Solutions to Chapter 4 Problems

4-1 F = P(F/P, 2%, 32) = $100(F/P, 2%, 32) = $188.7

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4-2 I = ($200)(1% /month)(6 months) = $12

Total owed = $200 + $12 = $212

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4-3 P = $2,000; i = 10%, N = 15

FW = P(F/P, 10%,15) = $8,354.4

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4-4 i = N F /P − 1 = 10 400/300 − 1 = 0.0291 = 2.91%

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4-5 P20 = A(P20/A, 10%, 4) = $38,038.8;

P = F(P/F, 10%, 20) = A(P20/A, 10%, 4) (P/F, 10%, 20) = $5,652.5657

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4-6 Amount Interest Total Amount Total
Owed at Accrued Owed at Principal EOM
Month BOM for Month End of Month Payment Payment
1 $17,000 $ 170 $17,170 $ 0 $ 170
2 17,000 170 17,170 8,500 8,670
3 8,500 85 8,585 0 85
4 8,500 85 8,585 8,500 8,585
Total Interest = $510

Total interest paid over the four month loan period = $510.

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4-7 (a) (The monthly payment is $24,000 (A/P, 1%, 60) = $24,000 (0.0222) = $532.80.

(b) Payment Interest Principal Remaining Loan

Number Payment Repayment Balance

1 $240.00 $292.80 $23,707.20

2 $237.07 $295.73 $23,411.47
3 $234.11 $298.69 $23,112.78

Interest in the third month is $234.11 and principal repayment is $298.69.

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4-8 F = $10,000; N = 6 years; i = 8%, P = ?

PW = F(P/F, i%, N) = $6302

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 4
⎛ 0.10 ⎞
i1 = ⎜ 1 + ⎟ − 1 = 0.103 M
⎝ 4 ⎠ ⎛ r ⎞
4-9 here, i = ⎜1 + ⎟ − 1
⎛ 0.09 ⎞
365
⎝ M⎠
i2 = ⎜1 + ⎟ − 1 = 0.0941
⎝ 365 ⎠

Difference = 0.97

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4-10 Consumer Loan: F = $5,000 (F/P, 12%, 5) = $5,000 (1.7623) = $8,811.50
Interest = $8,811.50 − $5,000 = $3,811.50

PLUS Loan: F = $5,000 (F/P, 8.5%, 5) = $5,000 (1.085)5 = $7,518.28

Interest = $2,518.28

Difference = $3,811.50 − $2,518.28 = $1,293.22

Chandra will save money by following the advice of her father.

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4-11 F = $25,000 (F/P, 10%, 25) = $25,000 (10.8347) = $270,867.50

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4-12 P = $18,000 (P/F, 7%, 15) = $18,000 (0.3624) = $6,523.20

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4-13 A = $1000; i = 5%; N = 20 years

FW = A(F/A, 5%, 20) = $33,066

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4-14 A = $10,000; N = 20; i = 8%, PW = ?

PW = A(P/A, i, N) = $98,181

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4-15 F28 = $1,200(F/A, 8%, 20)(F/P, 8%,8) − $7,500(F/A, 8%,5)(F/P, 8%,3) − $4,500(F/A, 8%,2)(F/P, 8%,1)

F28 = $36,106.09

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 72
4-16 Solution by Rule of 72: N ≈ = 7.2 years.
10
Compare to the exact solution:
$10,000 = $5,000 (F/P, 10%, N) = $5,000 (1 + 0.10)N
2 = 1.1 N ; ln(2) = N ln(1.1); and N = 7.2725 years

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4-17 A = P(A/P, i%, N) = $140,000(A/P, 1.25%, 360) = $1,770

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4-18 P = $50,000; i = 1%; N = 240 month; AW = ?

AW = P(A/P, i, N) = 50000 (A/P,1%, 240) = $550.543

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4-19 The $1,000 originally invested dollars doubles nine times in 36 years, so the student will gain
($1,000)(29) − $1,000 = $511,000 in 36 years.

An alternate approach is to solve 2 = (F/P, i′, 4) for i′ = 18.921%. Then

F = $1,000 (F/P, 18.921%, 36) = $512,000.

Thus, the gain is $512,000 − $1,000 = $511,000.

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4-20 F = A(F/A, 12%, 40) = $15,000(P/A, 12%, 20)

⇒ A (767.091) = $15000(7.4694)

A = $146.059

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4-21 (a) N = 2007 – 1982 = 25 years

$100,000 = $25,000 (1 + i)25

25
i= 4 − 1 = 0.057 or 5.7% per year.

So Barney and Lynne did not really do that well at all!

(b) $100,000 = $1,000 (F/A, i′, 25)

(F/A, i′, 25) = 100

i′ = 10.1% per year

In this situation they did pretty well on their mutual fund investment.

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4-22 $102,000 = $9,000 (F/P, i′ %, 36) or i′ = 6.98%. This is more than double the Consumer Price index.

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4-23 (a) $5,290 = $827 (F/P, i%, 23) i = 8.4% per year

(b) $5,290 = $2,018 (F/P, i%, 12) i = 8.36% per year

(c) 1982−2005: 198.1 = 96.5 (1 + i)23 i = 3.18% per year

1993−2005: 198.1 = 144.5 (1 + i)12 i = 2.66% per year

The cost of tuition and fees has risen 2.6 times faster than the CPI for the 1982−2005 time
period. Over the 1993−2005 period, they have risen more than three times as fast.

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 4-24 F = 600,000; A = $40,000; i = ?

