PROBLEM SETS

EECO 003-3: Engineering Economy

Submitted to:

ENGR. JERRIC D. ALMANZOR

Instructor

Submitted by:

JOHN CARLO C. RAMOS BS CIVIL ENGINEERING

RENATO A. SEVILLA JR. BS CIVIL ENGINEERING

KEN A. TIMBOL BS ELECTRONICS ENGINEERING

ISIAH JOHN S. VERANO BS CIVIL ENGINEERING

September 201
RAMOS VERANO TIMBOL SEVILLA (ENGINEERING ECONOMY)

A. SIMPLE INTEREST

1. If you borrowed money from your classmate with a simple interest of 15%, find the present
worth of P 50,000; which is due at the end of 1 year.

GIVEN: SOLUTION:

F = P 50,000 F=P+I

i = 15% = 0.15 F=P+Pin

n=1 P50,000=P+P(0.15)(1)

P=? P = P 43,478.26

2. A price tag of a T-shirt is P 1,500 is payable in 60 days but if paid within 30 days it will have a
5% discount. Find the rate of interest.

GIVEN: SOLUTION:

d = 5% = 0.05 Discount=0.05(1500)=75

n = 30 days / 360 days Amount on 30 days = 1500 75 = 1425 = P

i=? I=Pin

75=1425i(30/360)

i = 63.16%
3. P 5,000 is borrowed for 85 days at 18% per annum simple interest. How much will be due at
the end of 85 days?

GIVEN: SOLUTION:

P = P 5,000 I = Pin F=P+I

i = 18% = 0.18 = P 5,000 (0.18)(85/360) = 5,000 + 212.50

n = 85 days / 360 days I = P 212.50 F = P 5,212.50

F=?

4. A bank loan of P 5,000 was made at 7% simple interest. How long would it take in years for
the amount of the loan and interest to equal P 9,200?

GIVEN: SOLUTION:

F = P 9,200 I=FP I = Pin

P = P 5,000 = P 9,200 P 5,000 P 4,200 = P 5,000 (0.07) n

i = 7% = 0.07 = P 4,200 n = 12 years

n=?

5. A loan shark charges 15% simple interest on a P600 loan. How much will be repaid if the load
is paid back in one lump sum after three years?

GIVEN: SOLUTION:
P = P 600 A=P+Pin
i = 15% = 0.15 =600+600(0.15)(3)
n = 3 years A = P 408
B. COMPOUND INTEREST

1. A loan of $3,000 is made at an interest of 12% for 5 years. The principal and interest are due at
the end of the fifth year.

GIVEN: SOLUTION:

P = $ 3,000 F = P (1+i)n

i = 12% = 0.12 = $ 3,000(1+0.12)5

n = 5 years F = $ 5287.03

2. A man wishes his son to receive P 200,000 ten years from now. What amount should he invest
if it will earn interest 10% compounded annually during the first 5 years and 12% compounded
quarterly during the next 5 years?

GIVEN: SOLUTION:

F = P 200,000 P2 = F (1+i)-n

i1 = 10% = 0.10 = P 200,000 (1+0.03)-20

i2 = 12%/4 = 3% = P 110,735.15

n1 = 5 P1 = P2 (1+i)-n

n2 = 5(4) = 20 = P 110,735.15 (1+0.10)-5

= P 68,757.82
3. By the condition of a will the sum of P 25,000 is left to be held in trust by her guardian until it
amounts to P 45, 000. When will the girl receive the money if the fund is invested at 8%
compounded quarterly.

GIVEN: SOLUTION:

P = P 25,000 F = P (1+i)n

F = P 45,000 P 45,000 = P 25,000 (1+0.02)4n

i = 8%/4 = 2% = 0.02 45,000/25,000 = (1.02)4n

n=? n = 7.42 years

4. At a certain interest rate compounded semiannually P 5,000 will amount to P 20,000 after 10
years. What is the amount at the end of 15 years.

