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Chapter 2: Time Value of Money

2.1) I = (iP) N = 0.08 5000 3 = $1200

2.2)
Simple int erest
F = P (1 + iN )
10000 = 5000(1 + 0.06 N )
1
N= = 16.67 years
0.06
Compound int erest
F = P (1 + i ) N
10000 = 5000(1 + 0.05) N
log 2
N= = 14.20 years
log(1 + 0.05)

2.3)
Simple int erest
I = (iN ) P
I = 8, 000(0.08 15) = $9600

Compound int erest


I = P (1 + i ) N - P = 8, 000 { (1 + 0.08)15 - 1} = $17377.35

2.4)
Simple int erest
I = (iN ) P
I = 5, 000(0.08 10) = $4000

Compound int erest


I = P (1 + i ) N - P = 5, 000 { (1 + 0.07)10 - 1} = $4,835.75

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Fundamentals of Engineering Economics, 3rded. 2012

2.5)
Alternative 1
F = P ( F / P, i , N ) = 4000( F / P,5%,5) = 4000 1.2763 = $5105.20

Alternative 2
F = P { 1 + (iN )}
F = 4, 000 { 1 + (0.06 7)} = $5680
Alternative 2 is better than alternative 1.

2.6)
End of Period (Year) Principal Payment ($) Interest Payment ($) Remaining Balance ($)
0 0 0 8000
1 1364 640 6636
2 1473.12 530.88 5,162.88
3 1590.97 413.03 3571.91
4 1718.25 285.76 1853.67
5 1855.70 148.3 -2.03

2.7) P = F ( P / F , i, N ) = 15, 000( P / F ,0.06, 7) = 15,000 0.6651 = $9976.5

2.8) F = P( F / P, i, N ) = 75, 000( F / P, 0.09,3) = 75, 000 1.2950 = $97125

2.9)
Alternative1: P = $150
Alternative2 : P = F ( P / F ,9%, 2) = 200 0.8417 = $168.34
Alternative3: P = F ( P / F ,9%,5) = 250 0.6499 = $162.47
Alternative 2 is preferred

2.10) F = P( F / P, 7%,5) = 10000 1.4026 = $14, 026

2.11) P = F ( P / F , 6%,10) = 800 0.5584 = $446.72

2.12)
F = P( F / P,9%, 2) = 1.1881P
P
Discount = 1 - = 0.1583 = 15.83%
1.1881P

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2.13)
(a) F = P ( F / P, 7%, 6) = 5000 1.5007 = $7503.5
(b ) F = P( F / P, 6%,8) = 13000 1.5938 = $20, 719.4
(c) F = P( F / P,10%, 25) = 16000 10.8347 = $1, 73,355.2
(d ) F = P ( F / P,5%,10) = 10000 1.6289 = $16, 289

2.14)
(a) P = F ( P / F , 6%,8) = 6000 0.6274 = $3764.4
(b) P = F ( P / F ,10%, 6) = 10000 0.5645 = $5645
(c ) P = F ( P / F , 7%,8) = 12000 0.5820 = $6984
(d ) P = F ( P / F ,9%,10) = 18000 0.4224 = $7603.2

2.15)
(a ) P = F ( P / F ,10%,5) = 20000 0.6209 = $12, 418
(b) F = P( F / P,10%,5) = 12000 1.6105 = $19,326

2.16)
4 P = P (1 + 0.12) N
log 4
N= = 16.08 years
log1.09

2.17)
3P = P (1 + 0.12) N
log 3
N= = 16.23 years
log1.07

2.18)
2 P = P (1 + 0.12) N
log 2
N= = 6.11 years
log1.12
72
From the rule of 72, number of years = =6
12

F = P ( P / F , 6%, 281) = 5 ( 1 + 0.06 )


281
= $64553254.69
2.19)

2.20)
P = 20000( P / F ,12%, 2) + 55000( P / F ,12%, 4) = $50896.5

2.21) P = $450, 000( P / F ,5%,5) = 450, 000(0.7835) = $352,575

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2.22)
Simple interest (John):

I = iPN = (0.1)($1, 000)(5) = $500

Compound interest (Susan):

I = P(1 + i ) N - 1
= $1, 000
(1 + .095)5 - 1

= $574.24

Susans balance will be greater by $74 (or $74.24 to be exact)

2.23)
P = F1 ( P / F , i %, N1 ) + F2 ( P / F , i%, N 2 ) + F3 ( P / F , i %, N 3 )
= 8000(( P / F ,8%, 1) + 2000 ( P / F , 8%, 2 ) + 5000 ( P / F ,8%, 3 )
= 8000 0.9259 + 2000 0.8573 + 5000 0.7938 = $13090.80 Ans.

