Horus University Faculty of Engineering
Sheet (2)
1- Use economic equivalence to determine the amount of money or value of i that
makes the following statements correct.
(a) $5000 today is equivalent to $4275 exactly 1 year ago at i = ___% per
year.
(b) A car that costs $28,000 today will cost $____ a year from now at i = 4%
per year.
(c) At i = 4% per year, a car those costs $28,000 now, would have cost $____
one year ago.
(d) Last year, Jackson borrowed $20,000 to buy a preowned boat. He repaid
the principal of the loan plus $2750 interest after only 1 year. This year, his
brother Henri borrowed $15,000 to buy a car and expects to pay it off in only 1
year plus interest of $2295. The rate that each brother paid for his loan is ___
% for Jackson and ___ % per year for Henri.
(e) Last year, Sheila turned down a job that paid $75,000 per year. This year,
she accepted one that pays $81,000 per year. The salaries are equivalent at i =
____% per year.
2- Construct a cash flow diagram for the following cash flows: $25,000 outflow
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.
3- Construct a cash flow diagram that represents the amount of money that will be
accumulated in 15 years from an investment of $40,000 now at an interest rate
of 8% per year.
4- As a principal in the consulting fi rm where you have worked for 20 years, you
have accumulated 5000 shares of company stock. One year ago, each share of
stock was worth $40. The company has offered to buy back your shares for
$225,000. At what interest rate would the fi rm’s offer be equivalent to the worth
of the stock last year?
5- University tuition and fees can be paid by using one of two plans. Early-bird:
Pay total amount due 1 year in advance and get a 10% discount. On-time: Pay
total amount due when classes start. The cost of tuition and fees is $10,000 per
year.
(a) How much is paid in the early-bird plan?
Engineering Economics Dr: Mahmoud Elazab
Horus University Faculty of Engineering
(b) What is the equivalent amount of the savings compared to the on-time
payment at the time that the on-time payment is made?
6- A solid waste disposal company borrowed money at 10% per year interest to
purchase new haulers and other equipment needed at the companyowned
landfill site. If the company got the loan 2 years ago and paid it off with a single
payment of $4,600,000, what was the principal amount P of the loan?
7- At an interest rate of 10% per year, the equivalent amount of $10,000 one year
ago is closest to:
(a) $8264
(b) $9091
(c) $11,000
(d) $12,000
8- Construct a cash flow diagram that represents the amount of money that will be
accumulated in 7 years from an initial investment of $20,000 now and $3,500
per year for 7 years at an interest rate of 8% per year.
Engineering Economics Dr: Mahmoud Elazab
