Understanding Inflation and the Time Value of Money

Complete Assignments 3 and 4 on page 45 of the textbook. Complete Assignments 4 and 5 on page 57.

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3.  The Department of Corrections (DOC) needs to replace two of its prison transport buses. There are two companies that have a track record of making reliable vehicles, and both make a bus that meets the needs of the department. The DOC pays an 8% interest rate on money it borrows. The bus from Company A has a purchase price of $105,000 and a 10-year service life expectancy, and it averages $2,000 per year in maintenance costs. The bus from Company B has a purchase price of $110,000 and a 10-year service life expectancy, and it averages $1,500 per year in maintenance costs. Which bus should the Department of Corrections select?
You can use this NPV calculator for problem 3 on page 45
remember you are dealing with all cash outflows which consist of the purchase price and maintenance costs. For this the 8% interest rate is the discount rate. You can use the Net Present Value calculator I posted.

4.  The information technology (IT) department has recently completed a major refurbishment and upgrade of the citys data center, at a cost of $10,145,825. The chief information officer (CIO) has informed the central budget office that the IT department will need to do the same kind of upgrade in 5 years, and he expects the total cost of that project to be 10% more than this years project, accounting for better future technology and future increases in costs. The city does not expect to have enough funding available to pay for the refurbishment in 5 years and must put money away during each of the next 4 years to meet this need. How much money should the city put aside in each of the next 4 years to be able to pay for the data center refurbishment 5 years from now, assuming the city can invest the money at a 4.5% interest rate?

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4. Find a published cost-benefit analysis (net present value analysis) for any level of government and any public policy. Determine whether a sensitivity analysis has been conducted and, if so, whether any alternatives result in a recommendation that is contrary to the central recommendation of the published analysis. What variable changed in a way that led to the contrary recommendation?

5. Eastviews police department hires a new class of 50 trainees every quarter to begin the 3-month police academy program. Four nearby communities have struggled in running their own police academies, partly due to their own city funding but also because their class size is much smaller (ranging from 5 to 15 trainees in each city). Eastviews newspaper recently ran a story about the citys intent to build a new training facility for the police academy. The four communities want to partner with Eastview to have Eastview provide their academy program rather than hosting it themselves. Using the information in Worksheet 8.3, analyze how the cost would vary from the lowest enrollment to the highest enrollment if Eastview and the four surrounding communities cooperated on a joint academy. The academy provides room and board to all trainees for a period of 11 weeks.