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**• Q: Describe the concept of equivalence in a
**

way that your brother in law can understand

it…

• Since money has time value, an amount

today will be equal to a different amount

tomorrow. These two different amounts can

be related via interest rate.

Practice Problems

Summer 2003

Prepared by:

Eng. Ahmed Taha

Chapter 1

• Q: which of the following has a better rate of

return: $200 invested in 1 year with 6.25 paid in

interest or $500 invested for 1 year with $18

paid in interest

• Interest = present value (P) x interest rate (i)

Scenario a:

6.25 = 200 i

i = 0.03125 = 3.125%

Scenario b:

18 = 500 i

i = 0.036 = 3.6%

• Scenario b is better because it has better rate of return

What is the annual rate that the investment is returning? • Rate of return i 7.500.15 50.000 in a foreign coventure just one year ago and has reported a profit of $7.Chapter 1 • Starburst. Inc.000 i = 15 % profit Investment .500 i 0. invested $50.

Chapter 1 • Q: Compute.000 (10)(0. and compare the annual interest and total interest amount for 10 years on a million dollars under two different scenarios. • Scenario a: Interest/y = 1.000. First the $1 million is borrowed by a company at 6%-per-year simple interest. Second the $1 million is invested in a company at 6% per-year compounded annually.06) = $60.06) = $600.000 .000. graph.000 (0.000 per year Total interest = Pni = 1.

62 80293.847.88 101368.53 85111.82 95630.7 .7 scenario b is better Interest 60000 63600 67416 71460.15 90217.b = 190.96 75748.7 790847.Chapter 1 • Scenario b: F: the future value for the given year P: the present value for the given year Year 1 2 3 4 5 6 7 8 9 10 P 1000000 1060000 1123600 1191016 1262477 1338226 1418519 1503630 1593848 1689479 F 1060000 1123600 1191016 1262477 1338226 1418519 1503630 1593848 1689479 1790848 Total • The difference between the a.

(a) Deposit $350 now and again 3 years from now. He can withdraw an amount of F in a lump sum. He has developed the following alternative plans. • Scenario a: Scenario b: F=? i = 8% 0 $350 1 2 3 $350 F=? i = 8% year 4 5 6 0 1 2 3 A= $125 year 4 5 6 . (b) Deposit $125 per year starting next year and ending in year 6 draw the cash-flow diagram for each plan if F is to be determined in year 6.Chapter 1 • Q: Jaime wishes to invest at an 8%-per-year return so that 6 years from now.

Chapter 2 • How much money would u have 12 years from now if u take your Christmas bonus of $2500 each year and (a) place it under your mattress. (b) put it in an interestbearing checking account at 3% per year or (c) buy stock in a mutual fund which earns 16% per year? • Scenario a: i= 0% F= 2500 (12) = $30.000 .

85) = $77.16%.Chapter 2 • Scenario b: i = 3% F= 2500(F/A.125 F=? i = 3% 0 1 $2500 year 12 F=? i = 16% 0 1 $2500 12 year .480 • Scenario c: i = 16% F= 2500(F/A.12) = 2500(30.3%.12) = 2500(14.1920) = $35.

calculate (a) the equivalent uniform annual worth in year 1 through year 4 and (b) the present worth in year 0.4 $4000 i = 3% 2 G=-800 3 $2400 $3200 4 year $1600 .14%. Year 1 Cash flow $4000 2 3 4 3200 2400 1600 • a: G=-800 F= 4000-800(A/G. Assume i= 14% per year.4) 0 1 = 4000-800(1.Chapter 2 • For the cash flow shown below.337) A=? = $2930.

14%.4) = 4000(2.8957) = $8538 $2400 4 $1600 .14%.4)-800(P/G.Chapter 2 year i = 3% 0 1 2 3 G=-800 P=? $4000 $3200 • b: F= 4000(P/A.9137)-800(3.

4) 0 1 A=800 800 = 200+G(1. Year 0 Cash flow 0 1 2 3 4 $200 200+G 200+2G 200+3G i = 20% • i= 20% 2 G=? 3 800 = 200+G(A/G.20.2742) $200 $200+G G = 470.88 $200+2G year 4 $200+3G .Chapter 2 • For the cash flow shown below determine the value of G that will make the equivalent annual worth = $800 at an interest rate of 20% per year.

Chapter 2 • A company is planning to make s deposit such that each one 6% larger than the preceding one.06 = 1179. • 4th deposit= $1250 the third deposit will be less by 6% 3rd deposit = 1250/1. How large must the second deposit be (at the end of year 2) if the deposit extended till year 15 and that fourth deposit is $1250? Use an interest rate of 10% per year.25 2nd deposit = 1179.06 = 1112.5 .25/1.

