Chapter 3: Interest Rate and Economic Equivalence

Types of Interest

3.1
Simple interest:
years N
N
N
5 . 12
08 . 0
1
2 ) 08 . 0 1 (
) 08 . 0 1 ( 000 , 5 $ 000 , 10 $
= =
= +
+ =


Compound interest:
years N
N
N
2 . 10
2 ) 07 . 0 1 (
) 07 . 0 1 ( 000 , 5 $ 000 , 10 $
=
= +
+ =

3.2
Simple interest:
400 $ ) 5 )( 000 , 1 )($ 08 . 0 ( = = = iPN I

Compound interest:
469 $ ) 1 4693 . 1 ( 000 , 1 $ ] 1 ) 1 [( = = + =
N
i P I

3.3
Option 1: Compound interest with 8%:
408 , 4 $ ) 4693 . 1 ( 000 , 3 $ ) 08 . 0 1 ( 000 , 3 $
5
= = + = F

Option 2: Simple interest with 9%
350 , 4 $ ) 45 . 1 ( 000 , 3 $ ) 5 09 . 0 1 ( 000 , 3 $ = = +

Option 1 is better

3.4
End of Year Principal
Repayment
Interest
payment
Remaining
Balance
0 $10,000
1 $1,671 $900 $8,329
2 $1,821 $750 $6,508
3 $1,985 $586 $4,523
4 $2,164 $407 $2,359
5 $2,359 $212 $0

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2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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Equivalence Concept

3.5
402 , 9 $ ) 7835 . 0 ( 000 , 12 $ ) 5 %, 5 , / ( 000 , 12 $ = = = F P P


3.6
328 , 23 $ ) 1664 . 1 ( 000 , 20 $ ) 2 %, 8 , / ( 000 , 20 $ = = = P F F


Single Payments (Use of F/P or P/F Factors)

3.7
(a) 388 , 7 $ ) 8 %, 5 , / ( 000 , 5 $ = = P F F

(b) 208 , 3 $ ) 12 %, 3 , / ( 250 , 2 $ = = P F F

(c) 161 , 65 $ ) 31 %, 7 , / ( 000 , 8 $ = = P F F

(d) 700 , 45 $ ) 7 %, 9 , / ( 000 , 25 $ = = P F F


3.8
(a) 105 , 3 $ ) 6 %, 10 , / ( 500 , 5 $ = = F P P

(b) 338 , 3 $ ) 15 %, 6 , / ( 000 , 8 $ = = F P P

(c) 418 , 20 $ ) 5 %, 8 , / ( 000 , 30 $ = = F P P

(d) 851 , 3 $ ) 8 %, 12 , / ( 000 , 15 $ = = F P P


3.9
(a) 428 , 5 $ ) 5 %, 13 , / ( 000 , 10 $ = = F P P

(b) 763 , 40 $ ) 4 %, 13 , / ( 000 , 25 $ = = P F F


3.10
years N
N
P P F
N
69 . 9
) 12 . 1 ( log 3 log
) 12 . 0 1 ( 3
=
=
+ = =


Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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3.11

years N
N
P P F
N
96 . 4
) 15 . 1 ( log 2 log
) 15 . 0 1 ( 2
=
=
+ = =

Rule of 72: 72/15 4.80 years =


Uneven Payment Series

3.12
(a) Single-payment compound amount factors for ) , , / ( N i P F
n 9% 10%
35 20.4140 28.1024
40 31.4094 45.2593

To find , first, interpolate for ) 38 %, 5 . 9 , / ( P F 38 = n
n 9% 10%
38 27.0112 38.3965

Then, interpolate for % 5 . 9 = i
7039 . 32 ) 38 %, 5 . 9 , / ( = P F
As compared to formula determination
4584 . 31 ) 38 %, 5 . 9 , / ( = P F

(b) Single-payment compound amount factors for ) , , / ( N i F P
n 45 50
0.0313 0.0213

Then, interpolate for 47 = n
0273 . 0 ) 47 %, 8 , / ( = F P
As compared with the result from formula
0269 . 0 ) 47 %, 8 , / ( = F P


