Pr.

El Hafdaoui
AUI, FALL. 2023
EGR 2302

Al Akhawayn University in Ifrane

School of Science & Engineering
Engineering Economics

Assignment II

Instructions:
 This homework is divided into two sections:
o Practice
o Spreadsheet

 The answers to the homework should not be scanned.

 Cheating and submitting similar answers/copies is strictly prohibited.

 The practice section should be answered and submitted in PDF Format.

 The spreadsheet section should be answered and submitted in MS Excel file. The
spreadsheet templates are gathered one the same Excel file, and this latter is available
on Canvas.

 To submit your work, log in to Canvas, and upload each file individually under
‘Assignment #2’. Please, do not zip your files.
 Part I - Practice (Total 80 points):
Note: The questions to this part should be answered in a MS Word file, then converted to PDF.

Exercise 1 (10pts):
A company makes quarterly deposits into an account reserved for investments in 4 years
from now. The interest paid on the deposits is 12% per year, compounded monthly. (a) Identify
the interest period, compounding period, and compounding frequency in the interest period. (b)
Calculate the effective annual interest rate.

Answer
(a) 𝐼𝑃 = 1 𝑦𝑒𝑎𝑟
𝐶𝑃 = 1 𝑚𝑜𝑛𝑡ℎ
1𝑦 1𝑦
𝑚 = ⁄𝐶𝑃 = ⁄1𝑀 = 12
12
(b) 𝑖𝑎 = (1 + 𝑟⁄𝑚)𝑚 − 1 = (1 + 0.12⁄12) − 1 ≈ 12.68%

Exercise 2 (10pts):
A company of video games wants to have $20,000,000 available in 5 years to pay stock
dividends. How much money must the company set aside now in an account that earns interest
at a rate of 5% per year, compounded monthly? Answer the questions in two different methods.

Answer
Method 1:

a. 𝑖𝐶𝑃 = 𝑟⁄𝑚 = 5%⁄12 ≈ 0.417% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ, 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦

b. 𝑃 = 20,000 × (𝐹 , 𝑖𝐶𝑃 , 60) = 2,000,000⁄(1 + 0.417%)60 ≈ $15,581,000
𝑃

Method 2:

c. 𝑚 = 𝑃𝑃⁄𝐶𝑃 = 12
d. 𝑖𝑃𝑃 = (1 + 𝑟⁄𝑚)𝑚 − 1 ≈ 5.116% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ, 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦
e. 𝑃 = 20,000 × (𝑃/𝐹, 𝑖𝑃𝑃 , 5) = 20,000⁄(1 + 5.116%)5 ≈ $15,584,000
Exercise 3 (10pts):
A company borrowed $800,000 for R&D purposes. The loan shall be repaid in 2 years
through quarterly payments that increased by $20,000 each time. At an interest rate of 8% per
year, compounded monthly, what was the size of the first quarterly payment? Draw the cash
flow diagram.
AA=$33,100 Answer
G=$20,000
iPP=2.013%

1 2 3 4 5 6 7 8

Quarters

 𝐶𝑃 = 1 𝑚𝑜𝑛𝑡ℎ
 𝑃𝑃 = 3 𝑚𝑜𝑛𝑡ℎ
 𝑚 = 𝑃𝑃⁄𝐶𝑃 = 3
 𝑟 = 2% 𝑝𝑒𝑟 𝑞𝑢𝑎𝑟𝑡𝑒𝑟, 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦
 𝑖𝑃𝑃 = (1 + 𝑟⁄𝑚)𝑚 − 1 ≈ 2.013%

 800,000 = 𝐴 × (𝑃/𝐴, 𝑖𝑝𝑝 , 8) + 20,000 × (𝑃/𝐺, 𝑖𝑃𝑃 , 8) ←→ 𝐴 ≈ $41,286

Exercise 4 (20pts):
A university professor deposits his annual bonus of $10,000 into an account that pays
interest at 8% per year, compounded semiannually. If he withdraws $1,000 in months 2, 11,
and 23, what would be the future value of the account at the end of 3 years?
(a) Draw the cash flow diagram with original placements of cash flow.
(b) Calculate the future value and draw the moved cash flow diagram assuming no
interperiod compounding.
(c) Calculate the future value assuming monthly interperiod compounding.

