Benha University Engineering Economics & Accounting

Faculty of Engineering at Shoubra 1st Term 2023/2024

Mechanical Engg. Dept.(2nd Year) Assignment No. 2

Subject: The Time-Value of Money

[1] What rate of interest compounded annually is involved if an investment of $10,000
made now will result 10 years hence in a receipt of $23,670?

[2] A student deposits part of his paycheck into a savings account paying 1.5%
interest every three months. Part I: What are the nominal and effective interest rates?
Part II: What would be the nominal and effective interest rates if the account pays 4%
interest semiannually?

[3] What amount will be owed in 5 years if $5,000 is borrowed now at 10% per year
simple interest? For what period of time will $500 have to be invested to amount to
$625 if it earns 10% simple interest per annum?

[4] Compare the interest earned by $5,000 for 5 years at 15% simple interest with that
earned by the same amount for 5 years at 15% compounded annually.

[5] A person lends $10,000 at 8% simple interest for 5 years. At the end of this time
the entire amount (principal plus interest) is invested at 12% compounded annually for
10 years. How much will accumulate at the end of the 15-year period?

[6]What is the present value of the future receipt $18,000, 5 years from now at 8%
compounded annually?

[7] What will be the amount accumulated by each of the present investment $5,000 in
8 years at 13% compounded annually?

[8] For an interest rate of 10% compounded annually, find:

a) How much can be loaned now if $6,500 will be repaid at the end of 3 years?
b) How much will be required 6 years hence to repay a $50,000 loan made now?

[9] What series of equal payments is necessary to repay the present amount $5,000 in
5 years at 15% compounded annually with annual payments?

[10] What is the present value of the series of prospective receipts $1,500 a year for
15 years at 15% compounded annually?

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[11] Fishing Designs has arranged to borrow $15,000 today at 12 percent interest. The
loan is to be repaid with end-of-year payments of $3,000 at the end of years 1 through
4. At the end of year 5, the remainder will be paid. What is the year 5 payment?

[12] What value of T makes these two cash-flow diagrams economically equivalent at
8% annual interest?

[13] A series of 19 end-of-year payments that begins at $1,500 and decreases at the
rate of $40 a year with 14.3% interest compounded annually. What annual equal-
payment series is necessary to repay the decreasing series of payments?

[14] If you borrow $25,000 at an interest rate of 12% compounded annually with the
following repayment schedule, what is the required amount A?

[15] A company borrowed $180,000 at an interest rate of 9% compounded annually

over six years. The loan will be repaid in installments at the end of each year according
to the accompanying repayment schedule. What will be the size of the last payment (X)
that will pay off the loan?

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[16] A construction firm is considering the purchase of an air compressor. The
compressor has a first cost of $5,000 and the following end-of-year maintenance costs:
Year 1 2 3 4 5 6 7 8
Maintenance costs, $ 800 800 900 1,000 1,100 1,200 1,300 1,400
What is the present equivalent maintenance cost if the interest rate is 12%?

[17] Consider the cash flow shown in the accompanying diagram. What value of C
makes the inflow series equivalent to the outflow series at an interest rate of 10%?

[18] Consider the cash flow series given in the accompanying table. What value of C
makes the deposit series equivalent to the withdrawal series at an interest rate of 9%
compounded annually?

[19] A petroleum company is planning to sell a number of existing oil wells. The
wells are expected to produce 100,000 barrels of oil per year for 11 more years. If the
selling price per barrel of oil is currently $35, how much would you be willing to pay
for the wells if the price of oil is expected to increase by $3 per barrel every 3 years,
with the first increase to occur 2 years from now? Assume that the interest rate is 12%
per year for the first 4 years and 15% per year thereafter, and that oil sales are made at
the end of each year.