⎡ (1 + i ) N − 1 ⎤
F = A(F/A, i%, N) = $40,000 ⎢ ⎥⎦
⎣ i

i = 2% Compounded annually (Using hit & trial)

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4-25 F = $1,000 (F/A, 5%, 15) = $1,000 (21.5786) = $21,578.60

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4-26 P = $15,000; A = $500; i = 8% compounded monthly; N = 360 month

F = $15,000 (F/P, 8/12%, 360) + $500 (F/A, 8/12%, 360)

= $6.6092 ×1084

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4-27 0.01 ($20,000) = $200 per year will be placed in the savings account. This will accumulate to F = $200
(F/A, 5%,15) = $200 (21.5786) = $4,315.72

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4-28 F = $730 (F/A, 7%, 35) = $730 (138.2369) = $100,913. Of this amount, $730 × 35 = $25,550 is money
you paid in and $75,363 is accumulated interest.

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4-29 (a) F = $848 (F/A, 10%, 45) = $848 (718.9048) = $609,631. Liam’s friend has exaggerated the truth
because the claim is too high.

(b) Liam is trading off the answer in part (a) against the likelihood that he will survive to age 65. If
Liam’s health is good, he may choose to gamble and go ahead with the mutual fund.

(c) Answer left to the student.

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4-30 Use the uniform series compound amount factor to find the equivalence between $2,000,000 and
$10,000 per year for N years:

$2,000,000 = $10,000 (F/A, 10%, N)

$2,000,000 = $10,000 [(1+ 0.1)N - 1]/ 0.1

200 = [(1 + 0.1)N - 1]/0.1

20 + 1 = (1.1)^N

log(21) = N log(1.1)

N = 31.94 years (call it 32 years)

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4-31 (a) P = $10,000 (P/A, 2%, 12) = $10,000 (10.5753) = $105,573

(b) P = $10,000 + $10,000 (P/A, 2%, 11) = $107,868

(c) The present equivalent in part (b) is higher because the cash flows are not as far into the future, so
less discounting occurs.

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4-32 F11 = A(F16/A, 15%, 5) = $67,424

F21 = F16(F/P, 15%, 6) = $67,424 × 2.3131

= $155,958.45

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4-33 The carbon fiber automobile would average around 39 miles per gallon of gasoline. The dollar savings
in fuel per year is

⎡117,000 / 6 117,000 / 6 ⎤
A =⎢ − ⎥⎦ ($3.00) = $450
⎣ 30 39

The extra sticker price that can be afforded is $450 (P/A, 20%, 6) = $1,496. This is not a whole lot of
room to wiggle compared to the sticker price of the conventional car. So the cost of manufacturing
carbon fiber automobiles must be made much more competitive against conventional ferrous−aluminum
car bodies and parts.

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4-34 A = $22,000

EOY
0 1 2 3 4 5

i = 15% / yr
P=?

P = $22,000 (P/A, 15%, 5) = $22,000 (3.3522) = $73,748.40

The company can justify spending up to $73,748.40 for this piece of equipment.

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4-35 P = $1,000,000 + $1,000,000 (P/A, 6%, 19) = $12,158,100.

If Spivey is offered a lump-sum payment now that exceeds $12,158,100, he should take it.

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 4-36 F−3 = $5000 ( F/P,5%,1) + 6000 = $11250

F−2 = $11250 ( F/P,3%,1) + 6000 = $17587.5

F−1 = $17587.5( F/P, 6%,1) + 7000 = $25642.75

F0 = $25642.75( F/P,8%,1) = $27694.17

A = F0 ( A/P,8%,10) = $4126.43

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4-37 P = $100,000 (P/A, 15%, 10) = $100,000 (5.0188) = $501,880

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4-38 (a) In 30 years you would have $100,000 (F/P, 6%, 30) = $100,000 (5.7435) = $574,350 in real
purchasing power.

(b) In 20 years you would have $5,000 (F/A, 6%, 20) = $183,928. At the end of 30 years you would
have $183,928 (F/P, 6%, 10) = $329,378.

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4-39 A(P/A, 10%, 10) A(P/A, 10%, 6) + A(P/A, 10%, 10) + A(P/A, 10%, 1) + A(P/A, 10%, 15)

8000(6.1446) = A{4.3553 + 6.1446 + 6.8137 + 7.6061}

⇒ A = $1,972.608

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4-40 (a) N = $1 million per year / $0.005 per cup = 200,000,000 cups per year

$5 million (A/F,15%, 5)
(b) N= = 148,300,000 cups per year
$0.005 per cup

(c) The compounding of interest.

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 i (1 + i) N i i
4-41 (A/P, i%, N) = = =
(1 + i) − 1 1 − 1 /(1 + i)
N N
1 − ( P/F, i%, N)

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4-42 EAR = 16%, APR = 1.160.25 + EAR

i = 3.78%, APR = 3.78 × 4 = 15.12%

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 100,000 miles 100,000 miles
4-43 Fuel savings over eight years = − ≅ 275 gallons, which is about 34.4
26 miles/gallon 28 miles/gallon
gallons per year. Let X represent the cost of gasoline ($/gal).

$800 = (34.4 gal/yr)(X/gal)(P/A, 10%, 8)

$800
= X, or X = $4.36/gal
(34.4 gal)(5.3349)

If the actual cost of gasoline is less than $4.36 per gallon, the CVT is not a good deal.

175
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4-44 POT = P04 − P0G = A( P /A,12%,5) − G ( P /G,12%,5)

= $10, 000 (3.6048) − 1000(6.397) = $29651

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4-45 PW = $10, 000; N = 36, A = 500

i = 3.6007%

EAR = (1 + 0.036007)12 − 1 = 52.88%

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 [1 − (1 + i ) −6 (1 − 0.1) 6 ]
4-46 15, 000 = 3, 000
(i + 0.1)

i = 3%

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4-47 $35 million + $39 million = $35 million (F/P, i, 40)

(1 + i)40 = 74/3

i = 1.89% per year

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4-48 P5 = A( F/A, 7%,12)( P/F , 7%, 7)

= 10, 000(17.885)(0.6227) = $111,369.9

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4-49 (a) P = A ( P/A, i%, N); $1,000 = $200(P/A, 12%,N); (P/A, 12%, N) = 5.0000
By looking at the 12% interest table in Appendix C under the P/A column, N ≈ 8 years.

