TUTORIALS

TUTORIAL QUESTIONS
Question 1
An employee at Icy cup borrows GHS10,000 on May 1 and must
repay a total of GHS10,700 exactly 1 year later. Determine the
interest amount and the interest rate paid.

Solution
Interest paid= GHS10,700 - GHS10,000 =700

Interest rate paid for 1 year

=(Interest/Amount borrowed)* 100%
=(700/10,000)* 100%
= 7%
Question 2
AMG Company plans to borrow GHS 20,000 from a bank
for 1 year at 9% interest for new recording equipment.
Compute the interest and the total amount due after 1 year.

Solution
(i) Interest= Principal x Interest Rate
Interest=GHS 20,000(0.09)=GHS1800
(ii) The total amount due is the sum of principal and interest.
Total due =GHS20,000 + 1800 = GHS21,800
Question 3
( a) Calculate the amount deposited 1 year ago to have GHS1000 now at
an interest rate of 5% per year.
(b) Calculate the amount of interest earned during this time period.

Solution
( a) The total amount accrued (GHS 1000) is the sum of the original
deposit and the earned interest. If X is the original deposit,
Total accrued = Deposit + Interest
= Deposit + deposit(interest rate)
1000 = X + X(0.05) = X (1 + 0.05) = 1.05 X
Deposit = X = GHS 952.38
(b) To determine the interest earned.
Interest= Total accrued - Deposit
Interest =1000 - 952.38 = 47.62
Interest =GHS47.62
Question 4
You plan to make a lump-sum deposit of GHS5000 now into an
investment account that pays 6% per year, and you plan to withdraw an
equal end-of-year amount of GHS1000 for 5 years, starting next year. At
the end of the sixth year, you plan to close your account by withdrawing
the remaining money. Define the engineering economy symbols involved.

Solution
All five symbols are present, but the future value in year 6 is the unknown.
P=GHS5000
A= GHS1000 per year for 5 years
F =? at end of year 6
i =6% per year
n =5 years for the A series and 6 for the F value
Question 5
Last year Jane’s grandmother offered to put enough money into a savings account to
generate $5000 in interest this year to help pay Jane’s expenses at college. ( a ) Identify
the symbols, and ( b ) calculate the amount that had to be deposited exactly 1 year ago to
earn $5000 in interest now, if the rate of return is 6% per year.
Solution
( a) Symbols
P (last year is 1) and F (this year) are needed.
P= ? i =6% per year n =1 year
F = P + interest = ? + $5000

( b) Let
F = total amount now and P = original amount. We know that F – P = $5000 is accrued
interest. Now we can determine P .
F = P + Pi
The $5000 interest can be expressed as
Interest = F – P = ( P + Pi ) – P
=Pi
$5000 = P (0.06)
P = 5000/0.06
= $83,333.33
Question 6
How much money should you be willing to pay now for a
guaranteed GHS600 per year for 9 years starting next year,
at a rate of return of 16% per year?

Solution
Draw the cash flow
A=GHS 600, i =16%, and n =9, P=?
The present worth is
P =600( P/A ,16%,9) = 600(4.6065) = GHS2763.90
Question 7
Determine the effective rate on the basis of the
compounding period for each rate
(a) 9% per year compounded quarterly
(b) 9% per year compounded monthly
(c) 4.5% per 6months compounded weekly

Solution
(d) 9%/4 = 2.25%
(e) 9%/12 = 0.75%
(f) 4.5%/26 = 0.173%
 Question 8

For lab research, three equal-service machines need to be

evaluated economically. Perform the present worth analysis with
the costs shown below. The i=10% per year.
Electric Gas Powered Solar Powered
Powered
First Cost, GHS -4500 -3500 -6000
Annual Operation Cost (AOC), GHS/Year -900 -700 -50
Salvage value, S, GHS 200 350 100
Life, Years 8 8 8

