Exercises 8.

3
Exercise 8.3, Solution 1:
Let the single payment the company would make in 4 months that would settle both payments be ‘x’
The focal date is given to be four months from now.
Let S1 be the equivalent value on the focal date of $20,000 (due 6 months ago). Therefore, t1 = 6 + 4 = 10
months
Let S2 be the equivalent value on the focal date of $15,000 (due now). Therefore, t2 = 4 − 0 = 4 months =
4
years
12
We have S1 + S2 = x
P1 (1 + rt1) + P2 (1 + rt2) = x

4
20,000 (1 + 0.15 × 10/12) + 15,000 (1 + 0.095 × )= x
12
We get x = $37,975
Therefore, the repayment amount made by the company was $37,975.
Exercise 8.3, Solution 3:
Let the single payment to be made in 1 month that would settle both debts be ‘x’
The focal date is given to be 1 month from now.
Let P1 be the equivalent value on the focal date of $1250.00 (due in 4 months).
3
t1 = 4 – 1 = 3 months = years
12
Let P2 be the equivalent value on the focal date of $1450.00 (due in 7 months).
6
t2 = 7 − 1 = 6 months = years
12
We have P1 + P2 = x
S1 (1 + rt1) −1 + S2 (1 + rt2) −1 = x

3 −1 6 −1
1250 (1 + 0.0725 × ) + 1450 (1 + 0.0725 × ) =x
12 12
We get x = $2627.023321... = $2627.02
Therefore, the single payment required to settle both debts is $2627.02
Exercise 8.3, Solution 5:
Let the single payment to be made in 45 days that would settle both payments be ‘x’
The focal date is given to be 45 days from now.

Last updated: June 17, 2017

 Let S1 be the equivalent value on the focal date of $2900.00 (due 60 days ago).
105
t1 = 60 + 45 = 105 days = years
365
Let P2 be the equivalent value on the focal date of $3200.00 (due in 90 days).
45
t2 = 90 – 45 = 45 days = years
365
We have S1 + P2 = x
P1 (1 + rt1) + S2 (1 + rt2)−1 = x

105 + 45 −1 =
2900 (1 + 0.042 × ) 3200 (1 + 0.042 × ) x
365 365
We get x = $6118.553851... = $6118.55
Therefore, the single payment to be made to settle both given payments = $6118.55
Exercise 8.3, Solution 7:
a. Let the single unknown payment in 8 months that is equivalent to the two payments be ‘x’.
Single unknown payment at the focal date = Equivalent value of $10000 at the focal date + Equivalent
value of $12000 at the focal date.
• Equivalent value of $10000 at the focal date is the maturity value of $10000 at the focal date (S1)
• Equivalent value of $12000 at the focal date is the principal amount of $12000 at the focal date (P2)
x = S1 + P2
S1 = P1 (1 + rt1)
2 2
= 10000 (1 + 0.04 × ) [t1 = 2 months = years]
12 12
= $10,066.66666...
P2 = S2 (1+rt2)−1

2 -1 2
= 12000 (1 + 0.04 × ) [t2 = 2 months = years]
12 12
= $11,920.5298...
x = S1 + P2
x = 10066.66666... + 11920.5298... = $21,987.19647... = $21,987.20
Therefore, when the focal date is 8 months, the single payment in 8 months that is equivalent to the two
payments is $21,987.2.

b. Let the single unknown payment in 8 months that is equivalent to the two payments be ‘x’.

Last updated: June 17, 2017

 Single unknown payment at the focal date = Equivalent value of $10000 at the focal date + Equivalent
value of $12000 at the focal date.
• Equivalent value of $10000 at the focal date is the maturity value of $10000 at the focal date (S1)
• Equivalent value of $12000 at the focal date is the principal amount of $12000 at the focal date (P2)
x = S1 + P2
S1 = P1 (1 + rt1)
= 10000 (1 + 0.04 × 6/12) -1 [t1 = 6 months = 6/12 years]
= $9,803.9216
P2 = S2 (1+rt2)−1
= 12000 (1 + 0.04 × 10/12)-1 [t2 = 10 months = 10/12 years]
= $11, 612.9033
x = S1 + P2

