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