Assignment #1 SKKK 4173 (CO1, PO1)

Answer all questions. Show your cash flow diagram for each problem and box your
answer.

1. You deposit $5,000 in a saving account that earns 8% simple interest per year. What is the
minimum number of years you must wait to double your balance? Suppose instead that you
deposit the $5,000 in another saving account that earns 7% interest compounded yearly.
How many years will it take now to double your balance?

2. You are about to borrow $10,000 from a bank at an interest rate of 9% compounded
annually. You are required to make five equal annual repayments per year, with the first
repayment occurring at the end of year 1. What is the amount of annual repayment?

3. Suppose that you are obtaining a personal loan from your uncle in the amount of $12,000
now, to be repaid in two years to cover some of your college expenses. If your uncle usually
earns 8% interest (annually) on his money, which is invested in various sources, what
minimum lump-sum payment two years from now would make your uncle happy?

4. If you desire to withdraw the following amounts over the next five years from a savings
account that earns 8% interest compounded annually, how much do you need to deposit
now?

N (year) Amount ($)

2 32,000
3 43,000
4 46,000
5 28,000

5. Part of the income that a machine generates is put into a sinking fund to replace the
machine when it wears out. If $1,500 is deposited annually at 7% interest, how many years
must the machine be kept before a new machine costing $30,000 can be purchased?
6. An individual deposits an annual bonus into a savings account that pays 8% interest
compounded annually. The size of the bonus increases by $2,000 each year, and the initial
bonus amount was $5,000. Determine how much will be in the account immediately after
the fifth deposit.

7. What is the equal payment series for 12 years that is equivalent to a payment series of
$15,000 at the end of the first year, decreasing by $1,000 each year over 12 years. Interest
is 8% compounded annually.

8. You plan to buy a car by borrowing $50,000 from a local bank. The bank is offering you
two options. If you borrow the money now, you can do so at an interest rate of 3% per year
simple interest for 7 years. If you borrow next year, the interest rate will be 5% per year
compound interest, but it will be for only 5 years. Which options will you take, either
borrow now or 1 year from now?

9. $1,000 is invested in a small business enterprise which operates over a five-year period. It
costs $300 per year to run the business and the cash receipts are $600 per year in year 1 to
year 5. The investment of $1,000 is available at interest rate of 10% per year. It is assumed
that the money is borrowed at the end of year 0. Calculate the amount of money
accumulated at the end of year 5.

10. A piece of equipment has been installed at a cost of $100,000. It is expected to have a
working life of 10 years and after that it will be sold at $20,000. How much money the
equipment should generate per year starting from year 1 in order to get back the money
invested? Assume the interest rate of 7% per year compounded annually.

Due date: 5/3/2016