Chapter 2

Problem (2-18)

The operating expenditures of a certain project are expected to be $ 3,700 at the end
of first 3 months , $ 4,300 at the end of the second 3 months , and are expected to increase by
$ 600 at the end of each 3 months period there after for a total of 7 years. If the interest rate
is 12% compounded quarterly determine:

i) The equivalent quarterly worth of the operating costs (i.e. find the equivalent uniform cost
at the end of each 3 months period)

ii) The minimum amount of money that should be invested after 2 year from now that will
be sufficient to cover all of the operating expenses during the 7 year.

Solution:
Part (i)

Cash Flow Diagram:

0 1 2 3 28

$3,700
$4,300


$4,900

$19,900

i = 12%/4 = 3% every 3 month.

n = 7 x 4 = 28 period.
  A/G3,28
A = A0 + G  
 
 A/G3,28
  = [1/0.03 – (28/ (1.03^28)-1)] = 11.59298

 
So

 A/G3,28 
A = 3700 + 600  
11.59298 
A = $ 10,655.7893

Part (ii)

First we have to find the future worth (F).


0 1 2 3 28

A = $10,655.7893 A
 F = A  FlAi, n 

 F/A3,28  = [(1+0.03)628 – 1] / 0.03 = 42.931

F/A3,28
F = $ 10,655.7893  
42.931 
F = $ 457,462.86

Cash Flow Diagram:

F=$457,462.86
5

012345678

28


P
P = F  P/Fi, n 

= (1+0.03)-20 = 0.5537  P/F3,20 

P = 457,462.865

P = $ 253,286.097

a) Differentiate between “annual” and “continuous” compounding.

2.5 B) For what periods of time will $7500 have to be invested at a nominal interest
rate
of 12% to amount to $10000 using:

(i) Simple interest?

(ii) Annually compound interest?
(iii) Continuously compounded interest?

C) How many years will it take for an investment to double it self if the interest rate
is 15% compounded:

(i) Annually?
(ii) Continuously?

D) An investor wishes to have $ 22,000 available 10 years from now. If $10,000 is

available for investment at the present time, what interest rate on the investment would be
necessary to give the desired amount when the interest is compounded:

(i) Annually?
(ii) Continuously?
Solutions:

B)
Annual compounding
Frequency of compounding ( Ǿ ) is unity
Interest is calculated once year.
Continuous compounding
Frequencies of compounding ( Ǿ ) tend to
infinity.
Interest is calculated continuously.

The effective interest rate ieff is identical The effective annual interest rate ieff is
with the nominal rate r : given by :
ieff = r , Ǿ = 1 . ieff = er-1 Ø →. ∞
Number of compounding periods are No. Number of compounding periods per year
of year. tends to infinity.
Length of compounding period is one Length of compounding period tends to zero.
year.

(i) Simple interest:

I=Pin
I = F – P = 10000 - 7500 = $2500.
I = 12%
n = I / Pi = 2500 / (7500 * 0.12) = 2.7778 years.

(ii) Annually compounded:

General solution:
F/P i , n
F=P ( )
F =10000 , P =7500 & i =12%
F\P i , n
$10000=$7500 ( )
1. Formal solution:
n
10000 = 7500 (1+0.12)
(10000 / 7500) = n * ln (1+0.12)
n=2.5384 years.
2. Table solution:
F/P 12 , n
( )
= 1.3333
From table when i=12% we get :
F/P 12 , 2
( ) = 1.2544
F/P 12 , 3
( ) = 1.4049
( y - y1 ) / ( y2- y1 ) = ( n - n1 ) / ( n2- n1)
(iii) Continuously compounded:
 F \ P r,n
F=P [ ]
rn
F= P e
F=10000 , P=7500 & r=12%
e0..12 n
10000=7500*
0..12 n
10000 / 7500 = e
Ln(10 / 7.5) = 0.12*n
n=2.397 years.
C)
(i) Annually.

F\P i,n
F=P ( ).
n
F= P (1+i)
F=2P & i=15%
 n
2P=P (1+i)
Ln 2= n * ln 1.15
n =4.96 years.
(ii) Continuously.

F\Pi,n
F=P [ ]
rn
F=P e
2P=P e0.15n

n=4.62 years.
D)
(i) Annually.

F\P i ,n
F=P ( )
n
F=P (1+i)
F=22000 , P=10000 & n=10
10
22 ,000=10,000*(1+i)
 Ln(22000/10000)=10 ln(1+ i)
0.078845
(1+i) = e
i = 8.203%.
(ii) Continuously.

F\P i ,n
F=P [ ]
rn
F=P e
F=22000 , P=10000 & n=10 .
10r
22000 = 10000 * e
Ln (22000/10000) = 10 * r
r =7.8845%.
PROBLEM (2.13)
a) How could you determine a desired equal-payment-series present-worth factor if you
only had a table of?
i) equal-payment-series sinking-fund factor?
ii) single-payment compound-amount factor?
Use the 13% interest table to check your values at n=9 years.

b) How would you determine a desired equal-payment-series sinking-fund factor if you

only had a table of:
i) equal-payment-series present-worth factor?
ii) single-payment compound-amount factor.
iii) single-payment present-worth factor.
Use the 9% interest table to check your values at n=11 years.
==================================================================
Solution:
a) To determine a desired equal payment series present worth factor, if we have only a table
of:
i) equal-payment-series sinking-fund factor.
Answer:
(P/A i, n) resulted to (A/F i, n) by the following:
(P/A i,n) = 1 ; i= 13% & n=9 years.
A/F i,n
( )+i
From table A.19:
(A/F i, n)= 0.06487
:.( P/A i, n) = 1/ (0.06478+0.13) = 5.131626212
**Another method:
(F/A i, n
) = (P/A i, n) (1+i) n

(P/A i, n) = (F/A i, n
) (F/A
; i, n
)= 1
A/F i,n
(1+i) n ( )
P/A i,n
( )= 1 = 1
(A/F i,n
) (1+i) n
(0.06487) (1+0.13)9
(P/A i,n) = 5.131568327

ii) single-payment compound-amount factor:

(P/A i,n) related to(F/P i,n) by the following:

(P/A i,n)= 1- (P/F i,n) ; (P/F i,n) = 1

F/P i,n
i ( )
(P/A i,n)= 1-[1/ (F/P i,n)] ;from Table A.19 (
F/P i,n
) =3.00404
i

(P/A i,n) = 1-(1/3.00404) = 5.131653478

0.13

**Another method:
(F/A i,n) = (P/A i,n)(1+i) n

(F/A i,n)= (F/P i,n)-1 (P/A i,n)= (F/P i,n)-1

i i (1+i)n
(P/A i,n)= (3.00404)-1 = 5.131650227
0.13(1+0.13)9
b) To determine a desired equal-payment-series sinking-fund factor if we have only a table of
:
i-Equal-payment-series present-worth factors:

