IE343_HW2_Solutions

IE343_HW2_Solutions - HomeworkAssignment#2Solutions...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: HomeworkAssignment#2Solutions  PU R D U E U N I V E RSI T Y H om e w o r k A ssign m e n t #2 I E 343 : E n gi n e e r i n g E con om i cs A ssign e d : 3 Se p t 2010 F a l l 2010 D u e : 10 Se p t 2010 I nst r u c to r : A . C a p pon i I n st r u c t ions f o r com p l e t i ng t h e h om e w o r k assi gn m e n t : Write your name, course number (IE 343), Section 1 or 2, and due date on the top of each page submitted for the assignment. Homework must be legible. Box, underline, or highlight your final answer. Homework must be submitted at the beginning of class on the due date. Late homework will not be accepted. All pages of the homework assignment must be stapled together. Failure to do any of the items listed above will result in a deduction of points from your final homework grade. P r ob l e m 1 Textbook Problem 4-1 (5 points) Total Interest = P*N*I = $10,000(4.25 years)(0.10/year) = $4,250 P r ob l e m 2 Textbook Problem 4-10 (10 points) Consumer Loan F = $5,000(F/P,12%,5) = $5,000(1.12)5 = $5,000(1.7623) = $8,811.50 Interest = $8,811.50 - $5,000 = $3,811.50 PLUS Loan F = $5,000(F/P,8.5%,5) = $5,000(1.085)5 = $5,000(1.5037) = $7,518.28 Interest = $7,518.28 - $5,000 = $2,518.28 Difference of Consumer and PLUS Loans Difference = $3,811.50 - $2,518.28 = $1,293.22 Chandra should listen to her father and take the PLUS loan. IE343 HomeworkAssignment#2Solutions Page1  HomeworkAssignment#2Solutions  P r ob l e m 3 Textbook Problem 4-21 (10 points) a. N = 2007-1982 = 25 (years) Compared to the stock-based mutual fund which usually earned at least 10% per year, they did not do very well. b. they just did fine. P r ob l e m 4 Textbook Problem 4-27 You will get $4,315.72 in your savings plan after 15 years. IE343 HomeworkAssignment#2Solutions Page2  (10 points) HomeworkAssignment#2Solutions  P r ob l e m 5 Textbook Problem 4-28 (15 points) Saving: $730 / year Duration: 35 year Interest Rate: 7 % The question asks how much money you will accumulate in 35 years (F value) if you save $ 730 every year (A value) F = A (F/A, 7%, 35) = 730 (138.2369) F = $ 100,912.94 From Table c-9 P r ob l e m 6 Textbook Problem 4-31 (15 points) a. The present equivalent of these payments is i = 2% N = 12 P = A (P/A, 2%, 12) = 10,000 (P/A, 2%, 12) = 10,000 (10.5753) = $ 105,573 (P/A, 2%, 12) This value can be found in T abl e C -5. <Example 4-9> b. The payments are made at the beginning of the month i = 2% N = 12 P = 10,000 + 10,000 (P/A, 2%, N-1) = 10,000 + 10,000 (P/A, 2%, 11) = $107,868 c. The present value for (b) is higher than (a). The cash flows for part b are received earlier than the ones for part a, thus less discounting occurs, and consequently they have more value. IE343 HomeworkAssignment#2Solutions Page3  HomeworkAssignment#2Solutions  P r ob l e m 7 What is the effective interest rate when the nominal interest rate of 10% is: (5 points) (a) compounded semiannually m = 2, r = 10%. We have i = 10.25 % (b) compounded quarterly m = 4, r = 10%. We have i = 10.38 % (c) compounded monthly m = 12, r = 10%. We have i = 10.47 % P r ob l e m 8 (10 points) Many credit-card companies charge interest at a yearly rate of 18% compounded monthly. If the amount P is charged at the beginning of a year, how much is owed at the end of the year if no previous payments have been made? Such a compounding is equivalent to paying simple interest every month at a rate of 18/12 = 1.5% per month, with the accrued interest then added to the principal owed during next month. Hence, after a year, you will owe P (1 + 0.015)12 = 1.1956 P IE343 HomeworkAssignment#2Solutions Page4  ...
View Full Document

Ask a homework question - tutors are online