Problem 25:

Golden Valley Manufacturing is considering the purchase of an adjacent property so that the warehouse can
be expanded. If financed through the seller, the property’s price is $40K, with 20% down and the balance
due in nine equal payments at 12%. The seller will accept 10% less if cash is paid. Golden Valley does not
have $36K in cash, but may be able to borrow it from another source. What is the IRR for the loan offered by
the seller?

Solution:
Downpayment = 40000(0.2) = 8000

Balanced 0 1 2 3 4 5 6 7 8 9

Balanced
40000 – 0.2(40000) = 32000 A A A A A A A A A
40000 - 0.2(40000) = 32000

32000

0 1 2

A = $6006 40000 - 40000(0.10) = 36000 (cash)

Problem 25:
IRR for the loan offered by the seller:
P = (36000 – 8000)
P = 28000 where 800 is the downpayment

0 1 2 3 4 5 6 7 8 9

Balanced
A A A A A A A A A
40000 - 0.2(40000) = 32000

32000

0 1 2

Try i = 15.66%
40000 - 40000(0.10) = 36000 (cash)

Since i = 15.66% > 12% Borrowing from the bank and paying cash to the property owner is better.
Problem 26:
Mr. Smith is planning his retirement. He has decided that he needs to withdraw P12,000 per year from his
bank account to supplement his other income from Social Security and a private Pension Plan. How much
money should he plan to have in the bank at the start of his retirement if the bank pays 10% per year,
compounded annually and if he wants his money to last for a 12-year retirement period?

Solution: 0 1 2 3 4 11 12

A A A A A A
A éë(1 + i)nn - 1ùû
P = A éë(1 + i)n - 1ùû
P= A é(1 + i)n -i 1ù P
A éë(1 + i) n - 1ù
û
P = ë (1 + ni)n i û
PA = (1(1+ +i) i)ni i
A = (1(1+ +i)n nni) i i (capital recovery factor)
P
A = (1(1++i)i)n n- i1 (capital recovery factor)
A = (1(1++i)12i)n - i1 (capital recovery factor)
P
A = (1.1)
P - 1 (capital recovery factor)
(1 + i)12n(0.1)
P
A = (1
(1.1)+ i)12(0.1)
-1
P
A = (1.1)
(1.1)12 -1
1212(0.1)
A = (1.1)
P (1.1)12(0.1)-1
A = (1.1)12 - 1
P
P
A = 0.14676
(1.1) - 1
P
A = 0.14676
A = 0.14676
P
60,000
P = 0.14676
60,000
P = 0.14676 P = P81,766.15
P
60,000 = 0.14676
60,000 = 0.14676
P =P P81,766.15
= 0.14676
P =PPP81,766.15
Problem 27:
An engineer who is planning his retirement has decided that he will have to withdraw P10,000 from his savings account at the
end of each year. How much money must the engineer have in the bank at the start of his retirement, if his money earns 6% per
year, compounded annually and he is planning a 12-year retirement annual withdrawals?

Uniform Series Capital Recovery Factor: (A/P, 6%, 12) = 0.11928

Gradient Uniform Series: (A/G, 6%, 12) = 4.8113

Uniform Series Compound Amount Factor: (F/A, 6%, 12) = 16.8699

Uniform Series Present Worth Factor: (P/A, 6%, 12) = 8.3839

Solution:
P (1 + i)nn - 1 0 1 2 3 4 n
=
A (1 + i)nn i
A A A A A
P
= 8.3839
A P

P
= 8.3839
10,000
P
P ==P83,839
P83,839
Problem 28: CE Board Nov. 2017
How long must a temporary warehouse last to be desirable investment if it costs $16,000 to build, has
annual maintenance and operating cost of $360, provides storage space-valued at $3600 per year and if the
company MARR is 10%?

