ASSIGNMENT 2 : ENGINEERIG ECONOMICS

NAME: DHIRAJ NAYAK

ROLL NO: 074BME615

Q.3.3 You are considering investing $3,000 at an interest rate of 8% compounded annually for
five years or investing the $3,000 at 9% per year simple interest for five years. Which option is
better?

Answer :

Case I ,

Investing $3,000 at an interest rate of 8% compounded annually for five years

F = P(1+i)N

= $3000(1+0.08)5

= $4,407.98

Case II,

Investing the $3,000 at 9% per year simple interest for five years.

F = P+P*i*N

= $3,000 + $3,000*0.08*5

= $ 4,200

So, investing $3,000 at an interest rate of 8% compounded annually for five years is better.

Q.3.5 Suppose you have the alternative of receiving either $12,000 at the end of five years or P
dollars today. Currently you have no need for money, so you would deposit the P dollars in a
bank that pays 5% interest. What value of P would make you indifferent in your choice between
P dollars today and the promise of $12,000 at the end of five years?

Answer:

Given, future value, we need to find the present value

P = F (P/F, i, N)
For i = 5% ,N =5 years from interest table , we get
= $12,000* 0.7835
= $9,402
So, the equivalent present worth is $9,402.

Q. 3.8 What is the present worth of these future payments?

(a) $5,500 6 years from now at 10% compounded annually

Answer:
Present worth factor for above rate and year is 0.5645 (from interest table )

So, P = F (P/F, i, N)
= $ 5,500*0.5645
= $3104.75

(b) $8,000 15 years from now at 6% compounded annually

Answer:
P = F (P/F, i, N)
Present worth factor for above rate and year is 0.4173 (from interest table )

P = $8,000*0.4173

= $3,338.4

(c) $30,000 5 years from now at 8% compounded annually

Answer:
P = F (P/F, i, N)
Present worth factor for above rate and year is 0.6806 (from interest table )

P = $30,000*0.6806

= $20,418

(d) $15,000 8 years from now at 12% compounded annually

Answer:

P = F (P/F, i, N)
Present worth factor for above rate and year is 0.4039(from interest table )

P = $15,000*0.4039

=$6,058.5
Q.3.14 If $1,500 is invested now, $1,800 two years from now, and $2,000 four years from now
at an interest rate of 6% compounded annually, what will be the total amount in 15 years?

Answer:

Let’s break the question into three part

F1 = P (F/P, i, N)
Here , P = $1,500 , i = 6% , N = 15 years

F1 = $1,500* (F/P, i, N)
= $1,500* 2.3966
= $3,594.9

F2 = P (F/P, i, N)
Here , P = $1,800 , i = 6% , N = 15-2=13 years

F2 = $1,500* (F/P, i, N)
= $1,800* 2.1329
= $3,839.22

F3 = P (F/P, i, N)
Here , P = $2,000 , i = 6% , N = 15-4=11 years

F3 = $2,000* (F/P, i, N)
= $2,000* 1.8983
= $3,796.6

Then, the total amount in 15 years is

F = F1 +F2 +F3
= $11,230.72

Q. 3.20 Part of the income that a machine generates is put into a sinking fund to replace the
machine when it wears out. If $1,500 is deposited annually at 7% interest, how many years must
the machine be kept before a new machine costing $30,000 can be purchased?

Answer:
Given ;
A= $1,500
F = $30,000
i=7%
N = ? years

A = F(A/F, i, N)
Or , $1,500 = $30,000 * (A/F, i, N)
Or , (A/F, i, N) = 0.05
Looking for sinking fund factor equals to 0.05 in 7 % interest table , we get N ~ 13 years
Q. 3.23 You have borrowed $25,000 at an interest rate of 16%. Equal payments will be made
over a three-year period. (The first payment will be made at the end of the first year.) What will
the annual payment be, and what will the interest payment be for the second year?

Answer:
First we find the future value of $25,000 in next 3 years. Then we will find the equal payments A
that will be made in next 3 years annually.

F = P(F/P, i, N)
= $25,000*1.5609
= $39,022.5
Now,

A = F(A/F, i, N)
= $39,022.5*0.2853
= $11,133.12

2nd part,
Interest in 1st year
= $25,000*0.16
= $4000
Principal for 2nd year , P = 25000+4000 = $29,000
So,
Interest in 2nd year
= $29,000*0.16
= $4,460

Q. 3.27 Five annual deposits in the amounts of $3,000, $2,500, $2,000, $1,500, and $1,000, in
that order, are made into a fund that pays interest at a rate of 7% compounded annually.
Determine the amount in the fund immediately after the fifth deposit.

Answer:
We divide the following deposits into two categories i.e. a uniform equal payment of $3,000 and
a decreasing linear gradient payment of $500.

