Solutions to Chapter 4 Problems

4-1 I = P(N)(i) = $15,000 (3.25 yrs.) (0.08/yr) = $3,900

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4-2 I = ($200)(1% /month)(6 months) = $12

Total owed = $200 + $12 = $212

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4-3 I = $2,000 (3 yrs.) (0.12) = $720; F = P + I = $2,000 + $720 = $2,720

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4-4 Simple interest earned = 5(i)P

Compound interest earned = P(1 + i)5 – P

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4-5 Amount Owed Interest Total Amount Total
at Beginning Accrued Owed at Principal End of Year
Year of Year for Year End of Year Payment Payment
1 $2,000 $ 200 $2,200 $ 0 $ 200
2 2,000 200 2,200 0 200
3 2,000 200 2,200 0 200
4 2,000 200 2,200 1,000 1,200
5 1,000 100 1,100 0 100
6 1,000 100 1,100 0 100
7 1,000 100 1,100 0 100
8 1,000 100 1,100 1,000 1,100
Total Interest = $ 1,200

$200 in interest is payable each year for the first four years. $100 in interest is payable each year for the
second four years. The total interest paid over the eight year period is $1,200.

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4-6 (a) Amount Interest Total Amount Total
Owed at Accrued Owed at Principal EOM
Month BOM for Month End of Month Payment Payment
1 $17,000 $ 170 $17,170 $ 0 $ 170
2 17,000 170 17,170 7,500 7,670
3 9,500 95 9,595 7,500 7,595
4 2,000 20 2,020 0 20
Total Interest = $ 455
Total interest paid over the four month loan period = $455.

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4-7 (a) EOY 1 principal = $3,880 − $800 = $3,080
EOY 3 interest = [$10,000 − $3,080 − $3,326.40](0.08) = $287.49
EOY 3 principal = $3,880 − $287.49 = $3,592.51

(b) Beginning of year 3 principal = $10,000 − $3,080 − $3,326.40 = $3,593.60

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4-8 F = $8,000 (F/P, 8%, 6)
= $8,000 (1.5869)
= $12,695

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4-9 F = $400 (F/P, 9%, 40) = $400 (31.4094) = $12,563.76

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4-10 Consumer Loan: F = $5,000 (F/P, 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 = $7,518.28

Interest = $2,518.28

Difference = $3,811.50 − $2,518.28 = $1,293.22

Chandra will save money by following the advice of her father.

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4-11 F = $30,000 (F/P, 8%, 20)
= $30,000 (4.6610)
= $139,830

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4-12 P = $18,000 (P/F, 7%, 15) = $18,000 (0.3624) = $6,523.20

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4.13 P = $25,000 (P/F, 4%, 10) = $25,000 (0.6756) = $16,890

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4-14 N = 2005 – 1981 = 24 years

P = $67 (P/F, 3.2%, 24) = $67 (1.032)−24 = $31.46

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4-15 $90 = $30 (F/P, 8%, N)
3 = (1.08)N
log (3) = N log (1.08)
log(3)
N = log(1.08)
N = 14.27 years

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 72
4-16 Solution by Rule of 72: N   7.2 years.
10
Compare to the exact solution:
$10,000 = $5,000 (F/P, 10%, N) = $5,000 (1 + 0.10) N
2 = 1.1 N ; ln(2) = N ln(1.1); and N = 7.2725 years

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4-17 Future Value will quadruple when the factor is close to 4
Looking in Future Value Table under 8% Column
= 18 Years

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4-18 $1,000,000 = $10,000 (F/P, 10%, N)

100 = (F/P, 10%, N) = (1.10) N

N = log(100)/log(1.1) = 48.3 or 49 years

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4-19 The $1,000 originally invested dollars doubles nine times in 36 years, so the student will gain ($1,000)(2 9)
− $1,000 = $511,000 in 36 years.

An alternate approach is to solve 2 = (F/P, i′, 4) for i′ = 18.921%. Then

F = $1,000 (F/P, 18.921%, 36) = $512,000.

Thus, the gain is $512,000 − $1,000 = $511,000.

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4.20 Years of growth = 2008 – 1885 = 123
Factor = $0.42/$0.02 = 21
21 = (1) (F/P, i, 123)
21 = (1+i)123
123
21 - 1 = i, or i = 2.51% per year

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4-21 (a) N = 2007 – 1982 = 25 years

$100,000 = $25,000 (1 + i)25

i= 25
4 − 1 = 0.057 or 5.7% per year.

So Barney and Lynne did not really do that well at all!

(b) $100,000 = $1,000 (F/P, i′, 25)

(F/A, i′, 25) = 100

i′ = 10.1% per year

In this situation they did pretty well on their mutual fund investment.

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4-22 Years of growth = 2008 – 1970 = 38
Factor = $4.00/$0.75 = 5.33
5.33 = (1) (F/P, I, 38)
5.33 = (1+i)38
38
- 1 = i, or i = 4.5% per year
5.33

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4-23 (a) $5,290 = $827 (F/P, i%, 23) i = 8.4% per year

(b) $5,290 = $2,018 (F/P, i%, 12) i = 8.36% per year

(c) 1982−2005: 198.1 = 96.5 (1 + i)23 i = 3.18% per year

1993−2005: 198.1 = 144.5 (1 + i)12 i = 2.66% per year

The cost of tuition and fees has risen 2.6 times faster than the CPI for the 1982−2005 time period.
Over the 1993−2005 period, they have risen more than three times as fast.

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4-24 $15 = $6 (F/P, i%, 6); i = 16.5% per year. This is more than five times the annual inflation rate! Turn
down the thermostat on your gas furnace.

