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# PROBLEM SETS

Submitted to:

Instructor

Submitted by:

## ISIAH JOHN S. VERANO BS CIVIL ENGINEERING

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

## i = 15% = 0.15 F=P+Pin

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

## n = 30 days / 360 days Amount on 30 days = 1500 75 = 1425 = P

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:

## n = 85 days / 360 days I = P 212.50 F = P 5,212.50

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:

## i = 7% = 0.07 = P 4,200 n = 12 years

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

## i = 12% = 0.12 = \$ 3,000(1+0.12)5

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

## i1 = 10% = 0.10 = P 200,000 (1+0.03)-20

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

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

## n2 = 5(4) = 20 = P 110,735.15 (1+0.10)-5

= 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

## n=? n = 7.42 years

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:

## n2 = 15 years i = 14.35% F2 = P 39, 973.74

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=?

## C.1 ORDINARY ANNUITY

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:

## n = 10 years = \$ 100[(1+0.08)10 1/0.08]

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]

## n = 4 years = \$ 7,500 [ 0.04/(1+0.04)4 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:

## n = 7 years = \$ 15,000[(1+0.06)7 1/0.06(1+0.06)7]

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:

## n = 5 years = \$ 5,000[(1+0.06)5 1/0.06]

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:

## n1 = 10 years = \$ 7,721.73 P2 = \$ 7003.84

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:

## n2 = 132 P132 = \$ 97, 288.01

n3 = 4 P132 = F132

## i2 = (1+i)n1= (1+0.03)1/6 = \$97,288.01 (1+0.03)-4

= 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

## i2 = (1+i)n2 1 \$ 7,803 = A[1 (1+0.0033)-60 / 0.0033]

= (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:

## n1 = 4(15) = 60 = \$10,000 [ 1 (1+0.015)-60 / 0.015] (1+0.015)-20

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:

## n1 = 4 years F4 = \$ 2,431.01 = \$ 38, 694.73

n2 = 12 years F4 = A 4

## D. EQUIVALENCE CALCULATIONS INVOLVING MULTIPLE INTEREST FORMULAS

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:

## +F3 (P/F, 20%,3) +\$500 (0.5787) +289.35

+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)

## =\$1203.82 (0.2606) =\$313.73

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:

## 7.8839H = Q (P/F, 10%, 2)-Q (P/F, 10%,7)

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)2 = \$21,180

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

## \$21,180 + \$19,250 + \$17,500 = \$57,930.

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

## A = 4461 (A/F,0.08,10) = 4461*0.069

= \$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:

## = 1000*2.158 + 1500*1.850 + 800*1.587

= \$6,204

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

## Present Worth = \$2,000(8.5595) + \$300(47.886) = \$31,485

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.

## P = 5000 (P/A, 10%,10) + 500 (P/G,10%,10)

= 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

## = 100 [ 0.2455] / (0.03)

= 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?

## Solution: In this problem, A= \$25,000 and i = 0.06.

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 = ?

## Cash flows are indicated in \$1000 units. The F value in 8 years is

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

## = \$13,232.80 = 13.232 million 8 years

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.

## = \$725.76 per year

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

## 4.) Find the future amount given:A=\$5,000,N=5years,andi=6%

Solution:

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

## 5.) Find the amount given: F=\$5,000, N=5years, and i=7%

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:

## r = 0.21 per year

n = 12

Solution:

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

## i = [ 1 + (.21 / 12) ]^12- 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

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%

## H. INTEREST PROBLEMS WITH CASH FLOWS LESS OFTEN THAN

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

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:

## i = (r/m) = (0.095/12) = 0.00792 (0.79%)

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:

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

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:

## A(2110) = 0.01e^(0.01)2110 = 0.01e^21.1

= (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:

## A(30)= A0e^0.08(30)= 1000000

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:

## e^25r = 300000/3000 = 100

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