3.13
437 , 114 $
08 . 1
000 , 28 $
08 . 1
000 , 46 $
08 . 1
000 , 43 $
08 . 1
000 , 32 $
5 4 3 2
= + + + = P


3.14
231 , 11 $ ) 11 %, 6 , / ( 000 , 2 $ ) 13 %, 6 , / ( 800 , 1 $ ) 15 %, 6 , / ( 500 , 1 $ = + + = P F P F P F F


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2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
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3.15

$3,000,000 $2,400,000( / ,8%,1)
$3,000,000( / ,8%,10)
$20,734,618
P P
P F
= +
+
=
F +
A


Or,

$3,000,000 $2,400,000( / ,8%,5)
$3,000,000( / ,8%,5)( / ,8%,5)
$20,734,618
P P
P A P F
= +
+
=



3.16
484 , 14 $ ) 7 %, 6 , / ( 000 , 5 $ ) 5 %, 6 , / ( 000 , 6 $ ) 2 %, 6 , / ( 500 , 7 $ = + + = F P F P F P P


Equal Payment Series

3.17
(a) With deposits made at the end of each year
816 , 13 $ ) 10 %, 7 , / ( 000 , 1 $ = = A F F

(b) With deposits made at the beginning of each year
783 , 14 $ ) 07 . 1 )( 10 %, 7 , / ( 000 , 1 $ = = A F F


3.18
(a) 713 , 16 $ ) 5 %, 7 , / ( 000 , 3 $ = = A F F

(b) 043 , 77 $ ) 12 %, 25 . 8 , / ( 000 , 4 $ = = A F F

(c) 575 , 267 $ ) 20 %, 4 . 9 , / ( 000 , 5 $ = = A F F

(d) 236 , 134 $ ) 12 %, 75 . 10 , / ( 000 , 6 $ = = A F F


3.19
(a) 166 , 1 $ ) 13 %, 6 , / ( 000 , 22 $ = = F A A

(b) 388 , 4 $ ) 8 %, 7 , / ( 000 , 45 $ = = F A A

(c) 5 . 479 $ ) 25 %, 8 , / ( 000 , 35 $ = = F A A
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
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obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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(d) 361 , 1 $ ) 8 %, 14 , / ( 000 , 18 $ = = F A A


3.20
$30,000 $1,500( / , 7%, )
( / , 7%, ) 20
12.94 13
F A N
F A N
N years
=
=
=



3.21
$15,000 ( / , 11%, 5)
$2,408.56
A F A
A
=
=



3.22
(a) 310 , 2 $ ) 5 %, 5 , / ( 000 , 10 $ = = P A A

(b) 70 . 723 , 1 $ ) 4 %, 7 . 9 , / ( 500 , 5 $ = = P A A

(c) 85 . 975 , 2 $ ) 3 %, 5 . 2 , / ( 500 , 8 $ = = P A A

(d) 171 , 3 $ ) 20 %, 5 . 8 , / ( 000 , 30 $ = = P A A


3.23
Equal annual payment:
5 . 132 , 11 $ ) 3 %, 16 , / ( 000 , 25 $ = = P A A

Interest payment for the second year:

End of Year Principal
Repayment
Interest
payment
Remaining
Balance
0 $25,000
1 $7,132.5 $4,000 $17,867.5
2 $8,273.7 $2,858.8 $9,593.8
3 $9,593.8 $1,535 -


3.24
(a) 2 . 781 , 6 $ ) 12 %, 8 . 5 , / ( 800 $ = = A P P

(b) 25 . 403 , 16 $ ) 10 %, 5 . 8 , / ( 500 , 2 $ = = A P P
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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(c) 61 . 665 , 3 $ ) 5 %, 25 . 7 , / ( 900 $ = = A P P

(d) 3 . 726 , 30 $ ) 8 %, 75 . 8 , / ( 500 , 5 $ = = A P P


3.2
(a) The capital recovery factor N i P for
5
) , , / (A
n 6% 7%
35 0.0690 0.0772
40 0.0665 0.0750
To find , f nterpolate for

