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Chapter 3 Understanding Money Management

3.1)
(a) No min al int erest rate 12 1.5 18%
m
r
(b) Effective int erest rate 1 1 1 0.015 1 0.1956 19.56%
12

3.2)

No min al int erest rate 12 1.75 21%


m
r
Effective int erest rate 1 1 1 0.0175 1 0.2314 23.14%
12

1400
3.3) Effective int erest rate 100 16.27 Ans.
8600

3.4)
m
r
Effective int erest rate 1 1
m
0.07 m
0.72 (1 ) 1 m 12 i.e. monthly compounding Ans.
m

3.5)

4
Interest rate per week 0.6667%
600
Effective int erest rate for 13 weeks (1 0.00667)13 1 9.026%
No min al Interest rate per year 52 0.00667 34.6667% Ans.
Effective int erest rate per year (1 0.00667)52 1 41.29% Ans.

3.6)

2
Weekly no min al int erest rate 0.0025 0.25%
800
Annual no min al int erest rate 52 0.0025 13% Ans.
Effective annual int erest rate 1 0.0025 1 13.86% Ans.
52
Fundamentals of Engineering Economics, 3rd ed. 2012

3.7)
250 12
No min al int erest rate 13.63% Ans.
22000

3.8)
Total amount paid in 36 month 36 *525 $18900
Total interest paid in 36 month $900
900 / 3
No min al int erest rate 1.667% per year. Ans.
18000

3.9)
Total amount paid in 60 months 400 60 24000
24000 20000
No min al interest paid per year $800
5
No min al int erest rate 800 / 20000 4.0%
12
0.04
Effective int erest rate per year 1 1 4.07% Ans.
12

3.10)
$20, 000 $922.90( P / A, i, 24)
( P / A, i, 24) 21.6708
i 0.8333%
APR 0.8333% 12 10%

3.11)
12
0.12
Effective int erest rate of Bank A 1 1 12.68%
12
365
0.118
Effective int erestrate of bank B 1 1 12.52%
365
Bank B is preferred .

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Fundamentals of Engineering Economics, 3rd ed. 2012

3.12)
K 1
r 0.08
(a) ia 1 1 1 1 0.667% Ans.
CK 12 1
3
0.08
(b) ia 1 1 2.01% Ans
43
6
0.08
(c ) ia 1 1 4.067% Ans
2 6
12
0.08
(d ) ia 1 1 8.2% Ans
112

3.13)
3
0.1
ia 1 1 2.52% Ans
43

3.14)
r 0.09
ia e 1 e
K 12
1 0.75% Ans.

3.15)
r 0.08
ia e 1 e
K 4
1 2.02% Ans.

3.16)
Total amount paid in 48 months 650 48 $31200
Total int erest paid in 48 months 31200 30000 $1200
1200 4
Total int erest paid per year 1.0%
30000
12
0.01
ia 1 1 1.004% Ans.
12

3.17)

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Fundamentals of Engineering Economics, 3rd ed. 2012

1
0.1
(a) ia 1 1 0.0.1%
1
2
0.09
(b) ia 1 1 9.20%
2
4
0.12
(c ) ia 1 1 12.55%
4
365
0.07
d ia 1 1 7.25%
365

3.18)

2
0.08
(a) ia 1 1 8.16%
2
F P ( P / A,8.16%,12) 6000(1 0.0816)12 $15379.82
4
0.06
(b) ia 1 1 6.13%
4
F P ( P / A, 6.13%,18) 14,500(1 0.0613)18 $42,311.16
12
0.08
(c ) ia 1 1 8.29%
12
F P ( P / A,8.29%, 7) 12,500(1 0.0829)7 $21,828.73

3.19)
1
0.08
(a) ia for six months 1 1 0.04%
2 1
F A( F / A, 4%, 24) 12, 000 39.0826 $468,991.2
1
0.12
(b) ia for three months 1 1 3.0%
4 1
F A( F / A,3%, 24) 8000 34.4625 $275412
1
0.06
(c ) ia for one month 1 1 0.5%
12 1
F A( F / A, 0.5%, 60) 6000 353.5837 $2121502.2

3.20)

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Fundamentals of Engineering Economics, 3rd ed. 2012

