Engineering Economics: Draw

1.14

a cash flow diagram for every problem below. Show your work.

How much interest would be due at the end of one year on a loan of $10,000 if the interest is 12% per
year?
=

= 1(0.12 10,000) = $1,200

Answer: At the end of one year, the interest would be $1,200
Cash flow Diagram:
LENDER

BORROWER

$ 11,200
$ 10,000

i =12%

i =12%

1
$ 11,200

1.17

$ 10,000

How long would it take for an investment of $5,000 to grow to $7,500, if it earns 10% simple interest per
year?
= + = (1 + )

1
=

7500
1
= 5
= 5000
0.10
Answer: It would take 5 years.
Cash Flow Diagram:
$ 5,500
$ 500

$ 500

$ 500

$ 500

0
3

i =10%

$ 5,000

1.20

Which is more desirable: investing $2,000 at 6% per year compound interest for three years, or investing
$2,000 at 7% per year simple interest for three years?
a) = (1 + )
1

 = 2,000(1 + 0.06)3 = $ 2,382.03

b) = (1 + )

= 2,0001 + (3 0.07) = $ 2,420

Answer: The second option (investing $2,000 at 7% per year simple interest for 3 years) is more
desirable because it is superior by approximately $38.
Cash Flow Diagram:
a)

$ 2,134.83
$ 127.20
$ 120
0
2

$ 2,000

b)
$ 2,140
$ 140

$ 140

0
3

$ 2,000

1.23

How much money will be required four years from today to repay a $2,000 loan that is made today
(a) at 8% interest, compounded annually?
(b) at 8% simple interest?
a) = (1 + )

= 2,000(1 + 0.08)4 = $ 2,720.98

b) = (1 + )

= 2,0001 + (4 0.08) = $ 2,640

Answer:
a) $ 2,720.98 will be required in 4 years
b) $ 2,640.00 will be required in 4 years

Cash Flow Diagram:

a)

$ 2,000

0
$ 160

$ 172.80

$ 186.62

b)

$ 2,201.55

$ 2,000

$ 160

$ 160

0
$ 160
$ 2,160

1.26

How many years will it take for an investment to double, if the interest rate is 8% per year, compounded
annually?

= (1 + )

2 = 1(1 + 0.08)
2 = 1.08

= (log 2) /(log 1.08)

Answer: It will take a time equal to 9 .

= 9

Cash Flow Diagram:

2P

1.30

What amount of money is equivalent to receiving $5,000 two years from today, if interest is compounded
quarterly at the rate of 2.5% per quarter?
= (1 + )

5,000 = (1 + 0.025)2(4)
=

5,000
(1 + 0.025)8

0 = $ 4,103.73

Answer: $4,103.73 is the equivalent amount today to receiving $ 5,000 two years after.
Cash Flow Diagram:
$ 4,573.98
$ 426.02
0

years
1

$4,103.73