) 38 %, 25 . 6 , / ( P A irst, i 38 = n
n 6% 7%
38 0.0675 0.0759

Then, interpolate for % 25 . 6 = i ; 6 , / ( P F 0696 . 0 ) 38 %, 25 . =
As compared with the result from fo ula rm
0694 . 0 ) 38 %, 25 . 6 , / ( = P F
(b) The equal payment series present-worth factor (P for ) 85 , , / i A
i 9% 10%
11.1038 9.9970

Then, interpolate for

% 25 . 9 = i
8271 . 10 ) 85 %, 25 . 9 , / ( = A P
As compared with the result from for ula m
8049 . 10 ) 85 %, 25 . 9 , / ( = A P


Linear Gradient Series

3.26

3.27
35 . 988 , 50 $
) 5 %, 8 , / )( 5 , % 8 , / ( 000 , 2 $ ) 5 %, 8 , / ( 000 , 5 $
) 5 %, 8 , / ( 000 , 2 $ ) 5 %, 8 , / ( 000 , 5 $
2 1
=
+ =
+ =
+ =
A F G A A F
G F A F
F F F


47 . 889 , 11 $
) 5 %, 7 , / )( 5 , % 7 , / ( 500 $ ) 5 %, 7 , / ( 000 , 3 $
) 5 %, 7 , / ( 500 $ ) 5 %, 7 , / ( 000 , 3 $
=
=
=
P F G P A F
G F A F F


Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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3.28
26 . 991 $
) 7 %, 9 , / )]( 2 %, 9 , / ( 50 $
) 4 %, 9 , / ( 50 $ ) 6 %, 9 , / ( 50 $ ) 7 %, 9 , / ( 100 [$ 100 $
=
+
+ + + =
F P A F
A F A F A F P


3.29

3.3
)

3 . 404 , 10 $
) 12 %, 8 , / ( 000 , 1 $ 000 , 15 $
=
= G A A


0
(a 076 , 372 , 21 $ ) 7 %, 12 %, 10 , / ( 000 , 000 , 6 $
1
= = A P P

Note that the oil price increases at the annual rate of 5% while the oil
production decreases at the annual rate
(b)
of 10%. Therefore, the annual
revenue can be expressed as follows:
) 945 . 0 ( 000 , 000 , 6 $
) 1 . 0 1 ( 000 , 1000 ) 05 . 0 1 ( 60 $

=
+ =
n
n n
n
A

ies is equivalent to a decreasing geometric gradient series
g =-5.5%.
So,
1
) 055 . 0 1 ( 000 , 000 , 6 $

=
n
This revenue ser
1
1 1
with
896 , 847 , 23 $ ) 7 %, 12 %, 5 . 5 , / ( 000 , 000 , 6 $
1
= = A P P
(c) sent worth of the remaining series at the end
of period 3 gives
1

Computing the pre
4 5 6 7
( , , , ) A A A A
652 , 269 , 14 $ ) 7 %, 12 %, 5 . 5 , / ( 460 , 063 , 5 = P $ = A P


3.31

20
1
20
1
1
20
1
(1 )
(2,000,000) (1.06) (1.06)
1.06
(2,000,000/1.06) ( )
1.06
$396,226,415
n
n
n
n n
n
n
n
P A i
n
n

=

=
=
= +
=
=
=

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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1
2
1
Note: if ,
[1 ( 1)
(1 )
When 6% and 8%,
1
0.9815
1
$2,000,000 0.9815[1 (21)(0.6881) 20(0.6756)]
1.06 0.0003
$334,935,843
N N N
n
n
i g
x N x Nx
nx
x
g i
g
x
i
P
+
=

+ +
=

= =
+
= =
+
+
=


=

3.32
(a) The withdrawal series would be

Period Withdrawal
11 $5,000
12 $5,000(1.08)
13 $5,000(1.08)(1.08)
14 $5,000(1.08)(1.08)(1.08)
15 $5,000(1.08)(1.08)(1.08)(1.08)

78 . 518 , 22 $ ) 5 %, 9 %, 8 , / ( 000 , 5 $
1 10
= = A P P

Assuming that each deposit is made at the end of each year, then;

