Christopher Willis, PhD, CAPM, P.

Eng, MCSCE

Engineering Management Principles and Economics

ENGR301-2/R Exam Review 1(Solutions)

1. Which of these statements is TRUE?

a. If interest is compounded quarterly, the interest period is four months
b. (F/A,12%,30) = (F/A,1%,360)
c. (F/P,i%,10) is greater than (P/F,i%,10) for all values above i%>0%

2. Which of these statements is FALSE?

a. A young engineer calculated that monthly payments of $A are required to pay off a $5000 loan
for n years at i% interest, compounded monthly. If the engineer decided to borrow $10,000
instead, her monthly payments will be $2A.
b. 400(P/A,i%,5) 100(P/G,i%,5) 400(P/A,i%,4) 100(P/G,i%,4)
c. None of the above

3. Which of the following represents this cash flow?

$300
$200
$100
i1=5%
0

a.
b.
c.
d.
e.

i2=7%
1

i3=9%
2

P = 100(P/F,5%,1) + 200(P/F,7%,1) + 300(P/F,9%,1)

P = 100(P/F,5%,1) + 200(P/F,5%,1)(P/F,7%,1) + 300(P/F,5%,1)(P/F,7%,1)(P/F,9%,1)
F = 100(F/P,5%,1) + 200(F/P,5%,1)(F/P,7%,1) + 300(F/P,5%,1)(F/P,7%,1)(F/P,9%,1)
F = 300(F/P,9%,1) + 200(F/P,9%,1)(F/P,7%,1) + 100(F/P,9%,1)(F/P,7%,1)(F/P,5%,1)
P=100(P/F,5%,1) + 200(P/F,7%,2) + 300(P/F,9%,3)

4. Which of the following incorrectly represents this cash flow, given i=10%.
$250
$150

$150

i=10%
$100

$100

Christopher Willis, PhD, CAPM, P.Eng, MCSCE

a. P = $150(P/F,10%,1) + $150(P/F,10%,2) + $100(P/F,10%,3) + $100(P/F,10%,4) +

$250(P/F,10%,5)
b. P = $150(P/A,10%,2) + $100(P/A,10%,2)(P/F,10%,2) + $320(P/F,10%,5)
c. P = $150(P/A,10%,2) + [$100+$150(A/G,10%,3)](P/A,10%,3)(P/F,10%,2) + $100(P/F,10%,4)
d. P = $150(P/A,10%,2) + [$100+$75(A/G,10%,3)](P/A,10%,3)(P/F,10%,2) + $175(P/F,10%,4)
e. None of the above.
(Please note that in the final exam there will be only one correct answer)

5. Peter borrowed $20,000 from a bank to buy a car at an interest rate 9% compounded monthly. This
loan will be repaid in equal monthly installments over 4years. Immediately after the 24th payment, Peter
decided to pay the remainder of the loan in a single payment. Compute the amount of the monthly
payment, the final single payment, and the total amount of interest that peter paid to the bank.
Effective rate, i.e. rate per month = 9%/12 = 0.75%
Peter will pay monthly installments for 24months, then a final single payment.
Monthly installments over 48 months = $20,000(A/P,0.75%,48) = $20,000(0.0249) = $498
Final single payment if he decides to pay it off after the 24th monthly payment
= $20,000 - $498(P/A,0.75%,24) = $20,000-$498(21.889) = $9099.27
Total amount of interest he paid the bank = $9099.27+($498*24) - $20,000 = $1051

6. Find the present worth of the following cash flows given that the interest rate is 10% compounded
annually.

$500

$500

A=$400
4

10

12

14

16

18

20

$500

NPW = $500(P/F,10%,2) + $400(P/A,10%14)(P/F,10%,3) + $500(P/F,10%,20) - $500(P/F,10%,10)

NPW = $500(0.8264) + $400(7.367)(0.7513) + $500(0.1486) - $500(0.3855)
NPW = $2508

Christopher Willis, PhD, CAPM, P.Eng, MCSCE

7. An investment company is considering building a 25-unit apartment complex in a growing town. Based
on the long-term growth potential of the town, it is felt that the company could average 90% full
occupancy for the complex each year. If the following items are reasonably accurate estimates, what is
the minimum monthly rent that should be charged if a 12% MARR (per year) is desired? Use the
annual worth method.
Land investment cost
$50,000
Building investment cost
$225,000
Study period, N
20 years
Rent per unit per month
?
Upkeep expense per unit per month
$35
Property taxes and insurance per month
10% of total initial investment

Initial investment cost = $50,000 + $225,000 = $275,000

Taxes and Insurance per year = 0.1($275,000) = $27,500
Upkeep expenses per year = $35/month*25 units*12months*0.9 = $9,450
Assuming that after 20 years, the investment in land is recovered, the capital recovery cost is:
P(A/P,12%,20) S(A/F,12%,20) = $275,000(0.1339) - $50,000(0.0139) = $36,127
Annual Worth of costs = $36,127+$27,500+$9,450 = $73,077
The required minimum annual rent = $73,077
Therefore, the monthly rent per unit = ($73,077)/(12months*25units*0.9) = $270.64

8.
$140

$140

$140
$120
$100

i=12%

i=10%

$600

NPW = -$600(P/F,12%,1) + $140(P/A,12%,2)(P/F,12%,1) + $140(P/A,10%,3)(P/F,12%,4) $20(P/G,10%,3)(P/F,12%,4)

NPW = -$600(0.8929) + $140(1.690)(0.8929) + $140(2.487)(0.6355) - $20(2.329)(0.6355)
NPW = -$535.74 + $211.26 + $221.26 $29.6
NPW = -$132.82
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