4.

31
A = $10,000
N = 12 months
i = 2%

a)
The present equivalent of these payments:
P = A(P/A,2%,12)
= 10,000*(10.575) = $105,753.41
b)
The present value when the payments are made at the beginning of the month:
P’ = P*(1 + i) = 105,753.41*1.02 = $107,868.48
c)
The present equivalent amounts in parts (a) and (b) differ due to the time value of
money. It means that money received today is more valuable than the same amount
received in the future. Therefore, an annuity due has a higher present value since its
payments occur earlier, reducing the amount that needs to be discounted compared to
end-of-period payments.
4.52
P = $100000
A = $10000
i = 5%
We have P= A ¿
⇔ $ 100000=$ 10000(P/ A , 5 % , N )
$ 100000
⇔(P/ A , 5 % , N )= =10
$ 10000
According to the interest table: (P/A, 5%, 14) = 9.8986
So, $100000 will last for ≃14 years

4.54 Loan amount: P-12 = $28,000

● Monthly interest rate: i = 0.5% = 0.005

● Deferral period: Ndefer = 12 months
● Payment period: Npayment = 48 months

Since Kris does not make any payments during the first 12 months, the loan accrues
interest each month. The loan balance after 12 months is

Po =P−12 ( FP , 0.5 % ,12)=P −12 (1+i)N =$ 28,000 × ( 1.062 )=$ 29,726.98

defer

P0 ≈ $29,727
After a 12-month deferment allowed by the car dealership, Kris will make 48 end-of-
month payments. The amount Kris will have to pay after the 12-month deferment is
equivalent to the present value at the time she begins her payments, where F = P0

A=Po ( AP , 0.5 % , 48)=P ¿

o

A ≈ $698.58

Thus, Kris's monthly payment for 48 months will be $698.58

4.57
Monthly withdrawals (Uniform amount) : A = $500
Total period of withdrawals : N = 5 years = 60 months
Monthly withdrawals begin at : n = 72
3
Interest rate per month : i = % = 0.75% = 0.0075
4

We have: P=A×(i1−(1+i)−N)×((1+i)n1)
P=A(P/A, i%, N)(P/F, i%, n) = 500(P/A,0.0075%,60)(P/F, 0.0075%,72) = 14064.40
1
500∗(1− 60
)
1.007 5 72
P=[ ]∗1.007 5 = 14064.79
0.0075
Thus, the lump sum that must be deposited today is $14,064.79 USD.
4.66

Interest rate: i = 8%
Future equivalent F at year 5
- Future value of an annuity transform the four payments (years 1 to 4) into a
future value in year 4: (F/A,8%,4)
- Then use future value factor to move a single present value forward year 5:
(F/P,8%,1)
- Present value of an annuity is used to convert the two payments (years 6 and 7)
into their equivalent present value at year 5 (P/A,8%,2)
Then the Future equivalent F at year 5 is
F = 100(F/A,8%,4)(F/P,8%,1) + 100(P/A,8%,2) = 100(4.5061)(1.08) +
100(1.7833)
= 664.99
4.77

Solution

a. Given

F = $10,000.
G = $600.
N = 6.
Find i = ?
From the given value, we infer the i using the formula
F = $600 * (P/G, i%, 6) * (F/P, i%, 6) = $10,000.
i = 7%, then F = $600 * (10.978) * (1.5007) = $9,884.8 < $10,000.
i = 8%, then F = $600 * (10.523) * (1.5869) = $10,019.4 > $10,000.
Then, we have 7% < i < 8%.
Using the linear interpolation,
i%−7 8 %−7 %
= ⇔ i≃ 7.9 %
10000−9886.7868 10020.0006−9886.7868

b. Given

F = $10,000.
G = $600.
i = 0.05 per period.
Find N = ?
From the given value, we infer the N using the formula
F = $600 * (P/G, 5%, N) * (F/P, 5%, N) = $10,000.
N = 6, F = $600 * (11.968) * (1.3401) = $9,623 < $10,000.
N = 7, F = $600 * (16.232) * (1.4071) = $13,704 > $10,000.

Then, we have 6 < N <7

Using linear interpolation,
(N – 6) / ($10,000 – $9,623) = (7 - 6) / ($13,704 – $9,993).
N = 6.1 periods (rounding to 7 periods).

c. Given

G = $1,000.
N = 12.
i = 0.1 per period.
Find F = ?
From the given value, we obtain the F using the formula
F = $1,000 * (P/G, 10%, 12) * (F/P, 10%, 12) = $1,000 * (29.901) * (3.1384)
=$93,841.3

d. Given

F = $8,000.
N = 6.
i = 0.1 per period.
Find G = ?
From the given value, we obtain the G using the formula
G = F * (P/F, 10%, 6) * 1/ (P/G, 10%, 6) = $8,000 * (0.5645) * (1/ 9.684) = $466.3

4.91

Given data

A1 = $8000

N = 10 years

f = 5%

i = 10%

Solution

a. The maximum amount that we could justify spending for the device is
 b. The maximum amount that we could justify spending for the device over the
eight – year period (N’= 8 years) is

The uniform annual equivalent value (A) of the labor costs over the eight – year
period is:

4.97 Determine the present equivalent value of the cash-flow diagram of Figure P4-
97 (p. 180) when the annual interest rate, ik, varies as indicated. (4.13)
Idea: Calculate the equivalent present value of each future cash flow occurred. The
sum of those equivalent present values would be the result that we seek.
Since the interest rate varies through different periods, we use the breakdown equation
of “Finding P when F is given” equation, which:

Detailed solution:

4.116.

Using continuous compounding interest at r = 20%, the factors become:

(F/P,20%,9)=e rN =e0.2∗9 = e 1.8≈ 6.0496

(F/P,20%,6)=e rN❑=e 0.2∗6 = e 1.2≈ 3.3201

0.2∗5 ❑
e −1
(F/A,20%,5)=e rN❑
= 0.2 ≈ 7.7609
e −1

We have: The total cash outflow = The total cash inflow

So, Z(F/P,20%,9) = Z(F/P,20%,6) + 500(F/A,20%,5)

⇔ Z*6.0496 = Z*3.3201 + 500*7.7609

⇔Z*(6.0496 - 3.3201) = 3880.45

⇔Z = 3880.45 / 2.7295 = $1421.6706

Therefore, the amount of unknown Z is $1421.6706