(b) P = A ( P/A, i%, N); $1,000 = $200 (P/A, i%,10); (P/A, i%, 10) = 5.0000
(P/A, 15%, 10) = 5.0188 and (P/A, 18%, 10) = 4.4941, thus 15% < i < 18%
18% - 15% i% - 15%
By using linear interpolation - =
5.0188 - 4.4941 5.0188 - 5.00
∴ i = 15.11%

(c) P = A (P/A, i%, N) = $200 (P/A, 12%, 5) = 200 (3.6048) = $720.96

(d) A = P (A/P, i%, N) = $1,000 (A/P, 12%, 5) = $1,000 (0.2774) = $277.40

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4-50 $100,000 = $1,000,000 (A/P, 6%, N), so (A/P, 6%, N) = 0.10.

From Table C-9, 13 ≤ N ≤ 14.

If i = 8%, Table C-11 gives us 16 ≤ N ≤ 17.

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4-51 f = 6%, A1 = $5000, i = 15%, for the first 8 years.

i = 5% for the remaining 12 years

P = G ( P/G,15%,8) + G ( P/G,5%,12)( P/F ,15%,8)

[1 − (1 + 0.15) −8 (1 + 0.06)8 ] (1.06)8 [1 − (1 + 0.05) −12 (1 + 0.06)12 ]

= 5000 + 5000
0.15 − 0.06 0.05 − 0.06

= $57,992.558

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4-52 A1 ( P/A1 ,10%, 20) + G ( P/G ,10%, 20) = A( P/A,10%, 20)

⇒ 1,500(8.5136) + G (55.407) = 20, 000(8.5136)

G = $2,842.63

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4-53 F = $100, 000; i = 10/12%, N = 30 × 12 = 360 months

A = F ( A/F ,10 /12%,360) = $44.238

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4-54 F12 = $24,000 (F/P, ½%, 12)
= $24,000 (1.0617)
= $25,480.80

and

A = F12 (A/P, ½%, 36)

= $25,480.80 (0.0304)
= $774.62 per month

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4-55 A = 5, 000, G = 1, 000, i = 20%, N = 10

A = { A( P/A, 20%,10) + G ( P/G, 20%,10)}{ A/P, 20%,10}

= $8, 073.1058

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4-56 F = P(F/P, 8%, N)

$10,000 = $2000 (1 + i)N

N = log5/log 1.08 = 20.91 21 years

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4-57 This is a deferred annuity, the time periods are months, and i = 3/4 % per month:
P71 = $500 (P/A, 3/4%, 60) = $500 (48.1733) = $24,086.65
P0 = $24,086.65 (P/F, 3/4% ,71) = 24,086.65 (0.58836) = $14,171.62

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4-58 F4 = ?

A = $10,000

EOY
0 1 2 3 4

i = 15% / yr

$100,000

Equivalent receipts = Equivalent expenditures

F4 + $10,000 (F/A,15%, 4) = $100,000 (F/P, 15%, 4)
so,
F4 = $100,000 (F/P, 15%, 4) − $10,000 (F/A,15%, 4)
= $100,000 (1.7490) − $10,000 (4.9934)
= $174,900 − $49,934 = $124,966

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4-59 (a) 0 4 7 10 13

EOY
$5,000

P0

(b) P0 = $5,000 [(P/F, 12%, 4) + (P/F, 12%, 7) + (P/F, 12%, 10) + (P/F, 12%, 13]
P0 = $5,000 (1.639) = $8,195

(c) A = $8,195 (F/P, 12%, 4)(A/P, 12%, 9) = $2,420

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4-60 P0 = −$1,000 (P/A, 10%, 5) − $10,000 (P/F, 10%, 15) − $10,000 (P/F, 10%, 30)
= −$1,000 (3.7908) − $10,000 (0.2394) − $10,000 (0.0573)
= −$6,757.80
A = −$6,757.80 (A/P, 10%, 50) = −$6,757.80 (0.1009) = −$681.86

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4-61 (a) F65 = $2,000 (F/A, 6%, 40) = $2,000 (154.762) = $309,524

(b) A66−85 = $309,524 (A/P, 6%, 20) = $309,524 (0.0872) = $26,990 per year or about
$2,249 per month.

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4-62 (a) $25,000

$15,000

0 1 2 3 4 5 6 7 8

$X

(b) The future compound value of the cash outflows from the account is

$15,000 (F/P, 2%, 4) + $25,000 = $41,236.

The future compound value of cash inflows (deposits) to the account is

X (F/A, 2%, 8) (1.02) = 8.7546 X.

By equating both future values and solving for X, we find that X = $4,710.21.

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4-63 (a) Cost in 10 years = $75,000 (F/P, 10%, 10) = $75,000 (2.5937) = $194,528

A = $194,528 (A/F, 6%, 10) = $194,528 (0.0759) = $14,765

(b) Because $150,000 is less than $194,528, this is a good deal (the college’s cost increases are less
than 10% per year).

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4-64 F = $200,000 (F/P, 7%, 15) + $22,000 (F/A, 7%, 15)
= $200,000 (2.7590) + $22,000 (25.1290)
= $1,104,638.

If inflation averages 3% per year over this time period, Eileen will have

$1,104,638 (P/F, 3%, 15) = $709,067

in today's spending power when she reaches age 65.

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4-65 New tires every two years (EOY 2, 4, 6, 8, 10).

P = $400 (A/F, 12%, 2)(P/A, 12%, 10) = $400 (0.4717)(5.6502) = $1,066

Another approach would be to discount each of the five cash flows individually using the appropriate
(P/F) factors.

This value of $1,066 is most likely an upper bound on what the deal is worth to you.

