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    HW2 - Answer Key

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    Hassan Shehadi
    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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    HW2 - Answer Key

    Uploaded by

    Hassan Shehadi
    38 views5 pages
    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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    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.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    38 views5 pages

    HW2 - Answer Key

    Uploaded by

    Hassan Shehadi
    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.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    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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