(A/F i, n
) related to (P/A i,n)by the following:
(A/F i,n
)= (A/P i,n) - i ; (A/P i,n)=1/ (P/A i,n)

(A/F i,n)= 1 -i ; from Table A.19 with n=11years we get:

P/A i,n
( )
(P/A i,n)=6.80519
(A/F i,n)=(1/6.80519)-0.09= 0.056946668
**Another method:
(F/A i,n) = (P/A i,n)(1+i) n

(A/F i,n)= 1 = 1
F/A i,n P/A i,n
( ) ( )(1+i) n

A/F i,n
( )=1/[6.80519(1+0.09) ]= 0.05694661 11

ii-Single-payment present-worth factors:

(A/F i,n)related to (F/P i,n)by the following:
(F/A i,n)=(F/P i,n)-1
i
F/P i,n
1 =( )-1
A/F i,n
( ) i
(A/F i,n
)= i
(F/P i,n)-1
(A/F i,n
) = 0.09/[2.58043-1] = 0.056946527
**Another method
n -1

( A/F i,n
)=1/  (F/P i, k
)
k=1
 F/P i,1
= 1/[1+( )+ (F/P i,2)+ (F/P i,3)+……..+ (F/P i,10
)]

=1/(1+1.09+1.1881+1.29503+1.41158+1.53862+1.6771+1.82804+1.99256+2.17189
+2.38736)

(A/F i,n
) = 0.0569467
iii-Single-payment present-worth factors:
(A/F i,n)related to (P/F i,n)by the following:
(A/F i,n)= 1 ;(
F/P i,n
)=1/(P/F i,n)
F/P i,n
[( )-1]*i
(A/F i,n)= 1 = (1/{[1/0.038753]-1})/0.09
P/F i,n
{[1/( )]-1}*i
(A/F i,n)= 0.056945972
**Another method:
(A/P i,n)=1/(P/A i,n)
(P/A i, n)=[1-(P/F i,n)]  (A/P i,n)= 1
P/F i, n
1-( )
A/P i, n A/F i,n
( )= ( )+i= i
P/F i, n
1-( )
(A/F i, n
)= i -i
P/F i, n
1-( )
A/F i, n
( )= 0.05694597

Problem 2.17:
a) A $35,000 piece of equipment is suggested for a workshop. It is estimated that the equipment
will result in first year savings of $3,500, a second year savings of $5,000 and savings of
$8,500 per year thereafter. If the equipment has zero salvage value at any time and money
can be invested at 20% annually, what is the minimum service life of the equipment that
would justify its purchase?

b) Mr. Mahir borrows $18,000 and wishes to repay it with 25 semi annual payments; each
payment is to be $ 125 greater than the previous payment .assuming an interest rate of %12
compounded continuously. Determine the size of the last payment made by Mr. Mahir?
Solution:
a) Cash flow diagram

P=$35,000 X1=$3,500 X 2=$5,000 X3…….X n =$8,500

P/Fi,1 P/Fi,2 P Ai,/ Pn /Fi,2

P X1( )X2( )X3( )( )
2 2
 1   1   (1  i ) n  1  1 
35,000  3,500   5,000   8,500 n 
 
1 i  1 i   i (1  i )  1  i 
2 2
 1   1   (1  0.2) n  1  1 
35,000  3,500   5, 000   8,500  
 1  0.2   1  0.2   (0.2)(1  0.2)  1  0.2 
n

 1 
35,000  2916.66667  3472.2222  29513.888891  n 
 1.2 
  1   1 
28611.1112  29513.888891  n 
0.96941177  1  n 
 1.2   1.2 
1.2 n  32.692314
ln(1.2) n  ln(32.692314)
ln(32.692314)
n  19.1298
ln(1.2)

 Minimum service life = n + 2 = 19.1298 + 2 = 21.1298 years

b) Cash flow diagram

Last payment = A + 24G & A =??

P / A i, n
P  A1[ ]

A / G i, n
A1  A  G[ ]
 A / G i , n P / A i, n
P  (A  G[ ])[ ]

A/ ip ,n A/ Gi,n
P[ ]  G[ ]  A
er  1 1 n
A  p[ ]  G[ r  rn ]
1 e rn
e 1 e 1
i = r/2 = 12% /2 = 6 %
e 0.06  1 1 25
A  $18,000[ ]  $125[ 0.06  0.06*25 ]
1 e 0.06*25
e 1 e 1
0.0618365 1 25
A  $18,000[ ]  $125[  ]
0.7768698 0.0618365 3.481689
A  $1432.745873  $1123.906934  $308.8389

 Last payment = A+24G = $308.8389 + $125*24 = $ 3308.8389

2.4:

a) Draw a cash flow diagram for $ 8,700 being loaned out on October 1, 1987 which will
be repaid on July 1, 1992 with a simple interest rate of 11% per year, what is the total
amount paid as interest?

b) In part (a) if the borrower fails to pay any interest until the end of the period and
interest is compounded at the rate as before, determine how much extra interest is being
paid in this case and the reason for this extra amount?
 Solution

a)
9
The period of the loan is 7 years and 9 months, 9 months = years = 0.75 years.
12
n = 7 + 0.75 = 7.75 years.
i = 11% per year at simple interest.
Total interest paid:
I = P i n = 8,700  0.11  7.75  $ 7,416.75
7,416.74
Interest paid per year = = $ 957
7.75

b)
n = 7.75 years.
i = 11% per year compounded interest.

F = (1+i)n
= 8700 (1+0.11)7.75
= $ 19,533.15239
Total interest paid:
I=F–P
= 19,533.15239 – 8700
= $ 10,833.15239
Extra interest paid:
= 10,833.15,239 – 7,416.75
= $ 3,416.40239
He will pay more interest because interest is accumulated until loan is due, that is mean
interest is charged on the total amount owed “principle plus interest”.
 2-16
a)what annual uniform payment series is necessary to repay the following series of payments
when the interest rate is 14% compounded annually :
i) An annual payment of $2,500 increasing at the rate of $250 a year until the end of the ninth
year?
ii)An annual payment of $18,500 decreasing at the rate of $320 a year for a period of 23
years?
b) what is the present – amount ,p , that should be invested now at a nominal interest rate of
10% compounded annually that will be sufficient for a withdrawal of $3,000 at the end of the
first year and decreasing by $250 every year to a final value of $750 ?
c) sketch the cash flow diagram of the following payment series . then find out the easiest way
for determining its present – worth :

End of year 1 2 3 4 5 6 7

Amount 0 500 600 700 700 900 1000

Solution :
a) i=14%
I) A1 = $2,500 , G=250$ , n= 9 years , A=??