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4-25 A = $1,200
F12 = $1,200 (F/A, 6%, 12)
= $1,200 (16.8699)
= $20,244

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  (1.3) 25  1
4-26 F = $100 (F/A, 30%,25) = $100   = $234,880
 0.30 

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4-27 A = $25,000 x 2% = $500
F10 = $500 (F/A, 4%, 10)
= $500 (12.0061)
= $6,003.05

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4-28 F = $730 (F/A, 7%, 35) = $730 (138.2369) = $100,913. Of this amount, $730 × 35 = $25,550 is money
you paid in and $75,363 is accumulated interest.

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4-29 (a) F = $848 (F/A, 10%, 45) = $848 (718.9048) = $609,631. Liam’s friend has exaggerated the truth
because the claim is too high.

(b) Liam is trading off the answer in part (a) against the likelihood that he will survive to age 65. If
Liam’s health is good, he may choose to gamble and go ahead with the mutual fund.

(c) Answer left to the student.

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4-30 The reduction in management fees between an actively – managed fund and an index fund is 0.005
($100,000) = $500 per year. The compound worth of this difference in 0 years is F = $500 (F/A, 8%, 20)
= $22,881. This is 22.88% of the original investment of $100,000. So the difference in sales
commissions does add up to a large number. We assume that both types of accounts grow in value at the
same rate. Try to minimize commisions!

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4-31 (a) P = $10,000 (P/A, 2%, 12) = $10,000 (10.5753) = $105,573

(b) P = $10,000 + $10,000 (P/A, 2%, 11) = $107,868

(c) The present equivalent in part (b) is higher because the cash flows are not as far into the future, so
less discounting occurs.

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4-32 A = $2,000
P5 = $2,000 (P/A, 7%, 5)
= $2,000 (4.1002)
= $8,200

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4-33 The carbon fiber automobile would average around 39 miles per gallon of gasoline. The dollar savings in
fuel per year is

117 ,000 / 6 117,000 / 6 

A=   ($3.00) = $450
 30 39

The extra sticker price that can be afforded is $450 (P/A, 20%, 6) = $1,496. This is not a whole lot of
room to wiggle compared to the sticker price of the conventional car. So the cost of manufacturing
carbon fiber automobiles must be made much more competitive against conventional ferrous−aluminum
car bodies and parts.

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4-34 A = $22,000

EOY
0 1 2 3 4 5

i = 15% / yr
P=?

P = $22,000 (P/A, 15%, 5) = $22,000 (3.3522) = $73,748.40

The company can justify spending up to $73,748.40 for this piece of equipment.

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4-35 P = $100,000 (P/A, 8%, 20) = $100,000 (9.8181) = $981,810. Gerard will get $1,018,190 less than the
stated $2,000,000 jackpot if he elects this option. Clearly, Gerard should take the $1,000,000 now
(assuming income tax considerations are ignored). Gerard – this is still a lot of money so we don’t feel
too sorry for you.

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4-36 AMaximum = $550
P15 = $550 (P/A, 6%, 15)
= $550 (9.7122)
= $5,341.71
Thus, the homeowner can afford to spend no more than $5,341.71 for the solar panels.

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4-37 P = $100,000 (P/A, 15%, 10) = $100,000 (5.0188) = $501,880

166
Engineering Economy, Fourteenth Edition, by Sullivan, Wicks, and Koelling. ISBN 0-13-208342-6
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4-38 A = ?, P25 = $200,000
P25 = A (F/A, 8%, 25)
$200,000 = A (73.1059)
A = $200,000 / 73.1059
= $2,736

167
Engineering Economy, Fourteenth Edition, by Sullivan, Wicks, and Koelling. ISBN 0-13-208342-6
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4-39 N = 12 × 25 = 300 months
 0.005 
A = $500,000 (A/F, 0.5%, 300) = $500,000   = $720 per month
 (1.005) 1
300

168
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4-40 (a) N = $1 million per year / $0.005 per cup = 200,000,000 cups per year

$5 million (A/F, 15%, 5)

(b) N= = 148,300,000 cups per year
$0.005 per cup

(c) The compounding of interest.

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 i (1  i) N i i
4-41 (A/P, i%, N) =  
(1  i)  1 1  1 /(1  i)
N N
1  (P/F, i%, N)

170
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4-42 A = $10,000,000 (A/P, 15%, 4) = $10,000,000 (0.3503) = $3,503,000

171
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 100,000 miles 100,000 miles
4-43 Fuel savings over eight years = 26 miles/gallon  28 miles/gallon  275 gallons, which is about 34.4
gallons per year. Let X represent the cost of gasoline ($/gal).

$800 = (34.4 gal/yr)(X/gal)(P/A, 10%, 8)

$800
= X, or X = $4.36/gal
(34.4 gal)(5.3349)

If the actual cost of gasoline is less than $4.36 per gallon, the CVT is not a good deal.

172
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4-44 A = $10,000,000 (A/P, 7%, 6) = $10,000,000 (0.2098) = $2,098,000 per year

Total interest paid = $2,098,000 (6) − $10,000,000 = $2,588,000

173
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4-45 A = ?, P8 = $250,000
P8 = A (P/A, 12%, 8)
A = $250,000 / 4.9676
= $50,326

174
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4-46 With traditional financing, the monthly payment will be A = $84,000 (A/P, ¾%, 60) = $1,747.20. The
monthly payment with the 0% financing plan would be $84,000/60 = $1,400 per month. Total savings =
($1,747.20 − $1,400)(60) = $20,832. Thus the claim is true.

175
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4-47 Present Value = $50,000
Future Value = $121,350
Future Value Factor = 121,350/50,000 = 2.427
Periods = 30, so, from table interest rate = 3.00%

176
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4-48 40A − $35 million = $39 million, thus A = $1,850,000.

We also know that A = $35 million (A/P, i%, 40). We can guess various interest rates and compare the
resulting value of A to $1,850,000. For example, at i = 4%, A = $1,767,500. At i = 5%,
A = $2,040,500. By linear interpolation, i ≈ 4.3% per year.

