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 41 (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 410 (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 421 (10 points) a. N = 20071982 = 25 (years)
Compared to the stockbased 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 427 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 428 (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 c9 P r ob l e m 6
Textbook Problem 431 (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 49>
b. The payments are made at the beginning of the month
i = 2%
N = 12
P = 10,000 + 10,000 (P/A, 2%, N1) = 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 creditcard 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
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 Spring '11
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 Interest, textbook problem

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