A financier has a staff of three people whosejob it is to

Chapter , Problem 15-28

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A financier has a staff of three people whosejob it is to examine possible business ventures forhim. Periodically they present their findingsconcerning business opportunities. On a particularoccasion, they presented the following investmentopportunities:Project A:This is a project for the use ofcommercial land the financier already owns.There are three mutually exclusive alterna-tives.A1. Sell the land for $500,000 A2. Lease the property for a car-washingbusiness. An annual income, after all costs(property taxes, etc.) of $98,700 would bereceived at the end of each year for 20years. At the end of the 20 years, it isbelieved that the property could be sold for$750,000.A3.Construct an office building on theland. The building will cost $4.5 millionto construct and will not produce any netincome for the first 2 years. The probabili-ties of various levels of rental income, after allexpenses, for the subsequent 18 years are asfollows:Annual Rental Income Probability$1,000,0000.11,100,0000.31,200,0000.41,900,0000.2The property (building and land) probably can besold for $3 million at the end of 20 years. Project B:An insurance company is seekingto borrow money for 90 days at 133/4%perannum, compounded continuously.Project C:A financier owns a manufacturingcompany. The firm desires additional work-ing capital to allow it to increase its inven-tories of raw materials and finished products.An investment of $2 million will allow thecompany to obtain sales that in the past thecompany had to forgo. The additional capitalwill increase company profits by $500,000 ayear. The financier can recover this additionalinvestment by ordering the company to reduceits inventories and to return the $2 million.For planning purposes, assume the additionalinvestment will be returned at the end of10 years.Project D:The owners ofSunrisemagazineare seeking a loan of $500,000 for 10 years ata 16% interest rate.Project E:The Galveston Bank has indicateda willingness to accept a deposit of any sumof money over $100,000, for any desired dura-tion, at a 14.06% interest rate, compoundedmonthly. It seems likely that this interest ratewill beavailable from Galveston,orsomeotherbank, for the next several years.ProjectF:A carrentalfirm is seekingaloan of$2 million to expand its fleet. The firm offers torepay the loan by paying $1 million at the endof Year 1 and $1,604,800 at the end of Year 2.If there is $4 million available for investmentnow (or $4.5 million if the ProjectAlandis sold), which projects should be selected?What is the MARR in this situation?If there is $9 million available for investmentnow (or $9.5 million if the ProjectAland issold), which projects should be selected?