Discussion 6

Exam 1 Review Solutions

1. P = F(P/F,7%,3) = $35000(0.8163)= $28,570.50

2. P = A (P/A,4%,10) (P/F,4%,6) = $5000 (8.1109) (0.7903) = $32,050.22
3. i per year = e0.10 - 1
= 10.517%
CC = 50,000/0.10517
= $475,421
4. 813,000 = 170,000(F/P,i,15)
813,000 = 170,000(1 + i)15
log 4.78235 = (15)log (1 + i)
0.6796/15 = log (1 + i)
log (1 + i) = 0.04531
1 + i = 1.11
i = 11 % per year
Can also be found via factor table or taking roots rather than logs.
5.
P = $400,000

PP = 6 months 6-month periods

CP = quarter

(b) effective i per 6-momths = (1 + 0.04/2)2 - 1 = 4.04%

n= 2(10) = 20 semiannual periods
6.
a.) PWP = -13,650 - 200(P/A,1%,48) - 13,650(P/F,1%,24)
= -13,650 - 200(37.9740) - 13,650(0.7876)
= $-31,996

PWF = -22,900 - 50(P/A,1%,48) + 2000(P/F,1%,48)

= -22,900 - 50(37.9740) + 2000(0.6203)
= $-23,558
Select the fiber optic sensors
b) AWP = $-31,996(A/P,1%,48)= $-31,996(0.02633) = -$842.45
AWF = -23,558(A/P,1%,48)= -23,558(0.02633) = -$620.28
Select the fiber optic sensors (work need not necessary be shown if they state that PW will always
give the same answer as AW analysis).

Discussion 6 – review problem sets Page 1 of 2

 Discussion 6
Exam 1 Review Solutions

7. a. P(1000) = $1000
P(1500) = F(P/F,8%,3) = $1500(0.7938)= $1190.70
P(3000) = F(P/F,8%,5) = $3000(0.6806)=$2041.80
Choose $3000 in five years.
b. E.g., If you really need the money now and cannot obtain it for less than 8% interest (e.g.,
taking out a loan)
8. I = (1+0.06/4)^4 = 6.136%
P = A (P/A,6.136%,8) = $7500( (1.06136)^8-1)/[0.06136*(1.06136)^8]= $46,323.80
9. i per year = e0.12 - 1
= 12.750%
CC = 25,000/0.12750
= $196,083.27
10. a. A(Madison) = -1260000(A/P,15%,12) + 480,000
= -1260000(0.18448) + 480,000
= $247,555.20
A(Tomahawk) = -1000000(A/P,15%,12) + 410,000
= -1000000(0.18448) + 410,000
= $225,520.00
Choose Madison
b. 0 = -1260000(A/P,i%,12) + 480,000
0.38095= (A/P,i%,12)
With linear interpolation between 35% and 40%, ROR(Madison) ~ 37.2%
11. a. Number of sign changes = 3; total number of real number roots is less than or equal to 3.
b. Cumulative cash flow:
0 -210
1 40
2 15
3 35
Since there is only one sign change in the series of cumulative cash flow which starts negatively, there is
one positive root.
c. 210 = $250(P/F,i%,1) - $25(P/F,i%,2)+ $20(P/F,i%,3)
By trial and error and with linear interpolation IRR ~ 15.9%
12.) b.) PW=9223.8
c.) PW=9223.8=AW(P/A,12%,10)=1632
d.) AW(B) = 6000-25000(A/P,12%,10)=1576
JIMMY should go with investment A
e.) 0=6000-25000(A/P,i*%,10)
i*=21%
f.) N: one sign change only => maximum ROR=1
D: by cumulative cash flow diagram, => one positive ROR.
13. A=400
I%=4%/12
F=400(F/A,4%/12, 5*12) =26520
14. a.) 10000/0.8
b.) e^8%-1=8.328% 10000/8.328% < 10000/0.8
c.) Continuously, the interest rate is compound endless, which amplifies your interest rate. Once
the interest rate is higher, that means your opportunity cost of holding money increases, that is, the current
dollar is even more valuable than future dollars, this would lead to a less PW.

Discussion 6 – review problem sets Page 2 of 2