GIVEN: SOLUTION:

P = P 5,000 n1 = 10, F1 = P 20,000 n2 = 15

n1 = 10 years F1 = P (1+i/2)2(n1) F2 = P (1+i/2)2(n2)

F1 = P 20,000 P 20,000 = P 5,000 (1+i/2)2(10) = P 5,000 (1+0.1435/2)2(15)

n2 = 15 years i = 14.35% F2 = P 39, 973.74

i=?

F2 = ?
5. A $1,000 deposit for 5 years at 10% / yr compounded quarterly yields what future value?

GIVEN: SOLUTION:

P = $ 1,000 F = P (1+i)n

n = 5(4) = 20 = $ 1,000 (1+0.025)20

i = 10%/4 = 2.5% = 0.025 F = $ 1638.62

F=?

C.1 ORDINARY ANNUITY

1. Your plan is to save $ 100 at the end of each year at 8% interest. What will be the size of the
account in 10 years?

GIVEN: SOLUTION:

A = $ 100 F = A [(1+i)n 1/i]

n = 10 years = $ 100[(1+0.08)10 1/0.08]

i = 8% = 0.08 F = $ 1,448.66

F=?

2. A mans goal is to save $ 7,500 for a car down payment in 4 years by investing part of his
year-end bonus. How much would he need to save annually at 4% interest?

GIVEN: SOLUTION:

F = $ 7,500 A = F [ i/(1+i)n 1]

n = 4 years = $ 7,500 [ 0.04/(1+0.04)4 1]

i = 4% = 0.04 A = $ 1,766.17

A=?
3. A woman is scheduled to receive $ 15,000 at the end of the next 7 years. If the current interest
rate is 6%, what is the equivalent amount today?

GIVEN: SOLUTION:

A = $ 15,000 P = A [(1+i)n 1/i(1+i)n]

n = 7 years = $ 15,000[(1+0.06)7 1/0.06(1+0.06)7]

i = 6% = 0.06 = $ 83,735.72

P=?

4. Loida invest P 5,000 in an account that returns 6% annual interest. How much can you
withdraw each semester (twice/year) over the next 4 years for books and supplies?

GIVEN: SOLUTION:

P = P 5,000 A = P [i(1+i)n/(1+i)n 1]

n = 4(2) = 8 = P 5,000[0.06(1+0.06)8/(1+0.06)8 1]

i = 6% = 0.06 = P 712.28/semester

A=?

5. Jessie was given $ 5,000 to invest in a 6% annual interest. What will be the amount of the
money in 5 years?

GIVEN: SOLUTION:

A = $ 5,000 F = A [(1+i)n 1/i]

n = 5 years = $ 5,000[(1+0.06)5 1/0.06]

i = 6% = 0.06 F = $ 28,185.46
C.2 DEFERRED ANNUITY

1. What amount should you invest now if you want to receive payments of $ 1,000 at the end of
each year for 10 years with the receipt of the first payment 3 years from now? Assume that
money earns 5% compounded annually.

GIVEN: SOLUTION:

A = $ 1,000 P10 = A [1 (1+i)-n / i] P2 = F2 (1+i)-n

i = 5% = 0.05 = $ 1,000[1 (1+0.05)-10 /0.05] = $ 7,721.73(1+0.05)-2

n1 = 10 years = $ 7,721.73 P2 = $ 7003.84

n2 = 2 years P10 = F2

2. Calculate the amount of money an investment banker would have to deposit in an investment
fund that will provide him $ 1,000 at the beginning of each month for 11 years. He received first
payment 2 years from now and the interest rate is 6% compounded semi-annually.