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4-66 F5 = $100 (F/A, 8%, 4) (F/P, 8%, 1) + $100 (P/A, 8%, 2)
= 100 (4.5061)(1.08) + 100 (1.7833) = $664.99

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4-67 Value of debt in eight years = $10,000 (F/A, 15%, 8) = $10,000 (13.7268) = $137,268

Annual payment = $137,268 (A/P, 15%, 10) = $137,268 (0.1993) = $27,358

The moral is to avoid debt if at all possible. Otherwise, minimize it by reducing the amount borrowed,
the obligation period, and/or the interest rate. It is assumed in this problem that the interest rate remains
constant at 15% per year over the next 18 years.

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4-68 Using time = 0 as the reference point, set P0(LHS) = P0(RHS)
$1,000(P/F,12%,1) + $1,000(P/F,12%,3) − $1,000(P/F,12%,5) = W + W(P/F,12%,7)
$1,000(0.8929) + $1,000(0.7118) − $1,000(0.5674) = W + W(0.4523)
$1,037.30 = 1.4523 W
W = $714.25

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4-69 (a) Monthly payment = $30,000 (A/P, ¾%, 48) = $30,000 (0.0249) = $747.
Amount owed after 24th payment = $747 (P/A, ¾%, 24) = $747 (21.8891) = $16,351.

(b) Not counting the $5,000 down payment, your friend is “upside down” by $1,351. This happens
when she owes more on the car than it is worth in the marketplace. Nothing much can be done
about this situation except to keep the car longer and hope the vehicle remains in good working
order. Or if the mileage is low and the car is in very good condition, perhaps it is worth more than
$15,000 and she should consider selling it.

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4-70 P0 = −$100,000 − $10,000 (P/A, 15%,10) − $30,000 (P/F, 15%, 5)
= −$100,000 − $10,000 (5.0188) − $30,000 (0.4972)
= −$165,104

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4-71 Profit = ($0.08/gal)(20,000 gal/mo) = $1,600 per month.

$30,000 = $1,600 (P/A, 1%, N), so (P/A, 1%, N) = 18.75

From Table C-4, N = 21 months.

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4-72 Equivalent cash inflows = Equivalent cash outflows
Using time 0 as the equivalence point and N = total life of the system:
$2,000(P/F,18%,1) + $4,000(P/F,18%,2) + $5,000(P/A,18%,N−2)(P/F,18%,2) = $20,000
$2,000(0.8475) + $4,000(0.7182) + $5,000(P/A, 18%, N−2)(0.7182) = $20,000
$5,000 (P/A,18%,N−2)(0.7182) = $15432.20
(P/A, 18%, N−2) = 4.297
From Table C-17, (P/A,18%,8) = 4.078 and (P/A,18%,9) = 4.303
Thus, (N−2) = 9 and N = 11 years . Note that if the system lasts for only 10 years, the present
equivalent of the cash inflows < present equivalent of the cash outflows.

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4-73 Left side:
PL = −10 (P/F, 15%, 1) + H (P/A, 15%, 16−4) (P/F, 15%, 4) +
0.7H (P/A, 15%, 6) (P/F, 15%, 7)
= −10 (0.8696) + H(5.4206) (0.5718) + 0.7H (3.7845) (0.3759)
= 4.0953H – 8.696

Right side:
PR = −P0 + 2P0 (P/F, 15%, 10) = −P0 + 2P0 (0.2472) = −0.5056 P0

set PR = PL: −0.5056 P0 = 4.0953H – 8.696

P0 = 17.2 – 8.1H

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4-74 A = $500 + $100(A/G,8%,20) = $500 + $100(7.0369) = $1,203.69

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4-75 P0(rental income) = $1,300(P/A,9%,15) − $50(P/G,9%,15)
= $1,300(8.0607) − $50(43.807)
= $8,288.56

The present equivalent of the rental income is greater than the present equivalent of the $8,000
investment, so the rental property appears to be a good investment.

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4-76 P0 (loan amount) = P0 (loan repayment)
$10,000 = Z(P/G,7%,8)(P/F,7%,2)
$10,000 = Z(18.789)(0.8734)
$10,000 = 16.4103 Z
Z = $609.37

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4-77 (a) F = $600 (P/G, i%, 6)(F/P i%, 6) = $10,000
If i = 7%, F = $9,884.81 < $10,000, ∴ i > 7%
If i = 8%, F= $10,019.37 > $10,000, ∴ i < 8%
Thus, 7% < i < 8%. Using linear interpolation,
i% - 7% 8% - 7%
=
$10,000 - $9,884.81 $10,019.37 - $9,884.81
i = 7.86%
(b) F = $600 (P/G, 5%, N) (F/P, 5%, N) = $10,000
If N = 6, F = $9,622.99 < $10,000, ∴ N > 6
If N = 7, F= $13,704.03 > $10,000, ∴ N < 7
Thus, 6 < N < 7. Using linear interpolation,
N-6 7-6
=
$10,000 - $9,622.99 $13,704.03 - $9,622.99
N = 6.1 periods. If an integer value of N is desired, choose N = 7 periods.

(c) F = $1,000(P/G,10%,12)(F/P,10%,12)
= $1,000(29.901)(3.1384) = $93,841.30
1 1
(d) G = F(P / F,10%,6) = $8,000(0.5645) = $466.34
(P / G,10%,6) 9.684

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4-78 (a) $2,000 = $100 (P/A, 0.5%, 12) + G (P/G, 0.5%, 12)
= $100 (11.6189) + G (63.214)

G = $13.26 per month beginning at the end of month 2

(b) A = $2,000 (A/P, 0.5%, 12) = $2,000 (0.0861) = $172.20

$2,000 − $150(11.6189)
(c) G= =$4.07 per month beginning at end of month 2.
63.214

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4-79 Using time 1 as the reference point, set P1(LHS) = P1(RHS)
K(P/A,12%,2) (P/F,12%,2) = $100(P/A,12%,6) + $110(P/G,12%,6)
K(1.6901) (0.7972) = $100(4.1114) + $110(8.93)
1.3473 K = $1,393.44
K = $1,034.25

211
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4-80 F = $1,000 (F/A, 8%, 4) (F/P, 8%, 1) − $200 (P/G, 8%, 4) (F/P, 8%, 5)
= $1,000 (4.5061) (1.08) − $200 (4.65) (1.4693) = $3,500.14

212
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4-81 A = [$2,000 (P/A,8%,4) + $400 (P/G,8%,4)] (P/F,8%,2) (A/F,8%,11)
= [$2,000 (3.3121) + $400 (4.650)] (0.8573) (0.0601) = $437.14

213
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4-82 Savings in heat loss: $3,000(0.8) = $2,400 next year
Savings will increase by: $200(0.8) = $160 each year (gradient)
P0(savings) = $2,400(P/A,10%,15) + $160 (P/G,10%,15)
= $2,400 (7.6061) + 160 (40.15)
= $24,678.64
The present equivalent value of the savings is greater than the installation cost of $18,000. Therefore
recommend installing the insulation.