Solution:
Annual income from rentals of warehouse = $3600
Net annual income = 3600 – 360 = $3,240
A éë(1 + i)n - 1ùû
P=
(1 + i)n i
0 1 2 3 4 n
3240 éë(1.10) - 1ùû
n

16,000 =
(1.10)n (0.10)
16,000 A A A A A
(1.10)n - 1
0.4938 =
(1.10)
n
P
n
11 ==0.5062(1.10)
0.5062(1.10)n
n
1.976 = (1.10)
1.976 = (1.10)n
log (1.976) = n =
log(1.976) logn(1.10)
log (1.10)
nn ==7.15
7.15saysay
8 years
8 years
Problem 29:
An engineering firm has turn to Friendly Shark Inc. to borrow $30,000 needed for a short term (2 year)
project, attracted by an advertisement announcing an interest rate of 2% per year. Friendly Shark’s load
settlement indicates the following:

(0.02)
Interest = 30000 (24) = $7200
2
Loan = = $30000
Total = = $37200

Monthly installment = 37200 = $1550

24
What is the actual cost of borrowing money from Friendly Shark Inc.?
Problem 29:

0 1 2 3 4 5 26 27 28

A A A A A A A A

Actual cost of borrowing money from Friendly Shark Inc.

ieff = (1 + i)n – 1
ieff = (1 + i)12 – 1

Try i = 0.018 = 1.8% ieff = (1.018)12 – 1

ieff = 0.2387
Actual cost = 23.87%
Problem 30:
A company which produces and markets microcomputers has just introduced a new line which is expected
to sell for $10,000 per system. Owing to market conditions, the company is being forced to offer financial
incentives to potential customers. The company has decided to change an interest rate of 10% compounded
yearly and to give customers three options.

End of Year Payments

Option 1 Option 2 Option 3
1 $3155 $1000 0
2 $3155 $1000 0
3 $3155 $1000 0
4 $3155 $11000 14641

Which option is best for both customers and company?

Option 1: Pay in four equal payments for 4 years.
Option 2: Pay interest each year and principal and interest the end of the 4th year.
Option 3. Make single payment at the end of the fourth year.
Problem 30:
Solution:
Option 1:

F = $14641

Option 2: Option 3:
F = P(1 + i)n
F = 10000(1.10)4
=1000
F = $14641 P=10000
10000

F = $14641 Therefore, all the 3 options are equal

for both customers and company.
Problem 31:
By replacing its assembly line conveyor with an asynchronous conveyor, Golden Valley Manufacturing will
save $50,000 per year in rework, inspection, and labor costs. The asynchronous conveyor will cost
$275,000, and its life is 15 years. There is no salvage value. If Golden Valley uses a 10% interest rate,
should the asynchronous conveyor be installed?

Solution:
0 1 2 3 4 5 6 14 15

A A A A A A A A=50,000

P = $275,000

Try i = 16.3%

Use i = 16.3% Therefore the synchronous conveyor should be installed. 10% < 16.3%
Problem 32:
Charlie Ng is selecting materials for a government-subsidized housing development. The building wil be
maintained for at least 75 years, and the agency uses an i of 6%. Which of the following two grades of
shingles and metal roofing is the most cost-effective?
All costs are per square (equals 100 square feet).

Solution:

Min. Quality Max. Quality

Metal Roofing
Shingles Shingles
Buy $35 $70 $120
Install $70 $70 $100
Annual Maintenance $5 $3 $1
Life (years) 15 25 50
Problem 32:

Annual cost of Min. Quality Shingles:

𝐴 (1 + 𝑖)𝑛 −1
𝑃=
(1 + 𝑖)𝑛 𝑖 0 1 2 3 4 5 14 15

P = 35 + 70 = 105
A A A A A A A
𝐴 (1.06)15 −1
105 =
1.06 15 (0.06)
P=105
A = $10.81

Total annual cost for Min. Quality Shingles:

Total annual cost = 10.81 + 5 = $15.81

Problem 32:

Annual cost of Max. Quality Shingles:

𝐴 (1 + 𝑖)𝑛 −1
𝑃=
(1 + 𝑖)𝑛 𝑖 0 1 2 3 4 5 6 7 8 24 25

P = 70 + 70 = 140
A A A A A A A A A A
25
𝐴 (1.06) −1
140 =
1.06 25 (0.06)
P=140
A = $10.95

Total annual cost for Max. Quality Shingles:

Total annual cost = 10.95 + 3 = $13.95

Problem 32:
Annual cost of Metal Roofing:

𝐴 (1 + 𝑖)𝑛 −1
𝑃=
(1 + 𝑖)𝑛 𝑖
P = 120 + 100 = 220

𝐴 (1.06)50 −1
220 =
1.06 50 (0.06)

A = $13.96

Total annual cost for Metal Roofing:

Total annual cost = 13.96 + 1 = $14.96

Charlie Ng should choose the higher quality shingles.

