ENGINEERING ECONOMY

4th Qtr AY 2011-2012

Name: Score LEARNING TASK NO. 2

Date:

Money-Time Relationship and Equivalence

Enrico Suarez just graduated with a BS in engineering and landed a new job with a starting annual salary of $48,000. There are a number of things that he would like to do with his newfound wealth. For starters, he needs to begin repaying his student loans totaling $20,000 and hed like to reduce some outstanding balances on credit cards totaling $5,000. Enrico also needs to purchase a car to get to work and would like to put money aside to purchase a condo in the future. Last, but not least, he wants to put some money aside for his eventual retirement. Our recent graduate needs to some financial planning for which he has selected a 10-year time frame. At the end of 10 years, hed like to have paid off his current student loan and credit card debt, as well as have accumulated $40,000 for a down payment on a condo. If possible, Enrico would like to put aside 10% of his take home salary for retirement. He has gathered the following information to assist him in his planning. Student loans are typically repaid in equal monthly installments over a period of 10 years. The interest rate on Enricos loan is 8% compounded monthly. Credit cards vary greatly in the interest rate charged. Typical rates are close to 17% and monthly minimum payments are usually computed using a 10-year repayment period. The interest rate on Enricos credit card is 18% compounded monthly. Car loans are usually repaid over 3, 4 or 5 years. The rate on a car loan can be as low as 2.9% or as high as 12%. As a first-time car buyer, Enrico can secure a $15,000 car loan at 9% compounded monthly to be repaid over 60 months. A 30-year old, fixed rate mortgage is currently going for 5.75 to 6.0% per year. If Enrico can save enough to make a 20% down payment on the purchase of his condo, he can avoid private mortgage insurance that can cost as much as $60 per month. Investment opportunities can provide variable returns. Safe investments can guarantee 7% per year, while risky investments could return 30% or more per year. Enricos parents and older siblings have reminded him that his monthly take home pay will be reduced by income taxes and benefit deductions. He should not count on being able to spend more than 80% of his gross salary.

As Enricos friend (and the one who took Engineering Economy instead of Appreciating the Art o f Television Commercials), you have been asked to review his financial plans. How reasonable are his goals? After Enricos car is paid off, he plans to continue setting aside the amount of his car payment to accumulate funds for the cars replacement. If he invests this amount at a rate of 3% compounded monthly, how much will he have saved by the end of the initial 10-year period?

Mapua Institute of Technology School of Chemical Engineering and Chemistry

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