İMÜ 376 - ENGINEERING ECONOMICS

2019-2020 FALL SEMESTER

PROBLEM SET 1

Q1. Find the present value of the cash flow given below. The interest rate is given as 8% per
year.

1 000 TL 1 000 TL

600 TL

300 TL 300 TL

2 3 4 6 7
10
0 1 5 8 9

500 TL 500 TL 500 TL

600 TL

900 TL

1 200 TL

Solution:

P0 = 1000 – 500 (P/A, 8%, 3) (P/F, 8%, 1) + 300 (P/F, 8%, 5) – 600 (P/F, 8%, 6) –
900 (P/F, 8%, 7) + [300 + 300 (A/G, 8%, 3)] (P/A, 8%, 3) (P/F, 8%, 7) + 100 (P/F, 8%, 10) –
1200 (P/F, 8%, 10)
P0 = 1000 – 500 * 2.5771 * 0.9259 + 300 * 0.6806 – 600 * 0.6302 –
900 * 0.5835 + [300 + 300 * 0.9487] * 2.5771 * 0.5835 + 100 * 0.4632 –
1200 * 0.4632
P0 = -522.58 TL

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Q2. Find the future worth of the cash flow given below at the end of year 10. The interest rate
is given as 10% per year.

800 TL
700 TL
600 TL
500 TL 500 TL
400 TL

0 4 5 6 7
10
1 2 3 8 9

500 TL

800 TL 800 TL

1 000 TL

1 200 TL

Solution:

F10 = -500 (F/P, 10%, 10) + [800 – 100 (A/G, 10%, 3)] (P/A, 10%, 3) (F/P, 10%, 10) –
1000 (F/P, 10%, 6) – 800 (P/A, 10%, 3) (P/F, 10%, 4) (F/P, 10%, 10) +
500 (F/A, 10%, 2) (F/P, 10%, 1)
F10 = -500 * 2.5937 + [800 – 100 * 0.9366] * 2.4869 * 2.5937 –
1000 * 1.7716 – 800 *2.4869 * 0.6830 * 2.5937 +
500 * 2.1000 * 1.1000
F10 = -881.79 TL

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Q3. Find the value of X that makes the present value of the following two cash flows equivalent
at 12% interest rate per year.

2X

800 TL

600 TL X X
500 TL
400 TL
300 TL
200 TL
100 TL

0 1 2 3 4 5 6 7 8 0 1 2 3 4 5

Solution:

[800 – 100 (A/G, 12%, 8)] (P/A, 12%, 8) – 700 (P/F, 12%, 2) = X + 2X (P/F, 12%, 2) +
X (P/F, 12%, 5)
[800 – 100 * 2.9131] * 4.9676 – 700 * 0.7972 = X + 2X * 0.7972 +
X * 0.5674
1968.93 = 3.1618X
⇒ X = 622.72 TL

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Q4. If a man saves $500 each month, what would be the total value of the savings at the end
of the year? The interest rate is given as 1% per month.

Solution:

F=?

0 1 2 3 4 5 6 7 8 9 10 11
12

A = $500

F = 500 (F/A, 1%, 12) = 500 * 12.6825 = $ 6 341.25

OR
(1 + i)n − 1 (1 + 0.01)12 − 1
F = A[ ] = 500 ∗ [ ] = $ 𝟔 𝟑𝟒𝟏. 𝟐𝟓
i 0.01

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Q5. A bank gives you a loan, which will be paid back as 6 000 TL, 7 000 TL, and 8 000 TL at
the end of the 3rd, 4th, and 5th months, respectively. What is the amount of the loan if the interest
rate determined by the bank is 2 % per month?

Solution:

X=?

3 4 5

0 1 2

6 000 TL
7 000 TL
8 000 TL

X = [6000 + 1000 (A/G, 2%, 3)] (P/A, 2%, 3) (P/F, 2%, 2)

X = [6000 + 1000 * 0.9868] * 2.8839 * 0.9612 = 19 367.44 TL

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Q6. A woman deposited 5 000 TL to her bank account each year starting from 2010 until 2019
(10 times). She wants to withdraw the accumulated money as three equal payments in 2022,
2023, and 2024. How much money she will receive each year during the period of 2022-2024
if the interest rate is 15% per year?

Solution:

A=?

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

2022 2023 2024

5 000 TL 5 000 TL 5 000 TL 5 000 TL 5 000 TL 5 000 TL 5 000 TL 5 000 TL 5 000 TL 5 000 TL

F2024 = 5000 (F/A, 15%, 10) (F/P, 15%, 5) = A (F/A, 15%, 3)

5000 * 20.3037 * 2.0114 = A * 3.4725
⇒ A = 58 803.26 TL

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Q7. 500 000 TL deposited in a bank is withdrawn as 1 000 000 TL a few years later. How
many years did the money stay in the bank if the interest rate is 18% per year?

