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Chapter 04

# Chapter 04

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09/21/2013

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Chapter 4 Understanding Money and Its Management
Nominal and Effective Interest Rates

4.1

(a)

Monthly interest rate:
12.5%121.04%
i
= ÷ =
Annual effective rate:
12
(10.0104)113.22%
a
i
= + =
(b)

82.041,2\$)0104.01(000,2\$
2
=+
4.2

Nominal interest rate:
%6.1212%05.1
=×=

Effective annual interest rate:
12
(10.0105)113.35%
a
i
= + =
4.3

Assuming a weekly compounding
52
6.89%0.0689(1)10.0712852
a
i
== + =
4.4

Interest rate per week
Given:\$500,40,16 weeks
P A
= = =

\$500\$40(/,,16)3.06% per week
P A ii
==

Nominal annual interest rate:
%12.15952%06.3
=×=

Effective annual interest rate:
52
(13.06%)1379.39%
a
i
= + =

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 beobtained 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.

2 4.5

Interest rate per week: (
Correction
: In the first printing, the lending amountwas stated as \$40. It should be \$400.)\$450\$400(1)12.5% per week
ii
= +=
(a)

Nominal interest rate:
%65052%5.12
=×=
(b)

Effective annual interest rate
52
(10.125)145,601%
a
i
= + =
4.6

24-month lease plan:347,14\$ )24%,5.0, / (500\$)23%,5.0, / (520\$)500\$520\$500,2(\$
=+++=
P APP

Up-front lease plan:836,12\$ )24%,5.0, / (500\$500\$780,12\$
=+=
PP

Select up-front lease plan4.7

No. Since the debt interest rates are higher than the return on the investmentfunds, it is better to pay off the debt.
Compounding More Frequent than Annually

4.8

(a)

Nominal interest rate:
%6.2112%8.1
=×=
(b)

Effective annual interest rate
12
(10.018)123.87%
e
i
= + =

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 beobtained 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.

3 (c)

3(10.018)log3log1.01861.58 months
N
P P N  N
= +==

61.58 / 12 = 5.13 years(d)

0.018
3ln(3)0.01861.03 months
N
e N  N
===

61.03 / 12 = 5.08 years4.9

83.930,10\$) 409.01(000,10\$
4
=+=
4.10

(a)

60.233,9\$) 205.01(635,5\$
20
=+=
(b)

15.324,18\$) 406.01(500,7\$
60
=+=
(c)

64.743,71\$) 1209.01(300,38\$
84
=+=
4.11

(a)

Quarterly interest rate = 2.25%3(10.0225)log3log1.022549.37quarters
N
P P N  N
= +==

49.37 / 4 = 12.34 years(b)

Monthly interest rate = 0.75%3(10.0075)log3log1.0075147.03 months
N
P P N  N
= +==

147.03 / 12 = 12.25 years
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 beobtained 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.

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