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HW2 - Answer Key

The document contains examples of time value of money calculations for various compound interest scenarios. It provides the interest rate, compounding period, present and future values, and cash flows to calculate the future or present worth of each scenario. The supplementary problems provide additional examples calculating the present worth of investment projects with different cash flow patterns and interest rates compounded monthly.

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Hassan Shehadi
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70 views

HW2 - Answer Key

The document contains examples of time value of money calculations for various compound interest scenarios. It provides the interest rate, compounding period, present and future values, and cash flows to calculate the future or present worth of each scenario. The supplementary problems provide additional examples calculating the present worth of investment projects with different cash flow patterns and interest rates compounded monthly.

Uploaded by

Hassan Shehadi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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4.

14)

i = 8% per 6 months compounded monthly = 16% per year compounded monthly

Step 1: PP = 1 quarter = 3 months, CP = 1 month

Step 2: m = 12, k = 4, c = 3

Step 3: i/quarter = (1 + i/m)c-1 = (1+0.16/12)3 -1 = 4.05% per quarter

4.25)

P0 = $5000, P5 = $7000

i = 8% per year compounded quarterly, r = 8% per year, m = 4

ia = (1+r/m)m - 1 = (1+0.08/4)4 – 1 = 8.24 % / year

F = 5000 (F/P, 8.24, 12) + 7000 (F/P, 8.24, 7) = $25,122.52

NOTE: an alternative solution is to use i/CP = r/m = 2% per quarter, then: F = 5000 (F/P, 2, 48) + 7000
(F/P, 2, 28) = $25,122.52

4.27)

i = 10% per year, compounded semiannually, CP = 6 months, m =2


i/CP = 0.1/2 = 5% per 6 months

P = 21000 ( P/F, 5, 4) + 24000 (P/F, 5, 6) + 10000 (P/F, 5, 10) = $41,324.5

4.41)

i = 1% per month
NOTE: since compounding period is not mentioned then it will be the same as the given, i.e. i = 1% per
month compounded monthly

i = 1% per month compounded monthly = 12% per year compounded monthly


CP =1 month, m = 12

i effective per year: ia = (1+r/m)m - 1 = (1+0.12/12)12 – 1 = 12.68 % / year

F = 30(F/A, 12.68, 9) + 20(F/A, 12.68, 3) = $524.161

4.52)

12% per year compounded continuously  Nominal annual rate: r= 12% per year

Effective annual rate: i = er – 1 = e0.12 – 1 = 12.75 %

P = 13,000,000 (P/F, 12.75, 2) = 10,226,105.08


4.53)

10% per year compounded continuously  Nominal annual rate: r= 10% per year

Effective annual rate: i = er – 1 = e0.1 – 1 = 10.517 %

P = 150,000 + 200,000 (P/F, 10.517, 1) + 350,000 (P/F, 10.517, 2) = $617,523

4.57)

(a) P = 100(P/A, 10, 5) + 160(P/A, 14, 3)(P/F, 10, 5) = 100(3.7908) + 160(2.3216)(0.62092) = $609.73

(b) P = A(P/A, 10, 5) + A(P/A, 14, 3)(P/F, 10, 5)

609.73 = A(3.7908) + A(2.3216)(0.62092)  A = $116.53 per year

5.14)

Gaseous chlorine: PWG = -8000 – 650(P/A, 10, 5) – 800 (P/A, 10, 5) = $-13,496.64

Dry chlorine: PWD = – 1000(P/A, 10, 5) – 1900 (P/A, 10, 5) = $-10,993.28

PWD > PWG  Use Dry chlorine

5.19 a)

Different life spans  use LCM = 6 years

PWX = -250,000 - 60,000 (P/A, 10, 6) + 70,000 (P/F, 10, 3) - 250,000 (P/F, 10, 3) + 70,000 (P/F, 10, 6) = $-
607,039.1

PWY = -430,000 - 40,000 (P/A, 10, 6) + 95,000 (P/F, 10, 6) = $-550,585.4

PWY > PWX  Select Machine Y


Supplementary problem 1:

a) i = 7% per year compounded monthly, CP = 1 month, m = 12

ia = (1+r/m)m - 1 = (1+0.07/12)12 – 1 = 7.23 % / year

P0 = 0

-2000 - 1800 (P/A, 7.23, 4) + 200 (P/G, 7.23, 4) + C (P/A, 7.23, 5)(P/F, 7.23,5) + C (P/G, 7.23, 5)(P/F,
7.23,5) = 0

-2000 – 1800(3.3697) + 200(4.7609) + C(4.075)(0.70537) + C(7.5824)(0.70537) = 0

 C = $865.25

b) P0 = 0

-2000 - 1800 (P/A, 7.23, 4) + 200 (P/G, 7.23, 4) + C (P/A, 9, 5)(P/F, 9, 1)(P/F, 7.23,4) + C (P/G, 9, 5)(P/F,
9,1)(P/F, 7.23, 4) = 0

-2000 – 1800(3.3697) + 200(4.7609) + C (3.88965)(0.91743)(0.75637) + C (7.111)(0.91743)(0.75637) = 0

 C = $931.85
Supplementary problem 2:

Initial cost: $20M

Pay now: $12M, Loan: $8M at 6%/year for 6 years

 ALoan = 8 (A/P, 6, 6) = $1.63M per year

Operation and maintenance cost: $1.8M per year

Revenue: $2.8M per year starting at EOY 5

Life: 25 years

PW = -12 – 1.63 (P/A, 7, 6) – 1.8 (P/A, 7, 25) + 2.8 (P/A, 7, 21)(P/F, 7,4) = $-17.5M

PW < 0  Do not invest


Supplementary problem 3:

i = 12% per year compounded monthly, CP = 1 month, m = 12

i/CP = 0.12/12 = 1% per month

Different life spans  use LCM = 24 months

PW1 = 5000 + 3000(P/A, 1, 24) + 5000(P/F, 1, 6) + 5000(P/F, 1, 12) + 5000(P/F, 1, 18) = 5000 +
3000(21.24339) + 5000(0.94205) + 5000(0.88745) + 5000(0.83602) = $82,057.77

PW2 = 6000 + 1500(P/A, 1, 24) + 6000(P/F, 1, 12) = 6000 + 1500 (21.24339) + 6000 (0.88745) =
$43,189.79

PW3 = 5300 + 1000(P/A, 1, 24) + 50(P/G, 1, 8) + 5300 (P/F, 1, 8) + 50(P/G, 1, 8)(P/F, 1, 8) + 5300 (P/F, 1,
16) + 50(P/G, 1, 8)(P/F, 1, 16) = 5300 + 1000 (21.24339) + 50(26.3812) + 5300(0.92348) + 50(26.3812)
(0.92348) + 5300 (0.85282) + 50(26.3812) (0.85282) = $39,619.89

PW1 > PW2 > PW3  Choose payment scheme 1

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