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Lebanese American University

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 Since there is no inter-period interest, the amounts deposited and withdrawn must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

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