Вы находитесь на странице: 1из 4

Lebanese American University

School of Engineering and Architecture


Midterm 1 - KEY
COURSE
DATE
TIME
SEMESTER
PROFESSOR

:
:
:
:
:

INE 320, Engineering Economy I


Tuesday, November 25, 2008
9:30 11:00 a.m.
Fall 2008
Dr. Raymond Ghajar

1.

Find the value of the unknown quantity in the cash flow diagram shown below to P
establish equivalence of cash inflows and outflows using i = 12% per year.

1.

Economic equivalence is established at EOY 9.

F1 = [$400(P/A, 12%, 4) - $100(P/G, 12%, 4)](F/P, 12%,10) + $500(F/A, 12%,3)


F1 = [$400(3.0373) - $100(4.1273)](3.1058) + $500(3.3744) = $4,178.74
F2 = A(F/A, 12%, 5) = 6.3528A
Equating the two future values gives: F1 = F2 A =

$4,178.74
= $657.77
6.3528

2.

An end-of-year (EOY) geometric gradient series having an initial value at EOY 3 P


of $5,000 is increasing at g = 6.04% per year for a period of 10 years. Find the
equivalent uniform gradient amount (G) over the time period beginning in EOY 1
and ending EOY 12 if the initial value of the uniform gradient series at EOY 1 is
$4,000. The interest rate is 8% nominal, compounded semi-annually.

2.

Geometric gradient series:

Starts at EOY 3 and finishes at EOY12, (N = 10 years)


2

0.08
1 = 8.16%
The effective annual interest rate is: ia = 1 +
2

The present worth of this series is:


P1 = $5,000(P/A1, 8.16%, 6.04%, 10)(P/F, 8.16%, 2)
P1 = $5,000(8.4713)(0.8548) = $36,206.41

November 25, 2008

Page 1

INE 320, Engineering Economy I

Midterm 1 - Key

Linear gradient series:

Starts at EOY 1 and finishes at EOY12, (N = 12 years)


The present worth of this series is:
P2 = $4,000(P/A, 8.16%, 12) + G(P/G, 8.16%, 12)
P2 = $4,000(7.4740) + 34.2224G = $29,896.01 + 34.2224G
Equating the two present values gives:
P1 = P2 $36,206.41 = $29,896.01 + 34.2224G

G=

$34,206.41 $29,896.01
= $184.39
34.2224

3.

How much simple interest is payable each year on a loan of $2,000 if the interest P
rate is 10% per year when half of the loan principal will be repaid as a lump sum
at the end of four years and the other half will be repaid in one lump sum amount
at the end of eight years? How much total interest will be paid over the eightyear period?

3.

Since the interest is simple, the following interest amounts are paid:

For years 1 4: I 14 = i P = 0.1 $2,000 = $200

For years 5 8: I 58 = i

P
$2,000
= 0.1
= $100
2
2

Total interest paid is: I total = 4 I 1 4 + 4 I 58 = 4 $200 + 4 $100 = $1,200

4.

A loan of $4,000 is to be repaid over a period of eight years. During the first four P
years, exactly half of the loan principal is to be repaid (along with accumulated
compound interest) by a uniform series of payments A1 dollars per year. The
other half of the loan principal is to be repaid over four years with accumulated
interest by a uniform series of payments A2 dollars per year. If i = 9% per year,
find A1 and A2 .

4.

This problem can be viewed as shown in the following cash flow where $2,000 S
was added and subtracted at EOY 4 to enable us to establish economic
equivalences for years 1 to 4 and 5 to 8 separately.
Years 1 4:

Establishing economic equivalence at EOY 4 yields:


$4,000(F/P, 9%, 4) = A1(F/A, 9%, 4) + $2,000
$4,000(1.4116) = A1(4.5731) + $2,000 $5,646.33 = 4.5731A1 + $2,000
A1 =

$5,646.33 $2,000
= $797.34
4.5731

November 25, 2008

Page 2

INE 320, Engineering Economy I

Midterm 1 - Key

$2,000
A1

A1

A1

A1
A2

A2

A2

A2

0
1

4
$2,000

End of year

$4,000
Years 5 8:

Establishing economic equivalence at EOY 8 yields:


$2,000(F/P, 9%, 4) = A2(F/A, 9%, 4) $2,000(1.4116) = 4.5731A2
$5,646.33 = 4.5731A1 + $2,000

A2 =

$2,823.20
= $617.34
4.5731

Alternatively, economic equivalence can be established at EOY4:


A2 = $2,000(A/P, 9%, 4) = $2,000(0.3087) = $617.34
5.

Suppose that you borrow $1,000 from the Easy Credit Company with the P
agreement to repay it over a 5-year period. Their stated add-on interest rate is 9%
per year.
(a) Calculate the total amount of interest due on the loan
(b) Calculate the monthly payments of the loan
(c) If the lender asks you to pay 20% of the interest due immediately as a service
charge, how much would you leave the bank with?
(d) Determine the effective annual interest rate of this add-on loan (including the
service charge payments).

5.

(a) The amount of interest due on the loan is: I = iPN = 0.09 $1,000 5 = $450

(b) The monthly payments are given by:


A=

P + I $1,000 + $450 $1,450


=
= $24.17
=
N
5 12
60

(c) The amount of the service charge is given by:


Service ch arg e = 0.2 $450 = $90

November 25, 2008

Page 3

INE 320, Engineering Economy I

Midterm 1 - Key

The amount left with is: P = P Service ch arg e = $1,000 $90 = $910
(d) The effective interest rate establishes equivalence between a principal
amount of $910 and a series of payments of $24.17 for 60 months.
$910 = $24.17(P / A, im , 60 ) (P / A, im , 60 ) =

$910
= 37.6552
$24,17

The effective monthly interest rate is found by linear interpolation:


i (%)
1%
im %
2%

(P/A, im%, 60)


44.9550
37.6552
34.7609

37.6552 44.9550
im = 0.01 + 0.01
= 1.7161%
34.7609 44.9550
The effective annual interest rate is: ia = [1 + 0.017161] 1 = 22.6523%
12

6.

How much can be paid now for a bond having a face value of $5,000 and earning P
10% interest paid semi-annually if the bond matures in 12 years? Assume the
purchaser will be satisfied with 8% nominal interest compounded semi-annually.

6.

The amount of interest paid semi-annually for 12*2 = 24 periods is:


A = i SA P =

0.1
$5,000 = $250
2

=
The effective semi-annual interest of the purchaser is: iSA

0.08
= 4%
2

The equivalent worth of the bond now is given by:


P = $5,000(P/F, 4%, 24) + $250(P/A, 4%, 24)
P = $5,000(0.3901) + $250(15.2470) = $5,762.35

November 25, 2008

Page 4