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Example Problems for interest - d every day(365 days in a...

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EC 309 ECONOMICS FOR ENGINEERS EXAMPLE PROBLEMS & SOLUTIONS 1) A series of equal monthly payments of $1000 for 10 years is equivalent to what future value at the end of 10 years, with an interest rate of 7% compounded continuously? Solution: Continuous compounding effective interest rate =i= e r/K -1 i= e 0.07/12 -1=0.00585=0.585% on monthly basis 10 years 120 months 120 payments in total F=A(F/A,i,N)=1000(F/A,0.585%,120) 44 . 275 , 173 00585 . 0 1 ) 00585 . 0 1 ( 1000 120 = - + = F 2) Suppose the nominal annual rate of interest rate is 12%. Find the equivalent effective rate of interest for m= a) yearly b) every 6 months (2) c) every week(52)
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Unformatted text preview: d) every day (365 days in a year, i.e., interest is earned every day) Solution: r=12% 1 ) 1 (-+ = C cK r i a) % 12 1 ) 1 12 . 1 ( 1 =-+ = i b) % 36 . 12 1 ) 2 12 . 1 ( 2 =-+ = i c) % 73 . 12 1 ) 52 12 . 1 ( 52 =-+ = i d) % 747 . 12 1 ) 365 12 . 1 ( 365 =-+ = i 3) Given the following cash flows for three different alternatives, find which alternative should be selected using PW analysis, if the interest rate is 8%. Year Cash flow Alt. A Alt. B Alt. C-$5,300-$10,000-$8,200 1 1,800 2,000 2 1,800 3,000 3 1,800 4,000 4,500 4 1,800 4,500 7,000 Solution:...
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