4.- A bicycle manufacturer currently produces 300,000 units a year and expects output levels to remain steady in the future. It buys chains from an outside supplier at a price of $2 a chain. The plant manager believes that it would be cheaper to make these chains rather than buy them. Direct in-house production costs are estimated to be only $1.50 per chain. The necessary machinery would cost $250,000 and would be obsolete after 10 years. This investment could be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. The plant manager estimates that the operation would require additional working capital of $50,000 but argues that this sum can be ignored since it is recoverable at the end of the 10 years. Expected proceeds from scrapping the machinery after 10 years are $20,000. If the company pays tax at a rate of 35% and the opportunity cost of capital is 15%, what is the net present value of the decision to produce the chains in-house instead of purchasing them from the supplier?

5.-You have found three investment choices for a one-year deposit: 10% APR compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice. (Assume that there are 365 days in the year.)

6.- In an MBA class that graduated a few years ago there was a student, Jeff "Spot" Diamond, who came up with a number of business ideas related to improving the life of his fellow classmates. One of the ideas Spot considered required him to buy a piece of equipment at an immediate cost of $3,750. The asset would have a two-year life and be responsible for generating a positive cash flow of $2,000 at the end of the first year and a positive cash flow of $3,000 at the end of the second year. For his analysis, Spot determined that the appropriate interest rate for evaluation of the purchase decision was 15%. For this problem right now let's make it a pure finance question without any concerns about any possibly confusing accounting issues. That is, let's assume the equipment has zero salvage value, zero disposal cost, and that Spot's company existed in a world without taxes. Don't worry, we will make our world more realistic in a bit by bringing in more accounting. a. Calculate the Internal Rate of Return (IRR) for this investment. Please show your finance and mathematical work in driving yourself to an answer. Calculating IRR by simply using your financial calculator or spreadsheet program is not sufficient. You are going to have to go back to your ability to do some math from your early years in school. Be sure to show that work. [0.50 points] b. Based upon your answer in a. above, indicate whether the piece of equipment should be purchased. Please be sure to explain your answer fully. To do that you should clearly explain in a couple of well-written sentences why buying or not buying this piece of equipment for $3,750 is a good decision to make relative to your calculated IRR.

7.- You are considering moving your money to new bank offering a one-year CD that pays an 8% APR with monthly compounding. Your current bank's manager offers to match the rate you have been offered. The account at your current bank would pay interest every six months. How much interest will you need to earn every six months to match the CD?