1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9
General solution :
A=A1+G(A|G i , n)
 A=2500+250(A|G 14
, 9)

Numerical solution :
a- from tables: (A|G,14,9)=3.14632
(A|G,14,9)=3286.58$
b-From formula :

1 n 
   (A|G i,n)=
 i (1  i )  1 
n

 1 9  A|G,14,9
= 3.146318    ( )=
 0.14 (1  0.14)  1 
9

A = 2500 + 250 (3.146318)= 3286.579 $

Annual payment uniform series of A = 3286.58 $ is equivalent to the given series .
ii) A1=18500$ G= -320 $ , n= 23 years A=??

23 22. ……………………………0 0 1 ………………………….23

General soulution:

A= A1- G(A/G,14,23)=18500-320 (A/G ,14, 23)

Numerical solution :
a- using tables : (A/G ,14,23)=5.95494
A= 18500- 320 (5.95494)=16594.4192$

b- using fomula(A/G ,14, 23)=(1/0.14- 23/(1+0.14)23-1) =5.954937

A=18500-320(5.954937)=16594.4189$

b) i=10% , p=? ,firest years withdrawal =$3,000 , G=250$ , final value = 750$
 1)cash flow diagram .

$3,000

0 $950

1 2 3 4 5 6 7 8 9 10
P=?

Number of periods =3000- 750 /(250) = 9 years

Starting from the firest withdrawal
General solution :

A=Ao-G(A/G ,i ,n)
A= 3000- 250 (A/G ,10 ,10)

Numerical solution :

a)Using Tables : (A/G ,10 ,10) = 3.72546

A=3000-250(A/G ,10 ,10)=2068.635$
b)using formula:
(A/G ,10 ,10) =(1/0.1 – 10/(1+0.1 )10-1) = 3.72546
A=2068.635$
To find present worth :
P=A(A/G ,10 ,10)=2068.635(6.14457)=12710.872 $

1 2 3 4 5 6 7 8 9 10
P=?
By using formula :
(A/G ,10 ,10) =((1+0.1)10- 1)/((0.1)(1+0.1)10)
P=2068.635 (1.5937/0.25937)
P=12710.872$

c)

End of year 1 2 3 4 5 6 7

Amount 0 500 600 700 700 900 1000

Cash flow diagram :

0 1 2 3 4 5 6 7

This is equivalent to:

 01 2 3 4 5 6 7 + 0 1 2 3 4 5 6 7

100
Po

P1

1)A=Ao+G(A/G ,i ,n)
A=500+100(A/G ,i ,6)
P1=A(A/G ,i ,6)
P1 is considered as a future amount of Po
Po=P1(P/F , i, 1)
Po=A(P/A, i ,6)(P/F ,i ,1)
2)Po= - 100 (P/F , i,5)
Po= Po' +Po'' = A(P/A , i, 6)(P/F , i,1)- 100(P/F , i,5)
The easiest method is to substitute in :
Po=[500 +100(A/G ,i,6)](P/A ,i,6)(F/P ,i,1) – 100(P/F ,i,5)
Either from tables Appendix A or by using formula

Problem 2.6:
a) If the nominal interest rate is 14% compounded annually, find the present-worth of a $
9000 receipt due in 3 years, plus an $ 11500 receipt due in 5 years, plus a $ 7800 debt
due in 8 years, plus a $18500 receipt due in 10 years, plus a $ 12800 debt due in 13
years.
b) If $ 17500 is owed, what equal beginning-of-year payments for 7 years will discharge
the debt when money is worth 11% per year?

Solution

a) Cash flow diagram:

 P = 9000(P/F 14 , 3) + 11500(P/F 14 , 5) - 7800 (P/F 14 , 8) + 18500 (P/F 14 , 10) - 12800(P/F 14 , 13)

Using table A.20

P = 9000(0.67497) + 11500(0.51937) - 7800 (0.35056) + 18500 (0.26974) - 12800(.18207)

= 6074.73 + 5972.755 - 2734.368 + 4990.19 - 2330.496 = $ 11,973

b) cash flow diagram:

 P-1 = P(P/F 11 , 1)
Using table A.17
P-1 = 17500(0.90090) = $ 15765.75
A = P-1(A/P 11 , 7)
Using table A.17
A = 15765.75(0.21222) = $ 3345.8075

Comments on the original solution:

 There is a difference of $10,130.028 between the two solutions, as a result of taking the
amounts at the 8th and the 13th years as receipts instead of depts..

Problem 2.15:
a) Young couples with a 2-year-old son want to save for their son's college expenses in
advance. A savings account that pays 9% compounded annually is opened for the child.
Annual deposits of $ 1500 starting on the child's 3rd birthday are made. Determine the
maximum size of 4 equal withdrawals that can be made by the child on his 17th, 18th 19th
and 20th birthdays.
b) Mr. Husam wishes to establish a fund to provide for the college education of his
daughter,Maha. He wishes the fund to provide $4500 on Maha's 18th , 19th , 20th and 21st
 birthdays. Mr. Husam will make the first deposit when Maha is three and a half years
old and will make quarterly deposits thereafter until the end of Maha's fifteenth year.
If a nominal rate of 12% compounded quarterly can be earned on the fund, what
should the uniform quarterly deposit be?

Solution

c) Cash Flow Diagram:

F16 = Ad(F/A i , n)
=1500(F/A 9 , 14)
Using table A.15
F16 =1500(26.01920)=$ 39028.8
Aw = P16(A/P i , n) = 39028.8(A/P 9 , 4)
Using table A.15
Aw = 39028.8(0.30867) = $ 12047.0197

b) Cash Flow Diagram:

 ieff = (1+r/c)c-1 where r=12% & c=4

i = ieff = (1+0 .12/4)4 -1 = 0.1255088 = 12.551%

P17 = Aw (P/A ieff , n) = 4500(P/A 12.55 , 4)
(P/A 12.55 , 4) = [(1+ 0.12551)4 -1]/ [0.12551(1+0.12551)4] = 3.00244
P17 = 4500 (3.00244) = $ 13510.96

F15= P17(P/F ieff , n) = 13510.96(P/F 12.551 , 2)

(P/F 12.551 , 2) = 1/(1+0.12551)2 = 0.7894
F15= 13510.96 (0.7894) = $10665.654

i= r/4 =12/4 = 3 % (quarterly)

Ad = F15(A/F 3 , 47) = 10665.654( A/F 3 , 47
)
Using table A.9
Ad = 10665.654(0.00996)
Ad= $ 106.13

2.17 a) A $35000 piece of equipment if suggested for a workshop. It is estimated that the
equipment will result in first-year savings of $3500, a second year savings of $5000 and
savings of $8500 per year thereafter. If the equipment has zero salvage value at any
time and money can be invested at 20% annually, what is the minimum service life of
the equipment that would justify its purchase?
b) Mr. Mahir borrows $18000 and wishes to repay it with 25 semi-annual payments.
Each payment is to be $125 grater than the previous payment. Assuming an interest
 rate of 12% compounded continuously, determine the size of the last payment made by
Mr. Mahir.