2.24)
P = F2 ( P / F , i%, N1 ) + F3 ( P / F , i%, N 2 ) + F4 ( P / F , i%, N 3 ) + F5 ( P / F , i%, N 4 )
= 5000(( P / F ,7%, 2 ) + 6000 ( P / F , 7%, 3 ) + 8200 ( P / F , 7%, 4 ) + 4500( P / F , 7%, 5)
= $19362.95 Ans.
2.25)
F = P1 ( F / P, 9%, 8 ) + P2 ( F / P, 9%, 6 ) + P3 ( F / P, 9%, 4 )
= 4000 ( F / P, 9%, 8 ) + 7000 ( F / P, 9%, 6 ) + 5000 ( F / P, 9%, 4 )
= 4000 1.9926 + 7000 1.6771 + 5000 1.4116 = $26768.10 Ans.

2.26)
P = $3, 000, 000 + $2, 400, 000( P / A,8%,5)
+ $3, 000, 000( P / A,8%, 5)( P / F ,8%,5)
= $20, 734, 774.86

2.27)
P = F1 ( P / F , i%, N1 ) + F2 ( P / F , i%, N 2 ) + F3 ( P / F , i %, N 3 )
= 5000(( P / F ,10%, 2 ) + 7000 ( P / F , 10%, 6 ) + 9000 ( P / F ,10%, 12 )
= $17083.81 Ans.

2.28)

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F = 7000 + 5000( F / P,8%,1)( F / P,12%,1) + 4000( F / P, 4%,1)( F / P,8%,1)( F / P,12%,1)


= 7000 + 6048 + 5031.93 = $18079.93
2.29)
X = 20000( F / P,8%, 6) - 16000( F / P,8%,5) - 16000( F / P,8%, 4)
- 12000( F / P,8%, 3) - 16000( F / P,8%, 2) - 16000( F / P,8%,1)
= $221, 044.40 Ans.

2.30)
100000 - 12000( F / P,10%,5) - 15000( F / P,10%,3)
X=
( F / P,10%, 2)
= $50,172.72 Ans.

2.31)
X = 1000( F / P,12%, 4) - 60( F / P,12%,3) - 100( F / P,12%, 2)
- 120( F / P,8%,1) - 130
= $1099.36 Ans.

2.32)
P = 50000(( P / F ,10%, 1) + 65000 ( P / F , 10%, 2 ) +55000 ( P / F , 10%, 3)
+ 46000 ( P / F ,10%, 4 ) + 39000 ( P / F ,10%, 5 )
= $196125.6 Ans

2.33) F = A( F / A, i%, N ) = 8000( F / A,8%,10) = 8000 14.4866 = $115892.8 Ans.

2.34)
(a) F = A( F / A,5%, 6) = 6000 6.8019 = $40811.4 Ans.
(b) F = A( F / A,5%, 6)(1 + i ) = 40811.4 1.05 = $42851.97 Ans.

2.35)
(a ) F = A( F / A,7%,5) = 8000 5.7507 = $46005.6
(b) F = A( F / A,8%,8) = 10000 10.6366 = $106366
(c ) F = A( F / A,10%, 20) = 18000 57.2750 = $1030950
(d ) F = A( F / A,12%,12) = 7000 24.1331 = $168931.7

2.36)

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(a) A = F ( A / F , 6%,12) = 28000 0.0593 = $1660.40


(b) A = F ( A / F ,10%,8) = 21000 0.0690 = $1449
(c ) A = F ( A / F , 7%, 20) = 10000 0.0244 = $244
(d ) A = F ( A / F ,9%,11) = 15000 0.0569 = $853.50

2.37)
A = F ( A / F , 7%,8) = 375000 0.0975 = $36562.5

2.38) A = F ( A / F , 6%, 4) = 75000 0.2286 = $17145

2.39)
(
1 + i ) - 1 ( 1.07 ) - 1

N N

F = A 55000 = 5000
i 0.07

1.07 = 1.77
N

log1.77
N= = 8.439 years Ans.
log1.07

2.40)
A = F ( A / F ,10%, 6) = 120000 0.1296 = $15552 Ans

2.41)
F = A( F / A, i %, N ) + P( F / P, i %, N ) = 5000( F / A,5%,8) + 10000( F / P,5%,8)
= 5000 9.5491 + 10000 1.4775 = $62520.5 Ans.

