1. Approximately how many years will it take to 3.

A graduating high school student decides to

double an investment at a 6% effective annual take a year off and work to save money for
rate? college. The student plans to invest all money
earned in a savings account earning 6% interest,
compounded quarterly. The student hopes to
have $5000 by the time school starts in 12
months. How much money will the student
have to save each month?

2. An individual contributes $200 per month to

a 401K retirement account. The account earns
interest at a nominal annual interest rate of 8%,
with interest being credited monthly. What is
the value of the account after 35 years?
4. A gold mine is projected to produce $20,000 6. An engineer deposits $10,000 in a savings
during its first year operation, $19,000 the account on the day her child is born. She
second year, $18,000 the third year, and so on. deposits an additional $1000 on every birthday
If the mine is expected to produce for a total of after that. The account has a 5% nominal
10 years, and the effective annual interest rate interest rate, compounded continuously. How
is 6%, what is its present worth much money will be in the account the day
after the child’s 21 st birthday?

5. $5000 is put into an empty savings account

with a nominal interest rate of 5%. No other
contributions are made to the account. With
monthly compounding, how much interest will
have been earned after five years?
7. A machine costs $10,000 and can be
depreciated over a period of four years, after
which its salvage value will be $2000. What is
the straight-line depreciation in year 3?

8. A groundwater treatment system is needed

to remediate a solvent-contained aquifer. The
system costs $2,500,000. It is expected to
operate a total of 130,000 hours over a period
of 10 years and then have a $250,000 salvage
value. During its first year in service, it is
operated for 6500 hours. What is its
depreciation in the first year using the MACRS
method?

9. A machine initially costing $25,000 will have a

salvage value of $6000 after five years. Using 11. A warehouse building was purchased 10
MACRS depreciation, what will its book value be years ago for $250,000. Since then, the effective
after the third year? annual interest rate has been 8%, inflation has
been steady at 2.5%, and the building has no
deterioration or decrease in utility. What should
the warehouse sell for today?

10. The construction of a volleyball court for the

employees of a highly successful mid-sized
publishing company in California is expected to
cost $1200 and have annual maintenance cost
of $300. At an effective annual interest rate of
5%, what is the project’s capitalized cost?
12. A delivery company is expanding its
fleet by five vans at a total cost of $75,000.
Operating and maintenance costs for the
new vehicles are projected to be
$20,000/year for the next eight years. After
eight years, the vans will be sold for a total
of $10,000. Annual revenues are expected to
increase by $40,000 with the expanded fleet.
What is the company’s rate of return on the
purchase?

14. If a credit union pays 4.125% interest

compounded quarterly, what is the effective
annual interest rate?

13. A gourmet ice cream store has fixed

expenses (rent, utilities, etc.) of
$50,000/year. Its two full-time employees 15. The national debt is approximately $4
each earn $25,000 per year. There is also a trillion. What is the required payment per
part-time employee who makes $14,000 plus year to completely pay off the debt in 20
$6000 in overtime if sales reach $120,000 in years, assuming an interest rate of 6%?
a year. The ice cream costs $4/L to produce
and sells for $7/L. What is the minimum
number of liters the store must sell to break
even?
 16. The president of a growing
engineering firm wishes to give each of 50
employees a holiday bonus. How much is
needed to invest monthly for a year at 12% 18. An engineering graduate plans to
nominal interest rate, compounded monthly, buy a home. She has been advised
so that each employee will receive a $1000 that her monthly house and property
bonus? tax payment should not exceed 35%
of her disposable monthly income.
After researching the market, she
determines she can obtain a 30 year
home loan for 6.95% annual interest
per year, compounded monthly. Her
monthly property tax payment will
be approximately $150. What is the
maximum amount she can pay for a
house if her disposable monthly
income is $2000?

