Blank 3e ISM Ch02
Blank 3e ISM Ch02
Blank 3e ISM Ch02
Chapter 2
Factors: How Time and Interest Affect Money
2.1 (a) Look up the numerical value for the following factors from the compound interest factor
tables.
(b) Use spreadsheet functions to display the numerical value for the first three factors.
1. (F∕P,10%,7)
2. (A∕P,12%,10)
3. (F∕A,2%,50)
4. (P∕G,15%,20)
5. (A∕G,30%,15)
2.2 How much can Azco Autosystems, Inc. afford to spend now on an energy management
system, if the software will save the company $21,300 per year for the next 5 years? Use an
interest rate of 10% per year.
P = 21,300(P/A,10%,5)
= 21,300(3.7908)
= $80,744
2.3 What is the future worth in year 8 of a present sum in year 0 of $23,000 at an interest rate of
10% per year? Solve using (a) tabulated factor values, and (b) a built-in, single-cell
spreadsheet function.
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(b) Spreadsheet solution
The function = – FV(10%,5,23000) displays $49,302.54
2.4 Determine the amount of money Western Bank should be willing to loan a developer who
will repay the loan in a lump sum amount of $840,000 two years from now at the bank’s
interest rate of 10% per year.
P = 840,000(P/F,10%,2)
= 840,000(0.8264)
= $694,176
2.5 Xavier is an engineer who believes in “save now and play later.” He wants to retire from full
employment in 20 years with $1.5 million. At 10% per year interest, how much does he
have to invest each year (starting in year 1) to reach the $1.5 million goal? Solve by
tabulated factors and spreadsheet.
Hand solution
A = 1,500,000(A/F,10%,20)
= 1,500,000(0.01746)
= $26,190 per year
Spreadsheet solution
Function = –PMT(10%,20,1500000) displays an A value of $26,189.44 per year
2.6 During a recession, the price of goods and services goes down because of low demand. A
company that makes Ethernet adapters is planning to expand its production facility at a cost
of $1,000,000 one year from now. However, a contractor who needs work has offered to do
the job for $790,000 if the company will do the expansion now instead of one year from
now. If the interest rate is 15% per year, what is the difference in the present worth of the
two amounts?
2.7 The Moller Skycar M400 is a flying car known as a personal air vehicle (PAV). The cost is
$985,000, and a $100,000 deposit holds one of the first 100 vehicles. Assume a buyer pays
the $885,000 balance 3 years after making the $100,000 deposit. At an interest rate of 10%
per year, determine the effective total cost of the PAV in year 3 using (a) tabulated factors,
and (b) a single-cell spreadsheet function.
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(b) Spreadsheet function is = –FV(10%,3,100000) + 885,000.
Display is $1,018,000
2.8 What is the present worth of a future payment of $19,000 in year 7 if the interest rate is 10%
per year using (a) the tabulated factor values in your book, (b) TVM functions on a financial
calculator, and (c) built-in functions on a spreadsheet?
(a) P = 19,000(P/F,10%,7)
= 19,000(0.5132)
= $9750.80
2.9 Determine the amount of money a bank will loan a developer now who repays the loan by
selling seven view lots at $120,000 each 2 years from now. Assume the bank’s interest rate
is 10% per year. Use (a) the tabulated factor values in your book, (b) TVM functions on a
financial calculator, and (c) built-in functions on a spreadsheet.
2.10 You just deposited $3000 in an investment account and will deposit $5000 more 4 years
from now. How much will be in the account 12 years from now if the rate of return is 10%
per year? Use (a) tabulated factor values, (b) TVM functions on a financial calculator, and
(c) built-in functions on a spreadsheet.
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2.11 APR Performance Vehicles is considering the purchase of dual-axis inclinometers for
installation in a new line of tractors. The distributor of the inclinometers is temporarily
overstocked and is offering them at a 40% discount from the regular cost of $142. If the
purchaser gets them now instead of 2 years from now, which is when they will be needed,
what is the present worth of the savings per unit? The company would pay the regular
price, if purchased in 2 years. Assume the interest rate is 10% per year.
F = 200,000(F/P,10%,3)
= 200,000(1.3310)
= $266,200
2.13 A family that won a $100,000 prize in a state lottery decided to invest half of the money in
a college fund for their child. If the fund earned interest at 6% per year, how much was in
the account 14 years after it was started?
F = 50,000(F/P,6%,14)
= 50,000(2.2609)
= $113,045
2.14 How large of a repayment must Theresa make each year starting next year if she borrows
$60,000 now to start up a consulting office and if she promises to make equal annual
payments for 5 years. Assume the interest rate is 8% per year. Develop the answer using
(a) tabulated factor values, (b) a financial calculator, and (c) spreadsheet functions.
(a) A = 60,000(A/P,8%,5)
= 60,000(0.25046)
= $15,027.60
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2.15 Ametek Technical & Industrial Products (ATIP) manufactures brushless blowers for
boilers, food service equipment, and fuel cells. The company borrowed $17,000,000 for a
plant expansion and repaid the loan in eight annual payments of $2,737,680, with the first
payment made 1 year after the company received the money. What annual interest rate did
ATIP pay? Develop the answer using (a) tabulated factor values, (b) a financial calculator,
and (c) spreadsheet functions.
2.16 A design/build engineering company that usually gives year-end bonuses in the amount of
$8000 to each of its engineers is having cash flow problems. The company said that
although it couldn’t give bonuses this year, it would give each engineer two bonuses next
year: the regular one of $8000 plus an amount equivalent to the $8000 that each engineer
should have gotten this year. If the interest rate is 8% per year, what will be the total
amount of bonus money the engineer gets next year?
2.17 Assume the cost of a homeland security border fence is $3 million per mile. If the life of
such a fence is 10 years, what is the equivalent annual cost of a 10-mile-long fence at an
interest rate of 8% per year? Develop the answer using (a) tabulated factor values, (b) a
financial calculator, and (c) spreadsheet functions.
(a) A = 3,000,000(10)(A/P,8%,10)
= 30,000,000(0.14903)
= $4,470,900
2.18 One of the biggest vulnerabilities in a control system is network devices, such as Ethernet-
based network switches that are located in unsecured locations and accessible to everyone.
DeltaX switches, manufactured by Dahne Security, allow the user to automatically lock
and unlock the port access to all switches in the network. The company is considering
expanding its manufacturing lines now or doing it in three years. If the cost now would be
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$1.9 million, what equivalent amount could the company afford to spend in 3 years? The
interest rate is 15% per year.
F = 1,900,000(F/P,15%,3)
F = 1,900,000(1.5209)
= $2,889,710
2.19 Turik Electronics manufactures microprocessorbased soft starters that use thyristors for
controlled reduced voltage during starting and stopping. The company is planning a
production-line expansion that will cost $1.3 million. If the company uses a minimum
attractive rate of return of 15% per year, what is the equivalent annual cost in years 1
through 5 of the investment?
