GDB3023: Engineering Economics and Entrepreneurship-

May 2020

Assignment 4

Name:
Sanjeev Nehru Jawahar Nehru
ID:
16001174
Submission Deadline:
30/6/2020
Course Coordinator:
Pn Zazilah Bt May

PIC for Assignment:

Lakshmi
 Time Value of Money Part 1 - Chapter 4

Problem 4-7

Refer to Plan 2 in Table 4-1. This is the customary way to pay off loans on automobiles, house
mortgages, etc. A friend of yours has financed $24,000 on the purchase of a new automobile, and
the annual interest rate is 12% (1% per month). (4.4)

a. Monthly payments over a 60-month loan period will be how much?

b. How much interest and principal will be paid in the

third month of this loan?

Solutions:

a) 60 Months with 1% annual interest.

A = P (A/P, i%, N)
=$24000 ( A/P, 1%, 60)
𝑖 (1+𝑖)𝑁
= $24000 [ ]
(1+𝑖)𝑁 −1
= $24000 (0.0222) =$532.80
 b) Based on the excel spreadsheet, the principle payment for the third month would be
$298.15

Monthly Loan Interest accrued

Payment Month Principle Repayment,$
Payment, $ Balance,$ for the month,$
1 532.80 24000.00 240.00 292.80
2 532.80 23760.00 237.60 295.20
3 532.80 23464.80 234.65 298.15
4 532.80 23166.65 231.67 301.13

.
Problem 4-10

A lump-sum loan of $5,000 is needed by Chandra to pay for college expenses. She has obtained
small consumer loans with 12% interest per year in the past to help pay for college. But her father
has advised Chandra to apply for a PLUS student loan charging only 8.5% interest per year. If the
loan will be repaid in full in five years, what is the difference in total interest accumulated by these
two types of student loans? (4.6)

Solution

Loan will be repaid in 5 years for an amount of $5000

Option 1: Consumer Loan -12% interest/year

F= P (F/P,i%,N)
= P(1 + 𝑖)𝑁
= $5000 (1 + 0.085)5 = $5000 (1.5037)
= $7518.28

Interest = $7518.28-$5000 = $2518.28

Option 2: PLUS Loan -8.5%/year

F= P (F/P, i %, N)
= P(1 + 𝑖)𝑁
= $5000 (1 + 0.12)5 = $5000 (1.7623)

=$8811.50

Interest= $8811.50-$5000 = $3811.50

Differences between the interest = $3811.50-$2518.28

=$1293.22

Plus Loan tend is a better option which have a lower interest payment when compared to
consumer’s loan.
Problem 4-18
Calculate the compounded future value of 20 annual payments of $5,000 each into a savings
account that earns 6% per year. All 20 payments are made at the beginning of each year.

Evaluating the future value after 20 Payment

F= (F/A, 6%, 20)

(1+𝑖)𝑁 −1
𝐹 =𝐴[ ]
𝑖

(1+0.06)20 −1
= $5000[ ]
0.06

= $183927.956

F= P(F/P,6%,1year)

𝐹 = $183927.956(1 + 𝑖)𝑁
= $183927.956 (1.06)1
= $194 963.63
Problem 4-20

In 1885, first-class postage for a one-ounce letter cost $0.02. The same postage in 2015 costs
$0.49. What compounded annual increase in the cost of firstclass postage has been
experienced over this period of time? (4.6)

Solutions:

𝑖 = 𝑁√𝐹/𝑃 - 1

Periods experiencing the compounded increase in costs:

N= 2015-1885 = 130 years

F= $0.49 (2015)
P=$0.02(1885)

130
𝑖= √0.49/0.02 - 1

=0.02491 / 2.49 % of compounded annual increase applied.

Problem 4-25

Your parents make 20 equal annual deposits of $2,000 each into a bank account earning 3% interest per
year. The first deposit will be made one year from today. How much money can be withdrawn from this
account immediately after the 20th deposit? (4.7)

Solutions:

F= A(F/A,i%,N)

= $2000 ( F/A, 3%, 20)

(1+𝑖)𝑁 −1
F= A [ ]
𝑖

(1+0.03)20 −1
= $2000[ ]
0.03

= $53 740.75