214
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4-83 Using time 1 as the equivalence point:
− R (P/G,15%,N − 1) = −27R (P/F,15%,3) + 27R (P/F,15%,9)
− R (P/G,15%,N − 1) = −27R (0.6575) + 27R (0.2843)
(P/G,15%,N − 1) = 10.0764
From Table C-15, (P/G,15%,7) = 10.192, thus N − 1 = 7 and N = 8 years.

215
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4-84 The present equivalent of energy savings can be determined with Equation (4-30):

1 − (P/F, 15%, 10)(F/P,12%, 10)

P = $18,000 = $18,000(0.2322)/0.03 = $139,320. Therefore, the
0.15 − 0.12
investment in the insulation is justified by a wide margin.

216
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4-85 Note N = 6

$175,000[1 − ( P / F ,18%,6)( F / P,8%,6)]

P0 =
0.18 − 0.08
$175,000[1 − (0.3704)(1.5869]
=
0.10
= $721,371

You can afford to spend as much as $721,371 for a higher quality heat exchanger.

217
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 $1,000(1.05)[1 − (P/F, 10%, 5)(F/P, 5%, 5)]
4-86 PS1 = $1,000 + = $5,358.45
0.10 − 0.05

$2,000[1 − (P/F, 10%, 5)(1 − 0.06)5 ]

PS2 = = $6,804
0.10 + 0.06

Choose S2.

218
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 $500[1 − P / F ,12%,15)( F / P,6%,15)]
4-87 P=
0.12 − 0.06

= $4,684.51

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 $8,800[1 − (P/F, 18%, 15)(F/P,10%, 15)]
4-88 PGas = = $71,632
0.18 − 0.10
$345(1.15)[1 − (P/F, 18%, 15)(F/P,15%, 15)]
PMaint. = = $4,239
0.18 − 0.15

A = ($71,632 + $4,239)(A/P, 18%, 15) = $14,901

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4-89 $1,304.35 (1 + f )10 = $5,276.82; Solving yields f = 15%

$1,304.35[1 − ( P / F ,20%,11)( F / P,15%,11)]

P−1 =
0.20 − 0.15
$1,304.35[1 − (0.1346)(4.6524)]
=
0.05
= $9,750.98

∴ P0 = $9,750.98 (F/P,20%,1) = $9,750.98 (1.20) = $11,701.18

∴ A = $11,701.18 (A/P,20%,10) = $11,701.18 (0.2385) = $2,790.73

221
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 $2,200[1− (P/F, 7%, 40)(F/P, 3%, 40)]
4-90 F= (F/P, 7%, 40) = $644,128
0.07 − 0.03

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 $10,000[1 − ( P / F ,12%,8)( F / P,7%,8)]
4-91 (a) P0 =
0.12 − 0.07

$10,000[1 − (0.4039)(1.7182)]
=
0.05
= $61,204

We can justify spending up to $61,204 for the device

(b) Using the result of part (a):

A = $61,204 (A/P, 12%, 8) = $61,204 (0.2013) = $12,320

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 $300[1 − (P/F, 12%, 10)(F/P, 6%, 10)]
4-92 P = $1,000 (P/A, 12%, 15) + = $8,012
0.12 − 0.06

224
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 $5,000[1− (P/F, 8%, 8)(F/P, 6%, 8)]
4-93 (a) P0 = = $34,717
0.08 − 0.06
(b) P0′ = $4,000 (P/A, 8%, 8) + G (P/G, 8%, 8)

(c) Set P0 = P0′ and solve for G = $658.80.

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4-94 N = 20; A = $50; r % = 10%

F = A( F /A, r %, 20) ( F /P, r %,10) = $8, 256.741

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4-95 F = [$1,000 (F/P, 10%, 1)(F/P, 12%, 1) + $1,000](F/P, 12%, 1)(F/P, 14%, 1) = $2,850

227
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4-96 F = $10,000 (F/P, 6%, 1) (F/P, 4%, 1)(F/P, 2%, 2)(F/P, 5%, 1)
= $10,000 (1.06) (1.04)(1.0404)(1.05) = $12,042.83

228
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4-97 P = $1,000 (P/F, 8%, 1) + $2,000 (P/F, 10%, 1)(P/F, 8%, 1)
+ $1,000 (P/F, 6%, 1)(P/F, 8%, 1)(P/F, 10%, 1)(P/F, 8%, 1)
+ $2,000 (P/F, 10%, 1)(P/F, 6%, 2)(P/F, 8%, 1)(P/F, 10%, 1)(P/F, 8%, 1)
= $1,000 (0.9259) + $2,000 (0.9091)(0.9259)
+ $1,000 (0.9434)(0.9259)(0.9091)(0.9259)
+ $2,000 (0.9091)(0.8900)(0.9259)(0.9091)(0.9259)
= $4,606

229
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4-98 This solution assumes a 10-year repayment period (common practice) to compute the minimum monthly
payments.

