Problem+Set+4

Problem+Set+4 - E120 Principles of Engineering Economics...

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E120 Principles of Engineering Economics Fall 2010 Problem Set #4 1. A loan company is offering a loan of \$L for 30 years with the following characteristics: · A quote rate of 6 % per year compounded monthly for the first 15 years. · A quote rate of 7 % per year compounded monthly for the last 15 years. · Monthly payments of \$2000 for 30 years. a. Calculate the loan amount L. Explain. b. The APR for the entire loan is given to be 7 % compounded monthly. The loan also has 3 points which means you have to pay 3 % of the loan now. Calculate the closing costs. Explain. 2. Given two cash flows (a 1 ,a 2 ) and (b 1 , b 2 ) in which a 1 > b 1 and a 1 +a 2 > b 1 +b 2 then for any positive interest rate that present value of the first cash flow is bigger that the present value of the second cash flow. 3. In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over the year?

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