ASM International, an Australian steel company, claims that a savings of 40% of

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). Quarter Cost$ Savings, $ 0 -450,000 ---- 1 -50,000 10,000 2 -40,000 20,000 3 -30,000 30,000 4 -20,000 40,000 5 -10,000 50,000 6

Explanation / Answer

0 = -450,000 – [50,000(P/A,i%,5) –10,000(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)

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