Therefore,
The future value immediately after 5 deposit is

F = F1 - F2
= A(F/A, i, N) - G(P/G, i, N) (F/P, i,N)
= $3,000*(5.7507) - $500*7.6467*1.4026
= $ 17,252.1 - $5362.63
= $ 11,889.47
Q.3.33 By using only those factors given in interest tables, find the values of the factors that
follow, which are not given in your tables. Show the relationship between the factors by using
factor notation, and calculate the value of the factor. Then compare the solution you obtained by
using the factor formulas with a direct calculation of the factor values.
Example: (F/P, 8%, 38) = (F/P, 8%, 30)(F/P, 8%, 8) = 18.6253

(a) (P/F, 8%, 67)

Answer:
= (P/F, 8%, 60)( P/F, 8%, 7)
= 0.0099*0.5835
= 0.0057766
From direct calculations , the given value is = ( ⁄ 67
= 0.0057624

(b) (A/P, 8%, 42)

Answer:
From direct calculations , the given value is 0.08328.

(c) (P/A, 8%, 135)

Answer:
From direct calculations , the given value is 12.4996.

Q.3.41.
Answer:
The equivalent equal payment is A = 648.91+34.54 = $683.45
The original cash flow diagram is given as below:
Q.3.45
Answer:
The correct equations are (2) and (4).

Q.3.51 At what rate of interest compounded annually will an investment double itself in five
years?
Answer:

F = P(1 + i)N
Here, F = 2P
Solving we get;
i = 14.87%

Q.3.52 Determine the interest rate (i) that makes the pairs of cash flows shown economically
equivalent.

Answer:
Case1:
Equal payment series:
A = $2,000
N=6

Present value P =

Case 2
Decreasing gradient series
A1 = $2,500
g = -25%
N=6

Present worth P = A1*

Equating P1 = P2
We get;
i= 92.35%

ST3.2 The State of Florida sold a total of 36.1 million lottery tickets at $1 each during the first
week of January 2006. As prize money, a total of $41 million will be dis tributed ($1,952,381 at
the beginning of each year) over the next 21 years. The distribution of the first-year prize money
occurs now, and the remaining lottery proceeds will be put into the state’s educational reserve
fund, which earns interest at the rate of 6% compounded annually. After making the last prize
distribution (at the beginning of year 21), how much will be left over in the reserve account?

ANSWER:
Amount in the bank left after 21 years = amount stored – amount given

Amount stored = P(F/P,i, N)

F = $36,100,000* (F/P,6%,21)
= $36,100,000*3.3996
= $122,725,560
Amount given :
Installments of $1,952,381 at the beginning of each year) over the next 21 years.
This can be breakdown into 20 installments at the end of each year upto end of 20years (i.e.
beginning of 21st year)
And an initial payment at first year

F = F1 +F2
= $1,952,381(F/A,6%,20) + $1,952,381(F/P,6%,21)
= $1,952,381* 36.7856 + $1,952,381*3.3996
= $78,456,821

Therefore , amount left over in the bank is

$122,725,560 - $78,456,821
= $ 44,268,739

ST3.4 Fairmont Textile has a plant in which employees have been having trouble with carpal
tunnel syndrome (CTS, an inflammation of the nerves that pass through the carpal tunnel, a tight
space at the base of the palm), resulting from long-term repetitive activities, such as years of
sewing. It seems as if 15 of the employees working in this facility developed signs of CTS over
the last five years. DeepSouth, the company’s insurance firm, has been increasing Fairmont’s
liability insurance steadily because of this problem. DeepSouth is willing to lower the insurance
premiums to $16,000 a year (from the current $30,000 a year) for the next five years if Fairmont
implements an acceptable CTS-prevention program that includes making the employees aware of
CTS and how to reduce the chances of it developing. What would be the maximum amount that
Fairmont should invest in the program to make it worthwhile? The firm’s interest rate is 12%
compounded annually.

Answer:
By implementing the above proposed proposal $14,000 would be saved each year for the next
five years.
So , the present or initial investment would be

P = A (P/A,12%,5)
= $14,000*3.6048
= $50,467.2
ST3.8 Recently an NFL quarterback agreed to an eight-year, $50 million contract that at the time
made him one of the highest paid players in professional football history. The contract included a
signing bonus of $11 million. The agreement called for an nual salaries of $2.5 million in 2005,
$1.75 million in 2006, $4.15 million in 2007, $4.90 million in 2008, $5.25 million in 2009, $6.2
million in 2010, $6.75 million in 2011, and $7.5 million in 2012. The $11 million signing bonus
was prorated over the course of the contract, so that an additional $1.375 million was paid each
year over the eight-year contract period. Table ST3.8 shows the net annual payment schedule,
with the salary paid at the beginning of each season.

(a) How much was the quarterback’s contract actually worth at the time of
signing?

(b) For the signing bonus portion, suppose that the quarterback was allowed to
take either the prorated payment option as just described or a lump-sum payment option in the
amount of $8 million at the time he signed the contract.
Should he have taken the lump-sum option instead of the prorated one? As sume that his
interest rate is 6%.

Answer:
(a) lets find the present value of each payment made at the end of each 8 years.

Pcontract =$3,875,000+ $3,125,000( P/F ,6%,1) +$5,525,000( P/F ,6%,2) +…$8,875,000(P /F

,6%,7)

= $39,547,242

(b)

PBonus = $1,375,000 + $1,375,000(P /A ,6%,7)

= $9,050,775
The present value of prorated payment option is more than the lump sum payment of $8 million
.so, prorated payment option is better.