ENGR 301 Tutorial 6 solutions

A. Key Concepts

Simple Interest:

2.1 P = 3000
N = 6 months
i = 0.09 per year
= 0.09/12 per month, or 0.09/2 per six months

P + I = P + PiN = P(1 + iN)

= 3000[1 + (0.09/12)(6)] = 3135
or
= 3000[1 + (0.09/2)(1)] = 3135

The total amount due is $3135, which is $3000 for the principal amount
and $135 in interest.

2.6 (a) P = 1000

i = 0.10 per year
N = 2 years

F = P(1+i)N = 1000(1+0.10)2 = 1210

The balance at the end of 2 years will be €1210.

(b) P = 1000
i = 0.10 per year = 0.00833 per
month N = 2 years = 24 months

F = P(1+i)N = 1000(1+0.00833)24 = 1220.39

The balance at the end of 24 months (2 years) will be €1220.

2.8 F = P(1 + i)N

50 000 = 20 000(1 + i)20
(1+i)20 = 5/2
i = (5/2)1/20 1 = 0.04688 = 4.688% per quarter = 18.75% per year

The investment certificate would have to pay at least 18.75%

nominal interest, compounded quarterly.

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Copyright © 2013 Pearson Canada Inc.
 Chapter 2 - Time Value of Money

Cash Flow Diagrams:

2.14 F = P(1 + i)N

50 000 = 20 000(1 + 0.02)N
(1.02)N = 5/2
N = ln(5/2)/ln(1.02) = 46.27 quarters = 11.57 years

Greg would have to invest his money for about 11.57 years to reach his
target.

2.16 First, we shift the time reference point from now to three years ago
(i.e., P = 500 000 and F = 650 000). The computations relating the two
amounts remain unchanged. Then the formula F = P(1 + i)N must be
solved in terms of i to answer the question: i = (F/P)1/N 1.
(a) With a compounding period of one year, the number of periods is
N = 3. This gives:

i = (F/P)1/N 1 = (650 000/500 000)1/3 1 = 0.09139

The annual interest rate earned was approximately 9.14%.

(b) With a compounding period of one month, the number of periods is

N = 36. This gives:

i = (F/P)1/N 1 = (650 000/500 000)1/36 1 = 0.007315

The monthly interest rate earned was approximately 0.73%. On an annual

basis this would be stated as (0.73)(12) = 8.76% (nominal) interest.

2.18 P = 500
F = 708.31
i = 0.01 per month

From: F = P(1 + i)N

N = ln(F/P)/ln(1 + i) = ln(708.31/500)/ln(1 + 0.01) = 35.001

The deposit was made 35 months ago.

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Copyright © 2013 Pearson Canada Inc.
 Chapter 2 - Time Value of Money

2.20 Let P = X and F = 2X.

(a) By substituting F = 2X and P = X into the formula, F = P + I = P +

PiN, we get

2X = X + XiN = X(1 + iN)

2=1+
iN iN = 1
N = 1/i = 1/0.11 = 9.0909

It will take 9.1 years.

(b) From F = P(1 + i)N, we get N = ln(F/P)/ln(1 + i). By substituting F =

2X and P = X into this expression of N,

N = ln(2X/X)/ln(1 + 0.11) = ln(2)/ln(1.11) = 6.642

Since compounding is done every year, the amount will not double
until the 7th year.

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Copyright © 2013 Pearson Canada Inc.
 ENGR 301 Engineering Management Principles and Economics

Tutorial 7 – Cash Flow Analysis - Solutions

3.4 F = 1 000 000

i = 12%
N = 30

Using the formula: P = F/(1 + i)N = 1 000 000/(1 + 0.12)30 = 33 377.92

Using the tables produces a slightly different result due to the number of significant digits in the
table:

P = F(P/F, 12%, 30) = 1 000 000(0.0334) = 33 400

You should invest about $ 33 400.

3.9 (a) F = 40(F/A, 1%, 24) = 40(26.969) = 1079

(b) F = [30 + 1(A/G, 1%, 24)](F/A, 1%, 24) = [30 + 1(11.010)](26.969) = 1106

3.18 A 7% bond with a face value of $10,000 pays (7%/2) * $10,000 = $350 every 6 months.

So, I have annuities of $350 semiannually and I get our face value, $10 000 back at the end of 20
years (40 semiannual periods).

I want to receive at least 10% compounded semiannually. So, sum the present worths of the
$350 annuity and the 10 000 future value at 10%/2 = 5% per period over 202 = 40 periods.

P = 350(P/A, 5%, 40) + 10 000(P/F, 5%, 40) = 350(17.158) + 10 000(0.14205) = 7425.80

I should pay no more than (approximately) $7426 for the bond.

3.25 (a) 2000 + 350 + 210 = 100(P/A, 3%, N)

(P/A, 3%, N) = 2560/100 = 25.6

Solve for N using linear interpolation:

N = 45 + (50  45)(25.6  24.519)/(25.730  24.519) = 49.4632

It will take about 50 months to complete her payment.

(b) A = 2560(A/P, 3%, 24) = 2560(0.05905) = 151.168

Yoko’s monthly payment will have to be $151.

3.27 A = (P – S)(A/P, i, N) + Si
= (140 000 – 37 000)(A/P, 14%, 5) + 37 000(0.14)
= 103 000(0.2918) + 37 000(0.14)
= 35 235

The investment would have to save about $35 235 per year over its 5‐year life.