177
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4-49 (a) P = A ( P/A, i%, N); $1,000 = $200(P/A, 12%,N); (P/A, 12%, N) = 5.0000
By looking at the 12% interest table in Appendix C under the P/A column, N  8 years.

(b) P = A ( P/A, i%, N); $1,000 = $200 (P/A, i%,10); (P/A, i%, 10) = 5.0000
(P/A, 15%, 10) = 5.0188 and (P/A, 18%, 10) = 4.4941, thus 15% < i < 18%
18% - 15% i% - 15%
By using linear interpolation - 
5.0188 - 4.4941 5.0188 - 5.00
 i = 15.11%

(c) P = A (P/A, i%, N) = $200 (P/A, 12%, 5) = 200 (3.6048) = $720.96

(d) A = P (A/P, i%, N) = $1,000 (A/P, 12%, 5) = $1,000 (0.2774) = $277.40

178
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4-50 $100,000 = $1,000,000 (A/P, 6%, N), so (A/P, 6%, N) = 0.10.

From Table C-9, 13 ≤ N ≤ 14.

If i = 8%, Table C-11 gives us 16 ≤ N ≤ 17.

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4-51 $3,500 = $100 (P/A, 1.75%, N), so by trial and error, or exact numerical solution, we find that N = 55
months to repay the credit card value. Note: (P/A, 1.75%, 55) = 35.1345

180
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4-52 Present Value = $50,000
Annuity Amount = $5,000
Present Value of Annuity Factor = 10.0
Interest = 4%,
so, from Table C-7 the answer approximately = 13 years

181
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4-53 F6 = $2,000 (F/A, 5%, 6) = $2,000 (6.8019) =$13,603.80

and

F10 = F6 (F/P, 5%, 4) = $13,603.80 (1.2155) = $16,535.42

182
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4-54 F12 = $24,000 (F/P, ½%, 12)
= $24,000 (1.0617)
= $25,480.80

and

A = F12 (A/P, ½%, 36)

= $25,480.80 (0.0304)
= $774.62 per month

183
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4.55 Total Years to Save = 65 – 30 = 35 years
Annuity for 10 Years and Lump Growth for 25 Years
EOY10 = A (F/A, 7%, 10)
EOY10 = $5,000(13.8164) = $69,082
F25 = $69,082(F/P, 7%, 25)
F25 = $69,082(5.4274) = $374,936

184
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4-56 $3,000 / yr
i = 7% / yr

EOY
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

A=?
P12 (of deposits) = A (F/A, 7%,12), and P13 = P12 (F/P, 7%, 1)
P13' (of withdrawals) = $3,000 (P/A, 7%, 5)

By letting P13 = P13', we have

[A (F/A, 7%,12)](F/P, 7%, 1) = $3,000 (P/A, 7%, 5)

[A(17.885)] (1.07) = $3,000 (4.1002)
A = $735.90

185
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4-57 This is a deferred annuity, the time periods are months, and i = 3/4 % per month:
P71 = $500 (P/A, 3/4%, 60) = $500 (48.1733) = $24,086.65
P0 = $24,086.65 (P/F, 3/4% ,71) = 24,086.65 (0.58836) = $14,171.62

186
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4-58 F4 = ?

A = $12,500

EOY
0 1 2 3 4

i = 9% / yr

$108,000

Equivalent receipts = Equivalent expenditures

F4 + $12,500 (F/A,9%, 4) = $108,000 (F/P, 9%, 4)
so,
F4 = $108,000 (F/P, 9%, 4) − $12,500 (F/A,9%, 4)
= $108,000 (1.4116) − $12,500 (4.5737)
= $152,452.80 − $57,163.75 = $95,289

187
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4-59 (a) 0 4 7 10 13

EOY
$5,000

P0

(b) P0 = $5,000 [(P/F, 12%, 4) + (P/F, 12%, 7) + (P/F, 12%, 10) + (P/F, 12%, 13]
P0 = $5,000 (1.639) = $8,195

(c) A = $8,195 (F/P, 12%, 4)(A/P, 12%, 9) = $2,420

188
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4-60 P0 = −$1,000 (P/A, 10%, 5) − $10,000 (P/F, 10%, 15) − $10,000 (P/F, 10%, 30)
= −$1,000 (3.7908) − $10,000 (0.2394) − $10,000 (0.0573)
= −$6,757.80
A = −$6,757.80 (A/P, 10%, 50) = −$6,757.80 (0.1009) = −$681.86

189
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4-61 a. Future Equivalent Worth:
F30 = A (F/A, 5%, 30)
F30 = $2,500 (66.4388) = $166,097
b. Annual Withdrawal Calculation:
P0 = A (P/A, 5%, 20)
A = P0 / (P/A, 5%, 20) = $166,097 / 12.4622 = $13,138

190
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4-62 Using time = 0 as the reference point, set P0(LHS) = P0(RHS):

$2,000(P/F,8%,2) + $5,000(P/F,8%,6) = Z(P/F,8%,4) − 2Z(P/F,8%,5) + 3Z(P/F,8%,6)

$2,000(0.8573) + $5,000(0.6302) = Z(0.7350) − 2Z(0.6806) + 3Z(0.6302)
$4,865.6 = 1.2644 Z
Z = $3,848.15

191
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4-63 (a) Cost in 10 years = $75,000 (F/P, 10%, 10) = $75,000 (2.5937) = $194,528

A = $194,528 (A/F, 6%, 10) = $194,528 (0.0759) = $14,765

(b) Because $150,000 is less than $194,528, this is a good deal (the college’s cost increases are less
than 10% per year).

