1.

If you placed $3000 in your bank account on January 1st every year for the next 10 years,
how much money would you have at the end of the 10th year? Assume that interest is
compounded annually at a rate of 10% p.a.

This question requires the compound interest (uniform series) formula. However, note that the
formula is based on money being put in at the end of the year (see diagram in notes). In our case
the money is being deposited at the beginning of the year. Therefore if we use the formula it will
tell us the value at the time of the last payment, but we are interested in the value one year later.
Therefore we need to add an extra year’s interest.

value at end of 9 years 


A 1  i   1
n

i



$3000 1  0.1  1
10

0.1
 $47812.27
value at end of 10 years  $47812.27  1  0.1
1

 $52593.50

This question requires the compound interest (uniform series) formula. However, note that the
formula is based on money being put in at the end of the year (see diagram in notes). In our case
the money is being deposited at the beginning of the year. We can allow for this by using the
given formula with n = 11 instead of 10 and then subtracting the imaginary last payment.

Hence

F

A 1  i   1
n
A

i



$3000 1  0.1  1
11
 $3000

0.1
 $52593.50

2. How much must you save annually in expenses for 10 years to justify an expenditure of
$15000 now? (e.g. if you purchase a car to save public transport costs). Assume a discount rate
of 6% per annum.

This question uses the capital recovery factor formula.

Pi 1  i 
n
A
1  i   1
n

$15000  0.061  0.06

10

1  0.06 10
1 
 $2038.02

Engineering Economics Solutions to Discounting Tutorial Page 1

3. If you were offered a payment of $30000 in 20 years what payment now would be
acceptable as a replacement. (Use a discount rate of 5% p.a.).

This question uses the present value (single payment) formula

P = F / (1+i)n
= $30 000.00
(1 + 0.05)20
= $11 306.68

4. What replacement cost is equivalent to an annual maintenance cost of $4000 over a period
of thirty years? (Use a discount rate of 6%p.a.)

This question uses the uniform series present value formula. This is because the replacement
must occur at the beginning of the period in order for it to obviate the need for the maintenance
cost.

P

A 1  i   1
n

i 1  i 
n



$4000 1  0.06   1
30

0.061  0.06 
30

 $55059.32

5. The benefits arising from the construction of a dam to provide irrigation water are
estimated as follows: in the first five years after completion $100,000 per year; in the next five
years $200,000 per year; in the next fifteen years $300,000 per year; in the next 50 years
$400,000 per year.
a) What is the present worth of these benefits at completion date if the discount rate is 5%
per annum?
b) What is the equivalent uniform annual benefit over this life of 75 years at the same
discount rate?

a) This question will require several steps for each series of benefits. Firstly for each series it is
necessary to determine the equivalent benefit at the beginning of the time period. This
requires the uniform series present value formula.

P

A 1  i   1
n
 P

A 1  i   1
n
 P

A 1  i   1
n
 P

A 1  i   1
n

i 1  i  i 1  i  i 1  i  i 1  i 
n n n n



$100,000 1  0.05  1
5
 

$200,000 1  0.05  1
5
 

$300,000 1  0.05  1
15
 

$400,000 1  0.05  1
50

0.051  0.05 0.051  0.05 0.051  0.05 0.051  0.05
5 5 15 50

 $432,947.67  $865,895.33  $3,113,897.41  $7,302,370.18

Secondly each of these equivalent benefits (except the first) needs to be brought back to the
present. This requires the present value (single payment) formula.

Engineering Economics Solutions to Discounting Tutorial Page 2

P = $432,947.67 P = F / (1+i)n P = F(1+i)n P = F(1+i)n
= $865 895.33 = $3 113 897.41 = $7 302 370.18
(1+0.05)5 (1+0.05)10 (1+0.05)25
= $678 451.65 = $1 911 662.89 = $2 156 410.15

Thirdly these need to be added up to get the present value of the total benefits.

P = $432,947.67 + $678 451.65 + $1 911 662.89 + $2 156 410.15

= $ 5 179 472.36

b) To get the equivalent uniform annual benefit we can use the capital recovery factor formula
on the result from part (a)

Pi 1  i 
n
A
1  i   1
n

$ 5 179 472.36  0.051  0.05

75

1  0.05 75

1
 $265818.85

6. A project constructed in one year is estimated to cost $7.8 million with an economic life
of 50 years. Estimates of its earnings are made as follows:

Years after Annual

completion return
$
1-5 200,000
6 - 10 400,000
thereafter 800,000

What discount rate will give equal benefits and costs? (This may require trial and error.)

The working for this question is very similar to that of the last question. It will require
determining the present value of the benefits using different discount rates (the present value of
the cost is always $7.8 million). A table of results is given below. 6.7 seems to be a reasonable
answer. (I used a spreadsheet and the Goal Seek function on the Tools menu to get the bottom
answer.)

Discount Rate Present value of benefits

5 10 650 151
6 8 822 981
7 7 411 125
6.5 8 072 949
6.7 7 798 381
6.698791 7 800 000

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