CHAPTER 2

Time Value of Money

be in the account immediately after the fifth

(c) C = $394.65.

deposit.

(d) C = $458.90.

2.36 Five annual deposits in the amounts of $1,200,

$1,000, $800, $600, and $400 are made into a
fund that pays interest at a rate of 9% compounded annually. Determine the amount in
the fund immediately after the fifth deposit.

End of
Period

Withdrawal

$1,000

800

Compute the value of P for the accompanying

cash flow diagram. Assume i = 8%
$350 $350

Deposit

600
400
4

200

6
$150 $150

6
7
Years

10

36

4C

10

SC

11

Geometric Gradient Series

What is the equal-payment series for 10 years

that is equivalent to a payment series starting
with $15,000 at the end of the first year and
decreasing by $3,000 each year over 10 years?
Interest is 9% compounded annually.

2.39 The maintenance expense on a machine is expected to be $1000 during the first year and to increase
$250 each year for the following seven
years. What present sum of money should be
set aside now to pay for the required maintenance expenses over the eight-year period?
(Assume 9% compound interest per year.)
2.40 Consider the cash flow series given in the accompanying table. Which of the following values of C makes the deposit series equivalent
to the withdrawal series at an interest rate of
12% compounded annually?
(a) C = $200.00.
(b) C $282.70.

2.41 Suppose that an oil well is expected to produce

300,000 barrels of oil during its first production year.
However, its subsequent production (yield) is expected
to decrease by 10% over the previous years
production. The oil well has a proven reserve of
3,000,000 barrels.
(a) Suppose that the price of oil is expected to
be $30 per barrel for the next several years.
What would be the present worth of the
anticipated revenue stream at an interest
rate of 12% compounded annually over
the next seven years?
(b) Suppose that the price of oil is expected to

start at $30 per barrel during the first year,

but to increase at the rate of 5 % over the
previous years price. What would be the
present worth of the anticipated revenue
stream at an interest rate of 12% compounded annually over the next seven
years?
Assume the conditions of part (b). After
three years of production, you decide to
sell the oil well. What would be the fair
price for the oil well?

Problems
(b) P

2.42 A city engineer has estimated the annual toll

revenues from a newly proposed highway construction over 20 years as follows:

i. 4) ( P / F, i, 7).

(d) P $ 100[(f'/ F, i, 4) + (P/F, i, 5)

A ( $2,000,000)( < ) (1.06)" ',

n = 1, 2, . . . , 20.
To determine the amount of debt financing
through bonds, the engineer was asked to
present the estimated total present value of
toll revenue at an interest rate of 6 %. Assuming annual compounding, find the present
value of the estimated toll revenue.

2.43 What is the amount of 10 equal annual deposits that can provide five annual withdrawals, where
a first withdrawal of $3,000 is made at the end of year
11 and subsequent withdrawals increase at the rate of
6 % per year over the previous years. if
(a) the interest rate is 8 O compounded annually?
(b) the interest rate is 6% compounded annually?
Equivalence Calculations

2.44 Find the present worth of the cash receipts in the

accompanying diagram if i = 10% compounded annually, with only four interest factors.

Years

2.46 Find the equivalent present worth of the cash

receipts in the accompanying diagram. Where
i = 10% compounded annually. In other words,
how much do you have to deposit now (with
the second deposit in the amount of
$200 at the end of the first year) so that you
will be able to withdraw $200 at the end of
second year, $120 at the end of third year. and
so forth, where the bank pays you 10% annual
interest on your balance?

Years

Years

2.45 In computing the equivalent present worth

of the following cash flow series at period
zero, which of the following expressions is
incorrect?
(a) P $100(P/S, i, 4)('/f, i, 4).

What value of A makes the two annual

cash flows shown in the accompanying diagram equivalent at 10% interest compounded annually?