8 -1
P3 = S3 (1 + rt3)-1= x (1 + 0.04 × ) = 0.974025...x
12
P3 = P1 + P2
0.974025...x = $9,803.9216 + $11, 612.9033
x = $21987.94012... = $21,987.94
Exercise 8.3, Solution 9:
Let the balance payment due in 2 years be ‘x’
The focal date is given to be now.
Let S1 be the equivalent value on the focal date of $600 (due now).
Let S2 be the equivalent value on the focal date of $900 (due in 1 year).
Therefore, t2 = 12 months
Let S3 be the equivalent value on the focal date of $750 (due today).
Therefore, t3 = 6months
Therefore, we have S1 + S2 = S3 + x
Therefore, P1 (1 + rt1) + P2 (1 + rt2) = P3 (1 + rt3) + x
$600 + $900 (1 + 0.045 × 1)-1 = $750 (1 + 0.045 × 6/12 )-1 + x
$600 + $861.24 = 733.50 + x
Therefore, we get x = $727.75
Therefore, the balance payment to be made is $727.75
Exercise 8.3, Solution 11:
Equivalent value of payments of option (a) at focal date (today)

Last updated: June 17, 2017

 6 -1
= 120,500 + S1 = 120,500 + P1 (1 + rt1)-1 = 120,500 + 75,600(1 + 0.04 × ) = 120,500 +
12
74,117.64706… = $194,617.6471…=$194,617.65
Equivalent value of payments of option (b) at focal date
5 -1
= S2 + S3 = P2 + P3 (1 + rt3)-1 = 30,000 + 165,500 (1 + 0.04 × )
12
= 30,000 + 162,786.8852... = $192,786.8852... = $192,786.87
194,617.6471…- 192,786.8852... = $1830.76190… = $1830.76
Therefore, option (b) is economically better for the contractor by $1830.76.
Exercise 8.3, Solution 13:
Let the balance payment due in 4 months be ‘x’
The focal date is given to be 4 months from now.
Let S1 be the equivalent value on the focal date of $1800 (due 2 months ago).
6
t1 = 2 + 4 = 6 months = years
12
Let S2 be the equivalent value on the focal date of $700 (due in 3 months).
1
t2 = 4 – 3 = 1 month = years
12
Let S3 be the equivalent value on the focal date of $1500 (due today).
4
t3 = 4 months = years
12
We have S1 + S2 = S3 + x
P1 (1 + rt1) + P2 (1 + rt2) = P3 (1 + rt3) + x

6 + 1 4
1800 (1 + 0.06 × ) 700 (1 + 0.06 × ) = 1500 (1 + 0.06 × ) + x
12 12 12
1854 + 703.5 = 1530 + x
We get x = $1027.50
Therefore, the balance payment due in 4 months is $1027.50
Exercise 8.3, Solution 15:
Using ‘now’ as the focal date and let the equal payments be ‘x’.
Let S1 be the equivalent value of $4500 on the focal date.
Let P2 be the equivalent value of $7630 on the focal date.
Let x be the value of one of the equal payments on the focal date.
Let P4 be the equivalent value of the other equal payment x on the focal date.
S1 + P2 = x + P4

Last updated: June 17, 2017

 P1 (1 + rt1)-1 + S2 (1 + rt2)-1 = x + S4 (1 + rt4)-1

4 -1 13 -1 6 12 -1
4500(1 + 0.04 × ) + 7630(1 + 0.04 × ) = x (1 + 0.04 × )-1 + x (1 + 0.04 × )
12 12 12 12
4440.789474…+ 7313.099042... = 0.980392…x + 0.961538…x
x = $6052.682008... = $6052.68
Therefore, the value of each of the equal payments in option (b) = $6052.68
Exercise 8.3, Solution 17:
Let S be the total amount repaid and S1 and S2 the amounts repaid after 6 and 9 months respectively.
S1=2 S2. S= S1+ S2=3 S2
9
S= P (1 + rt) = 9500(1+0.05 × ) =9856.25
12
The total amount to be repaid $9856.25
Since the first payment is twice as much as the first payment:
S1=6570.84
S2=3285.42
We get:
3 -1
S1=6570.84=P1 (1+rt1) =P1 (1+0.05× ) ,
12
3 -1
P1=6570.84× (1+0.05× ) = 6489.72
12
P2=S2=3285.42
Total = 6489.72 + 3285.42 = $9775.14
S1=$6516.53
S2=$3258.26
Therefore, the amount to be paid in six months is $6516.53, and the amount to be paid in nine months is
$3258.26.
Exercise 8.3, Solution 19:
Let S be the total amount repaid and S1 and S2 the amounts repaid after 6 and 12 months respectively.
S = S1 + S2 + x

6 3
3000 (1 + 0.075) = 1000 (1 + 0.075 × ) + x (1 + 0.075 × ) + x
12 12
3225 = 1037.50 + 1.01875x + x
2187.50 = 2.01875 x
X = 1083.59

Last updated: June 17, 2017

Therefore the amount of the two equal payments one in nine months and one in one year is $1083.59.

Last updated: June 17, 2017