interest, and the funds can be withdrawn any time after 2 years. Which is a better
alternative on the basis of total interest paid at the end of year 3? Discuss other factors, in
addition to interest rates, that should be taken into consideration to justify your investment
decision. 1) Answer:
1
st option: Interest = $3190.55
2
nd option: Interest = $2973.71
The 1
st option is better on the basis of interest paid.
Other factors that should be taken under consideration include whether the fund is
left in the 2
nd option at the end of year 2, the tax rate, other investment
opportunities that the fund can be invested in after the end of year 2 that would
yield higher return, etc. Explanation:
1
st option: Interest at the end of Year 1 = 7700 x 0.1225 = 943.25
Interest at the end of Year 2 = (7700 943.25) x (0.1225)
= 1058.80
Interest at the end of Year 3 = (7700 943.25 1058.80) x (0.1225)
= 1188.50
Total interest = 943.25 1058.80 1188.50
= 3190.55
2
nd option: Interest at the end of Year 1 = 7700 x 0.115 = 885.50
Interest at the end of Year 2 = (7700 885.50) x (0.115)
= 987.33
Interest at the end of Year 3 = (7700 885.50 987.33) x (0.115)
= 1100.88
Total interest = 885.50 987.33 1100.88
= 2973.71
Thus, the 1
st option is better on the basis of interest paid.
Other factors that should be taken under consideration include whether the
fund is left in the 2
nd option at the end of year 2, whether the fund can be
reinvested at the same interest rate for the 2
nd option, the tax rate, other
investment opportunities that the fund can be invested in after the end of year 2
that would yield a higher return, and other factors that impact the economy
which can impact the interest rate and price of the bond. 1
2) Tahiti Manufacturing recently purchased a new machine. The maintenance contractor
recommended that this model should receive maintenance every 3,000-6,000 hours of
operation. If each maintenance check costs $220 and the machine is expected to provide
30,000 hours of service, what is the total savings of scheduling maintenance every 6,000
hours over 3,000 hours? 2) Answer: $1100 Explanation:
Maintenance every 3,000 hours:
Maintenance cost = 10 x $220 = 2200
Maintenance every 6,000 hours:
Maintenance cost = 5 x $220 = $1100
Total savings = 2200 – 1100 = 1100

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