Name: ____Solutions______________________

Date: _________________

Engineering Economics
1. Trevor needs a new computer for college. His uncle lends him $1000 at 5 percent interest for 3
years. What is the total payment after 3 years if simple interest is used?
given: i = 5%
n=3
P = $1000

find:

F = P (1 + in)
= $1000 (1 + 0.05*3)
= $1150

2. What deposit today is required for it to be worth $150,000 in 25 years if the deposit earns 5
percent annual compound interest? Include the cash flow diagram for this situation.
given: i = 5%
n = 25
F = $150,000

Using compound interest (with formula):

P = F / (1 + i)^n
= $150,000 / (1 + 0.05)^25
= $150,000 / (3.386355)
= $44,295.42

or

(with table):
P = F (P|F i%,n)
= $150,000 (P|F 5%,25)
= $150,000 (0.29530)
= $44,295.00

3. Juan borrows $25,000 at 7 percent compounded annually. If the loan is repaid in five equal
annual payments, what will be the size of Juans payments if the first payment is made 1 year after
borrowing the money? Include the cash flow diagram for this situation.

given: i = 7%
n=5
P = $25,000

Using compound interest (with formula):

A = P (i (1 + i)^n) / ((1 + i)^n 1)
= $25,000 * (0.07 (1 + 0.07)^5) /
((1 + 0.07)^5 1)
= $25,000 (0.243891)
= $6097.27
Professional Topics in Engineering
ME175A

or

page 1 of 1

(with table):
A = P (A|P i%,n)
= $25,000 (A|P 7%,5)
= $25,000 (0.24389)
= $6097.25

Quiz 5
Fall 2014