1
0.08
(a) ia for six months 1 1 0.04%
2 1
A F ( A / F , 4%, 20) 1700 0.0336 $571.2
1
0.03
(b) ia for three months 1 1 0.75%
4 1
A F ( A / F , 0.75%, 24) 9000 0.0382 $343.8
1
0.12
(c ) ia for one month 1 1 0.83%
12 1
A F ( A / F ,1%,84) 4000 0.0077 $30.80

3.21)
1
0.08
(a) ia for six months 1 1 0.04%
2 1
P A( P / A, 4%, 20) 2, 700 13.5903 $36693.0
1
0.12
(b) ia for three months 1 1 3.0%
4 1
P A( P / A,3%, 24) 10, 000 16.9355 $169355
1
0.06
(c ) ia for one month 1 1 0.5%
12 1
P A( P / A, 0.5%, 24) 14, 000 22.5629 $315880.6

3.22)
1
0.08
ia for 3 months 1 1 2%
4 1
C [2,500{( P / F , 2%, 2) ( P / F , 2%, 4) ( P / F , 2%, 6)} 3,500( P / F , 2%,8)]( A / P, 2%,8)
$1354.045

3.23) Ans: (b)

3
0.08
ia 1 1 2.01%
43
F $8,000 F/A, 2.01%,12 .

3.24) Ans: (a)

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Fundamentals of Engineering Economics, 3rd ed. 2012

3
0.08
ia 1 1 2.013%
43

3.25)
1
0.09
ia 1 1 0.75%
12 1
100, 000 A( F / A, 0.75%, 24)
A 100, 000 / 26.1885 $3818.46

3.26)

12
0.06
ia 1 1 6.16%
12
F 4000( F / P, 6.16%,9) 5000( F / P, 6.16%, 6) 7000( F / P, 6.16%, 4)
4000 (1 0.0616)9 5000 (1 0.0616)6 7000 (1 0.0616) 4 22898.168
F / 2 11449.08
For First Scheme, F 11449.08(1 0.0616)6 $16388.38 Ans
4
0.08
Now, For Second Scheme, ia 1 1 8.24%
4
F 11449.08(1 0.0824)6 $18411.84 Ans

3.27)

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Fundamentals of Engineering Economics, 3rd ed. 2012

1
0.09
ia quarterly 1 1 2.25%
4 1
F A( F / A, 2.25%,100) 360.84 A
4
0.09
ia annually 1 1 9.3%
4 1
P A( P / A,9.3%,10) 50, 000 6.333 $316688.76 360.84 A
A $877.643 Ans.

3.28)

12
0.09
ia 1 1 9.38%
12
{600( P / A,9.38%, 4) 400( P / G,9.38%, 4)}( P / F ,9.38%,3) C ( P / A,9.38%, 7)
600 0.3212 400 4.461 0.7641 C 4.9684
C $304.06 Ans.

3.29)
M 12
r 0.05
ia 1 1 1 1 0.0616
M 12
F A( F / A, i %,12) 1000 12.3356 12335.6
1.0616 N 1
300, 000 12335.6 N 15.315 years Ans.
0.0616

3.30)
F 300, 000 100, 000 $200, 000
A $2, 000, Monthly int erest rate 0.08 /12 0.006667
1 0.0066 N 1
200, 000 A( F / A, i, N ) 2000 N
N 164 months Ans
0.0066 1 0.0066

3.31)

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Fundamentals of Engineering Economics, 3rd ed. 2012

P 40, 000( P / A,9%,15) 40, 000 8.0607 $322426


1 0.09 N 1
$322426 967.28 39.84 40 years.
0.09
60 40 20 Birthday Ans.
th

3.32)

4
0.12
ia 1 1 12.55%
4
Quarterly int erest rate 0.12 / 4 0.03 3%
A1 ( F / A,3%, 60) 30000 30, 000( P / A,12.55%,3)
1.12553 1
30000 30000 3
30000 30, 000( P / A,12.55%,3) 0.1255 1.1255
A1 $621.76 per quarter Ans.
( F / A,3%, 60) 163.0534