$22,518.78 ( / , 9%, 10) 15.1929
$1482.19
A F A A
A
= =
=



(b) 85 . 491 , 24 $ ) 5 %, 6 %, 8 , / ( 000 , 5 $
1 10
= = A P P

$24,491.85 ( / ,6%, 10) 13.1808
$1858.15
A F A A
A
= =
=



Various Interest Factor Relationships

3.33
(a) 0058 . 0 ) 2703 . 0 )( 0213 . 0 ( ) 17 %, 8 , / )( 50 %, 8 , / ( ) 67 %, 8 , / ( = = = F P F P F P

0058 . 0 ) 08 . 0 1 ( ) 67 %, 8 , / (
67
= + = F P

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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(b)
) , , / ( 1
) , , / (
N i F P
i
N i P A

=
0394 . 0 ) 2 %, 8 , / )( 40 %, 8 , / ( ) 42 %, 8 , / ( = = F P F P F P
0833 . 0
0394 . 0 1
08 . 0
) 42 %, 8 , / ( =

= P A

0833 . 0
1 ) 08 . 1 (
) 08 . 1 ( 08 . 0
) 42 %, 8 , / (
42
42
=

= P A

(c) 4996 . 12
08 . 0
) 35 %, 8 , / )( 100 %, 8 , / ( 1 ) , , / ( 1
) , , / ( =

=
F P F P
i
N i F P
N i A P

4996 . 12
) 08 . 1 ( 08 . 0
1 ) 08 . 1 (
) 135 %, 8 , / (
135
135
=

= P A


3.34
(a)
N
N
N
N
i
i
i
i
i i
N i A F i N i P F
) 1 (
1 1 ) 1 (
1
1 ) 1 (
) 1 (
1 ) , , / ( ) , , / (
+ =
+ + =
+
+
= +
+ =


(b)
N
N
N
N
N
N
N
N
i
i
i
i
i
i i
i
i i
i N i A P N i F P

+ =
+
+

+
+
=
+
+
= +
=
) 1 (
) 1 (
1 ) 1 (
) 1 (
) 1 (
) 1 (
1 ) 1 (
1 ) 1 (
) , , / ( 1 ) , , / (



(c)
1 ) 1 (
1 ) 1 (
] 1 ) 1 [(
1 ) 1 (
) 1 (
1 ) 1 (
) 1 (
1 ) 1 (
) , , / ( ) , , / (
+
=
+
+

+
+
=
+
+
=
+
=
N
N
N
N
N
N
N
N
i
i
i
i i
i
i i
i
i
i i
i
i
i N i P A N i F A

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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(d)
1 ) 1 (
) 1 (
) 1 (
1
) 1 (
) 1 ( 1 ) 1 (
) 1 (
)] , , / ( 1 [
) , , / (
+
+
=
+

+
+
=
+
+

=
N
N
N N
N N
N
i
i i
i i
i
i
i
i i
N i F P
i
N i P A


(f) & vid (e) (g) Di e the numerator and denominator by and take the
mit .
Equivalence Calculations

3.35
N
i) 1 ( +
li N


49 . 740 $
) 10 %, 12 , / )]( 5 %, 12 , / ( 50 $ ) 7 %, 12 , / ( 50 $ ) 9 %, 12 , / ( 100 [$
=
+ + = F P A F A F A F P



3.36
92 . 373 $
) 4 %, 8 , / ( 300 $
) 3 %, 8 , / ( 120 $ ) 2 %, 8 , / ( 120 $ ) 1 %, 8 , / ( 200 $ 200 $ ) 08 . 1 (
=
+
+ + = +
P
F P
F P F P F P P


.37 Selecting the base period at n =0, we find



.38 Selecting the base period at n =0, we find

75 . 782 $ ) 5 %, 6 , / (
75 . 782 $
) 5 %, 6 , / ( 100 $ ) 4 %, 6 , / ( 50 $ ) 1 %, 6 , / ( 50 $ ) 5 %, 6 , / ( 100 $ 200 $
2
1
=
= =
=
+

