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Chapter 3

This document contains examples of calculating interest rates, compound interest, present value, and future value using time value of money principles. In example 1, the interest rate is calculated as 5.3%. Example 2 finds the future value of $2000 at 0.2% interest compounded annually over 13/12 years to be $2433.33. The last example calculates the number of years for the cost of two paint brands to be equal if one is replaced every 4 years and the other every k years, finding k to be 5.579 years.

Uploaded by

Yeye Nuñez
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
59 views

Chapter 3

This document contains examples of calculating interest rates, compound interest, present value, and future value using time value of money principles. In example 1, the interest rate is calculated as 5.3%. Example 2 finds the future value of $2000 at 0.2% interest compounded annually over 13/12 years to be $2433.33. The last example calculates the number of years for the cost of two paint brands to be equal if one is replaced every 4 years and the other every k years, finding k to be 5.579 years.

Uploaded by

Yeye Nuñez
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 31

Chapter 3

Principles of Interest and


Money-time Relationships

3.1)
= 15,000
= 15000 + 265 = 15,265
4
15265 = 15000(1 +
)
12
= 5.3%

Answer: 5.3%

3.2)
Given:
= 2000
13
=
12
= 0.20
Solution
13
= 2000 (1 + (0.20))
12
= 2433.33

Answer: 2433.33

3.3)
Given:
= 0.12
9
=
12
= 20000
Solution
9
= 20000(1 + (0.12))1
12
= 18348.62

Answer: 18348.62

3.4)
Given:
= 0.22
= 5000
Solution:
Date
Jan 15-31
Feb 1-29
Mar 1-31
April 1-30
May 1 31
June 1 30
July 1 31
August 1 31
Sept 1 30
Oct 1 31
Nov 1 28
TOTAL

Number of
days
16
29
31
30
31
30
31
31
30
31
28
318

318/366
= 5000 +
318
) (0.22))
= 1 + ((
366
= 5955.74 5000
= 955.74

Answer: 955.74

3.5)
Given:
= 200,000
Solution:
(4)(5)
0.12
)
= (1 +
4
20
0.12
)
= 200000 (1 +
4
= 110,735.15

= (1 + 0.10)5
= 110,735.15(1.1)5
= 68,757.81

Answer: 68,757.81

3.6)
Given:
= 45,000
= 25,000
= 0.08/4
Solution
0.08 4
)
45,000 = 25,000 (1 +
4
45000
0.08
) = 4 log (1 +
)
log (
25000
4
= 7.42

Answer: 7.42 years

3.7)
Given:
= 5000
= 20,000
Solution
20
20,000 = 5000 (1 + )
2
= 0.1435
0.1435 30
)
= 15,000 (1 +
25
= 40,000

Answer: 40,000

3.8)
12000
9000

2006

Period

2006
2007
2008
2009
2010

2009

2010

2011

7000

1.5x

2008

Principal
beginning

Interest

9000
1080
10080
1209
12000+11289
2794
19084
2290
21374-x
2564-0.12x

Principal Paid

4205
x-2290
1.62x-2564

Payment

7000
X
1.5x

Principal End
10080
11289
19084
21374-x
21374-x-[1.62x-2654]

21374 1.62 2564 = 0


2.62 = 23938
= 9136.98
1.5 = 13,705

Answer: 9136.96 & 13,705

3.9)

3.10)

3.11)
Solution
(1 + )
=
(1 + )
0.06 125
(1 +
)
12
)
= 50000 (
5
(1 + 0.065)
= 49,225

Answer: 49,225

3.12)

3.13)
Given:
= 1,000,000
Solution
1.15 1
]
1,000,000 = 2000 [
0.15
1,000,000
) 0.15 + 1]
log 1.15 = log [(
2000
log 76
=
log 1.15
= 31

Answer: 31 years

3.14)
600,000

...

0.12
]
= 600,000 [
15
1 (1 + 0.12)
= 88,094.54
Period

Principal Beginning

Interest

Payment

Principal
Paid

1
2
3
4
5
6
7
8
9

600,000
583,905.46
565,879.58
545,690.58
523,078.91
497,753.84
469,389.77
437,621.997
402 042

72000
70000
67905
65482
62769
59730
56326
52514

88,094
88,094
88,094
88,094
88,094
88,094
88,094
88,094

16094
18025
20188
22611
25325
28364
31767
35579

Answer: 402 042

3.15
a)
40

...