192
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4-64 A1 = [$10,000(F/P,9%,4) − $5,000](A/F,9%,4)
= [$10,000(1.4116) − $5,000](0.2187)
= $1993.67

A2 = $5,000(A/P,9%,4) = $5,000(0.3087) = $1543.50

193
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4-65 New tires every two years (EOY 2, 4, 6, 8, 10).

P = $400 (A/F, 12%, 2)(P/A, 12%, 10) = $400 (0.4717)(5.6502) = $1,066

Another approach would be to discount each of the five cash flows individually using the appropriate
(P/F) factors.

This value of $1,066 is most likely an upper bound on what the deal is worth to you.

194
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4-66 F5 = $100 (F/A, 8%, 4) (F/P, 8%, 1) + $100 (P/A, 8%, 2)
= 100 (4.5061)(1.08) + 100 (1.7833) = $664.99

195
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4-67 P0 = A (P/A, 12%, 9)
P0 = $12,000 (5.3282) = $63,938
Payoff Annuity A = P0 / [(P/A, 12%, 10)(P/F,12%,10)]
= $63,938 / [(5.6502)(.3220)] = $35,143

196
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4-68 Using time = 0 as the reference point, set P0(LHS) = P0(RHS)

$1,000(P/F,12%,1) + $1,000(P/F,12%,3) − $1,000(P/F,12%,5) = W + W(P/F,12%,7)

$1,000(0.8929) + $1,000(0.7118) − $1,000(0.5674) = W + W(0.4523)
$1,037.30 = 1.4523 W
W = $714.25

197
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4-69 (a) Monthly payment = $30,000 (A/P, ¾%, 48) = $30,000 (0.0249) = $747.
Amount owed after 24th payment = $747 (P/A, ¾%, 24) = $747 (21.8891) = $16,351.

(b) Not counting the $5,000 down payment, your friend is “upside down” by $1,351. This happens
when she owes more on the car than it is worth in the marketplace. Nothing much can be done
about this situation except to keep the car longer and hope the vehicle remains in good working
order. Or if the mileage is low and the car is in very good condition, perhaps it is worth more than
$15,000 and she should consider selling it.

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4-70 P0 = −$100,000 − $10,000 (P/A, 15%,10) − $30,000 (P/F, 15%, 5)
= −$100,000 − $10,000 (5.0188) − $30,000 (0.4972)
= −$165,104

199
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4-71 Profit = ($0.08/gal)(20,000 gal/mo) = $1,600 per month.

$30,000 = $1,600 (P/A, 1%, N), so (P/A, 1%, N) = 18.75

From Table C-4, N = 21 months.

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4-72 Equivalent cash inflows = Equivalent cash outflows

Using time 0 as the equivalence point and N = total life of the system:

$2,000(P/F,18%,1) + $4,000(P/F,18%,2) + $5,000(P/A,18%,N−2)(P/F,18%,2) = $20,000

$2,000(0.8475) + $4,000(0.7182) + $5,000(P/A, 18%, N−2)(0.7182) = $20,000
$5,000 (P/A,18%,N−2)(0.7182) = $15432.20
(P/A, 18%, N−2) = 4.297

From Table C-17, (P/A,18%,8) = 4.078 and (P/A,18%,9) = 4.303

Thus, (N−2) = 9 and N = 11 years . Note that if the system lasts for only 10 years, the present equivalent
of the cash inflows < present equivalent of the cash outflows.

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4-73 Left side:
PL = 10 (P/F, 15%, 1) + H (P/A, 15%, 16−4) (P/F, 15%, 4) +
1.7H (P/A, 15%, 6) (P/F, 15%, 7)
= −10 (0.8696) + H(5.4206) (0.5718) + 1.7H (3.7845) (0.3759)
= 5.5182H – 8.696

Right side:
PR = −P0 + 2P0 (P/F, 15%, 10) = −P0 + 2P0 (0.2472) = −0.5056 P0
set PR = PL: −0.5056 P0 = 5.5182H – 8.696
P0 = 17.199 – 10.91H

202
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4-74 A = $500 + $100(A/G,8%,20) = $500 + $100(7.0369) = $1,203.69

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4-75 P0(rental income) = $1,300(P/A,9%,15) − $50(P/G,9%,15)
= $1,300(8.0607) − $50(43.807)
= $8,288.56

The present equivalent of the rental income is greater than the present equivalent of the $8,000
investment, so the rental property appears to be a good investment.

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4-76 P0 (loan amount) = P0 (loan repayment)
$10,000 = Z(P/G,7%,8)(P/F,7%,2)
$10,000 = Z(18.825)(0.8734)
$10,000 = 16.4417 Z
Z = $608.21

205
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4-77 (a) F = $600 (P/G, i%, 6)(F/P i%, 6) = $10,000

If i = 7%, F = $9,884.81 < $10,000,  i > 7%

If i = 8%, F= $10,019.37 > $10,000,  i < 8%

Thus, 7% < i < 8%. Using linear interpolation,

i% - 7% 8% - 7%
=
$10,000 - $9,884.81 $10,019.37 - $9,884.81

i = 7.86%
(b) F = $600 (P/G, 5%, N) (F/P, 5%, N) = $10,000

If N = 6, F = $9,622.99 < $10,000,  N > 6

If N = 7, F= $13,704.03 > $10,000,  N < 7

Thus, 6 < N < 7. Using linear interpolation,

N-6 7-6
=
$10,000 - $9,622.99 $13,704.03 - $9,622.99

N = 6.1 periods. If an integer value of N is desired, choose N = 7 periods.