3
$100( / ,13%,5) $20( / ,13%,3)( / ,13%,2) ( / ,13%,5)
$351.72 $36.98 (3.5172)
$110.51
P A P A P F A P A
A
A
+ =
+ =
=

3
82 . 185 $
+ + + =
X
A P X P
F P F P F P A P P


Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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11

3.39

.40 Establish economic equivalent at
96 . 0 $
) 12 %, 10 , / ( 20 $ ) 5 %, 10 , / ( 20 $
=
= A P G P P













0 1 2 3 4 5 6 7 8 9 10 11 12
$20
$40
$60
$80
$20
3 8 = n :

73 . 334 , 1 $
80 . 699 , 10 $ 0164 . 8
) 7833 . 1 ( 000 , 6 $ ) 2597 . 1 )( 08 . 2 ( 6366 . 10
) 2 %, 8 , / ( 000 , 6 $ ) 3 %, 8 , / )( 2 %, 8 , / ( ) 8 %, 8 , / (
=
=
=
=
C
C
C C
A P P F A F C A F C



3.41 The original cash flow series is

.42 Establishing equivalence at n =8, we find

0 0 6 $900
1 $800 7 $920
2 $820 8 $300
3 $840 9 $300
4 $860 10 $300 $500
5 $880
n n
n A n A

3
13 . 297 $
) 4872 . 9 ( ) 1436 . 2 ( 2 77 . 092 , 4 $
) 7 %, 10 , / ( ) 8 %, 10 , / ( 2 ) 3 %, 10 , / ( 200 $ ) 8 %, 10 , / ( 300 $
=
+ =
+ = +
C
C C
A F C P F C A F A F



Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
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.43 Establishing equivalence at 3 5 = n

.44 Computing equivalence at
$200( / ,8%,5) $50( / ,8%,1)
( / ,8%,5) ($200 )[( / ,8%,2) ( / ,8%,1)]
$1,119.32 (5.8666) ($200 )(2.2464)
$185.09
F A F P
X F A X F P F P
X X
X

= + +
= +
=

3 5 = n

2 . 623 , 29 $ ) 5 %, 9 , / ( 000 , 3 $ ) 5 %, 9 , / ( 000 , 3 $ = + = A P A F X


3.45 (2), (4), and (6)

3.46 (2), (4), and (5)

3.47


25 . 91 $
2638 . 1 ) 5 %, 10 , / (
32 . 115 $ ) 5 %, 10 , / )]( 1 %, 10 , / ( 50 $ 50 [$ ) 5 %, 10 , / ( 50 $ 50 ($
2
1
=
= + =
= + + =
A
A P A A A A
P A F P G A A



3.48 (a)

3.49 (b)

.50 (b)




3
793 , 5 $
60 . 458 , 2 $ 8137 . 6 935 , 41 $
)] 6 %, 10 , / )( 6 %, 10 , / ( 000 , 1 $ ) 12 %, 10 , / (
) 6 %, 10 , / ( 000 , 30 $ 000 , 25 $
=
+ =
+ =
+
C
C
F P A P A P C
F P





Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department,
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13
Solving for an Unknown Interest Rate of Unknown Interest Periods

3.51
3.52 Establishing equivalence at
5
2 (1 )
log2 5 log (1 )
14.87%
P P i
i
i
= +
= +
=


0 = n

1
i ) / ( 500 , 2 $ ) 6 , , / ( 000 , 2 $ A P i A P 6 , %, 25 , =
Solving for I with Excel, we obtain % 35 . 92 = i


3.53

+
3.54
5
$35,000 $10,000( / , ,5) $10,000(1 )
28.47%
F P i i
i
= =
=



$1,000,000 $2,000( / ,6%, )
(1 0.06) 1
500
0.06
31 (1 0.06)
log30 log1.06
58.37 years
N
N
F A N
N
N
=
+
=
= +
=
=



Short Case Studies

ST 3. uming that they are paid at the beginning of each year 1 Ass
(a)
62 . 58 $ ) 3 %, 6 , / ( 96 . 15 $ 96 . 15 $ = + A P
It is better to take the offer because of lower cost to renew.



