Engineering

Economy Examples and Problems

Examples and Problems

1. Suppose you want to buy a car. You have surveyed the dealers’ newspaper advertisements,
and the following one has caught your attention:
College Graduate Special: New 2006 Nissan Altima 2.55 with automatic transmission, A/C,
power package, and cruise control

MSRP: $20,870
Dealer’s discount: $1,143
Manufacturer rebate $800
College graduate cash: $500
Sale price: $18,427

Price and payment is plus tax, title, customer service fee, with approved credit for
72 months at 6.25% APR.
You can afford to make a down payment of $3,427 (and taxes and insurance as well), so the
net amount to be financed is $15,000. What would the monthly payment be?

2. Suppose you make equal quarterly deposits of $1,500 into a fund that pays interest at a rate
of 6% compounded monthly. Find the balance at the end of year 2.

3. Suppose that you make $500 monthly deposits to a retirement plan that pays interest rate
of 10% compounded quarterly. Compute the balance at the end of 10 years.

4. Some financial institutions will not pay interest on funds deposited after the start of the
compounding period. To illustrate, consider Ex. 3 again. Suppose that money deposited
during a quarter (the compounding period) will not earn any interest. Compute what F will
be at the end of 10 years.

5. Suppose you secure a home improvement loan in the amount of $5,000 from a local bank.
The loan officer computes your monthly payment as follows:

Annual percentage rate = 12%,

Contract period = 24 months,
Contract amount = $5,000

a) For the sixth payment, compute both the interest and principal payments.
b) Immediately after making the sixth monthly payment, you would like to pay off
the remainder of the loan in a lump sum. What is the required amount?

6. Suppose you intend to own or lease a vehicle for 42 months. Consider the following three
ways of financing the vehicle:

Option A: Purchase the car at $32,508 and pay for it over 42 months with equal monthly
payments at 5.65% APR.
Option B: Purchase the car at a discount price of $31,020 to be paid immediately.
Option C: Lease the vehicle for 42 months: The lessee must come up with $1,507.76 at
signing. This cash due at signing includes the first month’s lease payment of $513.76 and a
$994 administrative fee. No security deposit is required; however, a $395 disposition fee is
due at the end of the lease, at which time the lessee has the option to purchase the car for
$17,817.
Engineering Economy Examples and Problems

7. You borrow $5000 for 2 years at an add-on rate of 12% with equal payments due at the end
of each month. Compute your monthly payment as well as the nominal and effective annual
interest rate.

8. Suppose that you need to finance a new home priced at $240,000 with a $4,000 down
payment at 6.6% compounded monthly over 30 years.

You are considering two options in securing a mortgage from a bank:

Option 1: A fully amortized option
Option 2: A five-year interest-only option

Assuming that the interest rate is fixed over the entire life of the loans, determine the
interest payment during the first year of ownership.

9. Suppose that you finance a home on the basis of a 5/1 hybrid mortgage (five-year
fixed/adjustable) plan over 30 years. The $100,000 hybrid loan plan offers an initial rate of
6.02% fixed for 60 months. The loan rate would be adjusted thereafter every 12 months to
the lowest of three options: the then-current rate on one-year Treasury bills plus 2.75
percent, the previous rate plus a maximum annual cap of 2.0 percent, or a lifetime cap of
11.02 percent. There is no prepayment penalty for this type of loan. The projected interest
rates by the lender after 5 years are as follows:

a) Develop the payment schedule for the first 10 years.
b) Determine the total interest paid over a 10-year ownership