Solution:
a) The cash flow diagram is below:
p=
$8500 $8500
$5000
…..
$3500

1 2 3 4 5 n
i = 20% annually

$35000
3500 (p/f 20,1) + 5000 (p/f 20,2) + 8500 (p/A 20,(n-2)) (p/f 20,2)
= 3500*0.83333 + 5000*0.69444 + 8500*0.69444 (p/A 20,(n-2))
35000 = 6388.75 + 5902.74 (p/A 20,(n-2))
(p/A 20,(n-2)) = 4.84711

Using the interest formula

[(1+i)(n-2) - 1]/i(1+i)(n-2) = 4.8711 = [1.2n-2 – 1]/[1.2n-2 * 0.2]

1.2n-2 (0.9742-1) = -1

n-2 = ln(38.76)/ln(1.2) = 20.06

n = 22.06 years
The minimum service life of the equipment to justify its purchase is 22.06 years.
 b)
(2)
(1)
2x+375
x+125
x 2x+125

1 2 25
1 2 3 12.5yrs

18000 18000

First convert the gradient factor to equal payment factor

A A (3) A

ieff = er - 1
= 0.1133
A = A0 + G (A/G i,n)
From cash diagram (2) G = 250
A = [2x+125] + 250 [1/i – (n/n(1+i)-1)]
= [2x+125] + 1106.122

The present worth of cash (3) is

P = [2x+1231.122] (p/A 11.33,12.5)

The present worth must equal the loan:

[2x+1231.122] = 18000/6.5188
x = 765.06

From cash diagram (1)

The size of the last payment made by Mr. Mahir is
(n-1)G + x = 24*250 + 765.06
= $6765.06
 PROBLEM (2.14):

(a) When paying back a loan, how much can one afford to pay each year for 10 years
to avoid paying $3,000 now, $5,000 after 3 years and $9,500 after 5 years, if money is worth
13%? Support your solution by a neat cash flow diagram.

(b) An individual makes 9 end-of-year deposit of $2,400 in an account paying 10%

compounded annually. Determine the maximum amount of money that can be withdrawn 3
years after the last deposit.

(c) Mr. Hazim is planning to retire in 20 years. He wishes to deposit a regular amount
every month until he retires so that beginning one month following his retirement he will
receive monthly payment of $900 for the next 15 years. How much must Mr. Hazim deposit if
the interest rate is 15%compounded monthly?

(d) How much must be deposited on January 1/1986 and every 6 months thereafter
until July 1/1994, in order to permit him to withdraw $2500 every 6 months for 5 years
starting January 1/1995 ? Interest is at a nominal rate of 13% compounded semi-annually?

SOLUTION
PART (A):
i. First step is the Cash Flow Diagram:

P
P-1
i =13%

-1 0 1 2 3 4 5 6 7 8 9 10
years

A=??

P1=$3000
P2=$5000

P3=$9500
P==$11,621.4691

i =13%

years
0 1 2 3 4 5 6 7 8 9 10

A=??

ii. Second step, General Solution,

First: calculate the present worth amount:

P/F i, n P/F i, n
P = P1 + P2 ( ) + P3 ( )
P/F 13, 3 P/F 13, 5
= $3000 + $5000 ( ) + $9500 ( )
Then the annual payments can be calculated as follows:
A/P i, n A/ P 13,11
A =P ( ) =P( )
iii. Third step is Numerical Solution ,
Solution using interest formula:
P/F i, n
1
( ) n
(1  i )
P/ F 13, 3
1
( ) 3
 0.693050
(1  0.13)

P/ F 13,5
1
( ) 5
 0.5437599
(1  0.13)
 P/F 13,3 P/F 13,5
P = $3,000 + $5,000 ( 0.693050 ) + $9,500 ( 0.5437599 )
= $11,621.4691

calculate P-1 in order to calculate A:

P/F i, n
P-1 = P ( )
P/F 13,1
=$11,621.4691 ( )
P / F 13,1
1
( ) 1
 0.884956
(1  0.13)

P/F 13,1
P-1 = $11,621.4691 ( 0.884956 )
= $10,284.4888
then the Annual payments will equal to..
A/ P i, n
A=P ( )
A/P 13,11
=$10,284.4888 ( )
n
A/ P i, n i (1  i )
( ) n
(1  i ) 1

11
A/ P 13,11 0.13  (1  0.13)
( ) 11
 0.175841
(1  0.13) 1

A/ P 13,11
A = $10,284.4888 ( 0.175841 )
= $1,804

Solution using interest tables,

P/F 13, 3 P/F 13,5
P = $3000+$5000 ( 0.6931 ) +$9500 ( 0.5428 )
= $11,622.1
P/F 13,1
P-1 = $11,622.1 ( 0.8850 )
 = $10,285.5585
A/P 13,11
A=$10,285.5585 ( 0.1758 ) = $1808.2
$1808.2  $1804
Percentage Error =  100%  0.233%
$1804

PART (B):
i. First step is the Cash Flow Diagram:

F
= ??
F9

Years
0 1 2 3 4 5 6 7 8 9 10 11 12

A=$2,400

i = 10%

ii. Second step, General Solution:

F/A i, n
F=A ( )
F / A 10 ,9
F9 =$2,400 ( )
Then
F/P i, n
F = P( )
F /P 10,3
=P ( )
iii. Third step is Numerical Solution:
 Solution using interest formula,
n
F / A i, n (1  i ) 1
( )
i
9
F / A 10, 9
(1  0.1) 1
( )  13.5795
0.1

F/P i, n
( )  (1  i) n
F /P 10,3
( )  (1  0.1)3  1.331

F / A 10,9
F9 = $2,400 ( 13.5795 ) = $32,590.745
F / P 10 , 3
F = $32,590.745 ( 1.331 ) = $43,378.282
Solution using interest tables:
F / A 10,9
F9 = $2,400 ( 13.5795 ) = $32,590.8
F / P 10 , 3
F = $32,590.8 ( 1.3310 ) = $43,378.3548
$43,378.3548  $43,378.282
Percentage Error =  100%  0.00017%
$43,378.282

Then, the maximum amount of money that can be withdrawn 3 years after the last
deposit is $ 43,378.282

PART (C):
i.First step is the Cash Flow Diagram:

A2 = $900
r = 15% compounded monthly
i=

Months
0 1 2 3 239 240 241 242 243 419 420

A1 = ????