GIVEN: SOLUTION:

A = $ 1,000 P132 = A [1 (1+i2)-n2 / i2] (1+i2)

n1 = 1/6 = $ 1,000[1 (1+0.0049)-132 / 0.0049] (1+0.0049)

n2 = 132 P132 = $ 97, 288.01

n3 = 4 P132 = F132

i = 6% / 2 = 3% = 0.03 P4 = F132 (1+i)-n3

i2 = (1+i)n1= (1+0.03)1/6 = $97,288.01 (1+0.03)-4

= 0.0049 = $ 86,439.13
3. The owner of a business borrowed $ 7,500 to purchase a new machine for his factory. The
interest rate charged on the loan is 4% compounded semi-annually and he is required to settle the
loan by making equal monthly payments at the end of each month, for 5 years with the first
payment to be made 1 year and 1 month from now. Calculate the size of the monthly payments
that are required to settle the loan.

GIVEN: SOLUTION:

P = $ 7,500 F2 = P (1+i)n1

n1 = 2 = $ 7,500(1+0.02)2

n2 = 1/6 = $ 7,803

n3 = 60 F2 = P2

i = 0.02 P2 = A [1 (1+i2)-n3 / i2]

i2 = (1+i)n2 1 $ 7,803 = A[1 (1+0.0033)-60 / 0.0033]

= (1+0.02)1/6 1 = $ 143.59

= 0.0033

4. A deferred annuity is purchased that will pay $ 10,000 per quarter for 15 years after being
deferred for 5 years. If money is worth 6% compounded quarterly, what is the present value of
this annuity?

GIVEN: SOLUTION:

P = $10,000 A(60,20) = P [ 1 (1+i)-n / i ] (1+i)-n

n1 = 4(15) = 60 = $10,000 [ 1 (1+0.015)-60 / 0.015] (1+0.015)-20

n2 = 4(5) = 20 = $ 292,386.85

i = 0.06/4 = 0.015
5. On January 1st, 2009, you open an investment account. If an annuity such that twelve annual
payments equal to $ 2,000 are made starting December 31st, 2009 is going to be credited to the
account, find the account balance on December 31st, 2024. Assume that i = 0.05.

GIVEN: SOLUTION:

P = $ 2,000 F = P (1+i)n1 P4 = A4 [ 1 (1+i)n / i ]

i = 5% = 0.05 = $ 2,000 (1+0.05)4 = $ 2,431.01 [ 1 (1+0.05)12 / 0.05 ]

n1 = 4 years F4 = $ 2,431.01 = $ 38, 694.73

n2 = 12 years F4 = A 4

D. EQUIVALENCE CALCULATIONS INVOLVING MULTIPLE INTEREST FORMULAS

1) Assume a problem with a series of year-end cash flows extending over eight years. The
amounts are $100 for the first year, $200 for the second year $500 for the third year, and $400 for
each year from the fourth through the eighth. These could represent something like the expected
maintenance expenditures for a certain piece of equipment or payments into a fund.

(a) Find the present equivalent expenditure, P0;

(b) Find the future equivalent expenditure, F8;

(c) Find the annual equivalent expenditure, A;

of these cash flows if the annual interest rate is 20%.

Solution:

P0 =F1 (P/F,20%,1) =$100 (0.8333) = $83.33

+F2 (P/F,20%,2) +$200 (0.6944) +138.88

+F3 (P/F, 20%,3) +$500 (0.5787) +289.35

+A(P/A, 20%,5) (P/F,20%,3) + $400 (2.99)(0.5787) +692.26

= $1203.82

F8=P0 (F/P,20%,8)

=$1203.82 (4.2998)

=$5176.19

A=P0(A/P,20%,8)

=$1203.82 (0.2606) =$313.73

2.) Transform the cash flows on the left-hand side to their equivalent cash flows on the right-
hand side. That is, take the left-hand quantities as givens and determine the unknown value of Q
in terms of H. The interest rate is 10% per year.

