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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:
= $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
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%
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:
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:
Given:
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
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