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.