A = 1,300,000(A/P,15%,5)
= 1,300,000(0.29832)
= $387,816
2.20 At 30 years old, Sally decided she wants to retire at 60. Determine the size of her
investment package 30 years from now if she deposits $12,000 each year, beginning
1 year from now, and the account earns interest at a rate of 10% per year. Solve using
(a) tabulated factors, and (b) a spreadsheet function.
Factor solution
(a) F = 12,000(F/A,10%,30)
= 12,000(164.4940)
= $1,973,928
2.21 Loadstar Sensors is a company that makes load/force sensors based on capacitive sensing
technology. For a major plant expansion project, the company wants to have $30 million
5 years from now. If the company already has $15 million in an investment account for the
expansion, how much more must the company add to the account now so that it will have
the $30 million 5 years from now? The funds earn interest at the rate of 10% per year.
Solve using (a) tabulated factors, and (b) a spreadsheet. Compare answers.
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2.22 If GHD Plastics purchases a new building now for $1.3 million for a regional corporate
headquarters, what must the building be worth in 10 years if the company expects all
expenditures to earn a rate of return of at least 18% per year?
In $1 million terms,
F = 1.3(F/P,18%,10)
= 1.3(5.2338)
= 6.80394 ($6,803,940)
2.23 Thompson Mechanical Products is planning to set aside $150,000 now for possible
replacement of large synchronous refiner motors when it becomes necessary. If the
replacement isn’t needed for 5 years, how much will the company have in its investment
set-aside account? Assume a rate of return of 8% per year. Write the single-cell spreadsheet
function.
F = 150,000(F/P,8%,5)
= 150,000(1.4693)
= $220,395
2.24 CGK Rheosystems makes high-performance rotational viscometers capable of steady shear
and yield stress testing in a rugged, compact footprint. How much could the company
afford to spend now on new equipment in lieu of spending $200,000 one year from now
and $300,000 three years from now, if the company uses an interest rate of 15% per year?
P = 200,000(P/F,15%,1) + 300,000(P/F,15%3)
= 200,000(0.8696) + 300,000(0.6575)
= $371,170
2.25 Labco Scientific sells high-purity chemicals to universities, research laboratories, and
pharmaceutical companies. The company wants to invest in new equipment that will reduce
shipping costs by better matching the size of the completed products with the size of the
shipping container. The new equipment is estimated to cost $450,000 to purchase and
install. How much must Labco save each year for 3 years in order to justify the investment
at an interest rate of 10% per year?
A = 450,000(A/P,10%,3)
= 450,000(0.40211)
= $180,950
2.26 How much must Animatics Sensors and Controls, Inc. invest each year, beginning 1 year
from now, to have $2.7 million dollars for new-product development 5 years from now if
the company investments earn a rate of return of (a) 18% per year, and (b) 8% per year?
What is the percentage increase necessary to cover the reduction in return?
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(a) 18% per year
A = 2,700,000(A/F,18%,5)
= 2,700,000(0.13978)
= $377,406
(a) Factors:
F = 100,000(F/P,8%,4) + 150,000(F/P,8%,3)
= 100,000(1.3605) + 150,000(1.2597)
= $325,005
(b) Spreadsheet:
= – FV(8%,4,100000) – FV(8%,3,150000) displays an F value of $325,005.70
2.28 For a profession, Henry Mueller has successfully written short articles for several monthly
parks and wildlife magazines. His steady annual cash flows for an 8-year period are shown
in the table. He received a good bonus in a single year. Determine the future worth (now,
year 8) of the net cash flows at an interest rate of 10% per year. Use (a) tabulated factors,
and (b) a single-cell spreadsheet function to answer.
Year 1 2 3 4 5 6 7 8
Revenues, $1000 200 200 200 200 200 200 400 200
Expenses, $1000 90 90 90 90 90 90 90 90
(b) Spreadsheet
= – FV(10%,8,110000) – FV(10%,1,200000) displays the amount $1,477,947.69
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2.29 China spends an estimated $100,000 per year on cloud seeding efforts, which includes using
antiaircraft guns and rocket launchers to fill the sky with silver iodide. In the United States,
utilities that run hydroelectric dams are among the most active cloud seeders, because they
believe it is a cost-effective way to increase limited water supplies by 10% or more. If the
yields of cash crops will increase by 4% each year for the next 3 years because of extra
irrigation water captured behind dams during cloud seeding, what is the maximum amount the
farmers should spend now on the cloud seeding activity? The value of the cash crops without
the extra irrigation water would be $600,000 per year. Use an interest rate of 10% per year.
P = 600,000(0.04)(P/A,10%,3)
= 24,000(2.4869)
= $59,686
2.30 In an effort to reduce childhood and teenage obesity by decreasing the consumption of sugared
beverages, some states have imposed taxes on soda and other soft drinks. A survey by Roland
Sturm of 7300 fifth-graders revealed if taxes averaged 4 cents on each dollar’s worth of soda,
no real difference in overall consumption was noticed. However, if taxes were increased to 18
cents on the dollar, Sturm calculated they would make a significant difference. For a student
who consumes 100 sodas per year, what is the future worth of the extra cost to the individual
for an increase from 4 cents to 18 cents per soda? Assume the student consumes sodas from the
5th grade through graduation in grade 12. Use an interest rate of 6% per year.
F = (0.18 – 0.04)(100)(F/A,6%,8)
= 14(9.8975)
= $138.57
2.31 Major automobile insurance companies are now offering telematics, technology that
collects information about an individual’s driving behavior. In exchange, the companies
reward good driving behavior with policy discounts or cash back awards. If, on average,
good driving reduces the likelihood of an accident that would cost the company $1700
eight years from now, how much of an annual discount could the insurance company give
to just break even at an interest rate of 10% per year?
A = 1700(A/F,10%,8)
= 1700(0.08744)
= $148.65
2.32 To improve crack detection in aircraft, the U.S. Air Force combined ultrasonic inspection
procedures with laser heating to identify fatigue cracks. Early detection of cracks may
reduce repair costs by as much as $200,000 per year. What is the present worth of these
projected savings over the next 5 years at an interest rate of 10% per year?
P = 200,000((P/A,10%,5)
= 200,000(3.7908)
= $758,160
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2.33 As a principal in the consulting firm where you have worked for 20 years, you have
accumulated 5000 shares of company stock. One year ago, each share of stock was worth
$40. The company has offered to buy back your shares for $225,000. At what interest rate
would the firm’s offer be equivalent to the worth of the stock last year? Solve using hand
calculation first, then write the spreadsheet function to display the rate.
2.34 What compound interest rate per year is equivalent to a 12% per year simple interest rate
over a 15-year period?
