Homework 4 solutions

Chapter 4 Understanding Money and Its Management

Nominal and Effective Interest Rates

4.1
x Nominal interest rate:

1.15% 12 13.8% r u

x Effective annual interest rate:


12
(1 0.0115) 1 14.71%
a
i

4.2
(a) Monthly interest rate: 13.9% 12 1.1583% i y
Annual effective rate:
12
(1 0.01158) 1 14.82%
a
i

(b)
2
$3, 000(1 0.01158) $3, 069.90



4.3 Assuming weekly compounding:

52
6.89%
0.0689
(1 ) 1 0.07128
52
a
r
i

4.4
x Interest rate per week

Given : $500, 40, 16 weeks P A N

$500 $40( / , ,16)
3.06% per week
P A i
i

x Nominal annual interest rate:

% 12 . 159 52 % 06 . 3 u r

x Effective annual interest rate:


52
(1 3.06%) 1 379.39%
a
i
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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Page | 3



4.10 No. The debt interest rates are higher than the return on the investment funds.
Pay down the highest-interest debt, which is the charge account debt.

4.11 Bank A:
365
0.07
1 1 7.25%
365
a
i






Bank B:
0.069
1 7.14%
a
i e
The difference between two banks after 2 years:
> @ $3, 000 ( / , 7.25%, 2) ( / , 7.14%, 2) $6.85 F P F P


Compounding More Frequent than Annually

4.12

F Pe
rN
$5,000e
(0.06u10)

= $9,110.59

4.13

P Fe
rN
$5,000e
(0.06u5)

= $3,704.09


4.14

F Pe
rN
$3,000e
(0.08u5)

= $4,475.47

4.15
0.06
2
N
P Pe
ln 2 0.06N
11.55 years N


4.16
(a) Nominal interest rate:

1.95% 12 23.4% r u

(b) Effective annual interest rate:

12
(1 0.0195) 1 26.08%
e
i

(c)
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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,
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Page | 4

3 (1 0.0195)
log3 log1.0195
56.89 months
N
P P
N
N

56.89 / 12 = 4.75 years

(d)
0.0195
3
ln(3) 0.0195
56.34 months
N
e
N
N

56.34 / 12 = 4.69 years
4.17
8
0.08
$15, 000(1 ) $17, 575
4
F

4.18
365
0.06
(1 ) 1 6.183%
365
a
i

6
$15, 000( / , 6.183%,12) $15, 000( / , %,12 365)
365
F F P F P u
= $ 30,815

4.19
(a)
20
0.09
$7,890(1 ) $19, 028.42
2
F

(b)
60
0.08
$4, 500(1 ) $14, 764.64
4
F

(c)
84
0.12
$29, 800(1 ) $68, 740.34
12
F


4.20
(a) Quarterly interest rate = 1.5%

3 (1 0.015)
log3 log1.015
73.78 quarters
N
P P
N
N

73.78 / 4 = 18.5 years

(b) Monthly interest rate = 0.5%

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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,
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Page | 5

3 (1 0.005)
log3 log1.005
220.27 months
N
P P
N
N

220.27 / 12 = 18.42 years


(c)
0.06
3
ln(3) 0.06
18.31 years
N
e
N
N

4.21
(a) Quarterly effective interest rate = 2.25%

$8, 000( / , 2.25%, 60) $261, 992 P P A

(b) Quarterly effective interest rate = 2.2669%

$8, 000( / , 2.2669%, 60) $260, 955 P P A

(c) Quarterly effective interest rate = 2.2755%

$8, 000( / , 2.2755%, 60) $260, 430 P P A


4.22
( / , , 20) $5, 000( / , 2.02%, 20) $121, 729 F A F A i F A


4.23
(a) Quarterly effective interest rate = 2.25%


F $4,000( F / A, 2.25%, 40) $255,145

(b) Quarterly effective interest rate = 2.2669%


F $4,000(F / A, 2.2669%, 40) $256,093

(c) Quarterly effective interest rate = 2.2755%


F $4,000(F / A, 2.2755%, 40) $256,577


Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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 any means, electronic, mechanical, photocopying, recording, or likewise.
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Page | 6



4.24 (d)





4.25
0.079/ 4
1 1.9946%
a
i e
$10, 000( / ,1.9946%, 20) A A P
= $ 611.25

4.26
(a) Monthly effective interest rate = 0.74444%

$1, 500( / , 0.74444%, 96) $209,170 F F A

(b) Monthly effective interest rate = 0.75%

$1, 500( / , 0.75%, 96) $209, 784 F F A

(c) Monthly effective interest rate = 0.75282%

$1, 500( / , 0.75282%, 96) $210, 097 F F A

4.27 (b)


0 1 2 3 4 5 6 7 8 9 10 11 12
$1,000
Effective interest rate per
payment period

i = (1 + 0.01)
3
1
= 3.03%
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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,
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Page | 12

Then, compute the total present worth of the energy cost savings over 5 years.


