40. Cornell has two options for upgrading their athletic facilities. The off campus option costs only $2.5 million, but it will require frequent bus service to those facilities at an annual cost that starts at $200,000 and increases by 5% per year (buses, drivers and mechanics salaries, maintenance, road wear, etc) Improving the on-campus facilities will cost $5.0 million, but no extra transportation costs are required. Both options involve an estimated annual

maintenance cost of 1 million for about 30 years before new facilities will again be needed Using benefit-cost ratio analysis, determine which option is more economically efficient Use

an interest rate of 10% per year Contributed by D P Loucks Cornell University

Variable rate cd’s = $90 treasury bills = $150 discount loans = $20 treasury notes = $100 fixed rate cds = $160 money market deposit accts. = $140 savings deposits = $90 fed funds borrowing = $40 variable rate mortgage loans $140 demand deposits = $40 primary reserves = $50 fixed rate loans = $210 fed funds lending = $50 equity capital = $120 a. develop a balance sheet from the above data. be sure to divide your balance sheet into rate-sensitive assets and liabilities as we did in class and in the examples. b. perform a standard gap analysis and a duration analysis using the above data if you have a 1.15% decrease in interest rates and an average duration of assets of 5.4 years and an average duration of liabilities of 3.8 years. c. indicate if this bank will remain solvent after the valuation changes. if so, indicate the new level of equity capital after the valuation changes. if not, indicate the amount of the shortage in equity capital.