Question

Engineering Economy

a. Mr. Manny invests $100,000 today to be repaid in five years in one lump sum at 12% compounded annually. If the rate of inflation is 3% compounded annually, approximately how much profit in present day pesos, is realized over the five years? b. What is the effective annual interest rate if Mr. Waldo pays interest on a loan semi-annually at a nominal annual interest rate of 16%. c. Determine the interest rate compounded monthly that is equivalent to 10% interest rate? d. What is the future worth of $100 at the end of four years if the annual rate of return is 8%.

Answer 1

In part b) i^(2) is nominal interest rate per annum payable semi annually and i is the effective rate of interest.
In part c) i^(12) is interest rate per annum compunded monthly and i is the effective rate of interest.

la Real rate of Return & Nominal Role Inflation Rate 1+R I IN It i HIN R 8-7378% 1.12 1.03 porofit in foresant day - 100.000 CIFR) – 16.00 100000 (1.087378) - 1 00000 = $ 52020.69 i = 16% (1+0) = (1+i) 1 = (1+0,16) =12 2 16.64% 2 (12) (c) We have to find in i=10% (1+i) = (1 + i ) 141 +9)" - 1] x12 (1.12-1)x12 = 9.569% 12 (12)

d) Future Value = 100 (1 + i)" loo (1.08)4 = $136.05