ST 3 payment series at the end of
20 (or beginning of Year 21) is
(b)

$57.12 $15.96 $15.96( / , ,3)
7.96%
P A i
i
= +
=

.2 The equivalent future worth of the prize
Year
Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department,
Pearson Education, Inc., Upper Saddle River, NJ 07458.
14

F F A =
quivalent future worth of the lottery receipts is


F F P =

resulting surplus at the end of Year 20 is



pute the equivalent present worth (in 2006) for each option at


F +


P P F P F
P F
= + + +
+
=

(b) sing either Excel or Cash Flow Analyzer, both plans would be

1
$71,819,490 =

$1,952,381( / ,6%,20)

The e

2
$109,516,040 =
($36,100,000 $1,952,381)( / ,6%,20)

The
2 1
$109,516,040 $71,819,490
$37,696,550
F F =
=


ST 3.3
(a) Com % 6 = i .
Deferred
$2,000,000 $566,000( / ,6%,1) $920,000( / ,6%,2)
$1,260,000( / ,6%,11)
$8,574,490
P P F P
P F
= + +
+
=

Non-Deferred
$2,000,000 $900,000( / ,6%,1) $1,000,000( / ,6%,2)
$1,950,000( / ,6%,5)
$7,431,560

At % 6 = i , the deferred plan is a better choice.

U
economically equivalent at % 72 . 15 = i


ST 3 ximum amount to invest in the prevention program is

.4 The ma
467 , 50 $ ) 5 %, 12 , / ( 000 , 14 $ = = A P P
sing the


ST 3.5 geometric gradient series present worth factor, we can establish
e equivalence between the loan amount $120,000 and the balloon payment
s as
U
th
serie

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department,
Pearson Education, Inc., Upper Saddle River, NJ 07458.
15
1)
1
$120,000 ( A =
1
1
1
/ ,10%,9%,5) 4.6721
$25,684.38
P A A =
=


2) Paym series

A
ent
n Payment
1
2
$25,684.38
$28,252.82
3 $31,078.10
4 $34,185.91


ST 3.6
1) Compute the required annual net cash profit to pay off the investment
and interest.

A
A
5 $37,604.50
$70,000,000 ( / ,1 A P A 0%,5) 3.7908
$18,465,759
= =
=


) Decide the number of shoes, X

2
$18,465,759 ($100)
184,657
X
X
=
=

ST 3.7

F P
$1,000( / ,9.4%,5) $500( / ,9.4%,5) $4,583.36 P F F A
$4,583.36( / ,9.4%,60) $1,005,132
+ =
=

ain question is whether or not the U.S. government will be able to
vest the social security deposits at 9.4% interest over 60 years.


F
(b)
A
>

Stay with the original deferred plan.


The m
in
ST 3.8
(a)

Contract
$3,875,000 $3,125,000( / ,6%,1)
$5,525,000( / ,6%,2)
$8,875,000( / ,6%,7)
$39,547,242
P P
P F
P F
= +
+ +
+
=

Bonus
=
$1,375,000 $1,375,000( / P P = + ,6%,7)
$9,050,775 $8,000,000


Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department,
Pearson Education, Inc., Upper Saddle River, NJ 07458.
16
ST 3.9

e between two
payment options. Selecting n =0 as the base period, we can calculate the
equivalent present worth for each option as follows:


Basically we are establishing an economic equivalenc
Option 1: $140,000
Option 2: $32,639( / , %,9)
P
P P A i
=
=


Or,

P A i $140,000 $32,639( / , %,9)
18.10% i
=
=
If Mrs. Setchfield can invest her money at a rate higher than 18


.10%, it is
better to go with Option 1. However, it may be difficult for her to find an
investment opportunity that provides a return exceeding 18%.

Contemporary Engineering Economics, Fourth Edition, By Chan S. Park. ISBN 0-13-187628-7.
2007 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved. This material is protected by Copyright and written permission should be
obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by means, electronic, mechanical,
photocopying, recording, or likewise. For information regarding permission(s), write to: Rights and Permissions Department,
Pearson Education, Inc., Upper Saddle River, NJ 07458.