(c) F = $1,000(P/G,10%,12)(F/P,10%,12)
= $1,000(29.901)(3.1384) = $93,841.30

1 1
(d) G = F(P / F,10%,6)  $8,000( 0.5645)  $466.34
(P / G,10%,6) 9.684

206
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4-78 (a) $2,000 = $100 (P/A, 0.5%, 12) + G (P/G, 0.5%, 12)
= $100 (11.6189) + G (63.214)

G = $13.26 per month beginning at the end of month 2

(b) A = $2,000 (A/P, 0.5%, 12) = $2,000 (0.0861) = $172.20

$2,000  $150(11 .6189)

(c) G= =$4.07 per month beginning at end of month 2.
63.214

207
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4-79 Using time 1 as the reference point, set P1(LHS) = P1(RHS)

K(P/A,12%,2) (P/F,12%,2) = $100(P/A,12%,6) + $110(P/G,12%,6)

K(1.6901) (0.7972) = $100(4.1114) + $110(8.93)
1.3473 K = $1,393.44
K = $1,034.25

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4-80 F = $1,000 (F/A, 8%, 4) (F/P, 8%, 1) − $200 (P/G, 8%, 4) (F/P, 8%, 5)
= $1,000 (4.5061) (1.08) − $200 (4.65) (1.4693) = $3,500.14

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4-81 A = [$2,000 (P/A,8%,4) + $400 (P/G,8%,4)] (P/F,8%,2) (A/F,8%,11)
= [$2,000 (3.3121) + $400 (4.650)] (0.8573) (0.0601) = $437.14

210
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4-82 Savings in heat loss: $4,000(0.75) = $3,000 next year
Savings will increase by: $300(0.75) = $225 each year (gradient)

P0(savings) = $3,000(P/A,10%,12) + $225 (P/G,10%,12)

= $3,000 (6.8137) + 225 (29.901)
= $27,169

The present equivalent value of the savings is greater than the installation cost of $15,000. Therefore,
recommend installing the insulation.

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4-83 Using time 1 as the equivalence point:

− R (P/G,15%,N − 1) = −27R (P/F,15%,3) + 27R (P/F,15%,9)

− R (P/G,15%,N − 1) = −27R (0.6575) + 27R (0.2843)
(P/G,15%,N − 1) = 10.0764

From Table C-15, (P/G,15%,7) = 10.192, thus N − 1 = 7 and N = 8 years.

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4-84 The present equivalent of energy savings can be determined with Equation (4-30):

1  (P/F, 15%, 10)(F/P, 12%, 10)

P = $18,000 = $18,000(0.2322)/0.03 = $139,320. Therefore, the
0.15  0.12
investment in the insulation is justified by a wide margin.

213
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4-85 Note N = 7 (six years in addition to the first)

$200,000[1  ( P / F ,15%,7)( F / P,6%,7)]

P0 =
0.15  0.06
$200,000[1  (0.3759)(1.5036]
=
0.09
= $966,215

You can afford to spend as much as $966,215 for a higher quality heat exchanger.

214
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 $1,000(1.05)[1  (P/F, 10%, 5)(F/P, 5%, 5)]
4-86 PS1 = $1,000 + = $5,358.45
0.10  0.05

$2,000[1  ( P/F, 10%, 5)(1  0.06) 5 ]

PS2 = = $6,804
0.10  0.06

Choose S2.

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 $500[1  P / F ,12%,15)( F / P,6%,15)]
4-87 P=
0.12  0.06

= $4,684.51

216
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 $8,800[1  (P/F, 18%, 15)(F/P, 10%, 15)]
4-88 PGas = = $71,632
0.18  0.10
$345(1.15)[1  (P/F, 18%, 15)(F/P, 15%, 15)]
PMaint. = = $4,239
0.18  0.15

A = ($71,632 + $4,239)(A/P, 18%, 15) = $14,901

217
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4-89 $1,304.35 (1 + f )10 = $5,276.82; Solving yields f = 15%

$1,304.35[1  ( P / F ,20%,11)( F / P,15%,11)]

P−1 =
0.20  0.15

$1,304.35[1  (0.1346)( 4.6524)]

=
0.05
= $9,750.98

 P0 = $9,750.98 (F/P,20%,1) = $9,750.98 (1.20) = $11,701.18

 A = $11,701.18 (A/P,20%,10) = $11,701.18 (0.2385) = $2,790.73

218
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 $2,200[1  (P/F, 7%, 40)(F/P, 3%, 40)]
4-90 F= (F/P, 7%, 40) = $644,128
0.07  0.03

219
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 $10,000[1  ( P / F ,12%,8)( F / P,7%,8)]
4-91 (a) P0 =
0.12  0.07

$10,000[1  (0.4039)(1.7182)]
=
0.05
= $61,204

We can justify spending up to $61,204 for the device

(b) Using the result of part (a):

A = $61,204 (A/P, 12%, 8) = $61,204 (0.2013) = $12,320

220
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 $300[1 (P/F, 12%, 10)(F/P, 6%, 10)]
4-92 P = $1,000 (P/A, 12%, 15) + = $8,012
0.12  0.06

221
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 $5,000[1 (P/F, 8%, 8)(F/P, 6%, 8)]
4-93 (a) P0 = = $34,717
0.08  0.06
(b) P0′ = $4,000 (P/A, 8%, 8) + G (P/G, 8%, 8)

(c) Set P0 = P0′ and solve for G = $658.80.

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4-94 F = $3,000 (F/A, 6%, 10) (F/P, 6%, 1)(F/P,7%,9)
= $3,000 (13.1808)(1.06)(1.8385) = $77,061

223
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4-95 F = [$1,000 (F/P, 10%, 1)(F/P, 12%, 1) + $1,000](F/P, 12%, 1)(F/P, 14%, 1) = $2,850

224
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4-96 CDendval = $25,000 (1.06)(1.05)(1.04)(1.03)(1.02) = $30,402

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4-97 P = $1,000 (P/F, 8%, 1) + $2,000 (P/F, 10%, 1)(P/F, 8%, 1)
+ $1,000 (P/F, 6%, 1)(P/F, 8%, 1)(P/F, 10%, 1)(P/F, 8%, 1)
+ $2,000 (P/F, 6%, 3)(P/F, 8%, 1)(P/F, 10%, 1)(P/F, 8%, 1)
= $1,000 (0.9259) + $2,000 (0.9091)(0.9259)
+ $1,000 (0.9434)(0.9259)(0.9091)(0.9259)
+ $2,000 (0.8396)(0.9259)(0.9091)(0.9259)
= $4,653.33

226
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4-98 As the interest savings are to be calculated on an annual basis, it is necessary to convert the APR to an
effective annual return and calculate the interest amounts before consolidation and then after
consolidation to determine the savings.

