Question

Industrial Engineering/Engineering Economy Question pt 1

Problem #1: a. Draw the cash flow diagram and find the uniform monthly amount over 5 years that would be generated from an investment of $500 now at an effective interest rate of 1.25% monthly. b. Draw the cash flow diagram and find the uniform annual amount over 5 years that would be generated from an investment of $500 now at an effective interest rate of 1.258 monthly. (Note: The effective annual interest rate is (1+0.0125) -1 16.075). Therefore, you may not want to use the tables.)

Answer 1

P= r(PV) 1- (1+r)-n PV = Present Value r=rate per period n = number of periods Equal monthly receipts over 5 years of investment is $500 [Initial investment made today] 1.25% Given] 60 [5 years x 12 --> As there will be 12 installments in a year] $11.89 {1.25% x $500/ [1 - (1+1.25%)^(-60)] = 0.0125 x $500 / (1 - (1+0.0125)^(-60)] = $11.89} Cash Flow Diagram: $500.00 $11.89 $11.89 and so on $11.89 $11.89 and so on $11.89 $11.89 and so on $11.89 $11.89 Now Month-1 Month-2 Month-25 Month-26 Month-35 Month-36 Month-59 Month-60

P=- r(PV) 1- (1+r)-n $500 (Initial investment made today] 16.075% [(1+1.25%)^12 - 1] PV = Present Value r = rate per period n = number of periods Equal monthly receipts over 5 years of investment is $152.97 {16.075% x $500/[1 - (1+16.075%)^(-5)] = 0.1608 x $500/[1 - (1+0.1608)^(-5)] = $152.97} Cash Flow Diagram: $500.00 $152.97 $152.97 and so on $152.97 $152.97 Now Year-1 Year-2 Year-3 Year-4 Year-5