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School of Engineering

Midterm 1 - KEY

Spring 2010 Page 1

COURSE : INE 320, Engineering Economy I

DATE : Wednesday, March 24, 2010

TIME : 8:00 9:00 a.m.

SEMESTER : Spring 2010

PROFESSOR : Dr. Raymond Ghajar

1. Calculate the value of X below such that the positive cash flows will be exactly

equivalent to the negative cash flows. Use an interest rate of 16% compounded

semi-annually.

P

1.

The effective annual interest rate: % 64 . 16 1

2

16 . 0

1

2

=

+ =

a

i

Economic equivalence is established at year 0:

The present value of inflows is given by:

P(16.64%)

inflows

=$800 +$1,000(P/A, 16.64%, 2)(P/F, 16.64%, 2)

+$1,200(P/A, 16.64%, 2)(P/F, 16.64%, 5) +3X(P/F, 16.64%, 10)

P(16.64%)

inflows

=$800 +$1,000(1.5924)(0.7350) +$1,200(1.5924)(0.4632)

+3X(0.2145)

P(16.64%)

inflows

=$2,855.53 + 0.6435X

The present value of outflows is given by:

P(16.64%)

outflows

=$500(P/F, 16.64%, 1) +X[(P/F, 16.64%, 5)

+2(P/F, 16.64%, 8)]

P(16.64%)

outflows

=$500(0.8573) +X[0.4632 +2(0.2919)] =$428.67 + 1.047X

S

INE 320, Engineering Economy I Midterm 1 - Key

Spring 2010 Page 2

P

inflows

=P

outflows

$2,855.53 +0.6435X =$428.67 +1.047X

52 . 014 , 6 $

6435 . 0 047 . 1

67 . 428 $ 53 . 855 , 2 $

=

= X

2. An investment of $9.6 million grows by $8,000 each week. What annual interest

rate corresponds to this investment?

P

2. Since the investment is growing by a constant amount every week, the interest

rate applied to the principal is a simple one.

The weekly interest rate is given by:

I =i

w

*P i

w

=I/P =$8,000/$9,600,000 =0.000833 i

w

=0.0833% per week

The effective annual interest rate is a simple summation of the weekly rates

because the compounding is simple.

i

a

=52*i

w

=52*0.0833% =4.333%

S

3. How much money would be in the account of a person at the end of 3 years if he

deposited $1,000 now and $100 every month starting one month from now but he

withdrew $100 every 2 months starting two months from now? Use an interest

rate of 6% per year (solve with no inter-period interest paid).

P

3. Since there is no inter-period interest, the amounts deposited and withdrawn must

be accumulated at the end of each year.

Total deposits per year =12*$100 =$1,200

Total withdrawals per year =6*$100 =$600

Net deposits per year =$1,200 $600 =$600 per year

The future value is given by:

F =$1,000(F/P, 6%, 3) +$600(F/A, 6%, 3)

F =$1,000(1.1910) +$600(3.1836) =$3,101.16

S

4. Your firm asks your help in establishing a revolving student loan fund to help

children of the firm's employees finance their college education. The conditions

of the fund are as follows:

1. Each student is eligible for a loan of $5,000 per year at the beginning of

each year of the four college years.

2. Interest paid on the outstanding balance of the loan is charged at 6% APR

compounded monthly.

3. Repayment of the loan is made in 10 equal end-of-year payments, with the

first payment due two years after graduation.

(a) Draw a cash flow diagram for this student loan program, using only one

student as an example.

(b) Find the amount of annual repayments, A.

P

INE 320, Engineering Economy I Midterm 1 - Key

Spring 2010 Page 3

4. (a) The cash flow diagram for one student is shown below:

(b) Economic equivalence is established at time 0 as indicated in the CDF.

r =6% and M =12, the effective annual interest rate is given by:

% 16778 . 6 1

12

06 . 0

1 1 1

12

=

+ =

+ =

M

a

M

r

i

The equivalent amount of payments at time zero is given by:

V

pmt

=A(P/A, 6.16778%, 10) =7.3019A

The equivalent amount of the loan at time zero is given by:

V

loan

=$5,000(F/A, 6.16778%, 4)(F/P, 6.16778%, 2)

V

loan

=$5,000(4.3855)(1.1272) =$24,715.90

Economic equivalent between payments and receipts gives:

84 . 384 , 3 $

3019 . 7

90 . 715 , 24 $

90 . 715 , 24 $ 3019 . 7 = = = = A A V V

loan pmt

S

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