Midterm1SolutionsE120Fall06

# Midterm1SolutionsE120Fall06 - E-120 Principles of...

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E-120 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 2-year 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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Midterm1SolutionsE120Fall06 - E-120 Principles of...

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