Solution:

500 000 TL

n=?
...
0 1 2 n-1

1 000 000 TL

500000 (F/P, 18%, n) = 1000000

500000 ∗ (1 + 0.18)n = 1000000
(1 + 0.18)n = 2
n * Log (1.18) = Log (2)
𝐋𝐨𝐠𝟐
⇒𝐧= = 𝟒. 𝟏𝟗 𝐲𝐞𝐚𝐫𝐬
𝐋𝐨𝐠𝟏. 𝟏𝟖

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Q8. A construction company will spend 1 500 000 TL to purchase an excavator, which serves
for 5 years. Operating and maintenance cost of the excavator at the end of the first year is
estimated to be 100 000 TL. This amount will increase by 25 000 TL per year during its
operational life. The company expects to earn 600 000 TL per year for the first 3 years and
450 000 TL per year for the last 2 years from the operations of the excavator. The salvage value
of this excavator will be 250 000 TL at the end of the 5 years. When the excavator is sold, the
company is planning to buy a new excavator, which costs 2 500 000 TL and will be used for
another 5 years. The operating cost of the new excavator is predicted as 75 000 TL per year.
Besides, there will be one major maintenance, which costs 125 000 TL at the end of the 3rd
year of its operational life. The income of the new excavator at the end of the first year is
determined as 600 000 TL. The income will increase by 100 000 TL annually during its
operational life. There will be no salvage value for the second excavator. By calculating the
present value of the excavators, determine whether the investment of the company is feasible
or not. The interest rate is given as 14% per year.

Solution:

250 000 TL
1 000 000 TL
900 000 TL
800 000 TL
700 000 TL
600 000 TL 600 000 TL 600 000 TL 600 000 TL

450 000 TL 450 000 TL

0 1 2 3 4 5 6 7 8 9
10

100 000 TL 75 000 TL 75 000 TL 75 000 TL 75 000 TL 75 000 TL

125 000 TL
150 000 TL
175 000 TL
200 000 TL
125 000 TL

1 500 000 TL

2 500 000 TL

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P0 = -1500000 – [100000 + 25000 (A/G, 14%, 5)] (P/A, 14%, 5) – 2500000 (P/F, 14%, 5) +
[600000 (F/A, 14%, 3) (F/P, 14%, 2) + 450000 (F/A, 14%, 2) + 250000] (P/F, 14%, 5) +
[525000 + 100000 (A/G, 14%, 5)] (F/A, 14%, 5) (P/F, 14%, 10) – 125000 (P/F, 14%, 8)
P0 = -1500000 – [100000 + 25000 * 1.7399] * 3.4331 – 2500000 * 0.5194
+ [600000 * 3.4396 * 1.2996 + 450000 * 2.1400 + 250000] * 0.5194 +
[525000 + 100000 * 1.7399] * 6.6101 * 0.2697 – 125000 * 0.3506
P0 = -65 750.60 TL ⇒ Not feasible!

Q9. A person borrows 100 000 TL from a bank. The debt will be paid back 5 years later.
a) What is the amount of repaid money if the bank uses a 6 % annual simple interest?
b) What is the amount of repaid money if the bank uses a 6 % interest rate compounded
annually?

Solution:

100 000 TL

0 1 2 3 4

F=?

a) F= P + P * i * n = 100000 + 100000 * 6% * 5 = 130 000 TL

b) F = P (1 + i)n = 100000 * (1+0.06)5 = 133 822.56 TL
OR
F = P (F/P, i, n) = 100000 (F/P, 6%, 5) = 100000 * 1.3382 = 133 820 TL

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Q10. An investor will construct a factory building, whose construction duration is 5 years and
the annual construction cost is €200 000 000. The facility will be operated for 45 years after
the construction. The annual income at year 6 (after the construction) is estimated as
€100 000 000, which decreases by €1 000 000 each year. On the other hand, annual operational
cost at year 6 is forecasted as €10 000 000, which increases by €1 000 000 each year. What is
the present value of this investment if the interest rate is 5% per year for the first 25 years and
3% per year for the next 25 years?

Solution:

€100 000 000

0 5 10 15 20 25 30 35 40 45
50

€10 000 000

€200 000 000

5% 3%

P0 = -200000000 (P/A, 5%, 5) +

[100000000 – 1000000 (A/G, 5%, 20)] (P/A, 5%, 20) (P/F, 5%, 5) –
[10000000 + 1000000 (A/G, 5%, 20)] (P/A, 5%, 20) (P/F, 5%, 5) +
[80000000 – 1000000 (A/G, 3%, 25)] (P/A, 3%, 25) (P/F, 5%, 25) –
[30000000 + 1000000 (A/G, 3%, 25)] (P/A, 3%, 25) (P/F, 5%, 25)
P0 = -200000000 * 4.3295 +
[100000000 – 1000000 * 7.9030] * 12.4622 * 0.7835 –
[10000000 + 1000000 * 7.9030] * 12.4622 * 0.7835 +
[80000000 – 1000000 * 10.4768] * 17.4131 * 0.2953 –
[30000000 + 1000000 * 10.4768] * 17.4131 * 0.2953
P0 = € 7 899 293.11

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