Assignment - Chapter 4 - Solution

Engineering Economy - Assignment 1 Solution
F = P(1+i*N) = 1000(1+6%*3.5) = 1210
4.8 Jonathan borrowed $10,000 at 6% annual compound interest. He agreed to pay equal
annual payments at end-of-years 1-5. How much of the annual payment is interest, and
how much principal is there in each annual payment?
We have: A = P(A/P,6%,5) = $10,000(0.2374) = $2,374.00 ($2,373.96 with the formula)
We have the following table:
EO
Y Remaining debt Principal = Total - Interest Interest = Remaining * 6% Total
1 $ 10,000.00 $ 1,773.96 $ 600.00 $ 2,373.96
2 $ 8,226.04 $ 1,880.40 $ 493.56 $ 2,373.96
3 $ 6,345.63 $ 1,993.23 $ 380.74 $ 2,373.96
4 $ 4,352.41 $ 2,112.82 $ 261.14 $ 2,373.96
5 $ 2,239.59 $ 2,239.59 $ 134.38 $ 2,373.96
4.9 Suppose you contribute $10 per week ($520 per year) into an interest-bearing account
that earns 6% a year (compounded once per year). That’s probably one less pizza per
week! But if you contribute faithfully each week into this account, how much money would
you have saved through the compounding of interest by the end of 15 years?
F= A(F|A, 6%, 15) = 520(23.2760)=12,103.53
4-10
A lump-sum loan of $5,000 is needed by Chandra to pay for college expenses. She has
obtained small consumer loans with 12% interest per year in the past to help pay for
college. But her father has advised Chandra to apply for a PLUS student loan charging
only 8.5% interest per year. If the loan will be repaid in full in five years, what is the
difference in total interest accumulated by these two types of student loans? (4.6)
Solution:
The formula to know the future value of both credit is: F = P(1+r)^n
Where:
r= the interest rate
n= the years of the loan
Let´s find out the future value of the small consumer loan.
F(consumer) = 5000(1+0.1212)^5 = 8859.02
Loan: i1 = 12% => F1 = P(F/P, i1, n) = 5000(F/P, 12%, 5) = 5000*1.762 = 8810

Now let´s find out how much interest would Chandra pay.
i(consumer) = 8859.02 – 5000 = 3.859.02
Now, let´s see what it is going to be the final balance of the loan if Chandra would have picked
the PLUS loan.
F(PLUS) = 5000(1+0.085)^5 = 7518.28
Loan i2= 8.5% => F2 = P(F/P, i2, n) = 5000(F/P, 8.5%, 5) = 5000* (1+8.5%)^5 =
7518.283And its interest are:
i(PLUS) = 7518.28 – 5000 = 2.518.28
The difference is then:
Difference = i(consumer) – i(PLUS) = 3859.02 – 2518.28 = 1340.73
This means that she will pay $1,340.73 more in interest if she picks the small consumer loan.

P = 1000(P/F, 9%, 5) = 649.93
4-13.
You just inherited $10,000. While you plan to squander some of it away, how much should
you deposit in an account earning 5% interest per year if you’d like to have $10,000 in the
account in 10 years? (4.6)
P= F(P/F, i%, n) = 10000(P/F, 5%, 10) = 10000 *0.6139 = 6139

4.24 The Dominion Freight Company has invested $50,000 in a new sorting machine that is
expected to produce a return of $7,500 per year for the next 10 years. At a 7% annual
interest rate, is this investment worthwhile?
Find present investment:

P0=A(P|A,7%,10) = $7500(7.0236)= $52677 > $50000
Present Worth = $52677 - $50000= $2677
Because the present worth is positive thus the investment is worth
4.30
4-31.
Twelve payments of $10,000 each are to be repaid monthly at the end of each month. The
monthly interest rate is 2%. (4.7)
a. What is the present equivalent (i.e., P0) of these payments?
b. Repeat Part (a) when the payments are made at the beginning of the month. Note that
the present equivalent will be at the same time as the first monthly payment.
c. Explain why the present equivalent amounts in Parts (a) and (b) are different.
a. Solution:
a/ P = A(P/A, i%, n) = 10000(P/A,2%, 12) = 10000*10.575 = 105750
b/ P = A + A(P/A,2%,11) = $10000 + $10000(P/A,2%,11) = $107868
c/ The present equivalent amounts in Parts (a) and (b) are different since:
In (a): payment is made at the end of month, meaning after total P0 plus interest is achieved.
In (b); payment is made at the beginning of month, meaning P has yet been added with interest,
so the initial P should have supposingly smaller value than P0 in (a); payment in case (b) should
be paid quicker than case (a) due to smaller loan.
But the number of payment is 12 - same for two cases, the value of P in (b) becomes greater than
P0 in (a). So instead of paying quicker (less number of payments) than (a), (b) would have larger
present equivalent P than P0 of (b) under circumstance of having to pay in the same quantity of
times, so that P in (b) can use up 12 times of payments.
4.52 You have just inherited $100,000 as a lump-sum amount from your distant aunt. After
depositing the money in a practically risk-free certificate of deposit (CD) earning 5% per
year, you plan to withdraw $10,000 per year for your living expenses. How many years will
your $100,000 last in view of these withdrawals?
A = P(A/P, 5%,N)  (A/P,5%,N) = A/P = 0.1  N ≈ 15 years (14.2 years with the formula)
4.54 Kris borrows some money in her senior year to buy a new car. The car dealership
allows her to defer payments for 12 months, and Kris makes 48 end-of-month payments
thereafter. If the original note (loan) is for $28,000 and interest in 0.5% per month on the
unpaid balance, how much will Kris’ payment be?
P−12=$ 28,000 , i=0.5 % , N defer =12 months , N payment =48 months
( FP , 0.5 % , 12 )=$ 28,000× ( 1.062 )=$ 29,736.00($29,726.98 with the formula)

