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Submitted to:

Instructor

Submitted by:

September 201

RAMOS VERANO TIMBOL SEVILLA (ENGINEERING ECONOMY)

A. SIMPLE INTEREST

1. If you borrowed money from your classmate with a simple interest of 15%, find the present

worth of P 50,000; which is due at the end of 1 year.

GIVEN: SOLUTION:

F = P 50,000 F=P+I

n=1 P50,000=P+P(0.15)(1)

P=? P = P 43,478.26

2. A price tag of a T-shirt is P 1,500 is payable in 60 days but if paid within 30 days it will have a

5% discount. Find the rate of interest.

GIVEN: SOLUTION:

d = 5% = 0.05 Discount=0.05(1500)=75

i=? I=Pin

75=1425i(30/360)

i = 63.16%

3. P 5,000 is borrowed for 85 days at 18% per annum simple interest. How much will be due at

the end of 85 days?

GIVEN: SOLUTION:

F=?

4. A bank loan of P 5,000 was made at 7% simple interest. How long would it take in years for

the amount of the loan and interest to equal P 9,200?

GIVEN: SOLUTION:

n=?

5. A loan shark charges 15% simple interest on a P600 loan. How much will be repaid if the load

is paid back in one lump sum after three years?

GIVEN: SOLUTION:

P = P 600 A=P+Pin

i = 15% = 0.15 =600+600(0.15)(3)

n = 3 years A = P 408

B. COMPOUND INTEREST

1. A loan of $3,000 is made at an interest of 12% for 5 years. The principal and interest are due at

the end of the fifth year.

GIVEN: SOLUTION:

P = $ 3,000 F = P (1+i)n

n = 5 years F = $ 5287.03

2. A man wishes his son to receive P 200,000 ten years from now. What amount should he invest

if it will earn interest 10% compounded annually during the first 5 years and 12% compounded

quarterly during the next 5 years?

GIVEN: SOLUTION:

F = P 200,000 P2 = F (1+i)-n

i2 = 12%/4 = 3% = P 110,735.15

n1 = 5 P1 = P2 (1+i)-n

= P 68,757.82

3. By the condition of a will the sum of P 25,000 is left to be held in trust by her guardian until it

amounts to P 45, 000. When will the girl receive the money if the fund is invested at 8%

compounded quarterly.

GIVEN: SOLUTION:

P = P 25,000 F = P (1+i)n

4. At a certain interest rate compounded semiannually P 5,000 will amount to P 20,000 after 10

years. What is the amount at the end of 15 years.

GIVEN: SOLUTION:

i=?

F2 = ?

5. A $1,000 deposit for 5 years at 10% / yr compounded quarterly yields what future value?

GIVEN: SOLUTION:

P = $ 1,000 F = P (1+i)n

F=?

1. Your plan is to save $ 100 at the end of each year at 8% interest. What will be the size of the

account in 10 years?

GIVEN: SOLUTION:

i = 8% = 0.08 F = $ 1,448.66

F=?

2. A mans goal is to save $ 7,500 for a car down payment in 4 years by investing part of his

year-end bonus. How much would he need to save annually at 4% interest?

GIVEN: SOLUTION:

F = $ 7,500 A = F [ i/(1+i)n 1]

i = 4% = 0.04 A = $ 1,766.17

A=?

3. A woman is scheduled to receive $ 15,000 at the end of the next 7 years. If the current interest

rate is 6%, what is the equivalent amount today?

GIVEN: SOLUTION:

i = 6% = 0.06 = $ 83,735.72

P=?

4. Loida invest P 5,000 in an account that returns 6% annual interest. How much can you

withdraw each semester (twice/year) over the next 4 years for books and supplies?

GIVEN: SOLUTION:

P = P 5,000 A = P [i(1+i)n/(1+i)n 1]

n = 4(2) = 8 = P 5,000[0.06(1+0.06)8/(1+0.06)8 1]

i = 6% = 0.06 = P 712.28/semester

A=?

5. Jessie was given $ 5,000 to invest in a 6% annual interest. What will be the amount of the

money in 5 years?

GIVEN: SOLUTION:

i = 6% = 0.06 F = $ 28,185.46

C.2 DEFERRED ANNUITY

1. What amount should you invest now if you want to receive payments of $ 1,000 at the end of

each year for 10 years with the receipt of the first payment 3 years from now? Assume that

money earns 5% compounded annually.

GIVEN: SOLUTION:

n2 = 2 years P10 = F2

2. Calculate the amount of money an investment banker would have to deposit in an investment

fund that will provide him $ 1,000 at the beginning of each month for 11 years. He received first

payment 2 years from now and the interest rate is 6% compounded semi-annually.

GIVEN: SOLUTION:

n3 = 4 P132 = F132

= 0.0049 = $ 86,439.13

3. The owner of a business borrowed $ 7,500 to purchase a new machine for his factory. The

interest rate charged on the loan is 4% compounded semi-annually and he is required to settle the

loan by making equal monthly payments at the end of each month, for 5 years with the first

payment to be made 1 year and 1 month from now. Calculate the size of the monthly payments

that are required to settle the loan.