The stock is selling for $25 per share. 25(F/P.54% i = ?% 0 1 P=25 2 year F=30 .2 i = 9.2) = 1. If u buy 500 shares and the stock increases to $30 per share in 2 years what rate of return would u realize on your investment.i.2 (1+i)2= 1.i.Chapter 2 • You have a just gotten a hot tip that you should buy stock in the GRQ company.2)= 30 (F/P.

i. His will also stipulated that you can withdraw $10.000 from your favorite uncle.Chapter 2 • You have just inherited $100.i.18)+1000(P/G. His will stipulated that a certain bank will keep the money on deposit for you. If it takes 18 years for the inheritance to go to ZERO what interest rate was the money earning while on deposit? 100.000(P/A.000 after 2 years. $11.18) i = ?% Using trial and error 0 1 2 3 4 year P=100000 i 13 % $10000 $11000 $12000 $13000 .000 after 1 year.000 = 10. and amounts increasing by $1000 per year until the amount is exhausted.

015% per day.Chapter 3 Q: what is the nominal and the effective interest rates per year for an interest rate of 0. Effective i= (1+i)n –1 i= (1+0.05475 = 5. Nominal i/year = 0.48% b.63% .00015 (365) = 0.00015)365-1 i= 5. a.

06 )1/4= 1+(r/4) R = 0.Chapter 3 • Q: what quarterly interest rate is equivalent to an effective annual rate of 6% per year compounded quarterly? • i effective = (1+(r/m)m) –1 0.06 = (1+(r/4)4) –1 (1+ 0.0587 per year R = 1.468 % per quarter .

13. 6.000 (P/F.000 (0.88% per year P = 50.5%.16) 1 2 year = 50.88%.16) = 50.675 = $580 .3651) = 18.Chapter 3 Q: What is the difference in the present worth of $50.13-1= 13.000 eight years from now if the interest rate is 13% per year compounded semiannually or continuously? • Semiannually i = 13% P = 50.3535) = 17.255 P=? F=50000 • Continuously i = er-1 i = e0.255 – 17.000 (P/F.675 • Difference 18.000 (0.

20) 750000 = A(13. (b) 12% per year compounded monthly.000 Quarterly A=? i = 16% year 5 .Chapter 3 Q: A jeans washing company is buying an ozone system for the washing machines and for the treatment of its dye wastewater. 750000 = A(P/A.4%.186 0 1 P=750.000. a.5903) A = $55.how much money must the company save each quarter (in chemical costs) in order to justify the investment if the system will last 5 years and the interest rate is (a) 16% per year compounded quarterly . The initial cost of the ozone system is $750.

20) 750000 = A(14.01)3-1= 3.03%.8363) A = $50.03% /quarter 750000 = A(P/A.Chapter 3 Cont.3.000 Monthly A=? i = 12% year 5 . i = 1%/Mo = (1+0. b.552 0 1 P=750.

750000 = A(F/A.000 in 5 years if the interest rate is 6% per year compounded semiannually? Assume no inter-period interest.Chapter 3 Q: a tool-and-die company expects to have one of its lathes replaced in 5 years at a cost of $18.15 per 6 month A/month = 1.570. How much would the company have to deposit every month in order to accumulate $18.3%.000.69 F=18.10) 750000 = A(11.4639) A = $1.000 year i = 6% 0 1 A=? 5 .15/6 = $261.570.

$ Expense.481 8000 0 1 9000 6000 2000 6 9 3000 i = 8% 14 5000 year .5) 6-8 6000 3000 9-14 8000 5000 +3000(P/A.16%.2055)(0.6756) = $19.8.Chapter 4 Q:what is the present worth of the following series of income and disbursement if the interest rate is a nominal 8% per year compounded semi annually? year Income.16%.16% 0 0 9000 1-5 6000 2000 P = -9000+4000(P/A.16%.$ I/yr = (1+0.5) Using the formulas = -9000+4000(3.9759)+ 3000(6.8.8.04)2-1 = 8.9) (P/F.

49%.3108)+3X 1.49% Moving all cash flows to year 10 0 = 800 (F/P.49%.9522)+1000(2.2) + 3X 0 = 800(3.14.2) (F/P.9472) +1200(2.14.14.49%.491 3x $800 i = 14% 1 2 0 $500 $1000 3 $1200 5 4 6 x 8 7 2x 9 5000 year 10 .2) (F/P.14.5888 X = 10313 X = $6.49%.8697)-500(2.49%.2522)-X(1.07)2-1 = 14.Chapter 4 Q: find the value of X below such that the positive cash flows will be exactly equal to the negative cash flows if i= 14 % compounded semiannually i/yr = (1+0.6)-X(F/P.14.2X(F/P.14.14.5)+ 1200(F/A.10)-500 (F/P.14.1449)(1.49%.3).5007)-2X(1.1449)(2.49%.8) +1000(F/A.49%.