3.30 A' = 10 000

G = 1000
i = 0.15
N= 6 for gradient to annuity
6 for annuity to present value
2 for future value to present value

P = [10 000 + 1000(A/G, 15%, 6)](P/A, 15%, 6)(P/F, 15%, 2)

= [10 000 + 1000(2.0971)](3.7844)(0.75614)
= 34 616.29

The software is worth $34 616 today.

3.34 This is an arithmetic gradient with

A' = 100 000

G = 10 000 per year
N = 30 years
i = 0.08 per year

A = A' + G(A/G, 8%, 30) = 100 000 + 10 000(9.1897) = 100 000 + 91 897 = 191 897

P = A(P/A, i, N) = 191 897(P/A, 8%, 30) = 191 897(11.258) = 2 160 376

Yes, it is a good deal.

 ENG
GR 301 Engineer
E ing Managementt Principlles and E
Economiccs
Tu
utorial 8: Ecconomic Eq
quivalency

1. An individu
ual deposits an annual bo
onus into a savings
s accoount that payys 8% interesst compoundded
annually. The
T size of th 2000 each yeear, and the iinitial bonuss amount was $5000.
he bonus incrreases by $2
Determine how much will
w be in thee account immmediately affter the 5th ddeposit.

To determin
ne how much ount after thhe 5th depositt we first dettermine a sinngle
h is availablle in the acco
present amo
ount at yearr 0.

00(P/G,8%,5
$5000(P/A,8%,5) + $20 5 = $5000(3
3.993)+20000(7.372) = $$34,709
or
$5000(P/A,8%,5) + $20
00(P/A,8%,5
5)(A/G,8%,5
5) = $5000(33.993)+20000(3.993)(1.8465) = $34,711

Convert thiis present am

mount to a fu
uture amountt at t=5
$34,709(F/P
/P,8%,5) = $34,709(1.46
$ 69) = $50,98
87

2. Compute th
he value of P in the accompanying caash flow diaagram, assum
ming that i=99%.

P = $100 + $100(P/F,9
9%,1) + $15
50(P/F,9%,2)) + $150(P/F
/F,9%,3) + $$200(P/F,9%
%,4) + $200((P/F,9%,5)
+ $250(P/F
F,9%,6) +$ 250(P/F,9%,
2 ,7)

P = $991.3
31
3. The two cash flow transactions sho
own in the acccompanyingg cash flow ddiagram are said to be eqquivalent
at 6% intereest compoun
nded annuallly. Find the unknown
u vaalue of X thaat satisfies thhe equivalencce.

To solve for X,, convert thee cash flow series

s to a present amounnt, then convvert to a unifform paymennt series.

P = $200 + $150(P/F,6%,1
1) + $100(P
P/F,6%,2) + $100 (P/F,66%,3) + $1500 (P/F,6%,4)
4) + $200(P//F,6%,5)

P = $782.7

X = $782.7(A/P
P,6%,5) = $782.7(0.237
74) = $185.80

4. From the ac
ccompanying
g cash flow diagram, fin
nd the value of C that wiill establish tthe economic
equivalencee between th
he deposit series and the withdrawal series at an interest rate of 8% comppounded
annually.

Sollve by bringiing everythin

ng to the preesent and equ
uating.

C(PP/A,8%,3) + C(P/A,8%,33)(P/F,8%,55) - $6000(P//A,8%,2)(P/F

/F,8%,8)
C(22.577) + C(2
2.577(0.6806
6) - $6000(1.783)(0.5403
3)
4.3309C - $57880 = 0
C = $1334
5. John Jay is purchasing a $24,000 automobile, which is to be paid for in 48 monthly installments of
$543.35. What effective annual interest is he paying for his financing arrangement?

P=$24,000; A=$543.35; n=48; i=?

$24,000 = $543.35 (P/A,i%,48)

(P/A,i%,48) = 44.17

Try different values for i: For i = 1%; (P/A,0.01,48) = 37.97

For i = 0.5%; (P/A,0.005,48) = 42.58
For i= 0.25%; (P/A,0.0025,48) = 45.179

Therefore the monthly interest rate lies between 0.25% and 0.5%

Interpolating: i = 0.25% + (0.5%-0.25%)[(45.179-44.17)/(45.179-42.58)] = 0.34%

ieff = (1 + 0.0034)12 – 1 = 0.0416 = 4.16%

6. Sketch the cash flow diagram associated with the following equivalency expression:
P = $200(P/F,i%,1) + [$100 + $20(A/G,i%,4)](P/A,i%,4)(P/F,i%,2)

We have a gradient series for 4 periods with a step of $20, which we convert into 4 equal amounts (the
20(A/G,1%,4)).
Coinciding with our gradient series we have 4 equal amounts of $100.
We now convert the uniform and gradient series into a single present value one period before the beginning
of those series (the (P/A),1%,4)). The (P/F,1%,2) is telling us that this single present value is considered a
future value when compared with P, and that this future value is 2 periods after P.
The $200(P/F,i%,1) is telling us we have a single amount of $200 1 period after P.

That gives the following CFD:

P = 200(P/F,0.1,1) + [100+20(A/G,0.1,4)](P/A,i%,4)(P/F,0.1,2)
P = 200(0.90909) + [100+20(1.3812)](3.1699)(0.82645) = 516.16

P = 200(P/F,0.1,1) + 100(P/F,0.1,3) + 120(P/F,0.1,4) + 140(P/F,0.1,5) + 160(P/F,0.1,6)

P = 200(0.90909) + 100(0.75131) + 120(0.68301) + 140(0.62092) + 160(0.56447) = 516.15