Faculty of Engineering 1st. Year (Production Dept.
)
Menofia University Sheet No. 3
Engineering Economy 2022-2023 (Cash Flow)
Comparison of Alternatives:
1- Investment A costs 10000 L.E. today and pays back 11500 L.E. two years from
now. Investment B costs 8000 L.E. today and pays back 4500 L.E. each year for
two years. If an interest rate of 5% is used, which alternative is superior?
Calculate the equivalent present value for each alternative:
𝑃𝐴 = −10000 + 11500 ∗ (𝑃⁄𝐹 , 5%, 2) = −10000 + (11500 ∗ 0.907)
= 430.5 𝐿. 𝐸.
𝑃𝐵 = −8000 + 4500 ∗ (𝑃⁄𝐴 , 5%, 2) = −8000 + (4500 ∗ 1.859) = 365.5 𝐿. 𝐸.
Alternative A is superior and should be chosen.
Another sol: calculate the equivalent future value for each alternative:
𝐹𝐴 = 11500 − 10000 ∗ (𝐹 ⁄𝑃 , 5%, 2) = 11500 − 10000 ∗ 1.102 = 480 𝐿. 𝐸.
𝐹𝐵 = 4500 ∗ (𝐹 ⁄𝐴 , 5%, 2) − 8000 ∗ (𝐹 ⁄𝑃 , 5%, 2)
= (4500 ∗ 2.05) − (8000 ∗ 1.102) = 409 𝐿. 𝐸.
Alternative A is superior and should be chosen.
Faculty of Engineering 1st. Year (Production Dept.)
Menofia University Sheet No. 3
Engineering Economy 2022-2023 (Cash Flow)
2- An individual supposed to borrow a sum of P=60000 L.E. for 24 equal
installments of A= 3174 L.E. Over the next two years. What is the effective
interest rate per month and the nominal interest rate for his loan? What is the
effective annual interest rate of his loan?
𝑃 = 60000 𝐿. 𝐸. 𝑛 = 24 𝑖𝑛𝑠𝑡𝑎𝑙𝑙𝑚𝑒𝑛𝑡𝑠 𝐴 = 3174 𝐿. 𝐸. 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
𝑃 = 𝐴 ∗ (𝑃⁄𝐴 , 𝑖%, 24)
𝑃 60000
(𝑃⁄𝐴 , 𝑖%, 24) = = = 18.9036
𝐴 3174
From tables: 𝑖 = 2%
The effective monthly interest rate = 2 %
The nominal annual interest rate = 2 x 12 = 24 %
𝒓 𝟎.𝟐𝟒 𝟏𝟐
The effective annual interest rate= (𝟏 + 𝒎)𝒎 − 𝟏 = (𝟏 + 𝟏𝟐
) − 𝟏 = 𝟐𝟔. 𝟖𝟐𝟒%
3- Suppose a deposit of 1000 L. E. for is placed in a bank account at the end of each
three years. The bank pays an interest rate of 8 % compound quarterly. How
much will be accumulated at the end of the four years.
Effective interest rate per quarter= 8%/4=2%
Faculty of Engineering 1st. Year (Production Dept.)
Menofia University Sheet No. 3
Engineering Economy 2022-2023 (Cash Flow)
𝐹4 = 𝐹1 + 𝐹2 + 𝐹3
𝐹1 = 1000 ∗ (𝐹 ⁄𝑃 , 2%, 12) = 1000 ∗ 1.268 = 1268 𝐿. 𝐸.
𝐹2 = 1000 ∗ (𝐹 ⁄𝑃 , 2%, 8) = 1000 ∗ 1.172 = 1172 𝐿. 𝐸.
𝐹3 = 1000 ∗ (𝐹 ⁄𝑃 , 2%, 4) = 1000 ∗ 1.082 = 1082 𝐿. 𝐸.
𝐹4 = 1268 + 1172 + 1082 = 3522 𝐿. 𝐸.
4- An individual makes deposits and withdrawals as cash flow with compound
quarterly interest shown in figure. What is the equivalent present value at
nominal interest rate 6%?
Faculty of Engineering 1st. Year (Production Dept.)
Menofia University Sheet No. 3
Engineering Economy 2022-2023 (Cash Flow)
The effective quarter interest rate=6%/4=1.5%
𝑃 = 200 − (100 ∗ (𝑃⁄𝐹 , 1.5%, 1)) + (50 ∗ (𝑃⁄𝐹 , 1.5%, 2))
+ (100 ∗ (𝑃⁄𝐹 , 1.5%, 4))
= 200 − (100 ∗ 0.9852) + (50 ∗ 0.9707) + (100 ∗ 0.9422)
= 244.235 𝐿. 𝐸.