GIVEN: SOLUTION:

P = $ 7,500 F2 = P (1+i)n1

n1 = 2 = $ 7,500(1+0.02)2

n2 = 1/6 = $ 7,803

n3 = 60 F2 = P2

= (1+0.02)1/6 1 = $ 143.59

= 0.0033

4. A deferred annuity is purchased that will pay $ 10,000 per quarter for 15 years after being

deferred for 5 years. If money is worth 6% compounded quarterly, what is the present value of

this annuity?

GIVEN: SOLUTION:

n2 = 4(5) = 20 = $ 292,386.85

i = 0.06/4 = 0.015

5. On January 1st, 2009, you open an investment account. If an annuity such that twelve annual

payments equal to $ 2,000 are made starting December 31st, 2009 is going to be credited to the

account, find the account balance on December 31st, 2024. Assume that i = 0.05.

GIVEN: SOLUTION:

n2 = 12 years F4 = A 4

1) Assume a problem with a series of year-end cash flows extending over eight years. The

amounts are $100 for the first year, $200 for the second year $500 for the third year, and $400 for

each year from the fourth through the eighth. These could represent something like the expected

maintenance expenditures for a certain piece of equipment or payments into a fund.

Solution:

+A(P/A, 20%,5) (P/F,20%,3) + $400 (2.99)(0.5787) +692.26

= $1203.82

F8=P0 (F/P,20%,8)

=$1203.82 (4.2998)

=$5176.19

A=P0(A/P,20%,8)

2.) Transform the cash flows on the left-hand side to their equivalent cash flows on the right-

hand side. That is, take the left-hand quantities as givens and determine the unknown value of Q

in terms of H. The interest rate is 10% per year.

Solution:

Q =25.172 H

3.) Your company has just borrowed money at an interest rate of 10% compounded annually.

Your banker gives you the option of paying the loan off with 3 equal end of year payments of

$17,500 (A) or one lump sum payment at the end of year 3 (B). What lump sum payment would

be equivalent to the 3 end of year payments of $17,500?

Solution:

F3 = $17,500(1+0.1)1 = $19,250

4.) What is the amount of 10 equal annual deposits that can provide five annual withdrawals,

when a first withdrawal of $1,000 is made at the end of year 11, and subsequent withdrawals

increase at the rate of 6% per year over the previous year's if the interest rate is 8%, compounded

annually?

Solution:

A11=$1000

A12 = $1000*(1.06)

A13 = $1000*(1.06)^2

A14 = $1000*(1.06)^3

= $307.9.

5.) If $1000 is invested now, $1500 two years from now, and $800 four years from now at an

interest rate of 8% compounded annually, what will be the total amount in 10 years?

Solution:

= $6,204

E. GRADIENT INTEREST

1.) The annual maintenance costs for a facility are $2,000 for the first year (assumed payable at

the end of the first year) and increase by 15% each year thereafter. Assuming a facility life of 15

years, what is the present worth of the maintenance costs over the lifetime of the facility if the

interest rate is 8% compounded annually.

Solution:

Therefore

2.) The Texas Highway Department expects the cost of maintenance for a particular piece of

heavy equipment to be $5000 in year 1, $5,500 in year 2, and amounts increasing by $500

through year 10. At an interest rate of 10% per year, what is the present worth of the maintenance

cost?

Solution:

The cash flow can be represented as an increasing gradient with G = $500 and a base amount A

of $5,000.

= 5000(6.1446) + 500(22.8913)

= $42,168.55

3.) The cash flow associated with a strip mining operation is expected to be $200,000 in year 1,

$180,000 in year 2, and amounts decreasing by $20,000 per year through 8. At an interest rate of

12% per year, what is the equivalent annual cash flow?

Solution:

AT = A1 + AG

= $142,738

= 512.1

= 818.355

F. INTEREST RATE THAT VARY WITH TIME

1) A member of congress wants to know the capitalized cost of maintaining a proposed national

park. The annual maintenance cost is expected to be $25,000. At an interest rate of 6% per year,

what is the capitalized cost of the maintenance?

P = 25, 000/0.06

= $416,667

2.) Formosa Plastics has major fabrication plants in Riyadh and in Jaddh. It is desired to know

the future worth of $1,000,000 invested at the end of each year for 8 years, starting one year

from now.

Sol. Example:

F8 = ?

F = l000(F/A,14%,8) = 1000(13.23218)

from now.

3.) How much money must Carol deposit every year starting, l year from now at 5.5% per year in

order to accumulate $6000 seven years from now?

The cash How diagram from Carol's perspective fits the A/F factor.

The A/F factor Value 0f 0.12096 was computed using the A/F factor formula

Solution:

F=$5,000(F/A,6%,5)=$28,185.46

Solution:

A=$5,000(A/F,7%,5)=$869.50

G. NOMINAL AND EFFECTIVE INTEREST RATES

1) A credit card company charges 21% interest per year, compounded monthly. What

effective annual interest rate does the company charge?