3.33)
1
0.12
ia 1 1 3% Quarterly
4 1
2
0.12
ia 1 1 6.05% semiannualy
2 2
Quarterly int erest rate 0.12 / 4 0.03 3%
A1 ( F / A,3%,80) 55, 000( P / A, 6.05%,10)
1.060510 1
55, 000 10
55, 000( P / A,12.55%,10) 0.0605 1.0605
A1 $1256.9 per quarter Ans.
( F / A,3%,80) 321.3630

3.34)

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Fundamentals of Engineering Economics, 3rd ed. 2012

1 0.0066 36 1
$12, 000 A 36
$375.59.
0.0066 1 0.0066
F12 paid 375.59 F / A, 0.66%,12 $4674.34 paid upto 12th month.
F12 12, 000 1 0.0066 $12985.66Value of $12, 000 after 1 year .
12

Amount left after 12 month to be paid in next 24 month


$12985.66 $4674.34 $8311.32
3
0.08
ia 1 0.02013
12
8311.32 A P / A, 2.013%,8
8311.32
A $1135.21 Ans
7.32

3.35)
Monthly int erest rate 8 /12 0.666%
F P( F / P, 0.66%, 48) 1,500, 000(1 0.0066)48 2, 056,949.88
2, 056,949.88 A( F / A, 0.66%, 48) A 56.25
A $36,563.081 Ans.

3.36) First compute the equivalent present worth of the energy cost during the first
operating cycle:

P $100( P / A, 0.75%,3)( P / F , 0.75%,1) $160(P / A, 0.75%,3)( P / F , 0.75%, 7)


$742.15

Then, compute the total present worth of the energy cost over 5 operating cycles.

P $742.15 $742.15( P / F , 0.75%,12) $742.15( P / F , 0.75%, 24)


$742.15( P / F , 0.75%,36) $742.15( P / F , 0.75%, 48)
$3,126.5

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Fundamentals of Engineering Economics, 3rd ed. 2012

May June July Aug. Sept. Oct. Nov. Dec Jan. Feb. Mar. Apr.
0 1 2 3 4 5 6 7 8 9 10 11 12

$100 $100 $100 $160 $160 $160

3.37)
Option 1

.06 1
i (1 ) 1 1.5%
4
F $1, 000( F / A,1.5%, 40)( F / P,1.5%, 60) $132,587

Option 2

.06 4
i (1 ) 1 6.136%
4
F $6, 000( F / A, 6.136%,15) $141,111

Option 2 Option 1 = $141,110 132,587 = $8,523

Select (b)

3.38)
A1 $4,800, g 3% 0.03, i 8 /12 0.666%, N 25 12 300 years
A1 1 1 i 1 g 4800 1 1 0.0066 1 0.03
N N 300 300
(1 0.0066)300
F F / P, 0.0066%,12
ig 0.0066 0.03
$141,82, 63,541Ans.

3.39)

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Fundamentals of Engineering Economics, 3rd ed. 2012

4
0.08
(a) ia 1 1 0.0824
4
3P P(1 0.0824) N
log 3
N 13.874Years Ans.
log1.0824
12
0.08
(b) ia 1 1 0.0829
12
3P P(1 0.0829) N
log 3
N 13.794Years Ans
log1.0829
(c ) ia e0.08 1 0.0832
3P P(1 0.0832) N
log 3
N 13.746Years Ans
log1.0832

3.40)
(a) P A( P / A,3%, 24) 6000 16.9355 $101, 613 Ans.
(b) P A( P / A,1%, 72) 6000 51.1504 $306,902.4 Ans.
(c ) e.12 1 12.74%
e0.12746 1
P A( P / A,12.74%, 6) 6000 0.12746 0.1274 $23,598.22 Ans.
e e
1

3.41)

erN 1 e0.0810 1
F A r 5000 0.08 $73,573.50 Ans.
e 1 e 1

3.42) Given: A = $1,000, N = 80 quarters, r = 8% per year

(a)

F $1,500(F / A,2%,80) $290,658

(b)

F $1,500(F / A,2.0133%,80) $292,546.5


(c)

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Fundamentals of Engineering Economics, 3rd ed. 2012

F $1,500(F / A,2.020%,80) $293,503.35

3.43)

F P e rN 20, 000 e0.075 28381.55


r 7 / 4 1.75%, N 5 4 20
e rN 1 e0.017520 1
28381.55 A r A 0.175 A 167.92
e 1 e 1
A $169.016 Ans.

