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Carleton University
Department of Civil and Environmental Engineering
ECOR 3800 D
Assignment 1
Release Date: January 21th
Due Date: January 30th 4:00 PM
Submission: in designated filing cabin at the entrance to the Department of Civil and Environmental Engineering
Neatness and professionalism in packaging: The assignment submission must be neat and well-written or
professionally packaged. Up to 5% of the mark can be deducted for lack of appropriate packaging.

Question 1
Suppose you deposit $1,000 in a bank saving account that pays interest at a rate of 8% per year.
Assume that you don’t withdraw the interest earned at the end of each interest period (year), but
instead let it accumulate. Typically, compound interest is charged so this question and all subsequent
ones considers that compound interest is charged.
- How much would you have at the end of year three with compound interest?

Question 2
Suppose you are offered the alternative of receiving either $3,000 at the end of five years or P dollars
today. Because you have no current need for the money, you would deposit the P dollars in an
account that pays 8% interest. What value of P would make you indifferent to your choice between P
dollars today and the promise of $3,000 at the end of five years?

Question 3
Suppose you make an annual contribution of $4000 to your saving account at the beginning of each
year for Six years. If your saving account earns 2.5% interest annually, how much can be withdrawn
at the end of year six?

Hint: Please pay close attention to the points in time these transactions take place. It can be useful to
create a cash flow diagram before answering the question.

Question 4
The benefit of a revised production schedule for a seasonal manufacturer will not be realized until the
peak summer months. Net savings will be $1,200, $1,350, $1,500, $1,600, and $1,800 at the ends of
months 5, 6, 7, 8, and 9, respectively. It is now the beginning of month 1. Assume 365 days per year,
30 days per month. What is the present worth (PW) of these net savings if nominal interest is?
a] 3% per year, compounded monthly?
b] 3% per year, compounded daily?

Question 5
A loan received at the beginning of 2016 is scheduled to be repaid as uniform payments of $3,050 per
year for 4 years. The first repayment is expected to take place at the beginning of year 2017. Subsequent
repayments will take place on at the beginnings of years 2018, 2019, and 2020.

a] Create a cash flow diagram of the loan showing both the money received as a loan as well as the
money paid back to the lender.
b] What is the maximum amount which can be taken if the loan’s interest rate is 4.5% and compounding
is annual?
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Question 6
An educational saving account is created. The account is set up such that the beneficiary will receive all
money in the account (principal as well as accrued interest) after 12 years from the present. Payments into
this account are made by depositing $275 to this account every month. Because this saving plan is
registered, a matching grant is given by the Government amounting to 25% of the money deposited (with
the exception of the last $275 paid at the end of year 12 which is not matched). The grant amount is
deposited every month on top of the $275. However, there is one month lag between them. That is, the
first grant payment is deposited at the end of the second month; one month after the first payment. The
last amount deposited is excluded from the grant. The first payment to this account will be made at the
end of the first month and the last is by the end of year 12. If the expected monthly rate of return (interest
rate i) for this educational saving account is 0.14%, calculate the amount which is expected to be cashed
from this account by the beneficiary after 12 years.

Question 7
A company is considering an investment which will require two payments $44,000 each at the beginning
and at the end of the first year. The company expects the investment to achieve revenues of $22,300 per
year up to and including the eighth year. Revenues begin to be collected at the end of the second year.
Minimum Acceptable Rate of Return (MARR) = 7%. Please note that because this project is an
investment, MARR provides the mathematical interest rate used for calculations (i).

a] Draw the cash flow diagram (CFD) for this investment showing cost and revenue components of the
CFD.

b] If all the initial costs needed for this investment (total costs of $88,000) are to be financed from a line
of credit. What is remarkable about a line of credit, as opposed to a loan, is that you can borrow the
money whenever you want. Interest will only accrue after you borrow. The credit limit will always be
available, even if you choose not to use it. That is, money can be borrowed whenever needed from an
account with a maximum credit of $200,000. The investor decided to pay back this money to the line of
credit as a lump sum (one payment) at the end of the project (whenever the last revenue is received). Find
the maximum interest rate for this line of credit so that the project is feasible.