25% Getting P then converting to A P=3500+3500(P/A. 0 3.000 5.950 A= 33950(A/P.3796) = $33.7462)+ 15000(0.10.500 3.Chapter 4 Q: calculate the annual Worth (years 1 through 10) of the following series of disbursement.10.25%.25%.10.500 3.4759)+5000(4.10.$ compounded semiannually.000 9 10 i = 10% $5000 $15000 year .000 15.6)(P/F.585 0 3 1 $3500 1 2 3 4 5 6 7 8 9 10 3.500 i/yr = (1+0.25%.3235)(0.10)= 33950(0.10. Assume i= 10% per year Year Disburcment.000 5.25%.000 5.3)+ 5000(P/A.10) = P= 3500+3500(2.25%.000 5.3)+ 15000(P/F.05)2-1= 10.000 5.1645) = $5.500 5.

12%.1273) G = $1.0373) + G(4.12%.3) + G(P/G.030 0 1 $600 8 9 12 i = 12% G 2G 3G 4G year .12%.2997) = G(3. using an interest rate of 12% per year.8) = G(P/A.4) 600(12. 600(F/A.Chapter 4 Q: find the value of G in the diagram below that would make the income stream equivalent to the disbursements stream.

7538) = $15.12. i/yr = (1+0.68%. calculate the amount of money in year 15 that would be equivalent to the amounts shown.9) -20 (P/G. if the interest rate is 1% per month.7183) = $2.279 480 500 460 440 420 400 380 8 $340 year .262.12.1933)-20(16.Chapter 4 Q: for the diagram shown below.01)12-1= 12.262.28 F15= 2.68% Getting P-1 then getting F15 P-1= 500 (P/A.68%.12.28(F/A.28(6.262.68%.16) 0 1 2 3 4 5 6 7 360 = 2.9) = 500(5.

01166)6-1= 7.000 60 $8.000 60.000 Best Alternative .000 Life.9787)+10000(0.9591)+8000(0. $ 10.14/12= 0.17%.000 Monthly M&O Cost.01166 = 1.2%.2% PWx = -40000-5000(P/A.$ Alternatives X Y 40.10)+8000(P/F.000 month $5.000 Salvage Value.1.60)+10000(P/F.4989) = -$146.480 0 1 $40. Initial Cost .000 0 semiannual M&O Cost .7.1.Chapter 5 Q: compare the alternatives below on the basis of their present worth using an interest rate of 14% per year compounded monthly.000 month Alternative Y 0 1 $13.$ 0 13.4976) = .$249.17%.000 8.2%.60) = -40000-5000(42. years 5 5 i/mo = 0.000 semiannually 60 $60.$ 5.920 PWy = -60000-13000(P/A.10) = -60000-13000(6.7.000 Alternative X $10.17% i/6mos = (1+ 0.

000 6 $1.000 Year $7.10) +4000(P/F.12%.12%.Chapter 5 Q: Compare the following machines on the basis of their present worth.000 23.900 $9.$ 2. $ 4.11)+ (P/F.194 PWused= -23000-9350(P/A.000 Annual Operating Cost.350 11 $1.14)= -$93.$ 44.900 $44.12%.12%.6)+ (P/F.$ 210 350 Overhaul every 2 years.000 Used Machine = -$98.$ 7.2) +(P/F.5)-2500(P/F.900 Best Alternative .$ 0 1.14)2500(P/F.13)] +3000(P/F.7)-1900[(P/F.12%.000 Life. Use i= 12% per year Alternatives New Machine Used Machine Initial Cost .12%.12%.000 Annual Repair Cost .000 Year 7 $9.12%.14)23000(P/F.12%.000 3.14) $3.12%.350 $23.500 10 $2.12%.000 9.12%.900 14 13 $1. years 14 7 PWnew= -44000-7210(P/A.12%.500 0 Salvage Value.758 0 1 4 $1.500 $3.12%.000 $4.9)+(P/F.900 Overhaul every 5 years.900 $1.210 14 5 $2.900 9 $23.7)+3000(P/F.4)+(P/F.000 2 0 1 New Machine $1.