Card 1:
12
 0.20 
r = 20%, M = 12, i / yr = 1   1 = 0.2194 = 21.94%
 12 
Balance ( i ) = interest per year = $5,000 (21.94%) = $1,096.96

Card 2:
12
 0.21
r = 21%, M = 12, i / yr = 1   1 = 0.2314 = 23.14%
 12 
Balance ( i ) = interest per year = $6,000 (23.14%) = $1,388.64

Card 3:
12
 0.22 
r = 22%, M = 12, i / yr = 1   1 = 0.2436 = 24.36%
 12 
Balance ( i ) = interest per year = $7,000 (24.36%) = $1,705.18

Total Annual Interest for the 3 cards = $4,190.77

Consolidation:
12
 0.16 
r = 16%, M = 12, i / yr = 1   1 = 0.1723 = 17.23%
 12 
Balance ( i ) = interest per year = $18,000 (17.23%) = $3,100.87

Savings = $4,190.77 - $3,100.87 = $1,089.90

$1,089.90 / $4,190.77 = 26.01% , the loan consolidation company’s claim is correct.

227
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 2
 0.12 
4-99 a. r = 12%, M = 2, i / yr = 1   1 = 0.1236 = 12.36%
 2 
4
 0.12 
b. r = 12%, M = 4, i / yr = 1   1 = 0.1255 = 12.55%
 4 
52
 0.12 
c. r = 12%, M = 52, i / yr = 1   1 = 0.1273 = 12.73%
 52 

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4-100 [1 + 0.05875/X]X – 1 = 0.0604 X = 12 (monthly compounding)

229
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4-101 i / 6 months = 8% / 2 = 4%; N = 5 years = 10 6−month periods

A = $3,000 (A/F, 4%,10) = $3,000 (0.0833) = $249.99

230
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4-102 i / mo. = 9% / 12 = .75%

For the 30 Year Mortgage:

 1  0.0075 360  1 
P = A (P/A,.75%,360) = A   = A(124.2819)
  0.00751  0.0075 
360
 
A = $250,000 / (124.2819)

= $2,011.56

Total Payments = 360 ($2,011.56) = $724,160

Total Interest = $724,160 - $250,000 = $474,160

For the 50 Year Mortgage:

 1  0.0075 600  1 
P = A (P/A,.75%,600) = A   = A(131.8271)
  0.00751  0.0075 
600
 
A = $250,000 / (131.8271)

= $1,895.31

Total Payments = 600 ($1,895.31) = $1,137,233

Total Interest = $1,137,233 - $250,000 = $887,233

a. Difference in Monthly Payment = 2,011.56 – 1,895.39 = $116.17

b. Difference in Total Interest = 887,233 – 474,160 = $413,073

231
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 0.12 12
4-103 r = 12%; M = 12; i / yr = (1 + ) − 1 = 0.1268 or 12.68%
12
$10,000

0 11 12 13 14 15 16 17

End of Year

P0 = ?

P0 = $10,000(P/A,12.68%,6)(P/F,12.68%,11)
= $10,000 (4.034)(0.2689) =$10,847.43

232
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4-104 A = $50,000,000 (A/F, 2%, 80) = $50,000,000 (0.0052) = $260,000 per quarter

233
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4-105 i / qtr = 12% / 4 = 3%; N = 10 years = 40 quarters

F = $7,500 (F/P,3%,40) = $7,500 (3.2620) = $24,465

OR
4

r = 12%, M =4, ieff/yr = 1 

0.12 
  1 = 0.1255 or 12.55%
 4 

F = $7,500 (F/P,12.55%,10) = $7,500 (3.2620) = $24,465

234
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4-106 Monthly interest = 2.4% / 12 = 0.2% per month. The present equivalent of payments is

P = $1,238 + $249 (P/A, 0.2%, 39) = $1,238 + $249 (37.4818) = $10,571

The difference is $3,429 against the MSRP, so this 24.5% discount is very good for the buyer.

235
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4-107 (a) A = $10,000 (A/P, 1% per month, 36 months)
= $10,000 (0.0332) = $332

(b) 0 = $9,800 − $332 (P/A, i' per month, 36 months)

By trial and error, i' = 1.115% per month so the true APR is
12 (1.115%) = 13.38% per year

236
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4-108 a. For 4.5% interest rate:
30 years x 12 months = 30 payments
4.5% APR / 12 = monthly rate of .375 %
F30 = $500 (F/A, 0.375%, 360)
(1  0.00375) 360  1
= $500 [ ] = $500 (759.3861)
0.00375
= $379,693

b. F in today’s spending power = $379,693 (P/F, 2%,30)

= $379,693 (0.5521) = $209,629

Thus, the spending power equivalent is about half the amount saved in part a. Now you can see why it is
important for the Federal Reserve Board to keep
modest inflation rate (2–3% per year) in the economy.

237
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4-109 (a) A = $20,000 (A/P, 0.75%, 36) = $20,000 (0.0318) = $636
Interest = $636 (36) − $20,000 = $2,896

A = $20,000 (A/P, 0.75%, 72) = $20,000 (0.0180) = $360

Interest = $360 (72) − $20,000 = $5,920

Difference = $3,024

(b) You would be willing to pay this extra interest if either you can’t afford the $636 payment or if you
can invest at > 0.75% per month.