Solution:

P0=2H (P/A,10%,4)+ H(P/A,10%, 5)(P/F, 10%,5)=7.8839 H

7.8839H = Q (P/F, 10%, 2)-Q (P/F, 10%,7)

Q =25.172 H

3.) Your company has just borrowed money at an interest rate of 10% compounded annually.
Your banker gives you the option of paying the loan off with 3 equal end of year payments of
$17,500 (A) or one lump sum payment at the end of year 3 (B). What lump sum payment would
be equivalent to the 3 end of year payments of $17,500?

Solution:

F3= $17,500(1+0.1)2 = $21,180

F3 = $17,500(1+0.1)1 = $19,250

$21,180 + $19,250 + $17,500 = $57,930.

4.) What is the amount of 10 equal annual deposits that can provide five annual withdrawals,
when a first withdrawal of $1,000 is made at the end of year 11, and subsequent withdrawals
increase at the rate of 6% per year over the previous year's if the interest rate is 8%, compounded
annually?

Solution:

A11=$1000

A12 = $1000*(1.06)

A13 = $1000*(1.06)^2

A14 = $1000*(1.06)^3

A15 = $1000 *(1.06)^4.

i=8% and g = 6%.

P=1000(P/A, 0.06, 0.08, 5) = $4,461.

A = 4461 (A/F,0.08,10) = 4461*0.069

= $307.9.

5.) If $1000 is invested now, $1500 two years from now, and $800 four years from now at an
interest rate of 8% compounded annually, what will be the total amount in 10 years?

Solution:

F = 1000(F/P, 0.08, 10) + 1500(F/P, 0.08, 8) + 800(F/P, 0.08, 6)

= 1000*2.158 + 1500*1.850 + 800*1.587

= $6,204
E. GRADIENT INTEREST

1.) The annual maintenance costs for a facility are $2,000 for the first year (assumed payable at
the end of the first year) and increase by 15% each year thereafter. Assuming a facility life of 15
years, what is the present worth of the maintenance costs over the lifetime of the facility if the
interest rate is 8% compounded annually.

Solution:

Present Worth = $2,000( pa , i=0.08, 15 years) + $300(GPWF, i=0.08, 15 years)

(pa , i=0.08, 15 years) = 8.5595

15 (GPWF,i=0.08,15years)= 1 (1+ 0.08) 1 15 =47.886

Therefore

Present Worth = $2,000(8.5595) + $300(47.886) = $31,485

2.) The Texas Highway Department expects the cost of maintenance for a particular piece of
heavy equipment to be $5000 in year 1, $5,500 in year 2, and amounts increasing by $500
through year 10. At an interest rate of 10% per year, what is the present worth of the maintenance
cost?

Solution:

The cash flow can be represented as an increasing gradient with G = $500 and a base amount A
of $5,000.

P = 5000 (P/A, 10%,10) + 500 (P/G,10%,10)

= 5000(6.1446) + 500(22.8913)

= $42,168.55
3.) The cash flow associated with a strip mining operation is expected to be $200,000 in year 1,
$180,000 in year 2, and amounts decreasing by $20,000 per year through 8. At an interest rate of
12% per year, what is the equivalent annual cash flow?

Solution:

AT = A1 + AG

= 200,000 - 20,000 (A/G, 12%, 8)

= 200,000 - 20,000 (2.9131)

= $142,738

4.) What is the present worth given A1 = $100; g = 15%; i = 9%; n = 5

P = A1 ( P/ A1, g, i, n ) = 100 [ 1 ( 1 + 0.15 ) 5 ( 1 + 0.09 ) 5 ] / ( 0.09 0.15 )

= 100 [ 1 2.0114 * 0.6499] / (-0.06)

= 100 [-0.3072] / (-0.06)

= 512.1

5.) What is the present worth given A1 = $100; g = 5%; i = 8%; n = 10

P = A1 ( P/ A1, g, i, n ) = 100 [ 1 ( 1 + 0.05 ) 5 ( 1 + 0.08 ) 5 ] / ( 0.08 0.05 )

= 100 [ 1 1.628894627 * 0.463193488] / (0.03)

= 100 [ 0.2455] / (0.03)

= 818.355
F. INTEREST RATE THAT VARY WITH TIME

1) A member of congress wants to know the capitalized cost of maintaining a proposed national
park. The annual maintenance cost is expected to be $25,000. At an interest rate of 6% per year,
what is the capitalized cost of the maintenance?