2.35 To make CDs look more attractive than they really are, some banks advertise that their
rates are higher than their competitors’, but the fine print says that the rate is a simple
interest rate. If a person deposits $10,000 at 10% per year simple interest, what compound
interest rate would yield the same amount of money in 3 years?
2.36 Assume you plan to retire early in 30 years with $1 million in your IRA (individual
retirement account). You want to know the interest rate required to reach your goal if the
account currently has $19,627 in it, and (a) no further deposits are made, and (b) you plan
to deposit $5000 annually for each of the 30 years. (Hint: It is easier to solve part (b) using
a spreadsheet function.)
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(a) 1,000,000 = 19,627(F/P,i,30)
(F/P,i,30) = 50.95022
2.37 What interest rate is required for uniform deposits of $1453.26 in years 1 through 15 to
accumulate to $50,000?
50,000 = 1453.26(F/A,i,15)
(F/A,i,15) = 34.4054
2.38 Sterling Pumps de Mexico has a fund for equipment replacement that contains $500,000. If
the company spends $75,000 per year on new equipment, how many years will it take to
reduce the fund to less than $75,000 at an interest rate of 10% per year? Solve using factors
and the NPER function.
Hand
500,000 = 75,000(P/A,10%,n)
(P/A,10%,n) = 6.6667
Spreadsheet
= NPER(10%,–75000,500000) displays 11.5 years to reach $75,000
2.39 Ophra invested well and plans to retire now because she has $2,300,000 in her tax-deferred
IRA account. How long will she be able to withdraw $125,000 per year (beginning 1 year
from now) if her investments earn at a rate of 4% per year? Solve using factors and the
NPER function.
Hand
2,300,000 = 125,000(P/A,4%,n)
(P/A,4%,n) = 18.4000
Spreadsheet
= NPER(4%,–125000,2300000) displays 33.95 years.
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2.40 How many years will it take Rexchem, Inc. to accumulate $400,000 for a chemical feeder,
if the company deposits $50,000 each year starting 1 year from now, into an account that
earns interest at 12% per year?
400,000 = 50,000(F/A,12%,n)
(F/A,12%,n) = 8.0000
2.41 How many years will it take for money to increase to at least three times the initial amount,
if money earns at 10% per year?
F = P(F/P,10%,n)
3P = P(F/P,10%,n)
(F/P,10%,n) = 3.000
2.42 Acme Bricks, a masonry products company, wants to have $600,000 on hand before it
invests in new conveyors, trucks, and other equipment. If the company sets aside $80,000
per year in an account that increases in value at a rate of 15% per year, how many years
will it be before Acme can purchase the equipment?
600,000 = 80,000(F/A,15%,n)
(F/A,15%,n) = 7.50
2.43 You own a small engineering consulting company. If you invest $200,000 of the
company’s money in a natural gas well that is expected to provide income of $29,000 per
year, how long must the well produce at this income level to get the money back plus a rate
of return of 10% per year?
200,000 = 29,000(P/A,10%,n)
(P/A,10%,n) = 6.8966
2.44 Demco Products, a company that manufactures stainless-steel control valves, has a fund for
equipment replacement that contains $500,000. The company plans to spend $85,000 each
year on new equipment. (a) Estimate the number of years it will take to reduce the fund to
no more than $85,000 at an interest rate of 10% per year. (b) Use the NPER function to
determine the exact number of years.
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(a) 500,000 = 85,000(P/A,10%,n)
(P/A,10%,n) = 5.8824
2.45 An engineer who was contemplating retirement had $1.6 million in his investment
portfolio. However, a severe recession caused his portfolio to decrease to only 55% of the
original amount, so he kept working. If he was able to invest his money at a rate of return
of 9% per year after the recession ended, how many years did it take for his account to get
back to the $1.6 million value if no additional funds were invested? Solve by factors and
using a single-cell function.
Spreadsheet solution
= NPER(9%,–880000,1600000) displays an n of 6.94 or approximately 7 years
2.46 A cash flow sequence starts in year 1 at $3000 and decreases by $200 each year through
year 10. (a) Determine the value of the gradient G; (b) determine the amount of cash flow
in year 8; and (c) determine the value of n for the gradient.
2.47 Cisco Systems expects sales to be described by the cash flow sequence (6000 + 5k), where
k is in years and cash flow is in millions. In actual dollar amounts, determine (a) the value
of the gradient G, (b) the amount of cash flow in year 6, and (c) the value of n for the
gradient if the cash flow ends in year 12.
2.48 For a cash flow sequence that starts in year 1 and is described by (900 – 100k), where k
represents years 1–5, determine (a) the value of the gradient G, and (b) the cash flow in
year 5.
2.49 Profits from recycling paper, cardboard, aluminum, and glass at a liberal arts college have
increased at a constant rate of $1100 in each of the last 3 years. This year’s profit (end of
year 1) is expected to be $6000, and the profit trend is expected to continue through year 5.
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(a) What will the profit be at the end of year 5? (b) What is the present worth of the profit
at an interest rate of 8% per year? Solve using factors and a spreadsheet.
Factor solution:
(a) Profit in year 5 = 6000 + 1100(4) = $10,400
2.50 An arithmetic cash flow gradient series equals $500 in year 1, $600 in year 2, and amounts
increasing by $100 per year through year 9. At i = 10% per year, determine the present
worth of the cash flow series in year 0. Solve using factors and a spreadsheet.
Factor solution
P0 = 500(P/A,10%,9) + 100(P/G,10%,9)
= 500(5.7590) + 100(19.4215)
= 2879.50 + 1942.15
= $4821.65
Spreadsheet solution
Enter the series in cells A2 through A10. The function = NPV(10%,A2:A10) displays
$4821.66
2.51 Solar Hydro manufactures a revolutionary aeration system that combines coarse and fine
bubble aeration components. This year (year 1) the cost for check valve components is
$9000. Based on closure of a new contract with a distributor in Malaysia and volume
discounts, the company expects this cost to decrease. The cost in year 2 and each year
thereafter should decrease by $560. (a) Using factors, what is the equivalent annual cost for
a five-year period at an interest rate of 10% per year? (b) Solve using a spreadsheet and
compare the two methods to determine the A value.
(b) Two functions are necessary to find A. Enter the series into cells A2 through A6. Enter
the function = NPV(10%,A2:A6) into cell A7, followed by = – PMT(10%,5,A7) to
display an A of $7986.33.
In this case, the spreadsheet solution takes more time since there is no direct function for
gradient factors.
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2.52 A report by the Government Accountability Office (GAO) shows that the GAO expects the
U.S. Postal Service to lose a record $7 billion at the end of this year, and, if the business
model is not changed, the losses will total $241 billion by the end of year 10. If the losses
increase uniformly over the 10-year period, determine the following:
a. The expected increase in losses each year.
b. The loss 5 years from now.
c. The equivalent annual cost of the losses at an interest rate of 8% per year.