17. If the nominal interest rate is 3%,

how much is $5000 worth in 10
years in a continuously compounded
account?
19. The designer of the penstock for a
small hydroelectric cogeneration
station has the option of using steel
pipe, which costs $150,000 installed
and requires $5000 yearly for
painting and leak-checking
maintenance, or DSR4.3 (heavy-duty 20. If the interest rate on an account is
plastic) pipe, which costs $180,000 11.5% compounded yearly,
installed and requires $1200 yearly approximately how many years will
for leak-checking maintenance. Both it take to triple the amount?
options have an expected life of 25
years. If the interest rate is 8%,
which choice has the lower present
equivalent cost and how much lower
is it?

21. Fifteen years ago $1000 was

deposited in a bank account, and
 today it is worth $2370. The bank 23. The purchase price of a car is
pays interest semi-annually. What $25,000. Mr Smith makes a down
was the nominal annual interest rate payment of $5,000 and borrows the
paid on this account? balance from the bank at 6% interest
for five years. Calculate the nearest
value of the required monthly
payments to pay off the loan.

22.
Mr Jones plans to deposit $500 at the
end of each month for 10 years at
12% annual interest, compounded
24. A piece of machinery can be bought
monthly. The amount that will be
for $10,000 cash or for $2000 down
available in two years is?
and payments of $750 per year for
15 years. What is the annual interest
rate for the time payments?
 26. A company puts $25,000 down and
will pay $5000 every year for the life
of a machine (10 years). If the
salvage value is zero and the interest
rate is 10% compounded annually,
what is the present value of the
machine?

25. You have borrowed $5000 and must

pay it off in five equal annual
payments. Your annual interest rate
is 10%. How much interest will you
pay in the first two years?
27. You borrow $3500 for one year from
a friend at an interest rate of 1.5%
per month instead of taking a loan
from a bank at a rate of 18% per
year. Compare how much money
you will save or lose on the
transaction.
 29. A college student borrows $10,000
today at 10% interest compounded
annually. Four years later, the
student makes the first payment of
$3000. Approximately how much
money will the student still owe on
the loan after the first payment?

28. If you invest $25,000 at 8% interest

compounded annually,
approximately how much money will 30. A 40-year-old consulting engineer
be in the account at the end of 10 wants to set up a retirement fund to
years? be used starting at age 65. $20,000 is
invested now at 6% compounded
annually. Approximately how much
money will be in the fund at
retirement?
 compounded annually. Over a 10-
year period, what will be the
approximate effective annual
maintenance cost?

31. The maintenance cost for a car this

year is expected to be $500. The cost
will increase by $50 each year for
the subsequent 9 years. The interest
is 8% compounded annually. What is
the approximate present worth of
33. You deposited $10,000 in a savings
maintenance for the car over the full
10 years? account five years ago. The account
has earned 5.25% interest
compounded continuously since then.
How much money is in the account
today?

34. A young engineer wants to surprise

her husband with a European
vacation for their tenth anniversary,
32. A house is expected to have a which is five years away. She
maintenance cost of $1000 in the determines that the trip will cost
first year. It is believed that the $5000. Assuming an interest rate of
maintenance cost will increase by 5.50% compounded daily,
$500 per year. The interest rate is 6% approximately how much money
 does she need to deposit today for
the trip?

35. A young woman plans to retire in 30

years. She intends to contribute the
same amount of money each year to
her retirement fund. The fund earns
10% compounded annually. She
would like to withdraw $100,000
each year for 20 years; starting 1 36. A deposit of $1000 is made in a bank
year after the last contribution is account that pays 8% interest
made. Approximately how much compounded annually.
money should she contribute to her Approximately how much money
retirement fund each year? will be in the account after 10 years?
37. A deposit of $1000 is made in a bank
account that pays 24% interest per
year compounded quarterly.
Approximately how much money will
be in the account after 10 years?

38. A machine costs $20,000 today and 39. At what rate of annual interest will
has an estimated scrap cash value of an investment quadruple itself in 12
$2000 after eight years. Inflation is years?
8% per year. The effective annual
interest rate earned on money
invested is 8%. How much money
needs to be set aside each year to
replace the machine with an identical
model eight years from now?

40. A machine has an initial cost of

$50,000 and a salvage value of
$10,000 after 10 years. What is the
straight-line depreciation rate as a
percentage of the initial cost?
41. Referring to the machine described
in number 40, what is the book value
after five years using straight-line
depreciation?