A=15,000

200,000

0.12 40
1 (1 +
)
4
= 15,000 [
] = 346,722
0.12
4

= 346,722 + 200,000 = 546,722

b) = 15,000 [

0.12 13
1+(
) 1
4
0.12
4

] = 234 266.86

Answer: 546,722 & 234,266.86

c)
Period

Principal
Beginning

1
2
3
4
5
6
7
8
9
10

346,722
342,123
337,387
332,508
327,484
322,308
316,978
311,487
305,832
300,006

Interest

Payment

10401
10263
10121
9975
9824
9669
9509
9344
9174

15,000

Principal
Paid

4598
4736
4878
5024
5175
5330
5490
5655
5825

d)
Period
1

Principal
Beginning
346,722

Interest

Payment

0.12
4

Principal
+

to
11

479,994.34

Answer: 300,006 & 479,944

3.16)

3.17)
0.05
= 10,000,000 [
] = 582,781
40
1 (1.05)
Period

Principal
Beginning

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21

10,000,000
9,917,219
9,830,299
9,739,032
9,643,202
9,542,581
9,436,929
9,325,994
9,209,512
9,087,206
8,958,785
8,823,943
8,682,359
8,573,695
8,327,598
8,213,696
8,041,599
7,860,897
7,671,161
7,471,938
7,262,753

Interest

Payment

500,000
495,860
491,514
486,951
482,160
477,129
471,846
466,299
460,475
454,360
447,939
444,197
434,117
426,684
418,789
410,684
402,079
393,044
383,558
373,596

582,781

582,781

Answer: 7,262,753

Principal
Paid

82,781
86,920
91,266
95,829
100,620
105,651
110,934
116,481
122,306
128,420
134,841
141,583
148,663
156,096
163,901
172,096
180,701
189,736
199,222
209,184

b)
7,262,733 0.05 = 363,137
= 7,262,733 + 363,137 = 7,625,870
0.24
4
= 7,625,870 [
80 ]
0.24
)
1 (1 +
4
= 461,918
582,781 461,918 = 120,862

Answer: 120,862

3.18)

90k

90k

90k

90k

90k

60k 60k

120k

120k 120k 120k

120k

Figure 1
P

...

Figure 2
We want to transform Figure 1 to Figure 2
To do this we get the present worth of Figure 1

1 1.145
= 60,000(1 +
+ 90,000 [
] (1.14)2
0.14
1 1.145
+ 120,000 [
] (1.14)7
0.14
0.14)2

= 46,168 + 237,747 + 164,638


= 448,553
And get the annuity of that Present Worth for 12 years

0.14
= 448,553 [
]
1 1.1412
= 79,245

Answer: 79,245

3.19)

41
1

59
1
20

...
1

19

...

30

60

70

1 1.111
= 18,000 [
]
0.1
= 116,911
1 = 116,911 [

0.10
]
1.110 1

1 = 2285

Answer: 2285

3.20)

3.21)

3.22)
= + +
1,000,000
300,00
= 3,000,000 + [
]+
+
[(1.15)10 1]
[1.1513 1]
1 (1.15)4
160,000(1.15)4
= 100,000 [
]+
0.15
0.15
= 285,497 + 609,870 = 895,367
= 3,000,000 + 328,347 + 58,220 +
= 4,281,934

Answer: 4,281,934

3.23)

3.24)

BRAND A

BRAND B

Every 4 years

Every k years

=
11,200 11,200

14,400 14,400

We want to find k which is the lifespan of paint B (meaning the


span of years before we are required to repaint the roof using
paint B) that would give us the same expenses if we used paint
A.
This means
=
11,200
14,400
1
1
11,200 + 11,200 [
]
=
14,400
+
14,400
[
]
(1.12)4 1
(1.12) 1
1
30,728 = 14,400 + 14,400 [
]
1.12 1
16,328
1
=
14,400 1.12 1
(1.12 1)(16,328) = 14,400

1.12 1 =

14,400
16328

1.12 = 1.881920627

log 1.12 = log 1.881920627


= 5.579

Answer: 5.579 years

3.25)

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