In $ billion units,
(a) G = (241 – 7)/9 = $26 billion per year
(c) A = 7 + 26(A/G,8%,10)
= 7 + 26(3.8713)
= $107.7 billion
2.53 Omega Instruments budgeted $300,000 per year to pay for special-order ceramic parts over
the next 5 years. If the company expects the cost of the parts to increase uniformly
according to an arithmetic gradient of $10,000 per year, what is the cost estimated to be in
year 1 at an interest rate of 10% per year?
300,000 = A + 10,000(A/G,10%,5)
300,000 = A + 10,000(1.8101)
A = $281,899
2.54 As shown in the table below, Charlotte’s mother and father have experienced decreasing
revenues from their business, Thompson’s Print and Gift Shop, over the last 8 years due to
the increased use of digital media and e-commerce purchases. Determine the following for
Charlotte’s parents at i = 8% per year using the method(s) identified in each part.
a. Equivalent annual revenues for each of the 8 years by factor and spreadsheet.
b. The equivalent current value (year 8) of the recorded revenues by factor and spreadsheet.
c. (Optional question) The current purchasing power of the 8 years of revenue if inflation
has averaged 3% per year using the purchasing power reductions listed in Figure 1.3 by
spreadsheet only.
Year 1 2 3 4 5 6 7 8
Revenue, $1000 200 195 190 185 180 175 170 165
(b) F = 184,508(F/A,8%,8)
= 184,508(10.6366)
= $1,962,532
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(c) Initially, determine P using NPV function in cell B12. Then PMT and FV determine (a)
and (b) answers, respectively. Find current purchasing power of each revenue using the
reduction percentage. Again, the NPV and FV functions are applied to determine F with
3% inflation removed. Purchasing power is F = $1,745.235.
2.55 HGT Oil expects receipts from a fracked well to decline according to an arithmetic gradient
of $50,000 per year. If this year’s receipts are expected to be $280,000 (i.e., end of year 1)
and the company expects the useful life of the well to be 5 years, (a) what is the amount of
the cash flow in year 3, and (b) what is the equivalent uniform annual worth in years 1
through 5 of the income from the well at an interest rate of 12% per year?
2.56 For the cash flow revenues shown below, find the value of G that makes the equivalent
annual worth in years 1 through 7 equal to $500. The interest rate is 10% per year.
Yea Cash Flow, $ Year Cash Flow, $
r
0 4 200 + 3G
1 200 5 200 + 4G
2 200 + G 6 200 + 5G
3 200 + 2G 7 200 + 6G
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2.57 For the cash flows shown, determine the value of G that makes the present worth in year 0
equal to $14,000. The interest rate is 10% per year.
Year 0 1 2 3 4
Cash flow, $ per year — 8000 8000−G 8000−2G 8000−3G
2.58 GKX Industries expects sales of its hydraulic seals (in inch and metric sizes) to increase
according to the cash flow sequence ($70 + 4k), where k is in years and cash flow is in
$1000.
a. What is the amount of the cash flow in year 3?
b. What is the future worth of the entire cash flow series in year 10 at i = 10% per year?
F = 546.266(F/P,10%,10)
= 546,266(2.5937)
= $1416.850 ($1,416,850)
2.59 Amazon plans to install a computer system to “cube” an item’s dimensions—measure its
height, length, and width so that the proper box size will be used for shipment. This will
save packing material, cardboard, and labor. If the savings will be $150,000 the first year,
$160,000 the second, and amounts increasing by $10,000 each year for 8 years, what is the
present worth of the system at an interest rate of 15% per year?
P = 150,000(P/A,15%,8) + 10,000(P/G,15%,8)
= 150,000(4.4873) + 10,000(12.4807)
= $797,902
2.60 Ford Motor Company was able to reduce by 80% the cost required for installing data
acquisition instrumentation on test vehicles by using MTSdeveloped spinning wheel force
transducers. The cost this year (i.e., end of year 1) is expected to be $2000. (a) What was
the cost the year before installation of the transducers? (b) If the costs are expected to
increase by $250 each year for the next 4 years, what is the equivalent annual worth of the
costs (years 1–5) at an interest rate of 7% per year?
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(b) A = 2000 + 250(A/G,7%,5)
= 2000 + 250(1.8650)
= $2466.25 per year
2.61 For the cash flow series shown below, determine the value of G that will make the future
worth in year 4 equal to $6000 at an interest rate of 15% per year.
Year 0 1 2 3 4
Cash flow 0 2000 2000−G 2000−2G 2000−3G
Convert future to present and then solve for G using P/G factor:
6000(P/F,15%,4) = 2000(P/A,15%,4) – G(P/G,15%,4)
6000(0.5718) = 2000(2.8550) – G(3.7864)
G = $601.94
2.62 For the cash flows below, determine the amount in year 1 if the annual worth in years 1
through 9 is $601.17 and the interest rate is 10% per year.
Year 1 2 3 4 5 6 7 8 9
Cost, $ A A+30 A+60 A+90 A+120 A+15 A+18 A+21 A+240
0 0 0
601.17 = A + 30(A/G,10%,9)
601.17 = A + 30(3.3724)
A = $500
2.63 A major drug company anticipates that in future years it could be involved in litigation
regarding perceived side effects of one of its antidepressant drugs. In order to prepare a
“war chest,” the company wants to have money available 6 years from now that has a
present worth today of $50 million. The company expects to set aside $6 million the first
year and uniformly increase amounts in each of the next 5 years (through year 6). (a) If the
company can earn 12% per year on the money it sets aside, by how much must it increase
the amount set aside each year to achieve its goal? (b) What is the projected purchasing
power of the $50 million present worth equivalent 6 years hence, if inflation prevails at 5%
per year?
2.64 The future worth in year 10 of an arithmetic gradient cash flow series for years 1 through
10 is $500,000. (a) If the arithmetic gradient, G, is +$3000 per year, determine the cash
flow, A, in year 1 at an interest rate of 10% per year. (b) (Advanced exercise) Use the
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GOAL SEEK tool to determine the base amount, A, of the series. (Hint: Refer to Appendix
A to learn how to use this spreadsheet tool and make a guess that A = $10,000 initially.)
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(a) P in year 0 = 500,000(P/F,10%,10)
= 500,000(0.3855)
= $192,750
(b) Enter a cash flow of $10,000 in cell B5 and increase by $3000 each year. Use the NPV
and FV functons, respectively. Use the GOAL SEEK template to set cell B17 to 500,000
by changing cell B5. Display shows that A = $20,196.32 (cell E5) and F = $500,000.00.