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[20] You are the manager of a large crude-oil refinery. As part of the refining process,
a certain heat exchanger (operated at high temperatures and with abrasive material
flowing through it) must be replaced every year. The replacement and downtime cost
in the first year is $175,000. This cost is expected to increase due to inflation at a rate
of 8% per year for five years, at which time this particular heat exchanger will no
longer be needed. If the company’s cost of capital is 18% per year, how much could
you afford to spend for a higher quality heat exchanger so that these annual
replacement and downtime costs could be eliminated?

[21] A small company heats its building and spends $8,000 per year on natural gas for
this purpose. Cost increases of natural gas are expected to be 10% per year starting one
year from now (i.e., the first cash flow is $8,800 at EOY one). Their maintenance on
the gas furnace is $345 per year, and this expense is expected to increase by 15% per
year starting one year from now. If the planning horizon is 15 years, what is the total
annual equivalent expense for operating and maintaining the furnace? The interest rate
is 18% per year.

[22] An individual is borrowing $100,000 at 8% compounded annually. The loan is to

be repaid in equal annual payments over 30 years. However, just after the eighth
payment is made, the lender allows the borrower to double the annual payment. The
borrower agrees to this increased payment. If the lender is still charging 8%
compounded annually on the unpaid balance of the loan, what is the balance still owed
just after the twelfth payment is made?

[23] A company buys a machine for $12,000, which it agrees to pay for in five equal
annual payments, beginning one year after the date of purchase, at an interest rate of
4% per annum. Immediately after the second payment, the terms of the agreement are
changed to allow the balance due to be paid off in a single payment the next year.
What is the final single payment?

[24] A large manufacturing company purchased a semiautomatic machine for

$13,000. Its annual maintenance and operation cost was $1700. After 5 years from the
initial purchase, the company decided to purchase an additional unit for the machine
which would make it fully automatic. The additional unit had a first cost of $7100. The
cost for operating the machine in the fully automatic condition was $900 per year. If
the company used the machine for a total of 16 years and then sold the automatic
addition for $1800, what was the equivalent uniform annual worth of the machine at an
interest rate of 12% per year?

[25] A city that was planning an addition to its water supply and distribution system
contracted to supply water to a large industrial user for 10 years under the following
conditions: The first 5 years of service were to be paid for in advance and the last 5

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years at a rate of $45,000 a year payable at the beginning of each year. Two years after
the system is in operation the city finds itself in need of funds and desires that the
company pay off the entire contract so that the city can avoid a bond issue.
a) If the city uses 9 % interest compounded annually in calculating a fair receipt on
the contract, what amount can they expect?
b) If the company uses 20% interest compounded annually, how much is the
difference between what the company would consider a fair value for the
contract and what the city considers to be a fair value?

[26] Suppose that an oil well is expected to produce 100,000 barrels of oil during its
first year in production. However, its subsequent production (yield) is expected to
decrease by 10% over the previous year’s production. The oil well has a proven reserve
of 1,000,000 barrels.
a) Suppose that the price of oil is expected to be $60 per barrel for the next several
years. What would be the present worth of the anticipated revenue stream at an
interest rate of 12% compounded annually over the next seven years?
b) Suppose that the price of oil is expected to start at $60 per barrel during the first
year, but to increase at the rate of 5% over the previous year’s price. What
would be the present worth of the anticipated revenue stream at an interest rate
of 12% compounded annually over the next seven years?
c) Consider part (b) again. After three years’ production, you decide to sell the oil
well. What would be a fair price?

[27] A manufacturing firm is seeking a loan of $200,000 to finance production of a

newly patented product line. Owing to a good reception of the product at its
introductory showing, a bank had agreed to loan the firm an amount equal to 90% of
the present worth of firm orders received for delivery during the next 5 years. The
orders received are as follows:
25,000 during the first year.
20,000 during the second year.
15,000 during the third year.
10,000 during the fourth year.
5,000 during the fifth year.
If the product will sell for $4 each, will the present worth of the orders received justify
the loan required? Interest is 12% compounded annually.

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