Assignment #15 | Engineering Economics #2
Solution
For each of these questions, specify the type of questions (i.e. nominal and effective interest, uniform
series present worth, etc.)
Question 1 – Continuous Compounding
If you invest $2,000 at a nominal interest rate of 13% compounded continuously, calculate the final
amount you will have in the account after 20 years.
F=?
P = $2,000
n = 20 (years)
r = 13%
F 𝑃𝑒
.
F = ($2,000)𝑒 = $26,927.48
Question 2 – Uniform Grading Uniform Series (Convert G to A)
The maintenance on a machine is expected to be $155 at the end of the first year, and it is expected to
increase $35 each year for the following seven years. What is the uniform annual maintenance cost.
Use a 6% interest rate, compounded annually.
A = 155 + 35(A/G,6%,8yrs) = 155 + 35(3.195) = $266.83
Question 3 – Nominal and Effective
A bank offers a 10 year CD paying 10% annual interest, compounded quarterly. What is the effective
interest rate being offered?
%
𝑖 2.5%
Question 4 – Nominal and Effective
A bank offers a 10 year CD paying 10% annual interest, compounded quarterly. What is the number of
interest periods for this CD?
𝑛 4 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 10 𝑦𝑒𝑎𝑟𝑠 40 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑠
Question 5 – Nominal and Uniform Payment Compound Amount
Adam is saving up to buy a new car. Each month he deposits $300 into his savings account. Adams’
savings account earns 12% interest annually, compounded monthly. How much money will Adam have
to put towards his new car in 5 years?
%
𝐴 $300 | 𝑟 12% 0.12| 𝑒𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒 𝑖 1% 0.01
𝑛 5 𝑦𝑒𝑎𝑟𝑠 12 𝑚𝑜𝑛𝑡ℎ𝑠 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟 60 𝑚𝑜𝑛𝑡ℎ𝑠
𝐹 ??
Uniform Payment Compound Amount
𝐹 𝐴 𝐹/𝐴, 𝑖, 𝑛 $300 𝐹/𝐴, 1%, 60 $300 81.6697 $24,500.91
Question 6 – Cash Flow
Suppose you have a savings plan covering the next ten years, according to which you put aside $600
today, $500 at the end of every other year for the next five years, and $400 at the end of each year for
the remaining five years. As part of this plan, you expect to withdraw $300 at the end of every year for
the first 3 years, and $350 at the end of every other year thereafter. Tabulate your cash flow and draw
your cash flow diagram.
Question 7 – Uniform Gradient Present Worth
Steven is planning a 20‐year retirement; he wants to withdraw $6,000 at the end of the first year, and
then to increase the withdrawals by $800 each year to offset inflation. How much money should he have
in his savings account at the start of his retirement, if the bank pays 8% per year, compounded annually?
Uniform Gradient Present Worth
𝐴 $6,000 | G $800 | i 8% 0.08 | 𝑛 20 𝑦𝑒𝑎𝑟𝑠
𝑃 𝐴 𝑃/𝐴 ,𝑖, 𝑛 𝐺 𝑃/G,𝑖, 𝑛
𝑃 $6,000 𝑃/𝐴 ,0.08,20 $800 𝑃/G,0.08,20
𝑃 $6,000 9.8181 $800 69.0898 $114,180.44
Question 8 – Uniform Gradient Present Worth
Compute the value of C in the following cash flow
Using the Uniform Gradient Present Worth
𝑃 𝐺 𝑃/G,𝑖, 𝑛 $25 𝑃/𝐺, 0.1,4 $25 4.3781 $109.45
Question 9 – Uniform Gradient Present Worth Decreasing Gradient
Compute the value of P for i = 12% for the following cash flow.
Convert the above cash flow diagram to the following:
𝐴 $300 | G $100 | i 12% 0.12 | 𝑛 3 𝑦𝑒𝑎𝑟𝑠
(Gradient here is decreasing)
𝑃 𝐴 𝑃/𝐴,𝑖, 𝑛 𝐺 𝑃/G,𝑖, 𝑛
𝑃 $300 𝑃/𝐴,0.12,3 $100 𝑃/G,0.12,3
𝑃 $300 2.4018 $100 2.2208 $498.5