Solution
PWE =-4500-900( P/A ,10%,8) +200( P/F ,10%,8)= GHS -9208
PWG =-3500 -700( P/A ,10%,8) +350( P/F ,10%,8) =GHS -7071
PWS=-6000 -50( P/A ,10%,8) +100( P/F ,10%,8) =GHS -6220
The solar-powered machine is selected since the PW of its costs is the
lowest; it has the numerically largest PW value .
 Question 9
A company plans to purchase an equipment. Two manufacturers
offered the estimates below. Determine which vendor should be
selected on the basis of a present worth comparison, if i is 15% per
year.
VENDOR A VENDOR B
First Cost, GHS 15000 18000
Annual Operation Cost (AOC), 3.500 3100
GHS/Year
Salvage value, S, GHS 1000 2000
Life, Years 6 9

Solution
PWA=-15,000-15,000(P/F,15%,6)+1000(P/F,15%,6)-15,000(P/F,15%,12)
+1000(P/F,15%,12)+1000(P/F,15%,18)+3,500(P/A,15%,18)
=GHS-45,036
PWB=-18,000-18,000(P/F,15%,9)+2000(P/F,15%,9)+2000(P/F,15%,18)-3100(P/
A,15%,18)
=GHS-41,384 Therefore Vendor A is now selected based on its smaller PW
value.
Question 10
Michele is a general manager of a company and she
wishes to choose between two borehole development
projects. Use the cost Project
estimates
A
below to select the
Project B
more economic project at
Initial cost, GHS
a MARR of 8%
15000
per year.
20,000
Annual O&M, GHS/year 6,000 9,000
Refurbishment cost, GHS 0 2000 every 4 years
End of year value, GHS 20 40
Life, years 4 12
Solution
AW is taken at 8% per year over the respective lives of 4 and 12 years.
AWA = annual equivalent of P - annual O&M +annual equivalent of S
=-15,000(A/P ,8%,4) -6000 +0.2(15,000)(A/F ,8%,4)
=-15,000(0.30192) -6000 +3000(0.22192)
=GHS -9,863

AWB = annual equivalent of P -annual O&M -annual equivalent of refurbishment +annual

equivalent of S
=-20,000(A/P ,8%,12) -9000 -2000[(P/F ,8%,4) +(P/F ,8%,8)]( AP ,8%,12) +0.4(20,000)(A/F ,8%,12)
=-20,000(0.13270) -9000 -2000[0.7350 +0.5403](0.13270) +8000(0.05270)
=GHS -11,571

This means Project A is considerably less costly on an annual equivalent basis

Question 11
The president of Zoomlion Company wants to know the equivalent
future worth of a GHS1 million capital investment each year for 8
years, starting 1 year from now. Zoomlion capital earns at a rate
of 14% per year.

Solution
Draw the cash fl ow diagram to show the annual investments
starting at the end of year 1 and ending in the year the future
worth is desired.

A=GHS1000, i=14%, n=8, F=?

by using the F/A factor.
F = 1000( F/A, 14%,8)=1000(13.2328)= GHS13,232.80
Question 12
KMA have agreed to pool road tax resources already designated for
bridge refurbishment. At a recent meeting, the engineers estimated that a
total of GHS500,000 will be deposited at the end of next year into an
account for the repair of old and safety-questionable bridges throughout
the metro. Further, they estimate that the deposits will increase by
GHS100,000 per year for only 9 years thereafter, then cease. Determine
the equivalent (a) present worth and (b) annual series amounts, if public
funds earn at a rate of 5% per year.
Solution
Draw the cash flow diagram
(a) The total present worth is PT= 500(P/A,5%,10)+ 100(P/G,5%,10)
=500(7.7217) + 100(31.6520) = GHS7026.05 (GHS7,026,050)
(b) Total Annual worth is AT = 500 + 100(A/G,5%,10)
=500 + 100(4.0991)
= 909.91 per year (GHS909,910)