3.44) (a)
F $2, 000( F / A, 0.7444%, 72)
$189, 605.75
1
0.09 3
Note: i 1 1 0.7444% per month
4

(b)

F $2, 000( F / A, 0.75%, 72)


$190, 014.06

(c)

F $2, 000( F / A, 0.75282%, 72)


$190, 220.08

3.45)
F P e rN 30, 000 e0.096 51480.205
r 9 / 4 2.25%, N 6 4 24
e0.022524 1
51480.205 A 0.0225 A 31.46
e 1
A $1636.065 Ans.

3.46)

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Fundamentals of Engineering Economics, 3rd ed. 2012

r 8 / 4 2%, N 4 4 16
erN 1 e0.0216 1
P A rN r 2500 0.0216 0.02 $33890.19 Ans

e e 1 e e 1

3.47)

r 6 / 4 1.5%, N 10 4 40
erN 1 rN1 e0.01540 1 0.065
F A r e 5000 0.015 e $367147.343
e 1 e 1

3.48)
0.15
2
F 5000 e 12 5000 e0.025 $5126.57 Ans.

3.49)

M
r
ia 1 1
M
4
0.2
Bank A : ia 1 1 21.55%
4
365
0.195
Bank B : ia 1 1 21.52%
365

(a) Wrong
(b) Right
(c) Right
(d) Wrong

3.50)

F1 5000 F / P, 0.25%, 6 ( F / P,1.5%, 6) $5549.75


F2 150( F / A, 0.25%, 6)( F / P,1.5%, 6) 150( F / A,1.5%, 6) 990.58 934.5 1925.06
Balance amount at the end of the year 5549.75 1925.06 $3624.67 Ans.

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Fundamentals of Engineering Economics, 3rd ed. 2012

3.51)
(a) Bank A : ia (1 0.0165)12 1 21.659% Ans.
0.2 12
Bank B : ia (1 ) 1 21.939% Ans.
12
(b) FA 525( F / P,1.65%, 24) $790.39
FB 500( F / P,1.666, 24) $743.34
Bank B should be preferred .

3.52)
(a) Monthly int erest rate 15 /12 1.25%
1 0.0125 36 1
15000 1 0.0125 A
36
(b)
0.0125

A $519.97 Ans.
1 0.0125 22 1
(c ) Payoff balance at the end of 14th payment 519.97 22
$9947.31
0.0125 1 0.0125
Interest paid in 15th payment 9947.31 0.0125 $124.34 Ans.
(d )
Total int erest paid 15000 1 0.0125 1 $8459.15 Ans.
36

3.53) Loan repayment schedule: A $15, 000( A / P, 0.75%,36) $477.00

Remaining
End of Interest Repayment of Loan
month Payment Principal Balance
0 $0.00 $0.00 $15,000.00
1 $112.50 $364.50 $14,635.50
2 $109.77 $367.23 $14,268.27
3 $107.01 $369.99 $13,898.28
4 $104.24 $372.76 $13,525.52
5 $101.44 $375.56 $13,149.96
6 $98.62 $378.38 $12,771.58

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Fundamentals of Engineering Economics, 3rd ed. 2012

3.54)
(a) Monthly int erest rate 8 /12 0.666%
0.0066 1 0.0066 300
A 200, 000 $1533.24
1 0.0066 300 1

1 0.0066 240 1
(b) Payoff balance at the end of 5th year 1533.24 184, 405.81
0.0066 1 0.0066 240

After 5th year , monthly int erest rate 9 /12 0.75%
0.0075 1 0.0075 240
A 184, 405.81 $1659.157 Ans.
1 0.0075 240 1

3.55) (a) 3, (b) 3.

H int :
(a) Balance to be paid in two years 15000 3000 12000; Monthly int erest rate 8 /12 0.666
0.0066 1 0.0066 24
A 12, 000 $542.28 Ans
1 0.0066 24 1

1 0.0066 12 1
(b) P 542.28 $6236.58
0.0066 1 0.0066 12

3.56)

Daily int erest rate 10 / 365 0.02739%


30
0.1
ia monthly 1 1 0.008366
12 30
0.00836 1 0.00836 48
A 8000 $203.125 Ans.
1 0.00836 48 1

1 0.00836 48 1
F 203.125 $11,935.52
0.00836

Total int erest paid over the entire period 11,935.52 8000 $3,935.52 Ans.