Answer
$1,000 $1,000 $1,000
a. CFD_1 5 10 15 20 36
Months

$10,000

$1,000 $1,000 $1,000

6 12 18 24 30 36
0
Months
b. CFD_2
o 𝑖𝐶𝑃 = 4% 𝑝𝑒𝑟 6 𝑚𝑜𝑛𝑡ℎ𝑠 $10,000
o 𝐹 = (−10,000 + 1,000) × (𝐹/𝑃, 𝑖𝐶𝑃 , 6) + 1,000 × (𝐹/𝑃, 𝑖𝐶𝑃 , 5) + 1,000 × (𝐹/𝑃, 𝑖𝐶𝑃 , 3) ≈ $9,046

c. Monthly interperiod compounding  CPn = PP = 1 month

o 𝑟 = 0.667% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ, 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑠𝑒𝑚𝑖𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦 and 𝑚 = 6
o 𝑖𝑃𝑃 = (1 + 𝑟⁄𝑚 )𝑚 − 1 = 0.669% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
o 𝐹 = −10,000 × (𝐹/𝑃, 𝑖𝑝𝑃 , 36) + 1,000 × [(𝐹/𝑃, 𝑖𝑝𝑃 , 34) + (𝐹/𝑃, 𝑖𝑝𝑃 , 25) + (𝐹/𝑃, 𝑖𝑝𝑃 , 13)] ≈ $9,187
Exercise 5 (10pts):
A university is willing to invest $5,000,000 in renewable energy generation and energy
efficiency in buildings and expects to generate revenue from energy savings. Determine the
revenue necessary each month to recover its investment in 3 years for an interest rate of 2% per
month, compounded continuously.
Answer
f. 𝑖𝐶 = 𝑒 0.02 − 1 = 2.02% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
g. 𝐴 = 5,000,000 × (𝐴/𝑃, 𝑖𝐶 , 36) ≈ $196,794

Exercise 6 (20pts):

Year 0 1 2 3 4 5 6 7 8 9
Cash flow, $ 200 300 400 500 300 900 900-g 900-2g 900-3g 150

For the cash flows shown above, you are asked to answer the questions below for g = 10% and
i = 6% per year, compounding monthly.
a. Draw the cash flow diagram;
b. Calculate the present worth in year 0;
c. Calculate the equivalent annual worth over the last five years (A5-9);
d. Calculate the future worth in year 11.

Answer
A = $900
A = $200 g = -10%
G = $100
$300

0 1 2 3 4 5 6 7 8 9 Years

a. CFD
b. P0 calculation
o 𝑚 = 𝑃𝑃⁄𝐶𝑃 = 12⁄1 = 12
o 𝑖𝑃𝑃 = (1 + 6%⁄12)12 − 1 = 6.168%
o 𝑃0 = [200 × (𝑃/𝐴, 𝑖𝑃𝑃 , 4) + 200 × (𝑃/𝐺, 𝑖𝑃𝑃 , 4)] × (𝐹/𝑃, 𝑖𝑃𝑃 , 1) + 300 × (𝑃/𝐹, 𝑖𝑃𝑃 , 4) + 900 ×
(𝑃/𝐴, −10%, 𝑖𝑃𝑃 , 5) × (𝑃/𝐹, 𝑖𝑃𝑃 , 4) = $3,610

c. A5-9 calculation
o 𝐹4 = 𝑃0 × (𝐹/𝑃, 𝑖𝑃𝑃 , 4)
o 𝐴5−9 = 𝐹4 × (𝐴/𝑃, 𝑖𝑃𝑃 , 5) ≈ $1,094

d. 𝐹11 = 𝑃0 × (𝐹/𝑃, 𝑖𝑃𝑃 , 11) ≈ $6,973

 Part II - Spreadsheet (Total 30 points):
Note: For this exercise, use its allocated spreadsheet template.

Exercise 7 (30pts):
A professional earning a monthly salary of 12,000 MAD decided to obtain a loan from the bank
to purchase an affordable apartment costing 320,000 MAD. In addition to the loan, the
individual made the following payments in cash: 6% for registration duty, 1.5% for notary fees,
1% for stamp duty, and 10,000 MAD for insurance and bank fees. Assuming the full acquisition
price was financed by a bank loan with a constant yearly interest rate of 5.75%, compounded
monthly, how long (in years and months) will it take to repay the loan and what would be the
sum of money (including the fees associated with purchase and loan) paid if:
a. You pay 4,000 MAD monthly starting end of Month 1 after loan acquisition,
b. You pay 5,500 MAD monthly starting end of Month 3 after loan acquisition.

Important: Add more rows (months) if needed. Also, note that the final end of payment shall
be the remaining amount owned after interest; it shall be less than the monthly payment.

Answer
a. It would take 8 years and 6 months to pay $440,123 (full debt amount).
b. It would take 6 years to pay $415,915 (full debt amount).