P = ????
ii. Second step, General Solution:
P/ A i, n
P = A2 ( )
P/ A 1.25,180
= $900 ( )
A/ F i, n
A1 = F ( )
A/ F 1.25, 240
=P ( )
iii. Third step is Numerical Solution:
Solution using interest formula,
P/ A i, n n 1
( )  (1i)
i (1 i ) n
(1 0.0125)180 1
P/ A 1.25,180
( )  71.4496
0.0125(1 0.0125)180

A/ F i, n
i
( )
(1 i ) n 1

A/ F 1.25, 240
0.0125
( )  0.0006679
(1 0.0125) 240 1

P/ A 1.25,180
P = $900 ( 71.4496 )
= $64,304.64
 A/ F 1.25, 240
A = $64,304.64 ( 0.0006679 )
=$42.9491
Since n is large - 180&240 - it's not possible to use interest table to solve this problem;
they are limited to values of n less than or equal to 100.

PART (D):
i. First step is the Cash Flow Diagram:

A2 = $2,500

r = 13% compounded semi-annually

Periods
(6-months Each)
0 1 2 16 17 18 19 20 26 27

A1 = ????

P2 = ????

i = 13  6.5%
2

ii. Second step, General Solution:

P/ A i, n
P2=A ( )
P/A 6.5,10
=$2,500 ( )

A/ F i, n
A=F ( )
A/ F 6.5,18
=P2 ( )
iii. Third step is Numerical Solution:
Solution using interest formula,
 P/A i, n n 1
( )  (1i)
i (1 i ) n

(1 0.065)10 1
P/ A 6.5,10
( )  7.1888
0.65(1 0.65)10
A/ F i, n
i
( )
(1 i ) n 1
A/ F 6.5,18
0.065
( )  0.030855
(1 0.065)18 1

P/ A 6.5,10
P2 =$2,500 ( 7.1888 )
=$17,972
A/ F 6.5,18
A =$17,972 ( 0.030855 )
=$554.53

- The Amount that should be deposited is $554.53

- Since the interest rate is not integer No. we can't use the interest table directly but
through Linear Interpolation.

In problem No.(2.14):-

1- The cash flow diagrams should be drawn in one figure, and in cash
flow of part(d) payment is made at beginning of periode not at end of periode .
2- Part(a),factors used are wrong, Single Payment Compound Amount Factor
where as Single Payment Present Worth Factor should be
used.
3- Other differences are due to rand-off errors.

Part No. Given value Calculated Percentage

value error
a Wrong A=$1,808. -
b 1-F=$4,3378.35 1-F= $43,378.282 0.00017%
(using interest
formula)

2-F=$4,3378.35 2-F=$43,378.3548 -0.000011%

(using interest
tables)
c A=$42.95 A=$42.9491 0.0021%
d A=$554.52 A=$554.53 -0.0018%

2.21:
a) Starting two years from now, a copper mine is expect to yield net cash income of
$35,000 per year flowing continuously for 18 years. If the minimum acceptable rate of
return on investment is 15% per year, what is the maximum amount that can be
economically justified for buying the mine?
b) Convert the series of payments indicated below to a funds-flow process that extends
from the beginning of the 3rd year until the end of the 11 th year , assuming that money
can be invested at 13% compounded continuously ,
X0 = X1 = $500 X2
= X3 = $700 X4 = $1,100
, X5 = $1,300 , X6 = $1,500
X7 = $1,700 , X8 = $1,900 , X9 = $2,100
Where X t indicates the net cash flow element and the end of year t.

Solution:
a)

20 YRS

P*

P
P* =Ā [P/Ā r, n] = Ā [℮r n -1 /r ℮r n]
Ā =$35,000
r = 15%
n= 18
P* = $35,000[P/Ā 15, 18] = $35,000 * 6.2186 = $217,651.047
P = F [P/F r, n] = F ℮-r n
P* = F = $217,651
r =15%
n= 2
P = $217,651.047 * 0.740818 = $161240.6

b)

11 YRS

Ā
P*
P
For the given series of the payments, the present-worth, P1 is given as:
P1 = $500 + $500[P/F 13, 1] + $700[P/F 13, 2] + $700[P/F 13, 3] + {$1,100 + $200[A/G 13, 6]}*
[P/Ā 13, 6] [P/F 13, 2] = $5,980.617
For the funds-flow process, the present-worth, P2, is given as:
P2 = Ā [P/Ā 13, 9] [P/F 13, 2] = 4.09032 Ā
Equating P1toP2 yields:
As P1 =P2 => Ā = $5,980.617 / 4.09032 = $1,462.14
Problem (2.22):

The Murphy Company manufactures 2.5 million units per year which sell at $1. 5 less than a
competitor’s superior product. How much can the Murphy Company spend on research for 3
years if the research will improve the product and will succeed in attaining at least 75% of
the $1.5 per unit extra? Money can be invested at 15% per year, the research costs are
distributed evenly throughout the research period and the research benefits are expected to
start immediately after completion of the research and will continue for 7 years.

Solution:

Research benefits = Ā2 = 2500000*0.75*$1.5 = $ 2.8125*(10^6)

P3 = Ā2 [P/Ā r, n]
P3 = $2.8125*(10^6) [P/Ā 15, 7]

Using interest formulas:

[P/Ā r, n] = ((℮^rn)-1)/r(℮^rn)
[P/Ā r, n] = ((℮^(0.15*7))-1)/0.15(℮^(0.15*7))
[P/Ā r, n] = 4.33375
P3 = $12.18867*(10^6)
Ā1 = research costs
Ā1 = F [Ā/F r ,n]
Ā1 = $12.18867*(10^6) [Ā/F 15,3]

Using interest formulas:

[Ā/F r, n] = r/((℮^(r*n))-1)
[Ā/F 15, 3] = 0.15/((℮^(0.15*3))-1)
[Ā/F 15, 3] = 0.26394
Ā1 = $3.2171*(10^6) per year

Problem (2.7)
a) Differentiate between “nominal” and “effective annual” interest rates.