Solution: In this problem, A= $25,000 and i = 0.06.

P = 25, 000/0.06

= $416,667

2.) Formosa Plastics has major fabrication plants in Riyadh and in Jaddh. It is desired to know
the future worth of $1,000,000 invested at the end of each year for 8 years, starting one year
from now.

The interest rate is assumed to be 14% per year.

Sol. Example:

A = $1,000,000/yr; n = 8 yrs, i = 14%/yr

F8 = ?

Cash flows are indicated in $1000 units. The F value in 8 years is

F = l000(F/A,14%,8) = 1000(13.23218)

= $13,232.80 = 13.232 million 8 years

from now.
3.) How much money must Carol deposit every year starting, l year from now at 5.5% per year in
order to accumulate $6000 seven years from now?

The cash How diagram from Carol's perspective fits the A/F factor.

A= $6000 (A/F,5.5%,7) =6000(0.12096)

= $725.76 per year

The A/F factor Value 0f 0.12096 was computed using the A/F factor formula

4.) Find the future amount given:A=$5,000,N=5years,andi=6%

Solution:

F=$5,000(F/A,6%,5)=$28,185.46

5.) Find the amount given: F=$5,000, N=5years, and i=7%

Solution:

A=$5,000(A/F,7%,5)=$869.50
G. NOMINAL AND EFFECTIVE INTEREST RATES

1) A credit card company charges 21% interest per year, compounded monthly. What
effective annual interest rate does the company charge?

Given:

r = 0.21 per year

n = 12

Solution:

i = [ 1 + (r / n) ]^n - 1

i = [ 1 + (.21 / 12) ]^12- 1

= [1 + 0.0175 ]^12 - 1

= (1.0175)^12- 1 = 1.2314 - 1

= 0.2314

= 23.14%
 2) If a lender charges 12% interest, compounded quarterly, what effective annual interest
rate is the lender charging?

Given:

r= 0.12

n=4

Solution:

ia = [ 1 + (0.12 / 4) ]^4 - 1

= (1.03)^4- 1

= 1.1255 - 1

= .1255

= 12.55%
 3) If a lender charges 12% interest, compounded monthly, what is the effective interest rate
per quarter?

Given:

r= 0.03

n= 3

Solution:

i = [ 1 + (0.03 / 3) ]^3 - 1

= (1.01)^3- 1

= 0.0303

= 3.03%

4) Interest on a credit card is quoted as 23% compounded monthly. What is the effective
annual interest rate? Give your answer correct to two decimal places.

Given:

n=12

i= 0.23

Solution:

1+i=(1+i^n/n)^n

1+i=(1+0.23/12)^12

i= 25.59
 5) Determine the nominal interest rate compounded quarterly if the effective interest rate is
9% per annum.

Given:

n=4

i= 0.09

Solution:

1+i=(1+i^n/n)^n

1+0.09=(1+i^4/4)^4

4 i4
1.091=
4

i= 8.71%

H. INTEREST PROBLEMS WITH CASH FLOWS LESS OFTEN THAN

COMPOUNDING PERIOD.

1. An engineer deposits $1,000 in a savings account at the end of each year. If the bank
pays interest at the rate of 6% per year, compounded quarterly, how much money will
have accumulated in the account after 5 years?
 Given:
i = (6%/4) = 1.5% per quarter
P = $1000

Solution:
F = P (F/P,i,mn)
F = $1000(F/P,1.5%,16) + $1000(F/P,1.5%,12) + $1000(F/P,1.5%,8) + $1000(F/P,1.5%,4)
+ $1000(F/P,1.5%,0)
F = $5,652

2. An engineer deposits $1,000 in a savings account at the end of each year. If the bank
pays interest at the rate of 6% per year, compounded quarterly, how much money will
have accumulated in the account after 5 years?