238
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4-110 Number of monthly deposits = (5 years)(12 months/yr) = 60
$400,000 = $200,000(F/P, i' / month, 60) + $676(F/A, i' / month, 60)
Try i' / month = 0.75%: $400,000 > $364,126.69,  i' / month > 0.75%
Try i' / month = 1%: $400,000 < $418,548.72,  i' / month < 1%

Using linear interpolation:

i' /month  0.75% 1%  0.75%

 ; i' / month = 0.9148%
$400,000  $364,126.69 $418,548.72  $364,126.69

Therefore, i' / year = (1.009148)12 − 1 = 0.1155 or 11.55% per year

239
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4-111 (a) $1,100 = $19.80 (P/A, 1.5%, N), so (P/A, 1.5%, N) = 55.5556

This can be solved by trial and error or using Excel.

N = NPER (0.015, 19.8, −1100) = 120

(b) N = NPER (0.015, 29.8, −1100) = 54

(c) Difference = $19.80 (120) − $29.80 (54) = $766.80

240
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4-112 0.18 = er – 1 er = 1.18 r = ln(1.18) r = 16.55%

241
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4-113 i = e0.11333 – 1 = 0.12 or 12% per year

242
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4-114 i = e0.06 – 1 = 0.0618 or 6.18% per year

243
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 $8,000 $8,000
4-115 (a) A = $8,000(A/F,8%,10) =  = $543.67
(F / A,8%,10) 14.7147

(b) P = $1,000(P/A,8%,12) = $1,000(7.4094) = $7,409.40

(c) r = 8%/2% = 4%
 e (0.04)(12)  1
F = $243(F/A,4%,12) = $243  0.04  = $243(15.0959) = $3,668.30
 e 1 

(d) F = $1,000(F/P,8%,9) = $1,000(2.0544) = $2,054.40

244
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4-116 Set Equivalent cash outflows = Equivalent cash inflows
Using time 9 as the equivalence point,

Z (F/P,20%,9) = $500(F/A,20%,5) + Z (F/P,20%,6)

6.0496 Z = $500(7.7609) + 3.3201 Z
2.7295 Z = $3,880.45
Z = $1,421.67

245
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4-117 i = e0.05 – 1 = 0.0513 or 5.13% per year

F = $17,500 e0.05(5) = $22,470.44

246
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4-118 F12 = $25,000 (F/P,6%,12) = $25,000 (2.0544) = $51,361

247
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4-119 r = 10% / 2 = 5% every six months, compounded continuously

$18,000 $18,000
A = $18,000(A/P, 5%,24) =  = $1,320.66
(P/A, 5%,24) 13.6296

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4-120 P = $3,500 (P/A,10%,5) = $3,500 (3.7412) = $13,094.20

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4-121 $16,000 = $7,000 (F/P, r%, 9)
$16,000 = $7,000 e9r; 2.2857 = e9r ; 9r = ln(2.2857) = 0.8267
r = 0.0919 or 9.19%

250
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4-122 r = 10% per year, compounded continuously

(a) F = $2000 (F/A,10%,30] = $2000 (181.472) = $362,944

$362,944 $362,944
(b) A = $362,944(A/P,10%,10)=  = $60,386
(P / A,10%,10) 6.0104

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4-123 (a) False; (b) False; (c) False; (d) True; (e) False; (f) True; (g) False;
(h) False; (i) False

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4-124 (a) True; i/yr = er −1 = e0.1 −1 = 0.1052 or 10.52% > r = 10%

(b) True; In fact, more than half of the principal is still owed after the tenth monthly payment is made.

r = 10% / 12 = 0.833% per month compounded continuously.

 e 0.00833(24)  1 
P0 
= $185(P/A,0.833%,24) = $185  0.00833(24) 0.00833 

e (e  1) 
= $185(21.6627) = $4,008

Amount still owed

immediately following = $185(P/A,0.833%,10) = $185(13.1595) = $2,435
tenth payment

$2,435
* 100 = 61% of principal is still owed after tenth payment.
$4,008
2
False; r = 8%, M = 2, i/yr = 1 
0.08 
(c)
   1 = 0.0816 = 8.16%
2 
F = P(F/P, i%, N)
?
$1,791  $900 (F/P,8.16%,10)
?
$1,791  $900 (1.0816)10
$1,791  $1,972
N
N
(d) False; (P/A, i%, N) =  (P / F, i%, k)  1 + i
k=1

(e) Part i) (P/A,i%,N) (F/P,i%,N) = (F/A,i%,N)

( F / A , i%, N )  (1  i) N  1  i (1  i) N 
Note: = (F/A,i%,N)(A/P,i%,N) =   
( P / A , i%, N )  i N
  (1  i)  1

= (1+i)N = (F/P,i%,N)

Part ii) (A/G,i%,N)(P/A,i%,N) = (P/G,i%,N)

1 N   (1  i) N  1
Note: (A/G,i%,N)(P/A,i%,N) =   N  N 
 i (1  i)  1  i(1  i) 
1  (1  i) N  1 N 
=  N
 
i  i(1  i) (1  i) N 

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 = (P/G,i%,N)

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4-125 F = $12,000 (F/P, 6%, 20) = $12,000 (3.2071) = $38,485

F (in today’s dollars) = $38,485 (P/F, 3%, 20) = $38,485 (0.5537) = $21,309

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4-126 (a) Javier’s monthly mortgage payment is

$100,000 (A/P, 0.5%, 360) = $100,000 (0.0060) = $600

After adding the additional $400 for property taxes and insurance, the total condo payment is
$1,000 per month.

(b) This is an open−ended exercise for students to have fun with. Utilities could easily be in the $300−
$500 per month ballpark. Condo homeowner association fees might be another $100−$200 per
month. Other miscellaneous expenses could bring Javier’s total monthly expenses to $1,500−
$1,700. This is a fairly expensive undertaking for Javier!

