Dept/Division: Biomedical Engineering  

Academic Level: Third Semester: First

Course Code & Title: MEC 4312 - Engineering Statistics and Economy
Instructor: Dr. Joseph Awad
 
‫ ﺤﻠﻮان‬ ‫اﻟﻬﻨﺪﺳﺔ‬ ‫ ﻠ ﺔ‬  Assignment: 1‐ The Time Value of Money

1. You borrow $500 from a family member and agree to pay it back in 6 months. Because you are part of
the family, you are only being charged simple interest at the rate of 0.5% per month. How much will
you owe after 6 months? How much is the interest?
2. Compare the interest earned by P dollars at i% per year simple interest with that earned by the same
amount P for five years at i% compounded annually.
3. You have just invested a one-time amount of $5,000 in a stock-based mutual fund. This fund should
earn (on average) 9% per year over a long period of time. How much will your investment be worth in
35 years?
4. You just inherited $10,000. While you plan to squander some of it away, how much should you deposit
in an account earning 5% interest per year if you’d like to have $10,000 in the account in 10 years?
5. A good stock-based mutual fund should earn at least 10% per year over a long period of time. Consider
the case of Barney and Lynn, who were overheard gloating (for all to hear) about how well they had
done with their mutual fund investment. “We turned a $25,000 investment of money in 1982 into
$100,000 in 2007.”
a. What return (interest rate) did they really earn on their investment? Should they have been bragging
about how investment-savvy they were?
b. Instead, if $1,000 had been invested each year for 25 years to accumulate $100,000, what return did
Barney and Lynn earn?
6. The average price of gasoline was given as $2.5 in 2005. The average annual rate of increase in the
price of gasoline of 6.5%. If we assume that the price of gasoline will continue to inflate at this rate,
how long will it be for gasoline price to reach $5.00 per gallon?
7. A certain college graduate, Sallie Evans, has $24,000 in student-loan debt at the end of her college
career. The interest rate on this debt is 0.75% per month. If monthly payments on this loan are $432.61,
how many months will it take for Sallie to repay the entire loan?
8. Jonathan borrowed $10,000 at 6% annual compound interest. He agreed to repay the loan with five
equal annual payments at end-of-years 1–5. How much of the annual payment is interest, and how much
principal is there in each annual payment?
9. Suppose you contribute $10 per week ($520 per year) into an interest-bearing account that earns 6% a
year (compounded once per year). That’s probably one less pizza per week! But if you contribute
faithfully each week into this account, how much money would you have saved through the
compounding of interest by the end of 15 years?
10. Twelve payments of $10,000 each are to be repaid monthly at the end of each month. The monthly
interest rate is 2%.
a. What is the present equivalent (i.e., P0) of these payments?
b. Repeat Part (a) when the payments are made at the beginning of the month. Note that the present
equivalent will be at the same time as the first monthly payment.
c. Explain why the present equivalent amounts in Parts (a) and (b) are different.
11. A 45-year-old person wants to accumulate $750,000 by age 70. How much will she need to save each
month, starting one month from now, if the interest rate is 0.5% per month?
12. Compute the effective annual interest rate in each of the following situations.
a. 5.75% nominal interest, compounded quarterly.
b. 5.75% nominal interest, compounded daily.