ACard 1 = $4,500 (A/P, 21/12 %, 120) = $89.97

ACard 2 = $5,700 (A/P, 2%, 120) = $125.67
ACard 3 = $3,200 (A/P, 1.5%, 120) = $57.66
AConsolidated = $13,400 (A/P, 16.5/12 %, 120) = $228.66

Mary’s current monthly payments total $273.30. The consolidated payment represents a ($273.30 −
$228.66)/$273.30 × 100% = 16.3%. So while consolidating the credit cards will benefit Mary, the
company has overstated the amount of this savings.

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 M 2
⎡ r ⎤ ⎡ 0.1⎤
4-99 (a) r = 10%, M = 2/yr ; i = ⎢1 + ⎥ − 1 = ⎢1 + − 1 = 0.1025 =10.25%
⎣ M⎦ ⎣ 2 ⎥⎦
M 4
⎡ r ⎤ ⎡ 0.1⎤
(b) r = 10%, M = 4/yr ; i = ⎢1 + ⎥ − 1 = ⎢1 + − 1 = 0.1038 = 10.38%
⎣ M⎦ ⎣ 4 ⎥⎦
M 52
⎡ r ⎤ ⎡ 0.1⎤
(c) r = 10%, M = 52/yr ; i = ⎢1 + ⎥ − 1 = ⎢1 + − 1 = 0.1051 = 10.51%
⎣ M⎦ ⎣ 52 ⎥⎦

231
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4-100 F = $60, 000; N = 20; r = 15%

A = F ( A/F , r %, N ) = $508.765

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4-101 The effective annual interest rate is determined as follows:

12
⎛ 0.30 ⎞
ieff = ⎜1 + ⎟ − 1 = 0.3449
⎝ 12 ⎠

or 34.49% per year. The credit card holder is really paying a high rate if a balance is carried on this
card.

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4-102 (a) For a 30−year loan:

A = $300,000 (A/P, 0.5%, 360) = $300,000 (0.0060) = $1,800 per month

For a 50 year loan:

A = $300,000 (A/P, 0.5%, 600) = $300,000 (0.0053) = $1,590 per month

The difference is $210 per month.

(b) 30−year: Total interest paid = $1,800 (360) − $300,000 = $348,000

50−year: Total interest paid = $1,590 (600) − $300,000 = $654,000

Difference = $306,000

234
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 012
. 12
4-103 r = 12%; M = 12; i / yr = (1 + ) − 1 = 0.1268 or 12.68%
12
$10,000

0 11 12 13 14 15 16 17

End of Year

P0 = ?
P0 = $10,000(P/A,12.68%,6)(P/F,12.68%,11)
= $10,000 (4.034)(0.2689) =$10,847.43

235
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4-104 A = $50,000,000 (A/F, 2%, 80) = $50,000,000 (0.0052) = $260,000 per quarter

236
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4-105 The future lump-sum equivalent cost of the membership is:
F = $29 (F/A, 0.75%, 100) = $29 (148.1445) = $4,296.19

The manager is incorrect in his claim.

237
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4-106 Monthly interest = 2.4% / 12 = 0.2% per month. The present equivalent of payments is

P = $1,238 + $249 (P/A, 0.2%, 39) = $1,238 + $249 (37.4818) = $10,571

The difference is $3,429 against the MSRP, so this 24.5% discount is very good for the buyer.

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4-107 (a) A = $10,000 (A/P, 1% per month, 36 months)
= $10,000 (0.0332) = $332

(b) 0 = $9,800 − $332 (P/A, i' per month, 36 months)

By trial and error, i' = 1.115% per month so the true APR is
12 (1.115%) = 13.38% per year

239
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4-108 F20 = A( F/A, r %,15) = P0 = A21 ( P/A, 8%, 4)

A = A21 ( P /A, 8%, 4) / ( F /A, 8%,15) = $2,124.257

240
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4-109 (a) A = $20,000 (A/P, 0.75%, 36) = $20,000 (0.0318) = $636
Interest = $636 (36) − $20,000 = $2,896

A = $20,000 (A/P, 0.75%, 72) = $20,000 (0.0180) = $360

Interest = $360 (72) − $20,000 = $5,920

Difference = $3,024

(b) You would be willing to pay this extra interest if either you can’t afford the $636 payment or if
you can invest at > 0.75% per month.

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4-110 Number of monthly deposits = (5 years)(12 months/yr) = 60
$400,000 = $200,000(F/P, i' / month, 60) + $676(F/A, i' / month, 60)
Try i' / month = 0.75%: $400,000 > $364,126.69, ∴ i' / month > 0.75%
Try i' / month = 1%: $400,000 < $418,548.72, ∴ i' / month < 1%
Using linear interpolation:
i' /month − 0.75% 1% − 0.75%
= ; i' / month = 0.9148%
$400,000 − $364,126.69 $418,548.72 − $364,126.69
Therefore, i' / year = (1.009148)12 − 1 = 0.1155 or 11.55% per year

242
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4-111 (a) $1,100 = $19.80 (P/A, 1.5%, N), so (P/A, 1.5%, N) = 55.5556

This can be solved by trial and error or using Excel.

N = NPER (0.015, 19.8, −1100) = 120

(b) N = NPER (0.015, 29.8, −1100) = 54

(c) Difference = $19.80 (120) − $29.80 (54) = $766.80

243
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 ⎛ 15 ⎞ ⎛ 15 ⎞⎛ 15 ⎞
4-112 P = A ⎜ P/A, %, 25 ⎟ + A ⎜ P/A, %,5 ⎟ ⎜ P/F , %, 25 ⎟
⎝ 12 ⎠ ⎝ 12 ⎠⎝ 12 ⎠

A = $240.4786 per month

244
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4-113 i = e0.11333 – 1 = 0.12 or 12% per year

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4-114 i = e0.06 – 1 = 0.0618 or 6.18% per year

