BUS 369: Engineering Economics - Midterm Exam I

Maltepe University, Spring’21

Lect. İsmail Başoğlu, PhD.
1. Compute (F/A, %13, 20) using the closed-form formula and call that x. Also approximate it; by applying li-
near interpolation between the values obtained from compound interest factors table for (F/A, %12, 20) and
(F/A, %15, 20), and call that y. What is x − y? Choose the closest value to your answer.
Solution:

20
(1 + 0.13) −1
(F/A, %13, 20) = ≈ 80.94683
0.13
Table values are (F/A, %12, 20) = 72.0524 and (F/A, %15, 20) = 102.4436. The linear interpolation yields:
2 × 72.0524 + 102.4436
(F/A, %13, 20) ≈= = 82.1828
3
Then x − y = 80.94683 − 82.1828 ≈ −1.2358
2. In the last 30 years, in the end of each year, an engineer has deposited 10% of his/her annual salary to a
retirement fund where the deposits are compounded annually by an interest rate 5% per year. The engineer’s
first annual salary was $12000, and every next year’s salary was 6% more than the previous year’s salary. What
is the current balance in the end of 30 years? Choose the closest value to your answer.
Solution: Let us first calculated the current balance of the retirement fund. For a geometric series with:
A0 = 0.10 × 12000 = $1200, i = 5%, f = 6%, n = 30
The current balance is:
h  n i h i
1.06 30
A0 1 − 1+f


1+i 1200 1 − 1.05
n 30
Balance = (1 + i) = (1.05) = $170585.90
i−f 0.05 − 0.06

3. Under 9.6% nominal interest rate, how many months does it take a borrower to recover a principal of $18000 if
s/he prefers to pay in monthly installments at $500? Choose the closest value to your answer.
Solution: The monthly effective interest rate is 0.096/12 = 0.008 = 0.8%.
If the installments become $500, then we need to solve:
500 1
(A/P, 0.80%, n) = =
18000 36
for n, that is:
log (1 − 0.008 × 36)
n=− ≈ 42.63
log (1 + 0.008)
So, it takes 43 months with a last partial payment.
4. Suppose an engineer has $180000 in his/her savings account that pays 5% nominal interest that compounds
annually. In the next 10 years, in the end of each year, s/he would like to make withdrawals such that every next
year’s withdrawal will be 5% more than the previous year’s withdrawal. What is the maximum amount that can
be withdrawn in the end of the first year? Choose the closest value to your answer.
Solution: S/he would like to withdraw that principal balance in a geometric series with an unknown A0 , and:
i = f = 5%, n = 10

Hence:
nA0 10A0
Balance = ⇒ 180000 = ⇒ A0 = $18900
1+i 1.05
5. An engineer opens a savings account on January 1st, 2020 with a principal of $10000, then withdraws $500 on
the 10th day of every month and deposits $1000 on the 25th day of every month. Calculate the terminal balance
of the account on July 1st, 2021, assuming that the interest compounds quarterly (every three months) with
nominal interest rate 10% per year. Choose the closest value to your answer.
Solution: There are 6 quarters in the planning horizon with a quarterly effective interest rate i = 0.025. The
cash flow diagram is as follows. However, mid-period transactions should be analyzed and moved to end of
periods.

The terminal value is:

F = 9500 × (F/P, 2.5%, 6) + 1500 × (F/A, 2.5%, 6) + 500
= 9500 × 1.159693 + 1500 × 6.387737 + 500
= $21098.69

6. From a bank, an engineer borrows $18000 that is to be repaid in 2 years with end-of-month payments at $827.29.
The bank exposes the engineer to a monthly compounding interest. What is the nominal interest rate? Choose
the closest value to your answer.
Solution: In order to deetrmine the monthly effective interest rate, we need to solve:
827.29
(A/P, i%, 24) = ≈ 0.04596
18000
for i. An inverse linear interpolation between the closest values from the compound interest table would work.
(A/P, 0.75%, 24) = 0.04568
(A/P, 1.00%, 24) = 0.04707
Hence:
0.0075 × (0.04707 − 0.04596) + 0.01 × (0.04596 − 0.04568)
i≈ ≈ 0.0080 = 0.8%
0.04707 − 0.04568
The nominal interest rate is 0.008 × 12 = 0.096 = %9.6
7. An engineer purchases a house using only a loan borrowed from a local bank. The loan is offered at an interest
rate 5% per year, compounding annually. According to the 25-year mortgage plan, the engineer will have to pay
$10000 in the end of every year for 15 years, and after that, $12500 in the end of every year in the following 10
years. What is the price of the house? Choose the closest value to your answer.
Solution: There is a uniform series of payments of $10000 for 25 years and another uniform series of payments
of $2500 in the last 10 years. The present value is:
P = 10000 × (P/A, 5%, 25) + 2500 × (P/A, 5%, 10) × (P/F, 5%, 15)
−1 −1 −1
= 10000 × (0.07095) + 2500 × (0.12950) × (2.0789)
= $150230.5
8. For a principal borrowed under %14 nominal interest rate, compounded annually, a bank offers two alternative
payment plans in gradient series with 35 years of payment horizon.
• Base payment of $1000 at the end of the first year, and at the end of every next year, the payment size will
be increased by $25 compared to the previous year.
• Base payment of $800 at the end of the first year, and at the end of every next year, the payment size will
be increased by a constant $x compared to the previous year.
What is x? Choose the closest value to your answer.
Solution: If the series are equivalent, the present worth of the gradient series must be the same. Hence:

1000 + 25 × (A/G, 14%, 35) = 800 + G × (A/G, 14%, 35)

We use formula to compute (A/G, 14%, 35) ≈ 6.7824. Then we can solve the equation for the gradient component
in the latter part:

1000 + 25 × 6.7824 = 800 + G × 6.7824 ⇒ G ≈ 54.49