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Fundamentals of Engineering Economics, 3rd ed. 2012

3.57)
Monthly int erest rate 12 /12 1%
0.011 0.0148
A 25000 $658.58
1 0.0148 1

1 0.0128 1
Payoff balance after 20th payment 658.58 $16017.65 Ans.
0.011 0.0128

3.58)

Monthly int erest rate 10 /12 0.8333%


0.0083 1 0.0083144
A P( A / P, 0.8333%,144) 420, 000 $5008.166 Ans
1 0.0083144 1

3.59)
M 12
r 0.08
ia 1 1 1 1 0.0825
M 12
F P( F / P,8.25%, 20) 425, 000 1 0.0825 $2, 074, 660.462 Ans
20

Interest over 5 years 425, 000 1 0.0825 425, 000 $206725.56 Ans
5

3.60)
The amount to be paid $420, 000 0.8 $336, 000
Monthly int erest rate 12 /12 1%
0.011 0.01240
A P A / P,1%, 240 360, 000 $3963.70
1 0.01240 1

Monthly income required 3 A 3 3963.7 $11,891.12 Ans.

3.61) Given: purchase price = $180,000, down payment (sunk equity) = $30,000, i = 0.75%
per month,and N = 360 months,

Monthly payment:

A $150,000( A / P,0.75%,360)
$1,200

Balance at the end of 5 years (60 months):


:

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Fundamentals of Engineering Economics, 3rd ed. 2012

B60 $1, 200( P / A, 0.75%,300)


$142,993.92

Realized equity = sales price balance remaining sunk equity:

$205,000 $142,993.92 $30,000 $32,006.1

The $32,006.1 represents the net gains (before tax) from the transaction.

3.62) Given: i = 0.75% per month, mortgages for families A, B and C have identical
remaining balances prior to the 20th payment = $150,000,find interest on 20th
payment for A, B, and C. With equal balances, all will pay the same interest.

$150, 000(0.0075) $1,125

3.63) Given: loan amount = $260,000, points charged = 3%, N = 360 months, i = 0.75% per
month, actual amount loaned $260,000(0.97)= $252,200:

A $260, 000( A / P, 0.75%,360)


$2, 092.02

To find the effective interest rate on this loan

$252, 200 $2, 092.02( P / A, i,360)


i 0.7787% per month
r 0.7787% 12 9.3444%
ia (1 0.007787)12 1 9.755% per year

3.64) (a)

$44,000 $6,600(P / A,i,5) $2,200(P / G,i,5)


i 6.913745%

(b)

Amount borrowed $44,000


Total payment made $6,600 $8,800 $11,000
$13,200 $15,400
$55,000
Interest payment $55,000 $44,000
$11,000

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Fundamentals of Engineering Economics, 3rd ed. 2012

Beginning Ending
Period Balance Interest Payment Repayment Balance
1 $44,000.00 $3,042.05 ($6,600.00) $40,442.05
2 $40,442.05 $2,796.06 ($8,800.00) $34,438.11
3 $34,438.11 $2,380.96 ($11,000.00) $25,819.08
4 $25,819.08 $1,785.07 ($13,200.00) $14,404.14
5 $14,404.14 $995.87 ($15,400.00) $0.00
$11,000.01 ($55,000.00)

3.65) (a)

Amount of dealer financing = $18,400(0.90) = $16,560


A $16,560( A / P,1.125%, 48) $448.38
(b)

Assuming that the remaining balance will be financed over 44 months,

B4 $448.38( P / A,1.125%, 44) $15, 493.71


A $15, 493.84( A / P,1.02083%, 44) $438.88

(c)

Interest payment to the dealer:

I dealer $448.38 4 ($16,560 $15,493.71) $727.23

Interest payment to the credit union:

Total payment $438.88(44) $19,310.72


I credit $19,310.72 $15, 493.71 $3,817.01

Total interest payment:

