Instructor: Dr.

Nazim Nouiehed
Course: INDE 301
Date to be submitted: April 5, 2021

A Double Homework (version 1)

Question 1:
An infinite cash flow consists of $1000 for the odd year and -$500 for the even year (except
zero). At an interest rate of 10% a year, what is the equivalent uniform infinite series?
Question 2:
You have taken a loan of $5000 to be repaid in equal monthly payments for two years. The
annual interest charged is 8% a year. However at the end of the 12th month you had enough
money to pay whatever you still owe the bank. The bank gave you 5% discount on the whole
payment. How much money did you pay?
Question 3:
A sum of $10,000 is gaining interest at 8% a year compounded monthly. What is the future
worth if you withdrew $25 a month?
Question 4:
Same given as in question 3 but the monthly withdrawal is 5% of the account.
Question 5:
A real-state company is considering the construction of an apartment building.
There are three plans:
Plan 1 Plan 2 Plan 3
Land cost $1000,000 $1,200,000 $1,300,000
First year $1,500,000 $1,300,000 $1,400,000
construction cost
Second year - $1,200,000 $1,300,000
construction cost
Third year - - $1,100,000
construction cost
# of apartments 30 36 42
Expected sales price/ $300,000 $325,000 $350,000
Apartment
All apartments are expected to be sold within one year after construction. At discount rate of
9% a year, which plan is the most profitable?
Question 6:
Commercial water.com is a company specialized in supplying water for households (washing
and flushing) and the manufacturing industry. The demand for the annual supply of water has
increased and more water resources are needed. The most ambitious plan suggested by one of
the company is engineers (Water Resources Engineer) is to construct earthbound reservoirs in
the SANNINE area that will be called the water from molten snow.
The amount needed for sale is 60,000m3. Searching for possible sites for the project, three sites
were found:

Site 1 Site 2 Site 3

Construction cost/m3 $3 $3.2 $3.30
Evaporation rate 5% 6% 7%
Useful life 20 years 25 years 30 years
Annual cost $20,000 $30,000 $35,000

A cubic meter of water is expected to be sold at 3$. At the discount rate of 10% a year, which
site is the most profitable?

Question 7:
The nominal annual Rate of Return of a bond is called the yield to maturity denoted by” λ”.
Calculate the yield to maturity of the following bonds (The interest is paid every 6 months).

Bond Face Value Purchasing Price Maturity Time Coupon rate

A $5000 $4700 5 years 6%
B $5000 $4800 5 years 6.5%
C $10,000 $9200 10 years 7%
D $20,000 $18,600 10 years 8%
 Problems of Theoretical nature
Question 8:
Consider an arbitrary revenue investment with net cash flow (a0, a1,… ,an)
a) Find the Aw(i) formula
b) Find Awk(i) formula, where Awk(i) is the annual worth compounded over “k” useful lives.
What can be concluded about the rate of return?

Question 9:
Consider an investment with initial cost “C”, annual benefits A, and a discount rate “i”.
a) Let c = kA+ α , 0 ≤ α < A
Find a formula in terms of k, A, and α for the no-return (0%) payback period.

(1+𝑖)𝑥 −1
b) Set 𝐴 ( 𝑖 (1+𝑖)𝑥 ) = 𝐶𝑜
X is the discounted payback period.
Find X

Question 10:
When searching for the rate of return value, we needed a first guess.
(Sum of upper flow)−(Sum of lower flow)
I mentioned a (Rule of thumb 1) = n (Sum of lower flow)
+ 2%

Another Rule of thumb can be obtained using the following steps:

dpw
a) Find at i=0 (derivative of pw at i=0)
di
b) Find the equation of the tangent line to the graph of the function pw(i) at (0,TF). (TF
is the total flow).
c) The value of “i” at which the tangent interests the i-axis is the value of Rule of
thumb 2.
Find it