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Solution 03

This document provides instructions and solutions for 4 problems from Assignment 3 that are due on September 28th, 2007. It includes the calculations and steps to solve problems 3.12, 3.15, 3.25, and 3.39, which involve topics like present and future value, interest rates, and annuities.

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211 views

Solution 03

This document provides instructions and solutions for 4 problems from Assignment 3 that are due on September 28th, 2007. It includes the calculations and steps to solve problems 3.12, 3.15, 3.25, and 3.39, which involve topics like present and future value, interest rates, and annuities.

Uploaded by

api-26315128
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 3

Solution to Assignment 3

Problems 3.12, 3.15, 3.25, and 3.39 are to be solved and handed in by the
end of Tutorial on Friday, September 28th, 2007.

3.12 Find the effective annual interest rate first in order to determine the
effective interest rate for the four-month period:

ie for continuous compounding

ie = e0.12 − 1 = 0.1274
0.1274 = (1 + i4-months)3 − 1
i4-months = (1.1274)1/3 − 1 = 0.040804

Using this interest rate,

P = (P/A, 4.0804%, 20)[400 + 100(A/G, 4.0804%, 20)]


= 13.4949[400 + 100(8.1843)]
= 16 442.22

The present worth is $16 442.

3.15 From basic principles:

F = P(1 + i)N
5000 = 2300(1 + i)7
1 + i = (5000/2300)1/7
i = (5000/2300)1/7 − 1 = 0.1173 = 11.73%

Or from the tables:

F = P(F/P, i, N)
5000 = 2300(F/P, i, 7)
(F/P, i, 7) = 5000/2300 = 2.1739

(F/P, 11%, 7) = 2.0761


(F/P, 12%, 7) = 2.2106

By linearly interpolating between the two, we get:

i = 11 + (12 − 11)[(2.1739 − 2.0761)/(2.2106 − 2.0761)] = 11.73%


3.25 A' = 10 000
G = 1000
i = 0.15
N = 6 for gradient to annuity
6 for annuity to present value
2 for future value to present value

P = [10 000 + 1000(A/G, 15%, 6)](P/A, 15%, 6)(P/F, 15%, 2)


= [10 000 + 1000(2.0971)](3.7844)(0.75614)
= 34 616.29

The software is worth $34 616 today.

3.39 Construction costs (in $millions):

P1 = 20(P/A, 6%, 5)(P/F, 6%, 4) = 20(4.2124)(0.79209) = 66.728

Maintenance and Repair costs (in $millions):

i° = (1 + 0.06)/(1 + 0.01) − 1 = 0.0495 ≅ 5.0%

P2 = 2[(P/A, 5%, 35)/(1 + 0.01)](P/F, 6%, 9)


= 2(16.374/1.01)(0.5919) = 19.1914

P = P1 + P2 = 85.9193

The present cost of the water supply project is about $86 million.

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