MIE258/358

Engineering Economics and Accounting - Assignment 2

Due: October 10, 2016 5 pm - Submit to Drop-box: RS Building 2nd Floor
(In addition to the hard copy, a scanned copy must be submitted on Blackboard)

Resubmissions/re-grading: October 18 and October 21.

Late submissions will not be accepted.

Important: This is the cover page for your assignment write-up. Please
complete both sections 1 and 2 below and staple this page to your
submission.

1/2
Team Information

Name

Student Number

2/2
Return Assignment to
Tutorial:

Tuesday 12-1pm, WB342

Tuesday 12-1pm, BA2165
Tuesday 12-1pm, HA403
Friday 9-10am, GB405
Friday 3-4pm, GB405
Friday 4-5pm, GB405

MIE258/358 Engineering Economics and Accounting - Assignment 2

1. Consider an investment of $15,000 with a simple interest rate of 11% over 12 years. How many years
does it take for an investment of $10,000 with the same interest rate but compounded annually to produce
the same or higher future value than the first investment?
2. The present values of the following two cash flows are equivalent if the interest rate is i. Which one is
more valuable if the interest rate is 2i?
a)
0

X
Y

b)

3. Victoria has a 35-year mortgage with a principal of $150,000 at a rate of 7.5% APR, and has just made
her 15th payment. On top of her mortgage payments, she also makes monthly payments into a reserve
account, which the bank uses to pay her fire and liability insurance ($1,000 annually) and property taxes
($1,500 annually).
a) By how much does she shorten the term of the loan if she makes an extra loan payment today?
b) By how much does she shorten the term of the loan if she makes an extra payment equal to her
typical loan payment plus her typical reserve account payment (all towards the loan)?
c) By how much does she shorten the term of the loan if she increases each payment to 115% of the
current value (assume the extra reserve payment cash goes towards the loan)?
4. An industrial engineer at the University of Toronto has developed a generic simulation model that can be
used by all hospitals. She is selling the rights of her generic simulation model. Two hospitals have offered
her contracts. The first contract offers $10,000 at the end of each year for the next five years, and then
20,000 per year for the following 10 years. The second hospital offers 10 payments, starting with $10,000
at the end of the first year, $13,000 at the end of the second, and, and so forth, increasing by $3000 each
year (i.e., the tenth payment will be 10,000 + 9 * $3000).
a)
Compare the net present value of each contract at 8% interest rate compounded annually? Which
is better?
b)
Use the Goal Seek function in Excel to determine the interest rate that makes the two options
equally valuable. Note: When you put formulas in Excel, make sure that you show your work.
Otherwise, it is difficult for the TA to know if you really knew how to do it.
5. Suppose Coca-Cola sold an issue of bonds with a 25-year maturity, $2000 par value, a 12.5% coupon
rate, and semi-annual interest payments.
a) Three years after the bonds were issued, the going interest rate on bonds such as these fell to 10%. At
what price would the bonds sell?
b) Suppose that, three years after the bonds issue, the going rate of interest had risen to 15%. At what
price would the bonds sell?
c) Three years after bonds were issued, the closing price of the bond is $1,750. What is the nominal
annual current yield?