43. A machine that costs $20,000 has a

10-year life and a $2000 salvage
value. If the straight-line
depreciation is used, what is the
book value of the machine at the end
of the second year?

42. Referring to the machine described

in number 40, what is the book value
after five years using the MACRS
method of depreciation?

44. A $1000 face-value bond pays a

dividend of $110 at the end of each
year. If the bond matures in 20 years,
what is the approximate bond value
 at an interest rate of 12% per year,
compounded annually?

47. If computer A was to be purchased

and kept forever without any change in the
annual maintenance costs, what would be
the present worth of all expenditures?

Numbers 45-51 refer to the following situation.

A company is considering buying one of the following two computers.

Computer A Computer B
Initial cost $3900 $5500
Salvage value $1800 $3100
Useful life 10 years 13 years
Annual maintenance $390 $275(year 1 to 8)

Interest rate 6%
$425(year 9 to 13)
6%
48. What is the annual straight-line
depreciation for computer A?
45. What is the equivalent uniform
annual cost of computer A?

49. What is the total straight-line

depreciation value of computer A after the
fifth year?

46. What is the equivalent uniform

annual cost of computer B?

50. What is the book value of computer

B after the second year, using the MACRS
method of depreciation and a 10-year
recovery period?
51. What is the present worth of the costs
for computer A?

53. Twenty thousand dollars is invested

today. If the annual inflation rate is 6% and
52. An investment proposal calls for a the effective annual return on investment is
$100,000 payment now and a second 10%, what will be the approximate future
$100,000 payment 10 years from now. The value of the investment, adjusted for
investment is for a project with a perpetual inflation, in five years?
life. The effective annual interest rate is 6%.
What is the approximate capitalized cost?

54. An investment currently costs

$28,000. If the current inflation rate is 6%
and the effective annual return on
investment is 10%, approximately how long
will it take for the investment’s future value 55. Disregarding the initial and
to reach $40,000? replacement pipe costs, what is the
approximate capitalized cost of the
maintenance and pumping costs for the 80
mm pipe?

56. What is the approximate equivalent

uniform annual cost of the 80 mm pipe,
Numbers 55 – 59 refer to the considering all costs and expenses?
following information.
An oil company is planning to install
a new pipeline to connect storage
tanks to a processing plant 1500 m
away. The connection will be needed
for the foreseeable future. Both 80
mm and 120 mm pipes are being
considered.

57. What is the approximate equivalent

uniform annual cost of the 120 mm pipe,
considering all costs and expenses?

For this analysis, the company will

use an annual interest rate of 8%.
Annual maintenance and pumping
costs may be considered to be paid
in their entirety at the end of the
years in which their costs are
incurred.
 What approximate interest rate is being
earned on the initial investment?

61. Flood damage in a typical year is given

according to the following table.

58. What is the approximate depreciation

allowance for the 120 mm pipe in the first
year? Use MACRS depreciation assuming a
10-year life.
If the effective annual interest rate is
6%, what is the most likely present
worth of flood damage over the next
10-year period?

59. If the annual effective rates for

inflation and interest have been 5% and 9%,
respectively, what was the uninflated present
worth of the 120 mm pipe three years ago?

62. A company purchases a piece of

construction equipment for rental purposes.
The expected income is $3100 annually for
its useful life of 15 years. Expenses are
estimated to be $355 annually. If the
purchase price is $25,000 and there is no
salvage value, what is the prospective rate
of return, neglecting taxes?

60. Permanent mineral rights on a parcel

of land are purchased for an initial lump-sum
payment of $100,000. Profits from mining
activities are $12,000 each year, and these
profits are expected to continue indefinitely.
 Numbers 63 – 65 refer to the
following situation.

An industrial firm uses an economic

analysis to determine which of two
different machines to purchase. Each
machine is capable of performing the
same task in a given amount of time.
Assume the minimum attractive rate
of return is 8%.

Use the following data in this analysis. 66. Going broke county is using a 10%
annual interest rate to decide if it should buy
snowplow A or snowplow B.

63. What is the approximate equivalent

uniform annual cost of machine X?