I $727.23 $3,817.01 $4,544.24

3.66)
The monthly payment to the bank: Deferring the loan paymentfor 6 months is
equivalent to borrowing

$9, 600( F / P,1%, 6) $10,190.4

To pay off the bank loan over 36 months, the monthly payment would be

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Fundamentals of Engineering Economics, 3rd ed. 2012

A $10,190.40( A / P,1%,36) $338.32 per month

The remaining balance after making the 16th payment:

B16 $338.32( P / A,1%, 20) $6,105.19

The loan company will pay off this remaining balance and will charge $208 per
month for 36 months. To find the effective interest rate for this new transaction, we
set up the following equivalence relationship and solve for i:

$6,105.19 $208( P / A, i,36)


( P / A, i,36) 29.3519
i 1.1481%
r 1.1481% 12 13.78% per year
12
0.1378
ia 1 1 14.68%
12

3.67)
$18, 000 A( P / A, 0.667%,12) A( P / A, 0.75%,12)( P / F , 0.667%,12)
A(11.4958) A(11.4349)(0.9234)
22.05479 A
A $816.15

3.68) Given: i = 1% per month,deferred period = 6 months, N = 36 monthly payments,


first payment due at end of month 7, the amount of initial loan = $12,000

(a) Find the monthly payment to the furniture store: first, find the loan adjustment for
deferred period

$12,000(F / P,1%,6) $12,738

Find the monthly payments based on this adjusted loan amount

A $12,738( A / P,1%,36) $422.90

(b) Find the remaining balance after the 26th payment. Since there are 10 payments
outstanding,

B26 $422.90(P / A,1%,10) $4,005.41

(c) Find the effective interest rate:

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Fundamentals of Engineering Economics, 3rd ed. 2012

$4,005.41 $204(P / A,i,30)


i 2.9866% per month
r 2.9866% 12 35.84% per year
ia (1 0.029866)12 1 42.35% per year

3.69) Given: Purchase price = $18,000, down payment = $1,800, monthlypayment (dealer
financing) = $421.85, N = 48 end-of-month payments:

(a) Given: i = 11.75%/12 = 0.97917% per month

A $16,200( A / P,0.97917%,48)
$16,200(0.0262)
$424.44

(b) Using dealer financing, find i:

$421.85 $16,200( A / P,i,48)


i 0.95% per month
r 0.95% 12 11.4% per year
12
0.114
ia 1 1 12.015%
12

3.70)

24-month lease plan:

P ($2,500 $520) $500 $520(P / A,0.5%,23)


$500(P / F,0.5%,24)
$13,884.13
Up-front lease plan:

P $12,780 $500 $500(P / F,0.5%,24)


$12,836.4
Select the single up-front lease plan.

3.71) Given: purchase price = $85,000, down payment = $17,000

Option 1: i = 4.5%/12= 0.375% per month, N =360 months

Option 2: For the assumed mortgage,

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Fundamentals of Engineering Economics, 3rd ed. 2012

P1 $45,578, i1 4% /12 0.3333% per month,


N1 300 months, A1 $45,578( A / P,0.3333%,300) $240.57 per month;

For the second mortgage,


P2 $22, 422, i2 0.541667% per month; N2 120 months
A2 $22, 422( A / P,0.541667%,120) $254.60

(a) The effective interest rate for Option2 is

$68, 000 $240.57( P / A, i,300) $254.60( P / A, i,120)


i 0.3727% per month
r 0.3737% 12 4.4724% per year
ia (1 0.003727)12 1 4.57% per year
(b) Monthly payments:

Option 1:

4.5%
A1 $68, 000( A / P, ,360) $344.55
12

Option 2:

$240.57+ $254.60= $495.17 for 120 months, then $240.57 for remaining
180 months

(c) Total interest payment for each option:

For Option 1: $344.55360-68,000 = $56,038


For Option 2: $495.17120 + $240.57180-68,000 = $34,723

(d) Equivalent interest rate:

$344.55( P / A, i,360) $240.57( P / A, i ,300) $254.60( P / A, i ,120)


i 0.3804% per month
r 0.3804% 12
4.5648% per year

3.72) No answers given

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Fundamentals of Engineering Economics, 3rd ed. 2012

