- Prob1.

Many credit unions use semiannual

interest periods
to pay interest on customer savings accounts.
For a credit union that uses June 30 and
December 31 as its semiannual interest
periods, determine the amounts that will be
recorded for the deposits shown in the table.
-Sol.
End-of-period amount for June = 50 + 70 + 120
+ 20 = $260
End-of-period amount for Dec = 150 + 90 + 40
+ 110 = $390

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- Prob. 2 For a company that uses
a year as its interest period,
determine the net cash flow that
will be recorded at the end of the
year from the cash flows shown
- Sol.

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- prob.3 Construct a cash flow diagram for the following
cash flows: $25,000 out flow at time 0, $9000 per year
inflow in years 1 through 5 at an interest rate of 10% per
year, and an unknown future amount in year 5.
- sol.

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Prob.4 Look up the numerical value for the following factors from
the interest tables.
1. ( P/F ,6%,8)
2. ( A/P ,10%,10)
3. ( A/G ,15%,20)
4. ( A/F ,2%,30)
5. ( P/G ,35%,15)

Sol.

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 Prob.5 A manufacturer of off-road vehicles is considering the
purchase of dual-axis inclinometers for installation in a new line of
tractors. The distributor of the inclinometers is temporarily
overstocked and is offering them at a 40% discount from the regular
cost of $142. If the purchaser gets them now instead of 2 years from
now, which is when they will be needed, what is the present worth of
the savings per unit? The company would pay the regular price, if
purchased in 2 years. Assume the interest rate is 10% per year.
Sol.
Cost now = 142(0.60) = $85.20
Present worth at regular cost = 142(P/F,10%,2)
= 142(0.8264) = $117.35

Present worth of savings = 117.35 – 85.20 = $32.15

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Prob.6 A family that won a $100,000 prize on America’s Funniest
Home Videos decided to put one-half of the money in a college fund
for their child who was responsible for the prize. If the fund earned
interest at 6% per year, how much was in the account 14 years after
it was started?
Sol.

F = 50,000(F/P,6%,14)
= 50,000(2.2609)
= $113,045

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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Prob.7 The National Highway Traffic Safety Administration raised the
average fuel efficiency standard to 35.5 miles per gallon for cars and
light trucks by the year 2016. The rules will cost consumers an
average of $434 extra per vehicle in the 2012 model year. If a person
purchases a new car in 2012 and keeps it for 5 years, how much
must be saved in fuel costs each year to justify the extra cost? Use
an interest rate of 8% per year.
Sol.
A = 434(A/P,8%,5)
= 434(0.25046)
= $108.70

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Prob.8 The Texas Tomorrow Fund (TTF) is a program started in
1996 in Texas wherein parents could prepay their child's college
tuition when the child was young. Actuaries set the price based on
costs and investment earnings at that time. Later, the Texas
legislature allowed universities to set their own tuition rates; tuition
costs jumped dramatically. The cost for entering a newborn in 1996
was $10,500. If the TTF fund grew at a rate of 4% per year, while
tuition costs increased at 7% per year, determine the state’s shortfall
when a newborn enters college 18 years later.
Sol.
Fdifference = 10,500(F/P,7%,18) - 10,500(F/P,4%,18)
= 10,500(3.3799) - 10,500(2.2058)
= $12,328

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 Prob.9 Profits from recycling paper, cardboard, aluminum,
and glass at a liberal arts college have increased at a constant
rate of $1100 in each of the last 3 years. If this year’s profit (end
of year 1) is expected to be $6000 and the profit trend continues
through year 5, ( a ) what will the profit be at the end of year 5
and ( b ) what is the present worth of the profit at an interest rate
of 8% per year?
Sol.
0 1 2 3 4 5 6
(a) Profit in year 5 = 6000 + 1100(4) =
$10,400

6000 (b) P = 6000(P/A,8%,5) + 1100(P/G,8%,5)

= 6000(3.9927) + 1100(7.3724)
1100 = $32,066

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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Prob.10 There are no tables in the back of your book for the
geometric gradient series factors. Calculate the first two annual
worth factor values, that is, A values for n = 1 and 2, that would be
in a 10% interest table for a growth rate of 4% per year.
Sol.
First find P g (using equation) and then convert to A

For n = 1: P g = {1 – [(1 + 0.04)/(1 + 0.10)]1}/(0.10 – 0.04)

= 0.90909
A = 0.90909(A/P,10%,1)
= 0.90909(1.1000)
= 1.0000
For n = 2: P g = {1 – [(1 + 0.04)/(1 + 0.10)]2}/(0.10 – 0.04)
= 1.7686
A = 1.7686(A/P,10%,2)
= 1.7686(0.57619)
= 1.0190
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Prob.11 Determine the difference in the present worth values
of the following two commodity contracts at an interest rate of 8%
per year. Contract 1 has a cost of $10,000 in year 1; costs
will escalate at a rate of 4% per year for 10 years. Contract 2 has
the same cost in year 1, but costs will escalate at 6% per year for
11 years.
Sol.
Pg1 = 10,000{1 – [(1 + 0.04)/(1 + 0.08)] 10 }/(0.08 – 0.04)
= $78,590
Pg2 = 10,000{1 – [(1 + 0.06)/(1 + 0.08)] 11 }/(0.08 – 0.06)
= $92,926
Difference = $14,336

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Prob. 12 Gesky Industrial Products manufactures brushless
blowers for boilers, food service equipment, kilns, and fuel cells.
The company borrowed $18,000,000 for a plant expansion and
repaid the loan in seven annual payments of $3,576,420, with
the first payment made 1 year after the company received the
money. What was the interest rate on the loan?
Sol.
18,000,000 = 3,576,420(P/A,i,7)
(P/A,i,7) = 5.0330

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Prob.14 For the factor ( F/P ,10%,43), find the percent difference
between the interpolated and formula-calculated values, assuming
the formula- calculated value is the correct one.
Sol.
Interpolated value: Interpolate between n = 40 and n = 45:

3/5 = x/(72.8905 – 45.2593)

x = 16.5787

(F/P,10%,43) = 45.2593 + 16.5787 = 61.8380

Formula value: (F/P,10%,43) = (1+ 0.10)43 -1= 59.2401

% difference = [(61.8380 - 59.2401)/ 59.2401]*100 = 4.4%

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