What are the benefit-cost ratios for

snowplows A and B, respectively,
and which snowplow should Going
64. What is the equivalent uniform Broke County buy?
annual cost of machine Y?

65. Which, if either, of the two machines

should the firm choose and why?

67. A company produces a gear that is

commonly used by several lawnmower
manufacturing companies. The base cost of
operation (rent, utilities, etc.) is $750,000
per year. The cost of manufacturing is $1.35
per gear. If these gears are sold at $7.35
each, how many must be sold each year to
break even?
 68. Calculate the rate of return for an
investment with the following
characteristics.
Initial cost $20,000
Project life 10 years
Salvage value $5000
Annual receipts $7500
Annual disbursements $3000

70. You want to purchase one of the following

milling machines.

69. Grinding mills M and N are being

considered for a 12-year service in a
chemical plant. The minimum attractive rate
of return is 10%. What are the equivalent
uniform annual costs of mills M and N,
What are the approximate rates of
respectively, and which is the more return for machines A and B,
economical choice? respectively?
 72. The annual maintenance cost of a
machine shop is $10,000. The cost of
making a forging is $2.00, and the selling
price is $3.00. How many forgings should
be produced each year in order to break
even?

71. Consider the two machines described

in number 70. If machine A is the preferred
economic choice, what is the lowest value that
the minimum attractive rate of return can be?
 Numbers 73 – 74 refer to the
following situation.

A company plans to manufacture a

product and sell it for $3.00 per unit.
Equipment to manufacture the
product will cost $25,000 and will
have a net salvage value of $12,000
at the end of its estimated economic
life of 15 years. The equipment can
manufacture up to 2,000,000 units
per year. Direct labor costs are $0.25
per unit, direct material costs are
$0.85 per unit, variable
administrative and selling expenses
are $0.25 per unit, and fixed
overhead costs are $200,000, not 75. A particular gate valve can be
including depreciation. repaired, replaced, or left alone. It will cost
$12,500 to repair the valve and $25,000 to
73. If capital investments and return on replace it. The cost due to a failure of the
the investment are excluded, what is the valve seat is $13,000; for a failure of the
number of units that the company must stem, $21,000; and for a failure of the body,
manufacture and sell in order to break even $35,000. All amounts are the present values
with all other costs? of all expected future costs. The
probabilities of failure of the valve are
known.

What plan of action should be chosen based

on a present-worth economic basis?

74. If straight-line depreciation is used,

what is the number of units that the
company must manufacture and sell to yield
a before-tax profit of 20%?
76. Instead of paying $10,000 in annual
rent for office space at the beginning of each
year for the next 10 years, an engineering
firm has decided to take out a 10-year,
$100,000 loan for a new building at 6%
interest. The firm will invest $10,000 of the
rent saved and earn 18% annual interest on
that amount. What will be the difference
between the firm’s annual revenue and
expenses?
 Numbers 77 – 79 refer to the
following information.

An oil company is planning to install

a new pipeline to connect storage
tanks to a processing plant 1500 m
away. Both 120 mm and 180 mm
pipes are being considered.

For this analysis, the company will

use an annual interest rate of 10%.
Annual maintenance and pumping
costs may be considered to be paid 79. If the annual benefit for the 180 mm
in their entirety at the end of the pipe is $2000, what is the benefit-cost ratio?
years in which their costs are
incurred.

77. What is the approximate present

worth of the 120 mm pipe over the first 12
years of operation?

80. A machine has an initial cost of

$40,000 and an annual maintenance cost of
$5000. Its useful life is 10 years. The annual
benefit from purchasing the machine is
$18,000. The effective annual interest rate is
78. What is the present worth of the 180 10%. What is the machine’s benefit-cost
mm pipe over the first 12 years of operation ratio?
if operating costs increase by $0.75 (to
$1.75 per hour) beginning in year 7?
81. A small machine costing P80,000
has a salvage value of x at the end of its life
of 5 years. The book value at the end of the
4th year is P22,400. What is the value of x
using the straight line method depreciation?