000 31.$ 500(P/G.Chapter 5 Q: Compare the following machines on the basis of their Alternatives present worth.3)$2. $ 5.000 $147.000 in year 1: increasing 1: increasing Annual Cost.16%.6)+5000(P/F.3)-54000(P/F.6)11.000 32.000 per year year Salvage Value.000 32.000 $11.50 0 $56.000 4 5 6 year 11.000 56.000 5 G= $500 $13.16%.3)[30000(P/A.16%. Use i= 16% per year R1 R2 Initial Cost .000 2.16%.000 = $189.000 = -$203.$ 147.000 *(P/F.000-11000(P/A.000 Best Alternative .300 Life.3)+2000(P/F.16%.3)+1000(P/G.16%.16%. years 6 3 PWR2= -56000-30000(P/A.6) $2.16%.16%.3)] 0 1 2 3 year R2 30.644 $56.000 31.000 year R1 0 1 2 3 4 $5.000 PWR1= -147.000 in year 30.500 6 30.6) by $500 per by $1.16%.000 1000(P/G.

a.000/0.17227 PW = -$230. i/yr = (1+0.000-25.16/12)12-1= 17.000 + 25.25000/0.(60. PW = .333 b.12 PW = -$293.000 for an infinite time using an interest rate of (a) 12% per year (b) 16% per year compounded monthly.227% PW = -85.000 in year 0 and uniform beginning-of-year rent payments of $25.Chapter 5 Q: Calculate the capitalized cost of $60.121 .000) .

MAX MIN i/yr = (1+0.000 Year $900.cost max = [-150000(A/P. years 150.11.3%.000 8.3% Cap.000 $8.000 Best Alternative .000 Infinity = -$988. Use i= 11% per year compounded Alternatives semiannually.Chapter 5 Q: Compare the following machines on the basis of their capitalized cost .062 Cap.000.5)50000+8000(A/F. $ Life.000.3%.055)2-1= 11.000 50.000 5 900.$ Annual Operating Cost.$ Salvage Value.113 = -$793.000 Year 5 MIN 0 1 $10.000 1.cost Min = -900000-10000/0.000 10.11.000 $50.113 Initial Cost .5)]/0.496 MAX 0 1 $150.000 $1.

755 $11.48) = -38000 (0.02489)-2000+11000(0.75%.01739) = -$2.000 Year 0 1 $38.Chapter 6 Q: Find the annual worth amount (per month) of a truck which had a first cost of $38.000 $2.000 after 4 years at an interest rate of 9% per year compounded monthly.000 4 .0.75% AW = -38000 (A/P.75%.000 an operating cost of $2000 per month and a salvage value of 11.48)-2000+11000(A/F.09/12 = 0. i/mo = 0.0.

$ Life.6)-21000+ 10000(A/F.000 8.000 6 $10.000 10. Using i= 12% per year Machine G Machine H AWG = -62000 (A/P.000 Initial Cost .$ Salvage Value.000 21.4) = -$33.6) Machine G 0 1 $62.12%.000 Year 4 Machine H 0 1 $77.000 15.$ Annual Operating Cost.Chapter 6 Q: Compare the following machines on the basis of their Alternatives annual worth .738 AWH = -77000 (A/P.12%.000 $21.4)15000+8000(A/F.000 $15. years $8.000 62.12%.12%.000 4 77.000 Year 6 Best Alternative .

10%.10%.000 30.10%.6)(P/F.12) = -$11.000 10 11.10)-15000+ [500(P/G.000 12 $11.000 4 0 G= $ 5 0 Initial Cost .10%. years $7.981 AWQ = -42000(A/P.10%.000 $50.000 Year 12 $42.10%.12)-6000+ 11000(A/F.$ Annual Cost decrease year 5-n.650 Machine P 0 1 $30.10%.000 500 0 7.000 Machine Q Year 10 0 1 $6.000 6.$ Annual Operating Cost year 1-4.10) = -$19.000 Best Alternative .$ Salvage Value.4) (A/P.10)]+7000(A/F. $ Life.000 42.000 15.Chapter 6 Q: Compare the following machines on the basis of their Alternatives annual worth at i= 10% per year Machine P Machine Q AWP = -30000(A/P.

7513)]*0.1 = [50000+50000(0. AW = [50000+50000(P/F.10%.000 three years from now at an interest rate of 10% per year.756.Chapter 6 Q: What is the perpetual annual worth of $50.5 .1 = -$8.3)]*0.000 now and another $50.

000-100(k -2) Salvage Value.Chapter 6 Q: Compare the following machines on the basis of their annual worth .$ 40. years 10 Year $4. $ 8.121 AWH = -300000(0.000 Infinity $50.000 $8.000 Best Alternative .000 G $40.100 Initial Cost .000 300.000 Life.10)5100+100(A/G.200 G=-$100 0 1 $1. Using i= 8% per year (the index k varies Alternatives from 1-10) G H AWG = -40000(A/P.10)+ 8000(A/F.000 Year $300.000 H 10 1 $5.$ 5.8%.000 1.08)-1000 = -$25.8%.000 50.000 Annual Operating Cost.10) = -$10.8%.

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