2.65 Assume you work at Taco Cabaña part time during college. Your federal income taxes are
$3500 this year (year 1) and are expected to follow a geometric gradient series with
increases of 5% each year through year 6, when you plan to complete graduate studies.
Calculate the present worth of the tax series at i = 10% per year.
2.66 If you were told to prepare a table of factor values (like those in the back of this book) for
calculating the present worth of a geometric gradient series, determine the first three values
(n = 1, 2, and 3) for an interest rate of 10% per year and a rate of change g of 4% per year.
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For n = 1: {1 – [(1+0.04)1/(1+0.10)1}]}/(0.10 –0.04) = 0.9091
For n = 2: {1 – [(1+0.04)2/(1+0.10)2}]}/(0.10 –0.04) = 1.7686
For n = 3: {1 – [(1+0.04)3/(1+0.10)3}]}/(0.10 –0.04) = 2.5812
2.67 Charlotte, a newly graduated chemical engineer is preparing long term for her retirement
by depositing 10% of her salary each year into a hightechnology stock fund. If her salary
this year (end of year 1) is $60,000, and she expects it to increase by 4% each year,
determine the future worth of the investment fund after 15 years if it earns 4% per year.
P = 60,000(0.1)[15/(1 + 0.04)]
= $86,538
F = 86,538(F/P,4%,15)
= 86,538(1.8009)
= $155,847
2.68 Determine the difference in the present worth values of the following two commodity
contracts at an interest rate of 8% per year.
Contract 1: costs $10,000 in year 1; costs will escalate at a rate of 4% per year for 10 years.
Contract 2: same cost in year 1, but costs will escalate at 6% per year for 11 years.
2.69 A 50-year-old engineer planning for retirement places 10% of his salary each year into a
highyield bond fund. If his salary this year (end of year 1) is $100,000 and he expects his
salary to increase by 3% each year, determine the future worth of the retirement fund after
15 years provided it earns 7% per year.
F = 108,830(F/P,7%,15)
= 108,830 (2.7590)
= $300,262
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2.70 The future worth in year 10 of a geometric gradient series of cash flows was found to be
$80,000. If the interest rate was 15% per year and the annual rate of increase was 9% per
year, what was the cash flow amount in year 1?
P = 80,000(P/F,15%,10)
= 80,000(0.2472)
= $19,776
A1 = 19,776/6.91373
= $2860.40
2.71 A company that manufactures purgable hydrogen sulfide monitors is planning to make
deposits such that each one is 5% larger than the preceding one. (a) How large must the
first amount be (at the end of year 1) if the deposits extend through year 10 and the fourth
deposit is $12,500? Use an interest rate of 10% per year. (b) What is the 10-year equivalent
annual worth of the deposits?
(a) Decrease deposit in year 4 by 5% per year for three years to get back to year 1.
First deposit = 12,500/(1 + 0.05)3
= $10,798.00
A = 80,335(A/P,10%,10)
= 80,335(0.16275)
= $13,074
2.72 Find the 10-year equivalent annual worth of an investment that starts at $8000 in year 1 and
increases by 10% each year. The rate of return is 10% per year.
P = 8000[10/(1 + 0.10)]
= $72,727
A = 72,727(A/P,10%,10)
= 72,727(0.16275)
= $11,836
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2.73 Verizon Communications said it plans to spend $22.9 billion to expand its fiber-optic
Internet and television network so that it can compete with cable TV providers like
Comcast Corp. The company expects to attract 950,000 customers in year 1 and grow its
customer base by a constant amount of 142,500 customers per year. Estimates indicate that
income will average $800 per customer per year. What is the future worth of the total
subscription income in year 5 assuming Verizon uses a MARR of 10% per year?
P = 950,000(800)(P/A,10%,5) + (142,500)(800)(P/G,10%,5)
= 760,000,000(3.7908) + 114,000,000(6.8618)
= $3,663,253,200
F = 3,663,253,200 (F/P,10%,5)
= 3,663,253,200 (1.6105)
= $5,899,669,279
2.74 Altmax LLC, a company that manufactures automobile wiring harnesses, has budgeted
P = $400,000 now to pay for a specially designed wire clip over the next 5 years. If the
company expects the cost of the clips to increase by 4% each year, what is the expected
cost in year 3 if the company uses an interest rate of 10% per year?
Solve for A1 in geometric gradient equation and then find cost in year 3
2.75 A small northern California consulting firm wants to start a recapitalization pool for
replacement of network servers. If the company invests $5000 at the end of year 1 but
decreases the amount invested by 5% each year, how much will be in the account 5 years
from now? Interest is earned at a rate of 8% per year.
F = 18,207(F/P,8%,5)
= 18,207(1.4693)
= $26,751
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2.76 Hughes Cable Systems plans to offer its employees a salary enhancement package that has
revenue sharing as its main component. Specifically, the company will set aside 1% of total
sales for year-end bonuses for all of its employees. The sales are expected to be $5 million
the first year, $5.5 million the second year, and amounts increasing by 10% each year for
the next 5 years. At an interest rate of 8% per year, what is the equivalent annual worth in
years 1 through 5 of the bonus package?
A = 240,215(A/P,8%,5)
= 240,215(0.25046)
= $60,164
2.77 Bart is a junior in college. He plans to invest equal, annual amounts starting 3 years from
now for 5 consecutive years to accumulate a total of $50,000 at the end of 15 years. If the
funds earn 8% per year, what is the required amount of each deposit?
A(F/A,8%,5)(F/P,8%,8) = 50,000
A(5.8666)(1,8509) = 50,000
A = $4604.70 per year
2.78 Assume you start an investment account by purchasing international corporate stocks with
$1000 now, $1500 at the end of year 3, and $500 at the end of each year in years 4 through
10. How much money would you have in the account immediately after the last deposit in
year 10 if the interest rate is 6% per year?
Factor:
F= 1000(F/P,6%,10) + 1500(F/P,6%,7) + 500(F/A,6%,7)
= 1000(1.7908) + 1500(1.5036) + 500(8.3938)
= $8243
Spreadsheet:
For example, if the amounts are entered into cells F4 through F14, use the NPV and FV
functions in order.
In cell F16: = NPV(6%,F5:F14) + F4 displays a P of ,$4602.97
In cell F17: = – FV(6%,10,F16) displays a F of $8243.21
2.79 Find the present worth of cash flows of $1000 that start now (time 0) and continue through
year 8, provided the interest rate is 10% per year.
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2.80 Calculate the equivalent annual worth for years 1 through 7 of Merchant Trucking
Company’s net cash flows shown below. Use an interest rate of 10% per year.
Year 0 1 2 3 4 5 6 7
Cash flow, $ million −200 200 200 200 200 200 200 200
A = –200(A/P,10%,7) + 200
= –200(0.20541) + 200
= $158.918 ($158,918,000)
2.81 Use (a) factors, and (b) a spreadsheet to determine the amount of money that you could
accumulate by the end of year 12 from deposits of $1000 per year in years 4 through 12 if
investments earn at the rate of 5.5% per year.