82. An engineer bought an equipment

for P500,000. He spent an additional
amount of P30,000 for installation and other
expenses. The salvage value is 10% of the
first cost. If the book value at the end of 5
years will be P291,500 using straight line
method of depreciation, compute the useful
life of the equipment in years.
83. A manufacturing firm maintains one
product assembly line to produce signal
generators. Weekly demand for the
generators is 35 units. The line operates for
7 hours per day, 5 days per week. What is
the maximum production time per unit in
hours required of the line to meet a the
demand? 86. A man who won P300,000 in a
lottery decided to place 50% of his winning
in a trust fund for the college education of
his son. If the money will earn 14% per year
compounded quarterly, how much will the
man have at the end of 10 years when his
son will be starting his college education?
84. A sum of P1,000 is invested now and
left for eight years, at which time the
principal is withdrawn. The interest has
accrued is left for another eight years. If the
effective annual interest rate is 5%, what
will be the withdrawal amount at the end of
the 16th year.

87. The Philippine Society of

Mechanical Engineers is planning to put up
its own building. Two proposals being
considered are:
a. The construction of the building
now to cost P400,000.

85. By the condition of a will, the sum of

b. The construction of a smaller
P20,000 is left to a girl to be held in trust
building now to cost P300,000 and at the
fund by her guardian until it amounts to
end of 5 years, an extension to be added to
P50,000. When will the girl receive the
cost P200,000.
money if the fund is invested at 8%
compounded quarterly?
 By how much is proposal B more
economical than proposal A if
interest rate is 20% and depreciation
is to be neglected?

88. A company plans to construct an

additional building at the end of 10 years for
an estimated cost of P5,000,000.00. To
accumulate this amount, it will have equal 90. A firm considering the installation of
year end deposits in a fund earning 13 %. an automatic data processing unit to handle
However, at the end of the 5th year, it was some of its accounting operation. Machines
decided to have a larger building than for that purpose may be leased for P8,000
originally intended to an estimated cost of for the first year and P1,000 less every year
now and then until the end of the 4th year. If
P8,000,000.00. What should be the annual
money is worth 15%, how much can you
deposit for the last 5 years?
buy the machine in cash?

89. Each year a single payment of P1766

is deposited in an account that earns 6%
compounded continuously. What is the
amount in the account immediately after the
5th payment?
91. The cash price of an apartment
condominium is P85,908 and can be
acquired by a down payment of P50,000 and
a yearly payment of P10,000 at the end of
each year for 10 years starting at the end of 5
years from the date of purchase. If money is
worth “x” percent compounded annually,
what is the value of “x”?

94. What is most nearly the present

worth of a $100 annuity over a 10-year
period if the interest rate is 8%?

92. Compute the difference in the future

amount of P500 compounded annually at
nominal rate of 5 % and if it is compounded
continuously for 5 years at the same rate.

93. A house costs P400,000.00 cash. A

purchaser will pay P90,000.00 cash,
P60,000.00 at the end of 2 years and a
sequence of 6 equal annual payments
starting with one at the end of 4 years, to
discharge all his liability as to the principal
and interest at 7% compounded annually. 95. With a 12% interest rate.
Find the annual payments which must be Approximately how much money must be
made for 6 years. invested today in order to withdraw $1,000
per year at the end of each year for 10 years?
96. What is the present worth of two
$100 payments at the end of the third and
fourth years if the annual interest rate is 8%?

97. Consider a project that involves the

investment of $100,000 now and $100,000 at 100. $1000 is deposited into a 9%
the end of year 1. Revenues of $150,000 will account today. At the end of 2 years, another
be generated at the end of years 1 and 2. What $3,000 will be deposited. In 5 years, a $4000
is most nearly the net present value of this purchase will be made. Approximately how
project of the effective annual interest rate is much will be left in the account 1 year after
10%? the purchase?

98. An investment of x dollars is made at

the end of each year for 3 years, at an
interest rate of 9% per year compounded
annually. What will the dollar value of the
total investment be, most nearly, upon the
deposit of the third payment?

99. If $500 is invested at the end of each

year for 6 years at an effective annual
interest rate of 7%, what is most nearly the
total dollar amount available upon the
deposit of the sixth payment?