Given:
r = 6% or 0.06
x=4
A = $1,000
Solution:
i = (1 + r/x)x 1 = (1 + 0.06/4)4 1 = 0.06136 (6.136%)
F = $1,000 (F/A,6.136%,5)
F = $5,652

3. An engineer plans to borrow $3,000 from his company credit union, to be repaid in 24
equal monthly installments. The credit union charges interest at the rate of 1% per month
on the unpaid balance. How much money must the engineer repay each month?

Given:

P = $3000
i = 1%
mn = 24

Solution:

A = P (A/P, i, mn) = i P (1+i)n / (1+i)n -1

A = ($3000) (A/P, 1%, 24) = $141.20

4. An engineer wishes to purchase an $80,000 lakeside lot (real estate) by making a down
payment of $20,000 and borrowing the remaining $60,000, which he will repay on a
 monthly basis over the next 30 years. If the bank charges interest at the rate of 9%
per year, compounded monthly, how much money must the engineer repay each month?

Given:

r = 9 %
m = 12
P = $60000

Solution:

i = (r/m) = (0.095/12) = 0.00792 (0.79%)

A = P (A/P, i, mn) = i P (1+i)n / (1+i)n -1
A = ($60000) (A/P, 0.79%, 360) = $504.50
5. An engineer deposits $2000 in a savings account at the end of each year. If the bank pays
interest at the rate of 6% per year, compounded quarterly, how much money will have
accumulated in the account after 5 years?

Given:

i = (6%/4) = 1.5% per quarter

P = $2000
mn = 16 , 12 , 8 ,4 ,0

Solution:

F = P (F/P,i,mn)
F = $2000(F/P,1.5%,16) + $2000(F/P,1.5%,12) + $2000(F/P,1.5%,8) + $2000(F/P,1.5%,4)
+ $2000(F/P,1.5%,0)
F = $11304
 I. INTEREST FORMULA FOR CONTINOUS COMPOUNDING AND DISCRETE
CASH FLOW

1. Suppose that in year 0, one cent was invested in an account earning 1% interest
compounded continuously (r=0.01) How much will it be worth 2110 years later?

Given:

r = 0.01

t = 2110 years

Solution:

A(2110) = 0.01e^(0.01)2110 = 0.01e^21.1

= (0.01)(1457516796.05142392)

= 14575167.9605142392

= $14,575,167.96.

2. How much would you have to invest in an account earning 8% interest compounded
continuously ( r = 0.08) , for it to be worth one million dollars in 30years

Given:

r = 0.08

t = 30 years

Solution:

A(30)= A0e^0.08(30)= 1000000

A0 = 1000000/e^2.4 = $90,717.95
3. What is an investments doubling time, to the nearest ten thousandths of a year, if it earns
5% interest compounded continuously?

Given:

r = 0.05

t = 2t

Solution:

A(t) = A0e^0.05t = 2A0

e^0.05t = 2

0.05t = ln2

t = ln2/0.05 =13.862943611198906 = 13.8629 years

4. At what interest rate compounded continuously would $3,000 grow to $300,000 in 25

years?

Given:

t = 25 years

P = 3000

Solution:

A(25) = 3000e^r(25) = 300000

e^25r = 300000/3000 = 100

25r = ln100

r = ln100/25 = 0.18420680743952365

r = 18.42%
5. If you invest $1,000,000 in an account paying 12% compounded continuously, how much
will you have in the account after 20 years?

Given:

r = 12% or 0.12

t = 20 years

P = 1,000,000

Solution:

A= 1000000e^0.12(20) = 11,023,176.38

A = $11,023,176.38