Po =P−12
A
A=P ( , 0.5 % , 48) =$ 29,736× 0.0235=$ 698.796 ($698.14 with the formula)
o
P
4.57 What lump sum of money must be deposited into a bank account at the present time
so that $500 per month can be withdrawn for five years, with the first withdrawal
scheduled for six years from today? The interest rate is 3/4% per month. (Hint: Monthly
withdrawals begin at the end of the month 72.) (4.9)
Monthly withdrawal = 500 = A

Number of withdrawal =5 year = 60 months = N
Withdrawal will start at the end of month 72 = n
i = 0.75% = 0.0075
We have:
[1] P=A(P/A, i%, N)(P/F, i%, n) = 500(P/A,0.0075%,60)(P/F, 0.0075%,72) = 14064.399
[2] P = [500*(1-1/1.0075^60)/0.0075]/(1/1.0075^72) = 14064.78566
b. F = 600(P/G,5%,N)(F/P,5%,N) = 10000
 N = 6, F = 600(11.968)(1.3401) = 9622.99 < 10000

 N =7, F = 600(16.232)(.4071) = 13704.03 > 10000
Thus 6 < N <7

Using linear interpolation:
(N – 6) / (10000 – 9622.99) = (7-6) / (13704.03 – 9622.99) => N = 6.1 periods (rounding to 7 )

c. F = 1000(P/G, 10%, 12) (F/P, 10%,12) = 1000 (29.901) (3.1384) = 93841.3
d. G = F(P/F,10%,6) x 1/(P/G,10%,6) = 8000 (0.5645)(1/9.684) = 466.34
4.97
P = $1,000 (P/F, 8%, 1) + $2,000 (P/F, 10%, 1)(P/F, 8%, 1) + $1,000 (P/F, 6%, 1)(P/F, 8%, 1)
(P/F, 10%, 1)(P/F, 8%, 1) + $2,000 (P/F, 10%, 1)(P/F, 6%, 2)(P/F, 8%, 1)(P/F, 10%, 1)(P/F, 8%,
1)
= $1,000 (0.9259) + $2,000 (0.9091)(0.9259) + $1,000(0.9434)(0.9259)(0.9091)(0.9259) +

$2,000(0.9091)(0.8900)(0.9259)(0.9091)(0.9259) = $4,606
4.116
Set Equivalent cash outflows = Equivalent cash inflows
Using time 9 as the equivalence point,
Z (F/P,20%,9) = $500(F/A,20%,5) + Z (F/P,20%,6)
6.0496 Z = $500(7.7609) + 3.3201 Z
2.7295 Z = $3,880.45
Z = $1,421.67

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What is the difference between making loan payments at the beginning vs end of each period?

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How can you calculate the future and present value of a series of cash flows?

How can you calculate the future and present value of a series of cash flows?

Engineering Economy - Assignment 1 Solution

F = P(1+i*N) = 1000(1+6%*3.5) = 1210

We have: A = P(A/P,6%,5) = $10,000(0.2374) = $2,374.00 ($2,373.96 with the formula)

We have the following table:

F= A(F|A, 6%, 15) = 520(23.2760)=12,103.53

n= the years of the loan

Loan: i1 = 12% => F1 = P(F/P, i1, n) = 5000(F/P, 12%, 5) = 5000*1.762 = 8810

P = 1000(P/F, 9%, 5) = 649.93

P= F(P/F, i%, n) = 10000(P/F, 5%, 10) = 10000 *0.6139 = 6139

Find present investment:

P−12=$ 28,000 , i=0.5 % , N defer =12 months , N payment =48 months

( FP , 0.5 % , 12 )=$ 28,000× ( 1.062 )=$ 29,736.00($29,726.98 with the formula)

Monthly withdrawal = 500 = A

 N = 6, F = 600(11.968)(1.3401) = 9622.99 < 10000

Thus 6 < N <7

(N – 6) / (10000 – 9622.99) = (7-6) / (13704.03 – 9622.99) => N = 6.1 periods (rounding to 7 )

= $1,000 (0.9259) + $2,000 (0.9091)(0.9259) + $1,000(0.9434)(0.9259)(0.9091)(0.9259) +

Set Equivalent cash outflows = Equivalent cash inflows

Using time 9 as the equivalence point,

Z (F/P,20%,9) = $500(F/A,20%,5) + Z (F/P,20%,6)

6.0496 Z = $500(7.7609) + 3.3201 Z

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F = P(1+iN) = 1000(1+6%3.5) = 1210