SEEM2440: Engineering Economics

Exercise 2

1. You plan to borrow a loan of $100,000 which you will repay with equal annual payments for the next
5 years. Suppose the interest rate you are charged is 8% per year and you will make the first payment
one year after receiving the loan. How much is your annual payment?
2. Find the present value P0 of the cash flow in the following figure:

P0=?
5,000

4,000 ..…….. 4,000

2,000 …….. 2,000

6 7 8 9 10
0 1 2 3 4 5 11 12 13 14 15

1,000 ……..…………………. 1,000

i = 10 % per period

3. The XYZ corporation has found that a small amount of a new chemical additive will increase the
water repellency of its tent fabric. The company has arranged to purchase the additive through a 5-
year contract at $7,000 per year, starting 1 year from now. The annual price is expected to increase
by 12% per year thereafter for the next 8 years. Additionally, an initial investment of $35,000 was
made now to prepare a site suitable for the contractor to deliver the additive. The annual interest rate
is assumed to be 15%.
1) Provide a cash-flow diagram of this project.
2) Determine the equivalent present value of all these cash flows.
4. Suppose that the parents of a young child decide to make annual deposits into a savings account, with
the first deposit being made on the child’s 5th birthday and the last deposit being made on the 15th
birthday. Then, starting on the child’s 18th birthday, four withdrawals will be made on each birthday
in the amounts of $2,000, $2,400, $2,800, and $3,200, respectively.
1) Draw a cash-flow diagram from the account’s perspective.
2) If the effective annual interest rate is 8% during this period of time, what are the annual deposits
on birthday 5 through 15?