 Deferred Annuity
- is one where the payment of the first amount is deferred a certain
number of periods after the first.
Problem 33: CE Board May 2015
In 5 years, P1.8 M will be needed to pay for the building renovation. In order to generate this sum, a
sinking fund consisting of three annual payments is established now. For tax purposes, no further
payments will be made after 3 years. What payments are necessary if money is worth 15% per annum?
0 1 2 3 4 5
Solution:

A A A
F1

F=1,800,000
F1 = 3.4725A
0 1 2 3 4 5
F = F1(1 + i)2
1800000 = 3.4725A(1.15)2 F1
A = P391,600
F
Problem 34: CE Board May 2016
A father wants to set aside money for is 5-year old son’s future college education. Money can be deposited
in a bank account that pays 8% per year, compounded annually. What equal deposits should be made by
the father, on his son’s 6th through 17th birthdays, in order to provide P5,000 on the son’s 18th, 19th,
20th and 21st birthdays?
0 1 2 3 4 5 6 7 8 9 10 1 1 12
0 1 2 3 4 5 6 7 8 9 10 1 1 12 13 14 15 16 17 18 19 20 21
Solution:
F=P A A A AA A A A A A A A
5000 500050005000

F
P

A = P872.67
Problem 35: CE Board May 2004
A boy is entitled to 10 yearly endowments of P30000 each starting at the end of the eleventh year from
now. Using an interest rate of 8% compounded annually, what is the value of these endowment now?

Solution:
012 10 11 12 13 14 15 16 17 18 19 20
𝐴[ 1 + 𝑖 𝑛 − 1]
𝑃1 =
1+𝑖 𝑛𝑖 A A A A A A A A A A=30,000

30000[ 1.08 10 − 1] P1
𝑃1 =
1.08 10 (0.08)
P
P1 = 201302.44

𝑃1 0 1 2 3 4 5 6 7 8 9 10 19 20
𝑃= 10
1+𝑖

201302.44 P1
𝑃=
1.08 10
P
P = P93241.98
 Annuity Due
- is one where the payments are made at the start of each period
ANNUITY DUE

Present Worth:

𝑨 (𝟏 + 𝒊)𝒏−𝟏 −𝟏
𝑷= +𝑨
(𝟏 + 𝒊)𝒏−𝟏 𝒊

Future Worth:

𝑨 (𝟏 + 𝒊)𝒏+𝟏 −𝟏
𝑭= −𝑨
𝒊
Problem 36:
An engineer is entitled to received P25000 at the beginning of each year for 18 yrs. What is
the present value in pesos of this annuity at the time he is suppose to receive the first
payment if the rate of interest is 4% compounded annually?

0 1 2 3 4 5 14 15 1 6
Solution:

𝐴 (1 + 𝑖)𝑛−1 −1 A A A A A A A A A
𝑃= +𝐴
(1 + 𝑖)𝑛−1 𝑖
P
17
25000 (1.04) −1
𝑃= + 25000
(1.04)17 (0.04)

P = P329142
Problem 37:
A student will receive 3000 pesos at the beginning of each 3 months for 4 yrs. What is the
sum of this annuity at the end of the 4th year if the interest rate is 6% compounded
quarterly.
n = 16
0 1 2 3 4 5 6 15 16
Solution:
A A A A A A A A A
𝐴 (1 + 𝑖)𝑛+1 −1
𝐹= −𝐴
𝑖 F

3000 (1.015)17 −1
𝐹= − 3000
0.015

F = P54604