3.73)
No answers given, but refer to the article by Formato, Richard A., "Generalized
Formula for the Periodic Payment in a Skip Payment Loan with Arbitrary Skips," The
Engineering Economist, Vol. 37, No. 4; p. 355, Summer 1992

3.74) If you left the $15,000 in your savings account, the total balance at the end of 48 months
at 8% interest compounded monthly would be

FI $15,000( F / P,8%/12, 48) $20,635

The earned interest during this period is then

I $20, 635 $15, 000 $5, 635

Now if you borrowed $15,000 from the dealer at interest 11% compounded monthly
over 48 months, the monthly payment would be

A $15, 000( A / P,11%/12, 48) $388

You can easily find the total interest payment over 48 months under this financing by

I ($388 48) $15, 000 $3, 624

It appears that you save about $2,011 in interest ($5,635 - $3,624). However,
reasoning this line neglects the time value ofmoney for the portion of principal
payments. Since your money is worth 8%/12 interest per month, you may calculate
the totalequivalent loan payment over the 48-month period. This is doneby
calculating the equivalent future worth of the loan paymentseries.

FII $388( F / A,8%/12, 48) $21,863.77

Now compare FI with FII . The dealer financing would cost $1,229more in future
dollars at the end of the loan period.

3.75) (a) A $60, 000( A / P,13% /12,360) $664

(b)

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Fundamentals of Engineering Economics, 3rd ed. 2012

$60,000 $522.95(P / A,i,12)


$548.21(P / A,i,12)(P / F,i,12)
$574.62(P / A,i,12)(P / F,i,24)
$602.23(P / A,i,12)(P / F,i,36)
$631.09(P / A,i,12)(P / F,i,48)
$661.24(P / A,i,300)(P / F,i,60)

Solving for i by trial and error yields

i 1.0028%
ia (1 0.010028)12 1 12.72%

Comments: With Excel, you may enter the loan payment series and use the
IRR(range, guess) function to find the effective interest rate. Assuming that the loan
amount (-$60,000)is entered in cell A1 and the following loan repayment series in
cells A2 through A361, the effective interest rate is found with a guessed value of
11.5/12%:

IRR( A1: A361, 0.95833%) 0.010028

(c) Compute the mortgage balance at the end of 5 years:

Conventional mortgage:

B60 $664( P / A,13% /12,300) $58,873.84

FHA mortgage (not including the mortgage insurance):

B60 $635.28( P / A,11.5% /12,300) $62, 498.71

(d) Compute the total interest payment for each option:

Conventional mortgage(using either Excel or Loan Analysis Program at the


books websitehttp://www.prenhall.com/park):

I $178,937.97
FHA mortgage:
I $163,583.28

(e) Compute the equivalent present worth cost for each option at i 6%/12 0.5%
per month:

Conventional mortgage:
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Fundamentals of Engineering Economics, 3rd ed. 2012

P $664( P / A, 0.5%,360) $110, 749.63


FHA mortgage including mortgage insurance:
P $522.95(P / A,0.5%,12)
$548.21(P / A,0.5%,12)(P / F,0.5%,12)
$574.62(P / A,0.5%,12)(P / F,0.5%,24)
$602.23(P / A,0.5%,12)(P / F,0.5%,36)
$631.09(P / A,0.5%,12)(P / F,0.5%,48)
$661.24(P / A,0.5%,300)(P / F,0.5%,60)
$105,703.95
The FHA option is more desirable (least cost).

3.76) Given: Contract amount = $4,909, A = $142.45, N = 42 months,and


SUM = (42)(43)/2 = 903

(a)
$142.45 $4,909( A / P,i,42)
i 0.9555% per month
ia (1 0.009555)12 1 12.088% per year
(b)

APR 0.9555% 12 11.466%

(c) Rebate factor:

42 41 40 L 35
rebate factor 1
903
1 308 / 903
0.6589

(d) Verify the payoff using the Rule of 78th :

B7 $4,909 $25 ($142.45)(7)


(42 41 35)
$1,048.90
903
$4,934 $997.15 $357.76
$4,294.61

(e) Compute payoff using ( P / A, i, N ) :

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Fundamentals of Engineering Economics, 3rd ed. 2012

B7 $142.45(P / A,0.9555%,35)
$4,220.78

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