2.42)
(a) A = P( A / P, i %, N ) = 28000( A / P, 7%, 4) = 28000 0.2952 = $8265.60
(b) A = P( A / P, i%, N ) = 4800( A / P,8%,5) = 4800 0.2505 = $4800.25
(c ) A = P( A / P, i %, N ) = 9000( A / P,5%, 6) = 9000 0.1970 = $1773
(d ) A = P( A / P, i %, N ) = 33000( A / P, 7%,15) = 33000 0.1098 = $3623.4

2.43)
A = P( A / P, i %, N ) = 28000( A / P,12%, 4) = 28000 0.3292 = $9217.6 Ans
First year ' s int erest = 28000 0.12 = $3360
Pr incipal paid in f irst year = 9217.6 - 3360 = $5857.6
Interest paid in sec ond year = (28000 - 5857.6) 0.12 = $2657.08 Ans

2.44)

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(a) P= A( P / A, i%, N ) = 12000( P / A,5%,5) = 12000 4.3295 = $51954


(b) P= A( P / A, i%, N ) = 18000( P / A,8%,12) = 18000 7.5361 = $135649.8
(c ) P= A( P / A, i%, N ) = 10500( P / A,12%, 7) = 10500 4.5638 = $47919.9
(d ) P= A( P / A, i%, N ) = 8000( P / A, 6%, 40) = 8000 15.0463 = $120370.4

0.0625 ( 1 + 0.0625 )
36

( A / P, 6.25%,36) = = 0.07044
( 1 + 0.0625)
36
-1
2.45) (a)
( 1 + 0.0925) - 1
125

( P / A,9.25%,125) = = 10.81064
0.0925 ( 1 + 0.0925 )
125

(b)

2.46)
F = A( F / A,8%,12)(1 + i )( F / P,8%,3) = 800 18.97711.08 1.2597 = $20654.31 Ans.

2.47)
A = P ( A / P, i %, N ) = 9000( A / P,10%, 6) = 9000 0.2296 = $2066.40 Ans
Second year payment including first year payment at the end of sec ond year = A + A(1 + i )
= 2066.40 + 2066.40(1 + 0.10) = $4339.44 Ans.
2.48)
P = A( P / A, i %, N ) = 35000( P / A,9%,12) = 12000 7.1607 = $250624.50
Yes, it is worth to purchase the newequipment
( Since, total saving in ma int enance is more than the initial investment ).

2.49)
A
P=
i
A 300
i= = = 0.0666 @ 6.67% Ans.
P 4500

A 800
P= = = $6666.67 Ans.
2.50) i 0.12

2.51)

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F = A( F / A, i %, N ) + G ( A / G, i %, N )( F / G, 7%, N ) = 10000( F / A, 7%,5) + 3000( A / G, 7%,5)( F / A, 7%,5)


F = 10000 5.7507 + 3000 1.8650 5.7507 = $89682.167 Ans.

2.52)
F = A( F / A, i%, N ) - G ( A / G , i %, N )( F / G, 7%,5) = 15000( F / A, 7%,5) - 1000( A / G, 7%,5)( F / A, 7%,5)
F = 15000 5.7507 - 1000 1.8650 5.7507 = $75532.44 Ans.

2.53)
P = A( P / A, i %, N ) + G ( P / G, i %, N ) = A( P / A, 6%, 6) + G ( P / G, 6%, 6)
= 200 4.9173 + 100 11.459 = $2129.36 Ans

2.54)
A = A - G ( A / G , i %, N ) = 10000 - 1000( A / G , 7%,10)
A = 10000 - 1000 3.9461 = $6053.9 Ans.

2.55)
P = A( P / A, i %, N ) + G ( P / G, i %, N ) = A( P / A,8%,10) + G ( P / G,8%,10)
= 5000 6.7101 + 500 25.977 = $46539 Ans

2.56)
A( F / A, i%, N1 ) - G ( A / G, i %, N1 )( F / A, i %, N1 ) = G ( P / G, i %, N 2 )
1500( F / A, 6%,5) - 300( A / G, 6%,5)( F / A, 6%,5) = C ( P / G, 6%, 6)
1500 5.6371 - 300 1.8836 5.6371 = C 11.459
C = $459.92 Ans.