246
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 $8,000 $8,000
4-115 (a) A = $8,000(A/F,8%,10) = = = $543.67
(F / A,8%,10) 14.7147
(b) P = $1,000(P/A,8%,12) = $1,000(7.4094) = $7,409.40
(c) r = 8%/2% = 4%
⎡ e (0.04)(12) − 1⎤
F = $243(F/A,4%,12) = $243 ⎢ 0.04 ⎥ = $243(15.0959) = $3,668.30
⎣ e −1 ⎦

(d) F = $1,000(F/P,8%,9) = $1,000(2.0544) = $2,054.40

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4-116 Set Equivalent cash outflows = Equivalent cash inflows
Using time 9 as the equivalence point,
Z (F/P,20%,9) = $500(F/A,20%,5) + Z (F/P,20%,6)
6.0496 Z = $500(7.7609) + 3.3201 Z
2.7295 Z = $3,880.45
Z = $1,421.67

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4-117 i = e0.072 – 1 = 0.0747 or 7.47% per year

F = $5,000 e0.072(2) = $5,774.42

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4-118 F18 = $10,000 (F/P,8%,18) = $10,000 (4.2207) = $42,207

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4-119 r = 10% / 2 = 5% every six months, compounded continuously
$18,000 $18,000
A = $18,000(A/P, 5%,24) = = = $1,320.66
(P/A, 5%,24) 13.6296

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4-120 A = $1500; r % = 10.8%; N = 10 years.

P = A( P /A, r %, N ) = $8, 685.89

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4-121 F = 5, 000, 000, N = 10 years, i = 5%

P =F(P/F, i%, N) = $3.069 million

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4-122 r = 10% per year, compounded continuously
(a) F = $2000 (F/A,10%,30] = $2000 (181.472) = $362,944
$362,944 $362,944
(b) A = $362,944(A/P,10%,10)= = = $60,386
(P / A,10%,10) 6.0104

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4-123 (a) False; (b) False; (c) False; (d) True; (e) False; (f) True; (g) False;
(h) False; (i) False

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4-124 (a) True; i/yr = er −1 = e0.1 −1 = 0.1052 or 10.52% > r = 10%
(b) True; In fact, more than half of the principal is still owed after the tenth monthly payment is made.
r = 10% / 12 = 0.833% per month compounded continuously.
⎛ e 0.00833(24) − 1 ⎞
P0 = $185(P/A,0.833%,24) = $185 ⎜⎜ ⎟
⎟
⎝ e 0.00833(24) ( e 0.00833 − 1) ⎠
= $185(21.6627) = $4,008
Amount still owed
immediately following = $185(P/A,0.833%,10) = $185(13.1595) = $2,435
tenth payment

$2,435
* 100 = 61% of principal is still owed after tenth payment.
$4,008
2
⎡ 0.08 ⎤
(c) False; r = 8%, M = 2, i/yr = ⎢1 + − 1 = 0.0816 = 8.16%
⎣ 2 ⎥⎦
F = P(F/P, i%, N)
?
$1,791 = $900 (F/P,8.16%,10)
?
$1,791 = $900 (1.0816)10
$1,791 ≠ $1,972
N

∑ (P / F, i%, k) ≠ 1 + i
N
(d) False; (P/A, i%, N) =
k=1

(e) Part i) (P/A,i%,N) (F/P,i%,N) = (F/A,i%,N)

( F / A , i%, N ) ⎡ (1 + i) N − 1⎤ ⎡ i (1 + i) N ⎤
Note: = (F/A,i%,N)(A/P,i%,N) = ⎢ ⎥⎢ N ⎥
( P / A , i%, N ) ⎣ i ⎦ ⎣ (1 + i) − 1⎦
= (1+i)N = (F/P,i%,N)

Part ii) (A/G,i%,N)(P/A,i%,N) = (P/G,i%,N)

⎡1 N ⎤ ⎡ (1 + i) N − 1⎤
Note: (A/G,i%,N)(P/A,i%,N) = ⎢ − N ⎥⎢ N ⎥
⎣ i (1 + i) − 1⎦ ⎣ i(1 + i) ⎦
1 ⎡ (1 + i) N − 1 N ⎤
= ⎢ N
− ⎥
i ⎣ i(1 + i) (1 + i) N ⎦
= (P/G,i%,N)

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4-125 F = $10,000 (F/P, 11%, 25) = $10,000 (13.5855) = $135,855

F (in today’s dollars) = $135,855 (P/F, 3%, 25) = $135,855 (0.4776) = $64,884

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4-126 (a) Javier’s monthly mortgage payment is

$100,000 (A/P, 0.5%, 360) = $100,000 (0.0060) = $600

After adding the additional $400 for property taxes and insurance, the total condo payment is
$1,000 per month.

(b) This is an open−ended exercise for students to have fun with. Utilities could easily be in the
$300−$500 per month ballpark. Condo homeowner association fees might be another $100−$200
per month. Other miscellaneous expenses could bring Javier’s total monthly expenses to
$1,500−$1,700. This is a fairly expensive undertaking for Javier!

(c) The monthly interest rate is 5.8% / 12 = 0.4833%. Javier’s monthly mortgage payment will be
$100,000 (0.0083) = $830. The savings in interest paid on the mortgage between the answers in
parts (a) and (c) is enormous ($66,600).

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4-127 If the rate of return on your invstment is about 14% per year, set up cash flow diagrams for starting to
save at age 20 (first deposit at age 21), age 25 and age 30 to determine that

A = 0.0007F for 40 years of saving

2A = 0.0014F for 35 years of saving
4A = 0.0028F for 30 years of saving.

Here F = $1,000,000 and the coefficient of F is the appropriate (A/F, i%, N) factor. The big assumption
is whether you can earn 14% per year on your investments. If not, the above statement is not true. That
it is true for i = 14% is a real eye−opener for most students. Moral: start saving early!