2.82 For the cash flow diagram shown below, find the future worth in year 10 at an interest rate
of 10% per year.
2.83 How much money was deposited each year for 5 years if it now amounts to $100,000 and
the last deposit was made 10 years ago? Assume the account earned at 7% per year.
100,000 = A(F/A,7%,5)(F/P,7%,10)
100,000 = A(5.7507)(1.9672)
A = $8839.56
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2.84 Cindy’s father is now 50 years old. Twenty-one and twenty years ago, respectively, he
placed two equal amounts into a balanced stock and bond mutual fund. Due to the growth
of the fund, he could withdraw $10,000 now (year 0) and $10,000 per year for the next 14
years.
a. If the account earned interest at 10% per year, how large was the amount of each deposit
that Cindy’s father made? Are you surprised at how low the deposits were?
b. (Advanced exercise) Use a spreadsheet and the GOAL SEEK tool to find the deposits.
(Hint: Refer to Appendix A to learn how to use this spreadsheet tool and make an initial
guess of some amount for the two deposits.)
(a) Move the two unknown deposits, X, to current year –1, use the A/P factor and set equal
to $10,000.
X(F/A,10%,2)(F/P,10%,19)(A/P,10%,15) = 10,000
X(2.1000)(6.1159)(0.13147) = 10,000
X = $5922.34
(b) For a spradsheet solution, use two FV functions to find the value in year –1, followed by
the PMT function for 15 years. Guess at a deposit amount of, say, $20,000, in years –21
and –20. Set GOAL SEEK to fix the PMT amount at $10,000 by changing the cells with
the $20,000 deposit entries. The result of GOAL SEEK will be $5922.17.
2.85 By spending $10,000 now, and $25,000 three years from now, a plating company can
increase its income in years 4 through 10. How much extra income per year is needed in
years 4 through 10 to recover the original expenditures plus a return of 12% per year?
A = [10,000(F/P,12%,3) + 25,000](A/P,12%,7)
= [10,000(1.4049) + 25,000](0.21912)
= $8556.42
2.86 Assume you borrow $10,000 today and promise to repay the loan in two payments, one in
year 2 and the other in year 5, with the one in year 5 being only half as large as the one in
year 2. At an interest rate of 10% per year, what is the size of the payment in year 5?
X = $4398.12
2.87 You hope to make two equal-amount deposits for future savings, one now and the other 3
years from now in order to accumulate $300,000 ten years in the future. If the interest rate
is 14% per year, what is the size of each deposit?
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x(F/P,14%,10) + x(F/P,14%,7) = 300,000
x(3.7072) + x(2.5023) = 300,000
6.2095x = 300,000
x = $48,313.06
2.88 For the cash flow diagram below, what value of x will make the total equivalent worth in
year 7 equal to $8000 at i = 10% per year?
2.89 If a company makes a deposit of $1000 now, in what year must it make another deposit of
$1000 for the account to have a value as close to $8870 as possible in year 20? Assume the
account earns interest at 10% per year.
From 10% factor tables, n is very close to 8 years where (F/P,10%,8) = 2.1436
Payment year = 20 – 8
= 12
2.90 You plan to pay $38,000 cash for the new truck you want to buy 5 years from now. If you
have already saved $12,500, how much will your wellto- do aunt have to give you 2 years
from now (as a graduation present) for you to have the total amount of $38,000? Assume
all funds are invested and return 8% per year.
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2.91 Loadstar Sensors is a company that makes load/force sensors based on capacitive sensing
technology. The company wants to have $30 million for a plant expansion five years from
now. If the company currently has a total of $15 million in an investment account set aside
for the expansion, how much must the company add to the account next year (i.e., 1 year
from now) to accumulate the $30 million 5 years from now? The account earns interest at
10% per year.
P = 30,000,000(P/F,10%,4) – 15,000,000(F/P,10%,1)
= 30,000,000(0.6830) – 15,000,000(1.10)
= $3,990,000
2.92 Amalgamated Iron and Steel purchased a new machine for ram cambering large I-beams.
The company expects to bend 80 beams at $2000 per beam in each of the first 3 years, after
which the company expects to bend 100 beams per year at $2500 per beam through year 8.
If the company’s minimum attractive rate of return is 18% per year, what is the present
worth of the expected income? Solve using factors and a spreadsheet.
(a) Factor
P = 80(2000)(P/A,18%,3) + 100(2500)(P/A,18%,5)(P/F,18%,3)
= 80(2000)(2.1743) + 100(2500)(3.1272)(0.6086)
= $823,691
(b) Spreadsheet
For entries in A2 through A4 of 160000 and A5 through A9 of 250000, the NPV
function displays a P value of $823,706.88.
2.93 Sierra Electric Company is considering the purchase of a hillside ranch for possible use as a
wind energy farm sometime in the future. The owner of the 500-acre ranch will sell for
$3000 per acre if the company will pay her in two payments—one payment now and
another that is twice as large three years from now. If the transaction interest rate is 8% per
year, what is the amount of the first payment?
1,500,000 = x + 2x(P/F,8%,3)
1,500,000 = x + 2x(0.7938)
x = $579,688
2.94 The cost of energy for operating high-lift pumps in a water distribution system was $1.4
million for the first 4 years. Beginning in year 5, the cost decreased by $30,000 each year
through the end of year 12. What is the equivalent annual cost of the energy in years 1
through 12 if the interest rate is 8% per year?
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P0 = 1,400,000(P/A,8%,3) + [1,400,000(P/A,8%,9) – 30,000(P/G,8%,9)](P/F,8%,3)
= 1,400,000(2.5771) + [1,400,000(6.2469) – 30,000(21.8081)](0.7938)
= $10,030,907
A = 10,030,907(A/P,8%,12)
= 10,030,907(0.13270)
= $1,331,101
2.95 An arithmetic gradient has cash flow of $500 in year 2, $600 in year 3, and amounts
increasing by $100 per year through year 10. At i = 10% per year, what is the present worth
of the cash flow series in year 0?
P1 = 500(P/A,10%,9) + 100(P/G,10%,9)
= 500(5.7590) + 100(19.4215)
= 2879.50 + 1942.15
= $4821.65
P0 = P1(P/F,10%,1)
= 4821.65(0.9091)
= $4383.36
2.96 An industrial engineering consulting firm signed a lease agreement for simulation software.
Calculate the present worth in year 0 if the lease requires a payment of $30,000 now and
amounts increasing by 5% per year through year 7. Use an interest rate of 10% per year.