Nominal interest rate : is a Yearly basis that when interest is compounded

( computed and added to the deposit balance ) more frequently than once a year.
Given by:
r=ixc
where:
i = the interest rate per period.
C = the number of periods per year.
The effective interest rate ( ) : is the actual amount of interest paid , and the
difference in the compounding frequency results in a real difference in the effective
interest.
For a fixed nominal interest rate (r) , the amount of interest charged ( ) increases as
the compounding frequency ( ф ) increase.
ieff= f ( r, ф )
where :
ieff = the effective interest rate .
r = the nominal interest rate .
ф= the compounding frequency.
.
Also it given by:
ieff-ann = I/P
Where:
I = the actual amount of interest paid per year.
P = the principal sum.
 And also:

ieff =
Where:
ieff = the annual effective interest rate.
r = the nominal interest rate.
C = the number of actual compounding periods per year as stated in the
original financial arrangement.

b) What is the effective interest rate that corresponds to a nominal rate of 11.25%
compounded?
i) annually
ii) monthly
iii) continuously

=? r = 11.25 %

(i) Annually :

C=1
ieff = ( 1 + r ) -1 =
r =11.25 %
When interest is compounded annually the effective ( annual ) interest
rate will be identical with the nominal interest rate .

(ii) monthly :

for a nominal interest rate ,r, of 11.25 % compounded monthly , the

effective interest rate is given by :

C = 12 period per year

= 0.1185 = 11.85%.

(iii) continuously:

= 1.1191 – 1
 = 0.1191 = 11.91%.

C) Which is better to receive, an interest rate of 1.5 % every month or 9.25% at the end
of every 6 month period? Why?

to compare we first determine the effective semiannual interest rate for each
case , then they are compared with one another .
Case (i)
When interest is compounded every 6 month , the effective semiannual interest
rate :
ieff= ( 1
+ i0)m - 1
Where:
i0= the actual interest rate per compounding period.
m= the number of original compounding periods per effective period.

We have:
m= 1 period per 6 month
actual interest rate r/c = i0 = 9.25 %
= (1+0.0925)1 - 1 = 9.25 %

Case (ii)
for an actual interest rate i0 = 1.5 % every month the effective interest rate :
m
ieff= ( 1 + i 0) - 1
Where:
m=the original compounding periods per effective period =6
ieff =( 1 + 0.015 )6 - 1
= 1.09344 – 1 = 0.09344 = 9.344 %
Therefore, 1.5% every month is better than 9.25% every 6 month.
d) If 225$ in interest is earned in the first 3 month on an investment of $9,000 when
interest is compounded quarterly, what are the nominal and the effective interest
rate?

The equivalent cash flow diagram for the problem is as follows:-

 I = 225 $
F = P + I = 9225$
P = F ( P/F i,n )
9000 = 9225 * 1 / (1+ i )n
9225 /9000 = (1 + i ) n
Since interest compounded quarterly: 3 month 1 period

n=1

i = _ 1 = 0.025 = 2.5 %

The nominal interest rate = 2.5 * 4 = 10%

The effective interest rate = (1 + i0)m – 1
m=4
ieff= (1 + 0.025)4 – 1 = 10.38 %

e) If an effective rate of 15% is desired, what must the nominal rate be if compounding
is monthly?

ieff = 15 % , r=?
c
ieff = (1+ r/c ) – 1
Compounding monthly c = 12

ieff = (1 + r/12)12 – 1 = 0.15

1.15 = (1 + r/12)12

1.011715 = 1 + r/12

0.011715 = r/12
 r = 14.058 %

(2.15)
a) A Young couple with a 2 years old son want to save for their son’s college
expenses in advance . A saving accounts that pays 9% compounded
annually is opened for the child .Annual deposits of $1,500 starting on the
child’s 3rd birthday are made. Determine the maximum size of four equal
withdrawals that can be made by the child on his 17th ,18th,19th and 20th
birthdays?

The present worth due to the annual deposits is

Pd=A(P/A 9 14)
Pd=1,500 (7.786) = $11,679
The present worth due to the net receipts is
Pr=Ar (P/A 9 4)(P/F 9 16) = Ar (3.2397)(0.2519)
But Pr=Pd
Ar= $ 14,311.09

b) Mr .Husam wishes establish a fund to provide for the college education of his
daughter,Maha. He wishes the fund to provide $4,500 on Maha’s 18th ,19th,20thand
21st birthdays .Mr.Husam will make the first deposit when Maha is 3.5 years old
and will make quarterly deposits thereafter untill the end of Maha’s 15th year .If a
nominal rate of 12% compounded quarterly can be earned on the fund, what
should the uniform quarterly deposit be?
 The present worth due to the receipts
Since fc>fp

Ieff = = 12.55%

Pr=A(P/A 12.55 4)(P/F 12.55 17)

Pr= 4,500 (3.0025)(0.1340) =$ 1810.51
The present worth due to the deposits from 3.5th till 15th
The pay period = (15 - 3.25)*4= 47periods
Since fc=fp I=12/4= 3%
P/A 3 47 P/F 3 13
P d= A ( )( ) = A (25.025)(0.681)
Pd=Pr
A= $106.238

2.19 PROBLEM

Miss Eiman is celebrating h her twelfth birthday and will need $5000 on her
eighteenth, nineteenth, twenties and twenty first birthdays for her college education.
Her father agrees to lay aside a cretin amount now and each three month period there after
until she is sixteen years old. These payments form a uniform gradient series where each
payment increases by 10% of the first payment. If money can be invested at a nominal rate
of 12% compounded quarterly what is a father’s first contribution? Sketch a neat cash flow
diagram for the problem.

Solution:

The interest rate compounded quarterly:

12
i  3%
4

At first we have to find P5

The effective interest rate ieff  (1  0.03)  1  0.12550  12.5%
4
 (1  i ) n  1
( )
P / A i ,n

i (1  i ) n
P5  A( P / A 12.55, 4 )  $5000( P / A 12.55, 4
)  $150120.26
To find P we substitute the value of P 5 in a single payment present worth- factor
1
(P / F i,n
)
(1  i) n
P P5 ( P / F i ,n
)

After substituting values on the previous factor:

P   $8312

From the uniform gradient series:

Number of periods is 4*4=16 period

P  A  [( A  0.1A )  G[ A / G 3,16

]][ P / A 3,16 ]

Using tables the values of the factors respectively where found to be:

6.87421, 12.56110

Substitute these factors on the above equation yield that:

8312
A   $354.42646
23.463197

Which represents the father’s first contribute.