P $246.85 $246.85( P / F,0.5%,12) $246.85(P / F,0.5%, 24)
$246.85(P / F,0.5%,36) $246.85( P / F,0.5%, 48)
$1,098.97


Continuous Payments with Continuous Compounding

4.51 Given

i 10%, N 10years, and A $95,000 u 365 $34,675,000

x Daily payment with daily compounding:


P $95,000( P / A,
10%
365
,3650) $219,170,331.48
x Continuous payment and continuous compounding:



P Ae
rt
dt
0
10

$34,675,000
e
(0.10)(10)
1
0.1e
(0.10)(10)

$219,187,803.77


The difference between the two compounding schemes is only $17,472.27


4.52 Given ! 11%, " 3, #
0
$500, 000, #
"
$40, 000, and 0 d $ d 3,

) (t f
$500,000
$40,000
0 1 2 3
t
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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,
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Page | 14

42 . 875 , 8 $
) 8 %, 5 . 1 , / )( 8 %, 5 . 2 , / )( 4 %, 2 , / ( 000 , 2 $
) 8 %, 5 . 1 , / )( 8 %, 5 . 2 , / ( 000 , 2 $ ) 8 %, 5 . 1 , / )( 4 %, 5 . 2 , / ( 000 , 3 $
) 8 %, 5 . 1 , / ( 000 , 2 $ ) 4 %, 5 . 1 , / ( 000 , 2 $

F P F P F P
F P F P F P F P
F P F P P


(b) Find F:

186 , 13 $
) 4 %, 2 , / )( 8 %, 5 . 2 , / )( 8 %, 5 . 1 , / (

P F P F P F P F


(c) Find A, starting at 1 and ending at 5:

! " "(! / #, 2%, 4) "(! / #, 2.5%, 4)(! / #, 2%, 4)
"(! / #, 2.5%, 8)(! / #, 2%, 4) "(! / #,1.5%, 4)(! / #, 2.5%, 8)(! / #, 2%, 4)
5.9958"
"
$13,186
5.9958
$2,199.21

4.57
(a)
26 . 305 , 1 $
) 12 %, 5 . 0 , / )( 24 %, 75 . 0 , / )( 12 %, 5 . 0 , / ( 500 $
) 12 %, 5 . 0 , / )( 24 %, 75 . 0 , / ( 500 $
) 12 %, 5 . 0 , / )( 12 %, 75 . 0 , / ( 300 $ ) 12 %, 5 . 0 , / ( 300 $

F P F P F P
F P F P
F P F P F P P

(b)
$1, 305.26 $300( / , , 2) $500( / , , 2)( / , , 2)
7.818% per year
P A i P A i P F i
i

4.58 Since payments occur annually, you may compute the effective annual interest
rate for each year.

% 416 . 9 1 )
365
09 . 0
1 (
365
1
i , % 417 . 9 1
09 . 0
2
e i

$400( / , 9.416%, 2)( / , 9.417%, 2) $250( / , 9.416%,1)( / , 9.417%, 2)
$100( / , 9.417%, 2) $100( / , 9.417%,1) $250
$1, 379.93
F F P F P F P F P
F P F P

4.59
0.06 0.08
1 2
1 6.18%, 1 8.33% i e i e
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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 any means, electronic, mechanical, photocopying, recording, or likewise.
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Page | 15


0.06 0.08
$1, 000
$1, 000( / , 6.18%,1)( / , 8.33%,1)
$1,150.25
F e e
F P F P

Amortized Loans

4.60 Loan repayment schedule for the first 6 months:

End of
month Interest Payment
Principal
Payment
Remaining
Balance
0 $0.00 $0.00 $25,000.00
1 $125.00 $358.32 $24,641.68
2 $123.21 $360.11 $24,281.57
3 $121.41 $361.91 $23,919.66
4 $119.60 $363.72 $23,555.93
5 $117.78 $365.54 $23,190.39
6 $115.95 $367.37 $22,823.03


4.61
(a)
(i) ) 24 %, 75 . 0 , / ( 000 , 10 $ P A
(b)
(iii) ) 12 %, 75 . 0 , / (
12
A P A B



4.62 Given information:

9.45%/ 365 0.0259% per day i , N = 36 months.

x Effective monthly interest rate, i = (1 0.000259)
30
1 0.78% per month

x Monthly payment, A = $13,000( A/ P,0.78%,36) $415.58per month

x Total interest payment, I = $415.58 36 $13, 000 $1, 960.88 u


4.63

(a) Using the bank loan at 9.2% compound monthly
Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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,
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Page | 19


x Monthly repayment:

046 , 1 $ ) 360 %, 75 . 0 , / ( 000 , 130 $ P A A

x Effective interest rate on this loan

$126,100 $1, 046( / , , 360)
0.7787% per month
P A i
i

12
(1 0.007787) 1 9.755% per year
a
i

4.73
(a)

$50,000 $7,500(P / A, i,5) $2,500(P / G, i,5)
i 6.914%

(b)
P = $50,000
Total payments = $7,500 + $10,000 + + $17,500GdG$62,500
Interest payments = $3,456.87 + GRG$1,131.66GdG$12,500