Given:

n = 12

Solution:

i = [ 1 + (r / n) ]^n - 1

= [1 + 0.0175 ]^12 - 1

= (1.0175)^12- 1 = 1.2314 - 1

= 0.2314

= 23.14%

2) If a lender charges 12% interest, compounded quarterly, what effective annual interest

rate is the lender charging?

Given:

r= 0.12

n=4

Solution:

ia = [ 1 + (0.12 / 4) ]^4 - 1

= (1.03)^4- 1

= 1.1255 - 1

= .1255

= 12.55%

3) If a lender charges 12% interest, compounded monthly, what is the effective interest rate

per quarter?

Given:

r= 0.03

n= 3

Solution:

i = [ 1 + (0.03 / 3) ]^3 - 1

= (1.01)^3- 1

= 0.0303

= 3.03%

4) Interest on a credit card is quoted as 23% compounded monthly. What is the effective

annual interest rate? Give your answer correct to two decimal places.

Given:

n=12

i= 0.23

Solution:

1+i=(1+i^n/n)^n

1+i=(1+0.23/12)^12

i= 25.59

5) Determine the nominal interest rate compounded quarterly if the effective interest rate is

9% per annum.

Given:

n=4

i= 0.09

Solution:

1+i=(1+i^n/n)^n

1+0.09=(1+i^4/4)^4

4 i4

1.091=

4

i= 8.71%

COMPOUNDING PERIOD.

1. An engineer deposits $1,000 in a savings account at the end of each year. If the bank

pays interest at the rate of 6% per year, compounded quarterly, how much money will

have accumulated in the account after 5 years?

Given:

i = (6%/4) = 1.5% per quarter

P = $1000

Solution:

F = P (F/P,i,mn)

F = $1000(F/P,1.5%,16) + $1000(F/P,1.5%,12) + $1000(F/P,1.5%,8) + $1000(F/P,1.5%,4)

+ $1000(F/P,1.5%,0)

F = $5,652

2. An engineer deposits $1,000 in a savings account at the end of each year. If the bank

pays interest at the rate of 6% per year, compounded quarterly, how much money will

have accumulated in the account after 5 years?

Given:

r = 6% or 0.06

x=4

A = $1,000

Solution:

i = (1 + r/x)x 1 = (1 + 0.06/4)4 1 = 0.06136 (6.136%)

F = $1,000 (F/A,6.136%,5)

F = $5,652

3. An engineer plans to borrow $3,000 from his company credit union, to be repaid in 24

equal monthly installments. The credit union charges interest at the rate of 1% per month

on the unpaid balance. How much money must the engineer repay each month?

Given:

P = $3000

i = 1%

mn = 24

Solution:

A = ($3000) (A/P, 1%, 24) = $141.20

4. An engineer wishes to purchase an $80,000 lakeside lot (real estate) by making a down

payment of $20,000 and borrowing the remaining $60,000, which he will repay on a

monthly basis over the next 30 years. If the bank charges interest at the rate of 9%

per year, compounded monthly, how much money must the engineer repay each month?

Given:

r = 9 %

m = 12

P = $60000

Solution:

A = P (A/P, i, mn) = i P (1+i)n / (1+i)n -1

A = ($60000) (A/P, 0.79%, 360) = $504.50

5. An engineer deposits $2000 in a savings account at the end of each year. If the bank pays

interest at the rate of 6% per year, compounded quarterly, how much money will have

accumulated in the account after 5 years?

Given:

P = $2000

mn = 16 , 12 , 8 ,4 ,0

Solution:

F = P (F/P,i,mn)

F = $2000(F/P,1.5%,16) + $2000(F/P,1.5%,12) + $2000(F/P,1.5%,8) + $2000(F/P,1.5%,4)

+ $2000(F/P,1.5%,0)

F = $11304

I. INTEREST FORMULA FOR CONTINOUS COMPOUNDING AND DISCRETE

CASH FLOW

1. Suppose that in year 0, one cent was invested in an account earning 1% interest

compounded continuously (r=0.01) How much will it be worth 2110 years later?

Given:

r = 0.01

t = 2110 years

Solution:

= (0.01)(1457516796.05142392)

= 14575167.9605142392

= $14,575,167.96.

2. How much would you have to invest in an account earning 8% interest compounded

continuously ( r = 0.08) , for it to be worth one million dollars in 30years

Given:

r = 0.08

t = 30 years

Solution:

A0 = 1000000/e^2.4 = $90,717.95

3. What is an investments doubling time, to the nearest ten thousandths of a year, if it earns

5% interest compounded continuously?

Given:

r = 0.05

t = 2t

Solution:

e^0.05t = 2

0.05t = ln2

years?

Given:

t = 25 years

P = 3000

Solution:

25r = ln100

r = ln100/25 = 0.18420680743952365

r = 18.42%

5. If you invest $1,000,000 in an account paying 12% compounded continuously, how much

will you have in the account after 20 years?

Given:

r = 12% or 0.12

t = 20 years

P = 1,000,000

Solution:

A= 1000000e^0.12(20) = 11,023,176.38

A = $11,023,176.38

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