Pg = (30,000) [1 – (1.05/1.10)8]
(0.10 – 0.05)
= $186,453.68
P0 = 186,453.68(F/P,10%,1)
= 186,453.68(1.10)
= $205,099
2.97 In planning for your retirement, you know that you won’t be able to save any money for the
first 3 years after you start working, but you expect to save $5000 in year 4, $5150 in year
5, and amounts increasing by 3% each year through year 25. (a) If your investments earn
10% per year, what amount will you have at the end of year 25? (b) If you had the total
future equivalent amount calculated above in hand today, and future inflation averaged 3%
per year (the same as the percentage increase you expect to add annually to your savings),
what is the remaining purchasing power 25 years in the future?
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F25 = 54,615.32 (F/P,10%,22)
= 54,615.32 (8.1403)
= $444,585
(b) Using the 52% decrease amount found in Table 1.3, 48% remains
Purchasing power in year 25 is 444,585(0.48) = $212,401
By Equation [1.8], the more accurate decrease is 0.5224; therefore 0.4776 remains.
Purchasing power in year 25 is 444,585(0.4776) = $212,334
2.98 Levi Strauss has some of its jeans stonewashed under a contract with independent U.S.
Garment Corp. If U.S. Garment’s operating cost per machine is $22,000 per year for years
1 and 2 and then it increases by $1000 per year through year 5, what is the equivalent
uniform annual cost per machine (years 1–5) at an interest rate of 12% per year?
A = 82,993(A/P,12%,5)
= 82,993(0.27741)
= $23,023
2.99 San Antonio is considering various options for providing water in their 50-year plan,
including desalting. One brackish aquifer is expected to yield desalted water that will
generate revenue of $4.1 million per year for the first 4 years, after which less production
will decrease revenue each year by $50,000 per year. If the aquifer will be totally depleted
in 25 years, what is the present worth of the desalting option at an interest rate of 6% per
year? Solve using factors and a spreadsheet with a single NPV function. What is the
numerical difference in the two results?
Factor
P = [4,100,000(P/A,6%,22) – 50,000(P/G,6%,22)](P/F,6%,3)
+ 4,100,000(P/A,6%,3)
= [4,100,000(12.0416) – 50,000(98.9412](0.8396)
+ 4,100,000(2.6730)
= $48,257,271
Spreadsheet
Sample solution: Enter 4,100,000 in cells B2-B5 followed by a decreasing series in cells
B6-B26. The function = NPV(6%,B2:B26) displays a P value of $48,258,115 (rounded).
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2.100 A low-cost noncontact temperature measuring tool may be able to identify railroad car
wheels that are in need of repair long before a costly structural failure occurs. If the
BNSF railroad saves $100,000 in years 1 through 5, $110,000 in year 6, and constant
amounts increasing by $10,000 each year through year 20, what is the equivalent annual
worth over the 20 years of the savings? The interest rate is 10% per year. Solve using (a)
factors, and (b) a spreadsheet.
Factor
First find P in year 0 and then convert to A
A = 1,147,883(A/P,10%,20)
= 1,147,883(0.11746)
= $134,830
Spreadsheet
Sample solution: Enter 100,000 in cells B2-B6 followed by the increasing series in cells
B7-B21. The function = NPV(10%,B2:B21) displays a P value of $1,147,896,39.
Convert to A using a PMT function to display $134,831.48
2.101 A start-up company selling color-keyed carnauba car wax borrows $40,000 at an interest
rate of 10% per year. In planning for the financial future of the company, the owner
wishes to repay the loan over a 5-year period with annual payments such that the third
through fifth payments are $2000 greater than the first two. Determine the size of the first
two payments.
2.102 Silastic-LC-50 is a liquid silicon rubber designed to provide high clarity, superior
mechanical properties, and short cycle time for high-speed manufacturers. One high-
volume manufacturer used it to achieve smooth release from molds. The company’s
projected growth will result in silicon costs of $26,000 in years 1 and 2, with costs
increasing by $2000 per year in years 3 through 5. At an interest rate of 10% per year,
what is the present worth, annual worth, and future worth of these costs? Solve using (a)
factors, and (b) a spreadsheet.
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Factors
P = 26,000(P/F,10%.1) + [26,000(P/A,10%,4) + 2000(P/G,10%,4)](P/F,10%,1)
= 26,000(0.9091) + [26,000(3.1699) + 2000(4.3781)](0.9091)
= $106,523
A = 106,523(A/P,10%,5)
= 106,523(0.2638)
= $28,101
F = 106,523(F/P,10%,5)
= 106,523(1.6105)
= $171,555
Spreadsheet solution
2.103 The Pedernales Electric Cooperative estimates that the present worth now of income from
an investment in renewable energy sources is $12,475,000. There will be no income in
years 1 and 2, but in year 3 income will be $250,000, and thereafter it will increase
according to an arithmetic gradient through year 15. What is the required gradient, if the
interest rate is 15% per year? Solve using (a) factors, and (b) a spreadsheet with the
GOAL SEEK tool.
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(b) Spreadsheet solution and GOAL SEEK
2.104 John and Mariam have owned a house in Virginia for the last 9 years. The series of their
annual property tax expenses is shown below. If the same funds had been invested in the
stock market, they would likely have earned at a rate of 10% per year. Calculate the
equivalent annual amount in years 1 through 9 if they had been able to invest the same
amount of money each year in the stock market instead of paying property taxes.
Property Property
Year Taxes, $ Year Taxes, $
0 5000 5 7500
1 5500 6 8000
2 6000 7 8500
3 6500 8 9000
4 7000 9 9500
(a) Factors: Find P in year –1 using gradient factor and then move forward 1 year
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F = P0 = 33,243,650(F/P,10%,1)
= 33,243,650 (1.1000)
= $36,568,015
2.106 Find the future worth in year 10 of $50,000 in year 0 and amounts increasing by 15% per
year through year 10 at an interest rate of 10% per year.
F = 630,635(F/P,10%,11)
= 630,635(2.8531)
= $1,799,265
2.107 Calculate the present worth of all costs for a newly acquired 3D printer with an initial
cost of $29,000, a trade-in value of 8% of initial cost at the end of its 10-year life, and an
annual operating cost of $13,000 for the first 4 years, increasing by 10% per year
thereafter. Use an interest rate of 10% per year.
2.108 Union Pacific is considering the elimination of a railroad grade crossing by constructing a
dualtrack overpass. The railroad subcontracts for maintenance of its crossing gates at
$11,500 per year, starting next year (year 1). However, beginning 4 years from now the
costs are expected to increase by 10% per year into the foreseeable future (that is, $12,650
in year 4, $13,915 in year 5, etc.). If the railroad uses a 10-year study period and an interest
rate of 15% per year, how much could the railroad afford to spend now on the overpass in
lieu of the maintenance contracts? Solve using (a) factors, and (b) a spreadsheet.