2.57)
A1 = $8000, g = 6% = 0.06, i = 8% = 0.08, N = 30 years
1- ( 1+ i ) ( 1+ g ) 1 - ( 1 + 0.08 ) ( 1 + 0.06 )
-N -30
A1 8000
N 30

F= F / P, i %, N =
[ ] F / P,8%, 30
[ ]
i-g 0.08 - 0.06
= $17, 27, 673.68 Ans.
2.58)
(a) A1 = $120 1200000 = $144000000, g = -9% = -0.09, i = 10% = 0.1, N = 6 years
1 - ( 1 + i ) ( 1 + g ) 144000000
1 - ( 1 + 0.1) ( 1 - 0.09 )
-N -6
A1
N 6

P= =
i-g 0.1 - 0.09
= $9784117606 Ans.
(b) A1 = $120 1200000 = $144000000, g = 3% - 9% = -0.06, i = 10% = 0.1, N = 6 years
1 - ( 1 + i ) ( 1 + g ) 144000000
1 - ( 1 + 0.1) ( 1 - 0.06 )
-N -6
A1
N 6

P= =
i-g 0.1 - 0.06
= $2198111376 Ans.

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2.59)
20
P = An (1 + i ) - n
n =1
20
= (2, 000, 000)n(1.06) n -1 (1.06) - n
n =1
20
1.06 n
= (2, 000, 000 /1.06)n( )
n =1 1.06
20
= (2, 000, 000 /1.06)n
n =1

20(21)
= (2, 000, 000 /1.06)
2
= $396, 226, 415.1

2.60)
1- (1+ i) 1 (1+ g ) 1
-N
A1
N

(a) F = A( F / A, i %, N ) = P =
i-g

(
1 - 1 + 0.07 ) ( 1 + 0.05 )
-5
2000
5

A( F / A, 7%,10) =
0.07 - 0.05
1 - ( 1 + 0.07 ) ( 1 + 0.05 )
-5
2000
5

A= = $652.6 Ans.
(0.07 - 0.05) 13.8164
AN
(b) F = A( F / A, i %, N ) = P = 1
(1+ i)
2000 5 2000 5
A= = = $757.18 Ans.
( 1 + 0.05) ( F / A,5%,10) ( 1 + 0.05 ) (12.5779)

2.61) $1, 000, 000 = A( F / A, 6%,30) = A(79.0582)


A = $12,649 should be set aside on the account

a) $1, 000, 000 = A( P / A, 6%, 20) = A(11.4699)


A = $87,185 / year

b)

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$1, 000, 000 = A1 ( P / A1, 3%, 6%, 20)


1 - ( 1.03) ( 1.06 )
20 -20

= A1
0.06 - 0.03
= $68, 674 / year

2.62)
P = $40 ( P / A,10%,3) + 20( P / F ,10%, 2) = 3C ( P / A,10%,3 ) - C ( P / F ,10%, 2)
40 2.4869 + 20 0.8264 = 3C 2.4869 - C 0.8264 = C 6.6343
116.004 = C 6.6343
116.004
C= = $17.5 Ans.
6.6343

2.63)
P = 150( P / A,8%,8) + 50( P / A,8%, 6)( P / F ,8%, 2)
+50( P / A,8%, 4)( P / F ,8%, 4)
= 150 5.7466 + 50 4.6229 0.8573 + 50 3.31210.7350 = $1181.87

2.64) (a) Ans.

2.65)
P = -1000( P / F ,8%,1) + 600( P / A,8%, 4)( P / F ,8%,1) + 200( P / F ,8%, 5)
= -1000 0.9259 + 600 3.31210.9259 + 200 0.6806 = $1050.22 Ans.

2.66)

450( P / A,12%,5) = A( P / A,12%,5) - A ( P / F ,12%,3 )


450 3.6048 = A(3.6048 - 0.7118)
1622.16
A= = $560.71
2.893

2.67)
500( F / A,8%, 4) + 1000( F / A,8%, 2) 500 4.5061 + 1000 2.080
X= = = $2088.96 Ans.
( F / A,8%,5) 5.8666
2.68)
50( F / A,12%, 4) + 50( F / A,12%, 2) = C ( F / A,12%, 4) + 2C ( F / A,12%,3) - 2C
50 4.7793 + 50 2.12 = C { 4.7793 + 2 3.3744 - 2}
C = $33.598

2.69)