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4-128 Let’s start (guess) that three points ($3,000) are paid up front on a loan over 15 (12) = 180 months. The
loan amount will be $103,000(A/P, 0.5%, 180) = $103,000(0.0084) = $865.20 per month. The true
interest rate per month on the loan is found as follows: $100,000 = $865.20(P/A, i%, 180), or i =
0.5325% per month. The effective interest rate per year is (1 + 0.005325)12 – 1 = 0.0658 or 6.58% per
year. Thus, three points are being charged (lucky starting guess).

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 Solutions to Spreadsheet Exercises

4-129 See P4-129.xls.

Credit Card Balance: $17,000
Credit Card APR: 12%

Plan 1:  Pay interest due at end of each month and principal at the end of fourth month.
1 $17,000 $170 $17,170 $0 $170
2 $17,000 $170 $17,170 $0 $170
3 $17,000 $170 $17,170 $0 $170
4 $17,000 $170 $17,170 $17,000 $17,170
$‐mo. = $68,000 $680 = total interest

Plan 2:  Pay off the debt in four equal end‐of‐month installments (principal and interest).
1 $17,000 $170 $17,170 $4,187 $4,357
2 $12,813 $128 $12,941 $4,229 $4,357
3 $8,585 $86 $8,670 $4,271 $4,357
4 $4,314 $43 $4,357 $4,314 $4,357
$‐mo. = $42,711 $427 = total interest

Plan 3:  Pay principal and interest in one payment at end of fourth month.
1 $17,000 $170 $17,170 $0 $0
2 $17,170 $172 $17,342 $0 $0
3 $17,342 $173 $17,515 $0 $0
4 $17,515 $175 $17,690 $0 $17,690
$‐mo. = $69,027 $690 = total interest

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4-130
EOY Cash Flow
0 $ (15,000)
1 $ 2,000
2 $ 2,500
3 $ 3,000
4 $ 3,500
5 $ 4,000
6 $ 4,000
7 $ 4,000
8 $ 4,000
P $ 2,189
A $ 410
F $ 4,692

Notice that a cell is not designated for the interest rate. Therefore, the interest rate must be entered
specifically in the NPV, PMT, and FV financial functions. The following entries in the designated cells
will yield the results for P, A, and F:

B11 = NPV (0.1, B3:B10) + B2 P = $2,189.02

B12 = PMT (0.1, A10, −B11) or = PMT (0.1, 8, −B11) A = $410.32
B13 = FV (0.1, A10, −B12) or = FV (0.1, 9, −B12) F = $4,692.38

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4-131
i / yr = 25%
f= 20%
A1 = $ 1,000
N= 10

EOY
1 $ 1,000
2 $ 1,200
3 $ 1,440
4 $ 1,728
5 $ 2,074
6 $ 2,488
7 $ 2,986
8 $ 3,583
9 $ 4,300
10 $ 5,160

P= $ 6,703
A= $ 1,877
F= $ 62,430

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4-132 See P4-132.xls.

Note:  This spreadsheet assumes monthly compounding.

Loan Amount $25,000
# of Payments 60

APR Payment
0% $416.67
1% $427.34
2% $438.19
3% $449.22
4% $460.41
5% $471.78
6% $483.32
7% $495.03
8% $506.91
9% $518.96
10% $531.18
11% $543.56
12% $556.11

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 Solutions to Case Study Exercises

4-133 Amount set aside each month = $311.40

Interest rate = 3%/12 = ¼% per month
First payment occurs at the end of the first month of year 6
Amount available at end of 10−year time frame:

F = $311.40 (F/A, ¼%, 60) = $311.40 (64.6467) = $20,130.98

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4-134 Assume the utility cost remains at $150 per month.

Assume a property tax and insurance rate equal to 25% of the principal and interest (P&I) payment.

Total Monthly Payment = $800 = 1.25 (P&I)

P&I = $640

Assume a 30−year mortgage at 6% compounded monthly.

Mortgage amount = $640 (P/A, ½%, 360) = $640 (166.7916) = $106,747

Maximum purchase price = $106,747 + $40,000 = $146,747

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4-135 A = $320; i = 10%/12 = 0.833% per month; N = 120 months

F = $320 (F/A, 0.833%, 120) = $320 (204.7981) = $65,535.39

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 Solutions to FE Practice Problems

4-136 A = 5,000 +5,000 (8/100) (10) = 9,000

Select (e) $9000

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4-137 P = $100,000 (P/F, 10%, 25)
= $100,000 (0.0923) = $9,230

Select (b)

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4-138 FW2 = 2500 (F/A, 5%, 20) = 2500 x 33.066 = 82,665

Select (e) $82,665

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4-139 PW = $1200 (P/A, 2%, 15)
= $1200 x 12.8493

= 15419.16

Select (a) $15,400

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4-140 A = $8,000; G = $7,000
Atotal = $8,000 + $7,000 (A/G, 12%, 5)
= $8,000 + $7,000 (1.7746) = $20,422

Select (a)

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4-141 $9,982 = $2,500 (P/A, i', 5)
3.9928 = (P/A, i', 5); i' = 8% / yr
$9,982 = G (P/G. 8%, 5)
$9,982 = G (7.372)
G = $1,354

Select (d)

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4-142 A = $10,000 (A/P, 3%, 20) = $672

Select (c)

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 6.00% / year
4-143 imonthly = = 1/2% / month
12 months / year
A = $100,000 (A/F, 1/2%, 60) = 100,000 (0.0143) = $1,430
Select (d)

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4-144 A = $20,000 (A/P,1%,60) = $444

P (of remaining 40 payments) = $444 (P/A,1%,40) or P = $14,579

Select (c)

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4-145 AW = 5000 (A/P, 16/12)
= 5000 (0.0193) = 96.5

Select (b) $96.5

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4-146 0.192 = er – 1

r = ln (1.192) = 17.56%

Select (c)

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4-147 r = 12%

i = e0.12 – 1 = 0.1275 or 12.75% compounded annually

Select (c)

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4-148 F = $7,000 (F/P, 12%, 3) = $7,000 e(0.12)(3)
= $7,000e0.36
= $7,000 (1.4333) = $10,033

Select (c)

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