P0 = 11,500(P/A,15%,2) + P2(P/F,15%,2)
= 11,500(1.6257) + 68,829(0.7561)
= $70,737
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2.109 McCarthy Construction is trying to bring the company-funded portion of its employee
retirement fund into compliance with HB-301. The company has already deposited
$500,000 in each of the last 5 years. Beginning in year 6, McCarthy will increase its
deposits by 15% per year through year 20. How much will be in the fund immediately
after the last deposit, if the fund grows at a rate of 12% per year? Solve using
(a) tabulated factors, and (b) a spreadsheet.
(a) Factors:
Find P in year 4 for the geometric gradient, (b) Spreadsheet:
then move all cash flows to the future of year 20.
F = 500,000(F/A,12%,4)(F/P,12%,16) + P4(F/P,12%,16)
= 500,000(4.7793)(6.1304) + 8,773,844(6.1304)
= $68,436,684
2.110 A single deposit made 30 years ago by your grandmother is worth $45,000 today. If the
account earned interest at 10% per year, the amount she deposited was closest to:
a. $2579
b. $3285
c. $4565
d. $8505
P = 45,000(P/F,10%,30)
= $2578.50
Answer is (a)
2.111 An arithmetic gradient has cash flow of $1000 in year 4, $1200 in year 5, and amounts
increasing by $200 per year through year 10. If you use the factor 200(P∕G,10%,?) to find
P in year 3, the value of n to use in the P∕G factor is
a. 6
b. 7
c. 8
d. 9
Answer is (b)
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2.112 Summit Metals is planning to expand a local manufacturing operation 5 years from now at
a cost of $100,000. If the company plans to deposit money into an account each year for
4 years beginning 2 years from now (i.e., first deposit is in year 2) to pay for the expansion,
the equation that represents the amount of the deposit at 9% per year interest is
a. A = 100,000(A∕F,9%,5)
b. A = 100,000(A∕F,9%,4)
c. A = 100,000(A∕P,9%,4)
d. A = 100,000(A∕F,9%,4)(P∕F,9%,1)
Answer is (b)
2.113 For the diagram shown, the respective values of n to calculate the present worth in year 0
by the equation P0 = 100(P∕A,10%,n1)(P∕F,10%,n2) are
a. n1 = 6 and n2 = 1
b. n1 = 6 and n2 = 2
c. n1 = 7 and n2 = 1
d. n1 = 7 and n2 = 2
Answer is (a)
2.114 The amount of money that you can spend now for a much safer car in lieu of spending
$30,000 three years from now at an interest rate of 12% per year is closest to:
a. $15,710
b. $17,805
c. $19,300
d. $21,355
P = 30,000(P/F,12%,3)
= 30,000(0.7118)
= $21,354
Answer is (d)
2.115 A manufacturing company spent $30,000 on a new conveyor belt. If the conveyor belt
resulted in cost savings of $4200 per year, the length of time it would take for the
company to recover its investment at 8% per year is closest to:
a. 7 to 8 years
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37
b. 9 to 10 years
c. 11 to 12 years
d. 13 to 14 years
30,000 = 4200(P/A,8%,n)
(P/A,8%,n) = 7.14286
n is between 11 and 12 years
Answer is (c)
2.116 The cost of lighting and maintaining a transmission and receiving antenna on top of a
mountain in El Paso, Texas, is $90,000 per year. At an interest rate of 10% per year, the
present worth of maintaining the antenna for 10 years is closest to:
a. $1,015,000
b. $894,000
c. $712,000
d. $553,000
P = 90,000(P/A,10%,10)
= 90,000(6.1446)
= $553,014
Answer is (d)
2.117 An enthusiastic new engineering graduate plans to start a consulting firm by borrowing
$100,000 at 10% per year interest. The loan payment each year to pay off the loan in 7
years is closest to:
a. $18,745
b. $20,540
c. $22,960
d. $23,450
A = 100,000(A/P,10%,7)
= 100,000(0.20541)
= $20,541
Answer is (b)
2.118 Charley, an engineer who believes in the “save now, play later” philosophy wanted to
retire in 20 years with $1.5 million. At a 10% per year return on his investments, the
amount he must invest each year (starting in year 1) to reach the $1.5 million goal is
closest to:
a. $26,190
b. $28,190
c. $49,350
d. $89,680
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38
A = 1,500,000(A/F,10%,20)
= 1,500,000(0.01746)
= $26,190
Answer is (a)
2.119 An investment of $75,000 in equipment that will reduce the time for machining and
packaging self-locking fasteners will save $20,000 per year. At an interest rate of 10%
per year, the number of years required to recover the initial investment is closest to:
a. 9 years
b. 7 years
c. 5 years
d. 3 years
75,000 = 20,000(P/A,10%,n)
(P/A,10%,n) = 3.75
By interpolation or NPER function, n = 4.9 years
Answer is (c)
2.120 Sheryl is planning for her retirement now. She expects to save $5000 in year 1, $6000 in
year 2, and amounts increasing by $1000 each year through year 20. If the investments
earn 10% per year, the amount Sheryl will have at the end of year 20 is closest to:
a. $242,568
b. $355,407
c. $597,975
d. $659,125
F = [5000(P/A,10%,20) + 1000(P/G,10%,20)](F/P,10%,20)
= [5000(8.5136) + 1000(55.4069)](6.7275)
= $659,126
Answer is (d)
2.121 Income from a precious metals mining operation has been decreasing uniformly for 5
years. If income in year 1 was $300,000 and it decreased by $30,000 per year through
year 4, the equivalent annual worth of the income at 10% per year is closest to:
a. $310,500
b. $258,600
c. $203,900
d. $164,800
A = 300,000 – 30,000(A/G,10%,4)
= 300,000 – 30,000(1.3812)
= $258,564
Answer = (b)
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2.122 If you are able to save $5000 in year 1, $5150 in year 2, and amounts increasing by 3%
each year through year 20, the amount you will have at the end of year 20 at a 10% per
year return is closest to:
a. $60,810
b. $102,250
c. $351,500
d. $410,000
2.123 The present worth in year 0 of a lease that requires a payment of $9000 now and amounts
increasing by 5% per year through year 10 at 8% per year interest is closest to:
a. $73,652
b. $79,939
c. $86,330
d. $87,454
2.124 At an interest rate of 8% per year, the future worth in year 15 of an investment plan that
requires a deposit of $9000 now and amounts increasing by 8% per year through year 7,
and nothing further, is closest to:
a. $282,303
b. $465,376
c. $228,395
d. $609,328
P–1 = A1(n/1+i)
= 9000[8/(1.08)]
= $66,667
P0 = P–1(F/P,8%,1)
= 66,667(1.0800)
= $72,000
F15 = P0(F/P,8%,15)
= 72,000(3.1722)
= $228,398
Answer is (c)
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