Q : 2.11

a) Mr. Hazim borrows $2,500 at a nominal interest rate of 12% compounded monthly and decides
to repay the loan in equal monthly payments of $250 starting one month from now.

i) How many payments are required ?

ii) If immediately after fifth payment, Mr. Hazim decides to pay off the loan
completely , determine the amount he must pay.

b) Miss. Nada purchased a car whose cash price is $4,800. She defers payments for 3 months and
makes 30 beginning-of-month payments thereafter. If the interest rate is 1½% per month on the
unpaid balance, determine how much her monthly payments will be.
 Solution:-

a)
i) The cash-flow diagram

Equal Payment Present-worth factor :

P = A ( P/A i, n )
= A (P/A 0.01,n)

2500 = A ( 1+i)n – 1 = 250 (1.01)n – 1

i(i+1)n 0.01(1.01)n

(10) (1.01) n = (1.01)n – 1

0.9(1.01) n = 1
(1.01) n = 1.1
n ln(1.01) = ln(1.1)
n = 9.579 months

ii) Equal Payment Present-worth Factor ( for 5 months) :-

Po = A(P/A i, n)
= A(P/A 0.01,5)
= 250 (4.8527) [using the table]
= $ 1213.175

Present-worth factor remained (P‾ ) :-

P‾ = P − P o
= 2500 − 1213.175
= $ 1286.825

Single Payment Future-Amount factor :-

F = P‾ ( F/P i, n)
= P‾ ( F/P 0.01,5)
 = 1286.825 (1.051)
= $1352.45

b)
The cash-flow diagram:

-Equal Payment Present-worth factor at relative zero:-

Po = P (F/P i,n)
= P (F/P 0.015,2)
= 4800 (1.0302) = $ 4944.96
A = Po ( A/P i,n)
= Po ( A/P 0.015,30)
= 4944.96 (0.0416)
= $ 205.71

Problem (2.9):

a) Mr. Smith wishes to accumulate $22,000 in savings account in 5 years. If the bank pays 9%
compounded annually on deposits of such size, determine:
1) How much should Mr. Smith deposit in the account as a lump sum now?
2) How much should he deposit annually for 5 years if he decides to make equal end-
of-year payments?
b) What is the equivalent present-worth of $7,500 in obligations at the beginning of each
year for 9 years if interest is 10% compounded continuously?

c) For total yearly payments of $3,900 for 7 years at a nominal interest rate 17%, compare
the compound-amount accumulated at the end of the 7th year if the payments are:
1) end-of-year.
 2) beginning-of-year.
3) weekly.
4) continuous.

Solution:
a)
1)
- Cash flow diagram

F=22,000
:

0 1 2 3 4
i = 9%

P=??
- General solution:

P/ F i ,n
P  F( )
P/F 9, 5
 22,000 ( )

- Numerical solution:
P/F 9 ,5
P  22,000 ( 0.64993 )
 $14298.46

2)
- Cash flow diagram:

F =22,000

0 1 2 3 4
5 years

A=??
i = 9%
- General solution:

AF  A/ F i ,n

 22,000  A/ F 9,5

- Numerical solution:

A  22,000  A/ F
0.16709
9, 5

 $3675.48

b)
- General solution:

P1  A  P/ A r ,n

 7,500  P/ A 10 ,1

P0  P1  F/P 10,1


- Numerical solution:

P1  7,500  P / A 0.01042 10,10 

 45,078.15
P0  P1  F/P 10,1

 45,078.15  F/P
1.10517 10,1

 49,819.02

- Another solution:

P  7,500  7,500  P / A 5.64254 10,9 

 $49819.05

c)
1)
- Cash flow diagram:

F=??
i = 17%

0 1 2 3 4 5 6 7 years
 A= 3,900

- General solution:

F/A i ,n
F  A( )
F/A 17,7
 A( )
F/A 17,7
 3,900( )

- Numerical solution:

F  3,900 F / A 11 .77200 17, 7

 $45,910.8

2) Beginning of year:

- Cash flow diagram:

F7 F8

0 1 2 3 4 5 6 7 8

A= 3,900
i = 17%

- General solution:

F8  F7  F/P i ,n

 F7  F/P 17 ,1

 45,910.8  F /P 17,1

- Numerical solution:
F7  45,910.8 from above
F8  45,910.8  F/P
1.17 17 ,1

 $53,715.636
3) Weekly:
- Cash flow diagram:

F8 = ??
i = 17%

F7 = 45,910.5

- General solution:

 
 1   r m  mn  1
F  A0  
 r 

- Numerical solution:

 
 1   0.14 52    527   1 
F  3,900  
 0.17 
 $52,322.11

- Another approach:
3,900
A  $75 weekly
52
r 17
i   0.327%
m 52
n  52  7  364 periods
 1  i  n  1 
F  A  

 1 
 1  0.00327  364  1 
 75    $52330.8

 0.00327 

4) Continuous:
- Cash flow diagram
r = 17% F =??

=$3,900
 7 years

- General solution:
F  A  
F / A r ,n

 

 3,900  
F / A 17 , 7

 


- Numerical solution:
F  3,900  
F/A 17 , 7

 

 $5,2468.26

- Another approach:
 er n 1   e 0.177  1 
F  A    3,900  
 r   0.17 
 $52468.33

2.12
Mr. Husam deposits $2,400 per year into an account which pays a continuous compounding
interest of 9% during the first year after the initial deposit . If the nominal interest rate increases by
0.5% each year and 7 annual deposits are made , determine the worth of the fund immediately after
the last deposit .
 Solution

Step 1 :

The cash flow diagram is drawn in figure(1)

A A A A A A A

-1 0 1 2 3 4 5 6

Compounded continuously

Step 2 :

General formula used :

F6 = P( F / P i, n ) = F5 [ F / P 11 .5,1 ] –A
&
F = ( F / A i, n )

Step 3:

Numerical solution :
Using tables :
F1 = A[ F / A 9,2 ] , F2 = F1[ F / P 9.5,1 ] +A
F3 = F2[ F / P 10,1 ] +A , F4 = F3[ F / P 5,1 ] + A

F5 = F4[ F / P 11,1 ] +A , F6 = F5[ F / P 11 .5,1 ] +A

F1 = A [ 2F.09418
/A 9,2 ] = $2400 [ F / A
2.09418
9,2 ] = $5026.032

F2 = $5026.032 [ F / P 9.5,1 ] + $2400

By linear interpolation :

9 [ F / P 9,1 ]
9.5 
9.5,1
[F /P X ] 1

10  [ F / P 10,1
1.10517 ]
10  9 10  9.5
=  X 1 =1.09967
0.011 1.10517  X 1
F 2 =$5026.032[1F.09967
/P 9.5,1 ]+$2400=$7926.977

Similarly:

10  [1F.10517
/P 10,1 ]

10.5  [ X 10.5,1 ]
F/P
2

11  [1F.11628
/P
] 11,1

 X 2 =1.11628

And:

11  [1F.11628
/P 11,1 ]

11.5  [ X 3 11 .5,1 ]
F/P

12  [1F.12750
/P 12,1 ]

 X3 = 1.12189
F3 = $7926.977 [1F.10517
/P 10,1 ] + $2400 = $11160.657

F4 = $11160.657 [1F.11073
/P 10.5,1
] + $2400
=$14796.476
F5 = $14796.476 [1F.11628
/P 11,1 ] + $2400
=$18917.01
F6 = $18917.01[1F.12189
/P 11 .5,1 ] + $2400
=$23622.8

Comment :

The method used in solving the problem above is an accurate way to find the value of (F) ,
because it depend on the interpolation principle , which is a good mathematical way . it can be
seen that the first value of (F) was used as a present worth for the next one , which means (Fn-1) is a
present worth to find (Fn) . But this collides with the approximation in the values of the interest
rate found from the tables .
PROBLEM 2.15

A) A young couple with a 2-year-old son want to save for their son's college expenses in advance.
A savings account that pay 9% compounded annually is opened for the child. Annual deposits of $
1,500 starting on the child's 3rd birthday are made. Determine the maximum size of 4 equal
withdrawals that can be made by the child on his 17th, 18th, 19th and 20th birthday.