End of month Interest Payment
Principal
Payment
Remaining
Balance
0 $0.00 $0.00 $50,000.00
1 $3,456.87 $4,043.13 $45,956.87
2 $3,177.34 $6,822.66 $39,134.21
3 $2,705.64 $9,794.36 $29,339.85
4 $2,028.48 $12,971.52 $16,368.34
5 $1,131.66 $16,368.34 $0


4.74 Given Data: r = 7% compounded daily, N = 360 years

x The effective annual interest rate is

% 25 . 7 1 ) 365 / 07 . 0 1 (
365

a
i

x Total amount accumulated at the end of 25 years

$75, 000 u 5% $3, 750

! $3, 750(! / ", 7.25%, 25) $150(! / #, 7.25%, 25)
$3, 750(! / ", 7.25%, 25) $150($ / #, 7.25%, 25)(! / $, 7.25%, 25)
$329, 799.78

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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 any means, electronic, mechanical, photocopying, recording, or likewise.
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Page | 21


4.77
(a)
$3, 000 $156.04( / , , 24)
1.85613% per month
1.85613% 12 22.2735%
P A i
i
r

u


(b)
85 . 664 , 1 $ ) 12 %, 85613 . 1 , / ( 04 . 156 $ A P P


4.78
$5, 025 $146.35( / , , 48)
1.46% per month
$146.35( / ,1.46%, 33) 3,810.91
P A i
i
P P A

Loans with Variable Interest Rates

4.79
(a) Amount of dealer financing = $15,458(0.90) = $13,912

! $13, 912(! / ",11.5%/ 12, 60) $305.96

(b) Assuming that the remaining balance will be financed over 56 months,

#
4
$305.96(" / !,11.5%/ 12, 56) $13, 211.54
! $13, 211.54(! / ",10.5%/ 12, 56) $299.43

(c) Interest payments to the dealer:


I
dealer
$305.96 u 4 $13, 211.54 $13,912 $523.38

Interest payments to the credit union:

union
$299.43 56 $13, 211.54 $3, 556.54 I u


4.80 Given: purchase price = $155,000, down payment = $25,000

x Option 1: 7.5%/12 0.625% per month i , N = 360 months

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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 any means, electronic, mechanical, photocopying, recording, or likewise.
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Page | 21


4.77
(a)
$3, 000 $156.04( / , , 24)
1.85613% per month
1.85613% 12 22.2735%
P A i
i
r

u


(b)
85 . 664 , 1 $ ) 12 %, 85613 . 1 , / ( 04 . 156 $ A P P


4.78
$5, 025 $146.35( / , , 48)
1.46% per month
$146.35( / ,1.46%, 33) 3,810.91
P A i
i
P P A

Loans with Variable Interest Rates

4.79
(a) Amount of dealer financing = $15,458(0.90) = $13,912

! $13, 912(! / ",11.5%/ 12, 60) $305.96

(b) Assuming that the remaining balance will be financed over 56 months,

#
4
$305.96(" / !,11.5%/ 12, 56) $13, 211.54
! $13, 211.54(! / ",10.5%/ 12, 56) $299.43

(c) Interest payments to the dealer:


I
dealer
$305.96 u 4 $13, 211.54 $13,912 $523.38

Interest payments to the credit union:

union
$299.43 56 $13, 211.54 $3, 556.54 I u


4.80 Given: purchase price = $155,000, down payment = $25,000

x Option 1: 7.5%/12 0.625% per month i , N = 360 months

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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 any means, electronic, mechanical, photocopying, recording, or likewise.
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Page | 22

x Option 2: For the assumed mortgage,
1
$97, 218 P ,

i
1
5.5%/ 12 0.458% per month ,
1
300 months N ,
1
$597 per month A ;
For the 2
nd
mortgage 782 , 32 $
2
P ,
2
9%/12 0.75% per month i ,
2
120 months N

(a) For the second mortgage, the monthly payment will be

!
2
"
2
(! / ", #
2
, $
2
) $32, 782(! / ", 0.75%,120) $415.27

$130, 000 $597( / , , 300) $415.27( / , ,120)
0.5005% per month
0.5005% 12 6.006% per year
6.1741%
a
P A i P A i
i
r
i

(b) Monthly payment

x Option 1: 97 . 908 $ ) 360 %, 625 . 0 , / ( 000 , 130 $ P A A

x Option 2: $1,012.27 (= $597 + $415.27) for 120 months, then $597 for
remaining 180 months.

(c) Total interest payment

x Option 1: % $908.97 u 360 $130, 000 $197, 229.20
x Option 2: 4 . 932 , 98 $ 000 , 130 $ 4 . 932 , 228 $ I

(d) Equivalent interest rate:

$908.97( / , , 360) $597( / , , 300) $415.27( / , ,120)
1.2016% per month
1.2016% 12 14.419% per year
15.4114%
a
P A i P A i P A i
i
r
i

Loans with Variable Payments

4.81
$10, 000 ( / , 0.6667%,12) ( / , 0.75%,12)( / , 0.6667%,12)
22.05435
A P A A P A P F
A

43 . 453 $ A

Contemporary Engineering Economics, Fifth Edition, by Chan S. Park. ISBN: 0-13-611848-8
2011 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 any 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.