E120 Principles of Engineering Economics
Fall 2010
Problem Set #2 Solutions
1.
a. FV
5
= $2,000 × 1.05
5
= $2,552.56
b. FV
10
= $2,000 × 1.05
10
= $3,257.79
c. FV
5
= $2,000 × 1.1
5
= $3,221.02
d. Because in the last 5 years you get interest on the interest earned in the first 5 years as
well as interest on the original $2,000.
2.
PV of $10,000 in 10 years = $10,000/1.07
10
= $5, 083.49 > $5,000
So the 10,000 in 10 years is preferable because it is worth more.
3.
a. PV = $350,000/1.0
5
= $350,000. So you should take the $350,000.
b. PV = $350,000/1.08
5
= $238,204. You should take the $250,000.
c. PV = $350,000/1.2
5
= $140,657. You should take the $250,000.
4.
a. Amount of money in the account at age 25 = $3,996 × 1.08
7
= $6,848.44
b. Amount of money in the account at age 65 = $3,996 × 1.08
47
= $148,779
c. Amount of money originally put in the account = $3,996/1.08
18
= $1,000
5.
First, calculate the present value of the cash flows:
PV = $1,000/1.05 + $1,000/1.05
2
+ $1,000/1.05
3
= $(952 + 907 + 864) = $2,723
Once you know the present value of the cash flows, compute the future value (of this
present value) at date 3.
FV
3
= $2, 723 × 1.05
3
= $3,152.
6.
To find the Present Value of the Annuity (PVA), we use the equation:
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Fall '08
 ILAN
 Time Value Of Money, PVA

Click to edit the document details