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C ( F / A,9%,8) = $5, 000( P / A, 9%, 2) + $5000


C (11.0285) = $5, 000(1.7591) + $5000
C = $1, 250.90

2.71)

600( F / A,10%,8) + 1000( F / A,10%, 4) = C ( F / A,10%, 7) + 2C ( F / P,10%,8)


600 11.4359 + 1000 4.641
C= = $835.06
(9.4872 + 2 2.1436)

2.72)

[{100( F / P, 4%,1) + X }( F / P, 6%,1)( F / P,8%,1) + 200]( F / P,10%,1) = 800


[{100 1.04 + X }(1.06 1.08 + 200] 1.1 = 800
X = -$100.71

2.73)
A( F / A,10%,18)( F / P,10%,3) = 25000( F / P,10%, 4)
A 45.5992 1.3310 = 25000 1.4641
A = $603.08 Ans.

2.74)
800 + 800( P / A,12%,5) = X ( P / A,12%, 4)
800(1 + 3.6048) = X 3.0373
X = $1212.86 Ans.

2.75)
1200 ( F / A,10%,9 ) = X ( F / P,10%, 7 )
1200 13.5795 = X 1.9487
X = $8362.19 Ans.

2.76

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5000 = C ( P / A,8%,5)( P / F ,8%,1) = C 3.9927 0.9259


C = $1375.13 Ans.

2.77
[{1200( P / F , 6%,1) + 1200}( P / F ,8%,1) + 1800]( P / F , 6%,1) + 1200 = 4935.178
4935.178( P / F , 4%,1) = $4745.136 Ans.
2.78)
P1 = 30, 723( P / F , i %,5)
P2 = A( P / A, i%,10)
(1 + i )10 - 1
$50, 000(1 + i) -5 = $5, 000 10
i (1 + i )
\ i = 13.06%
2.79)
Exact:
2 P = P (1 + i )5
2 = (1 + i )5
log 2 = 5 log(1 + i)
i = 14.87%

Rule of 72:
72 / i = 5years
i =14.4%

2.80)
P1 = $150( P / A, i,5) - $50( P / F , i,1)
(1 + i )5 - 1
= $150 5
(1 + i )-1
- $50
i (1 + i )
$200 $150 $50 $200 $50
P2 = + + + +
(1 + i ) (1 + i) (1 + i ) (1 + i ) (1 + i)5
2 3 4

P1 = P2 and solving iwith Excel Goal Seek function,



i = 14.96%

2.81)
$35,000 = $10, 000( F / P, i,5)
= $10, 000(1 + i)5
i = 28.47%

2.82)

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$104(1 + i )25 = $7.92( F / A, i %, 25)(1 + i )


(1 + i ) 25 - 1
= $7.92 (1 + i)

i
\ i = 6.37%

2.83) The equivalent future worth of the prize payment series at the end of
Year 20 (or beginning of Year 21) is

F1 = $1,952,381( F / A, 6%, 20)


= $1,952,381(36.7856)
= $71,819,506.51

The equivalent future worth of the lottery receipts is

F2 = ($36,100, 000 - $1,952,381)( F / P, 6%, 20)


= ($36,100, 000 - $1,952,381)(3.2071)
= $109,514,828.9

The resulting surplus at the end of Year 20 is

F2 - F1 = $109,514,828.9 - $71,819,506.51
= $37,695,322.4

2.84)
$1, 000( F / P,9.4%,5) + $500( F / A,9.4%,5)
(1 + 0.094)5 - 1
= $1, 000((1 + 0.094)5 ) + $500( )
0.094
= $1, 000(1.5671) + $500(6.0326)
= $4,583.4

$4,583.4( F / P,9.4%, 60)


= $4,583.4((1 + 0.094)60 )
= $4,583.4(219.3)
= $1, 005,141.21

The main question is whether or not the U.S. government will be


able to invest the social security deposits at 9.4% interest over 60
years.

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2.85)

PContract = $3,875, 000 + $3,125, 000( P / F , 6%,1) + $5,525, 000( P / F , 6%, 2)


+6, 275, 000( P / F , 6%,3) + 6, 625, 000( P / F , 6%, 4)
+7575000( P / F , 6%,5) + 8125000( P / F , 6%, 6)
+ $8,875, 000( P / F , 6%, 7)
= $3,875, 000 + $2,550, 000(0.9434)
+ $5,525, 000(0.8900) + L
+ $8,875, 000(0.6651)
= $39,548, 212.5

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