B) Mr.Husam wishes to establish a fund to provide for the college education of his daughter,
Maha. He wishes the fund to provide $ 4,500 on Maha's 18th, 19th, 20th, and 21st birthday.
Mr.Husam will make the first deposit when Maha is three and a half years old and will make
quarterly deposits thereafter until the end of Maha's fifteenth year. If a nominal rate of 12%
compounded quarterly can be earned on the fund, what should the uniform quarterly deposit be?

SOLUTION

A)
i= 9% compounded annually
 1500$

A=?

0 1 2 3 4

14 15 16 17 18
i=9%

F/A 9, 14
F=A ( )
F/A 9, 14
The formula factor ( ) is [(1+i)n-1] / [i]

And the numerical solution is

= [(1.09) n-1]/ [0.09] =26.0192

So that the value of F is $ 39028.78

F represents the present worth amount for the 4 equal withdrawals

Also we can get the value of A:

A/P 9, 4
A=P ( )

And since the formula of this factor is given by:

A/P 9, 4
( ) = [i*(1+i)n]/ [(1+i)n-1]

So the numerical solution is [(0.09*(1.09)4]/ [(1.09)4-1] = 0.30867

So the value of A is $ 12046.961

B)
Number of deposits= (15*4)-(3.5*4)+1 =47deposits

From the cash flow diagram below:

 P0=?

4500$
0 1 2 46

58 62 54 66 70
A =?
P* i=3%

The above cash flow diagram represents the number of payments and withdrawal made by the
daughter.
The withdrawals made when the daughter is 18, 19, 20, 21 in quarterly basis are (18*4-3.5*4) =
58, (19*4-3.5*4) =62, (20*4-3.5*4) =66, (21*4-3.5*4) =70.

i=12/4=3%

i eff = [(1+Ic)c-1 ]= (1.03)4 -1=0.1255

So i eff = 12.55%

Now we will calculate P*:

P/A 12.55,4
*
P =A ( )

P/F 12.55,2
But we have P0=P*( )
 P/A 12.55 ,4
Since we know the formula of the factor ( ) = [i*(1+i)n]/ [(1+i) n -1]

Which equal [(0.1255)*(1.1255)4]/ [1.1255)4-1] = 3.0025

So the value of P* is 1498.752

P/F 12.55,2
Also the formula of the factor ( ) = 1/ [(1+i)n]

Which yield 1/ (1.1255)2 = 0.78942

So that the value of P0 =1183.147191

P0 represents the future amount of the quarterly deposits

A/F 3, 47
A=F ( ) and the formula of the Factor is given by [i]/ [(1+i)n -1]

Which equal [(0.03)]/ [(1.03)47 -1] = 0.00996

A/F 3, 47
A=P0 ( ) =$ 11.784745

PROBLEM 2.10

A) Determine ten equal end-of-year payments which are equivalent to the following cash flow
pattern when the interest rate is 13% compounded continuously:

END OF YEAR AMOUNT

0 -2700
1 -1200
2 +300
3 +300
4 +300
5 +1300
6 -1000
7 +2300

B) What equal series of payments must be paid every 3-months period into a sinking fund to
accumulate $15,000 in 15 years if the nominal interest rate is 12% compounded quarterly?

C) A house you are interested in is offered for $85,000. A down payment of 20 percent is required
and the nominal interest rate is quoted as 15% compounded monthly. If you want to make
monthly installments for 20 years what will your monthly payment be?

SOLUTION

A) First we draw the cash flow diagram which is shown below:

 2300
1300
300

0 1 2 3 4 5 6 7

1000
1200
1122
2700
W331

The resultant
Cash flow diagram:

0 1 2 3 4 5 6 7 8 9 10

A=??
r=13%
Compounding frequency= ∞
P0

The above cash flow diagram is equivalent to the addition of the following two cash flow
diagrams:
 2000 A=300
1000

0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7

1500
1300

2700
r =13%
Compounding frequency= ∞

Now we will determine the present worth amount:

P/A 3,7 P/F 13,1 P/F 13,5 P/F 13,6 P/F 13,7
P0=300 [ ] -1500[ ] +1000[ ] -1300[ ] +2000[ ]

To find the following values of these factors we can use TABLE (B) [Discrete payment
continuous compounding] with values of r=13% & Ф =∞ and we can see the below:

P/A 13, 7 P/F 13, 6 P/F 13, 1

[ ] =4.30370 [ ] =0.45841 [ ] =0.8781

P/F 13, 7 P/F 13, 6 A/P 13, 10

[ ] =0.40252 [ ] =0.52205 [ ] =0.19084

So that value of P0 will be:

= [300*(4.3037)] - [1500*(0.87810)] + [1000*(0.52205)] - [1300*(0.45841)] + [2000*(0.40252)]-

2700= (-1994.883$)

Thus value of P0 will equal (-1994.883$) and will be the same for the end of ten year payment

A/P 13, 10
 A=P0 [ ]

Also we can get the value of this factor from the same table which equal (0.19084)

So that A= (1994.883*0.19084) =380.703$

B)
A/F i,n
A=F ( ) and since that (i= 12/4=3%) and (n=15*4= 60) so that:

A/F 3, 60
A=15000( ) and we can get the value of this factor from table (A-9) which

Equal (0.00613) and so:

A=15000*0.00613= $ 91.95$

C)
20% down payment is equivalent to [20 %*( 85000)] =17000$ & the remainder will

Be 85000-17000= 68000$

The cash flow diagram is shown below:

 P0=$ 68000

1 2 3 239 240

.....................

A=??

i=1.25%

The nominal interest compounded monthly = (12)*(20) =240 month

i= 15/12=1.25%

A/P i, n
A=P ( )

A/P 1.25, 240

= 68000( )

And since the formula of this factor is [i* (1+i)n] / [(1+i)n -1] so the numerical value of this factor
will be

[0.125*(1+0.125)240 ]/ [(1+0.125) 240 -1] = 0.0131676895

So that A will be [68000*(0.0131676895)]=$ 895.4169