(c) The monthly interest rate is 5.8% / 12 = 0.4833%. Javier’s monthly mortgage payment will be
$100,000 (0.0083) = $830. The savings in interest paid on the mortgage between the answers in
parts (a) and (c) is enormous ($66,600).

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4-127 If the rate of return on your invstment is about 14% per year, set up cash flow diagrams for starting to
save at age 20 (first deposit at age 21), age 25 and age 30 to determine that

A = 0.0007F for 40 years of saving

2A = 0.0014F for 35 years of saving
4A = 0.0028F for 30 years of saving.

Here F = $1,000,000 and the coefficient of F is the appropriate (A/F, i%, N) factor. The big assumption
is whether you can earn 14% per year on your investments. If not, the above statement is not true. That
it is true for i = 14% is a real eye−opener for most students. Moral: start saving early!

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4-128 Let’s start (guess) that three points ($3,000) are paid up front on a loan over 15 (12) = 180 months. The
loan amount will be $103,000(A/P, 0.5%, 180) = $103,000(0.0084) = $865.20 per month. The true
interest rate per month on the loan is found as follows: $100,000 = $865.20(P/A, i%, 180), or i =
0.5325% per month. The effective interest rate per year is (1 + 0.005325) 12 – 1 = 0.0658 or 6.58% per
year. Thus, three points are being charged (lucky starting guess).

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 Solutions to Spreadsheet Exercises

4-129 See P4-129.xls.

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4-130
EOY Cash Flow
0 $ (15,000)
1 $ 2,000
2 $ 2,500
3 $ 3,000
4 $ 3,500
5 $ 4,000
6 $ 4,000
7 $ 4,000
8 $ 4,000
P $ 2,189
A $ 410
F $ 4,692

Notice that a cell is not designated for the interest rate. Therefore, the interest rate must be entered
specifically in the NPV, PMT, and FV financial functions. The following entries in the designated cells
will yield the results for P, A, and F:

B11 = NPV (0.1, B3:B10) + B2 P = $2,189.02

B12 = PMT (0.1, A10, −B11) or = PMT (0.1, 8, −B11) A = $410.32
B13 = FV (0.1, A10, −B12) or = FV (0.1, 9, −B12) F = $4,692.38

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4-131
i / yr = 25%
f= 20%
A1 = $ 1,000
N= 10

EOY
1 $ 1,000
2 $ 1,200
3 $ 1,440
4 $ 1,728
5 $ 2,074
6 $ 2,488
7 $ 2,986
8 $ 3,583
9 $ 4,300
10 $ 5,160

P= $ 6,703
A= $ 1,877
F= $ 62,430

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4-132 See P4-132.xls.

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 Solutions to Case Study Exercises

4-133 Amount set aside each month = $311.40

Interest rate = 4.5%/12 = .375% per month
First payment occurs at the end of the first month of year 6
Amount available at end of 10-year time frame:

F = $311.40 (F/A, .375%, 60) = $311.40 (67.1456) = $20,909.12

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4-134 Total Monthly Payment = P&I = $600

30-year mortgage at 6% compounded monthly.

Mortgage amount = $600 (P/A, .5%, 360) = $600 (166.7916) = $100,075

Maximum purchase price = $100,075 + $45,000 = $145,075

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4-135 A = $320; i = 12%/12 = 1% per month; N = 120 months

F = $320 (F/A, 1%, 120) = $320 (230.0387) = $73,612.38

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 Solutions to FE Practice Problems

4-136 I = (P)(N)(i) = $3,000 (7) (0.06) = $1,260

F = P + I = $3,000 + $1,260 = $4,260

Select (e)

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4.137 P= $50,000 (P/F, 8%, 18)
= $50,000 (0.2502) = $12,510

Select (a)

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4-138 F = $2,000 (F/A,2%,30) = $2,000 (40.5681)
= $81,136

Select (d)

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4-139 i / mo. = 0.5%, N = 20 x 12 = 240 months
P = $1,000 (P/A, 0.5%, 240)
 (1.005) 240  1 
= $1,000  240 
 (0.005)(1.005) 
= $1,000 (138.6747) = $138,675

Select (d)

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4-140 A = $8,000; G = $7,000
Atotal = $8,000 + $7,000 (A/G, 12%, 5)
= $8,000 + $7,000 (1.7746) = $20,422

Select (a)

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4-141 $9,982 = $2,500 (P/A, i', 5)
3.9928 = (P/A, i', 5); i' = 8% / yr
$9,982 = G (P/G. 8%, 5)
$9,982 = G (7.372)
G = $1,354

Select (d)

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4-142 10 years x 12 month/year = 120 months; i/mo. = 6%/12 = 1/2%
A = $20,000 (A/P, 1/2%, 120) = $20,000 (0.0111) = $222
Select (b)

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 4.50% / year
4-143 imonthly = = .375% / month
12 months/year

A = $250,000 (A/F, .375%, 180) = $250,000 (0.0039) = $975

Select (c)

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4-144 A = $30,000 (A/P,.75%,60) = $622.75

P (of remaining 36 payments) = $622.75 (P/A,.75%,36) or P = $19,584

Select (b)

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4-145 i / mo. = 12%/12 = 1% per month; N = 4 x 12 = 48 months
A = $5,000 (A/P, 1% per month, 48 months)
= $5,000 (0.0263) = $131.50

Select (a)

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4-146 0.12 = er – 1 r = ln (1.12) = 11.33%
Select (a)

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4-147 r = 12%

i = e0.12 – 1 = 0.1275 or 12.75% compounded annually

Select (c)

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4-148 F = $8,000 (F/P, 6%, 5) = $8,000 e(0.06)(5)
= $8,000e0.3
= $8,000 (1.3499) = $10,799

Select (d)

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