E120 Principles of Engineering Economics
Fall 06 Midterm I Solutions
1.
Let’s find the present value of each cash flow on Jan 01 2007 (any other date is
also fine since it will not change your final decision).
Payment 1:
The relevant cash flow is,
(
29
2
18
150000, 150000(1.02), 150000(1.02) ,.
....,150000(1.02)
where each period corresponds to 6 months. Since YTM is compounded
semiannually, the effective rate for period is 4%.
The corresponding present value is:
1
19
19
1
1
1
19
150000(1.02)
1.04
1
150000
1.02
1.04
(1.04/1.02)
1.04
1
1.04
1.02
150000
1.04
1.02
1
1.02
i
i
i
i
i
PV


=
=

=
=

=
=

∑
∑
2406577.787
Payment 2:
The relevant cash flow is,
(
29
200000, 500000, 200000, 500000,200000,500000, 200000, 500000, 200000, 500000
where each period corresponds to 1 year. The EAR is
2
1.04
1
8.16%
 =
and the
effective 2year rate is
4
1.04
1 16.99%
 =
. So the present value becomes:
4
5
1 1.1699
1 1.1699
200000
200000
500000
(1.0816)
0.1699
0.1699
PV



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 Spring '08
 ALDER
 4%, 2year, $200000

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