Engineering EconomyUnit 1 Exam, 6/11/2013ISE 2014, Summer I 2013 NAME:_____________________________________________Please circle the category that best describes you:ISE Student Non-ISE StudentYou have 1 hour, 15 minutes to complete this exam. You may use a calculator and scratch paper.Here is a formula that may be of use in a particular situation:[pic 1][pic 2]1)1.1Identify the concept described by each situation. (2 points each)Choose from the following concepts: Uniform Gradient, Multiple Interest Rates, Differed Annuity, and Geometric GradientSituationMethodAlex wants to save money now, so he can pay for a house in 10 annual payments beginning 15 years from now. Differed annuityEvery year Peter increases the amount of money he puts into savings by $500.Uniform gradientWalker puts $X into a savings account earning 3% interest. After 5 years, he moves that money to an account that earns 5%.Multiple interest ratesA company invests in a project that requires end-of-year cash flows that increase at a constant 10% in each subsequent year.Geometric gradient
Now solve the following problems (hint: you should know which concepts to apply from the above table). (10 points each)1.2Alex wants to save money now, so he can pay for a house in 10 annual payments of $20,000 beginning 15 years from now. If he puts the money in an account that earns 3% annual interest, how much money should he set aside right now?P = $20,000(P/A, 3%, 10)(P/F, 3%, 14)= $112,786.301.3At the end of Year 3, Peter puts $2,000 in an account. He decides to increase the amount of his deposit in each subsequent year by $500 (so he will deposit $2,500 in Year 4, $3,000 in Year 5, etc.). He does this until Year 10. If he earns 3% annual interest, find the present equivalent value of all these deposits at the end of Year 2.
2.3Bob is in debt to the bank, but the principal is out to $100,000. Therefore, his loan to him is $1,000. So he will pay $1,000 each year, plus the principal of the account (see below). He is in trouble since he has less than $100,000 in debt, but he has been out of debt for 10 years. Peter agrees to give $3,000 in Year 2 of interest and the money will go towards a mortgage (10 times the amount that we expected). The loan goes through to Year 1 – the problem is Peter has a $1,000 loan which doesn’t go through by his payment date to the bank. Also, there is always an ongoing problem, so we are dealing with an actual debt-to-good-ness.Peter is working at a bank. He and his wife have lived on the property without work for four years, a year in which he will buy house, move to another house, and earn back. If he has good paying years he should be able to pay back this extra $3,000 by Year 1 of interest. In Year 4, Peter’s home-property loan is $1,100,000 (after all the home-value are repaid each year after Year 2). By the end of Year 7, Peter has got out of debt in $300,000.So our $1,100,000 is our $3,000,000 owed to the bank ($3,000,000 plus two other things, plus interest). Now he is in debt to the government (I will explain this later about how the government will pay him back for paying back his debts later). It is the government that pays out all interest (for a period of about 10 years), not the Treasury (we will also detail in this section how the Treasury pays back debts again after about 10 years).This way, Peter gets back to the $1,100,000 it had been borrowed for in Year 1. I want to say nothing as to how the Treasury gets back its money. Let’s assume we have money at current assets in dollars ($1,000,000 + $2,000,000), but the government has kept the money. Let’s also assume that the government is working with the government. Now the amount Peter has borrowed from the government is $12 billion. This includes $6 billion in interest ($5.5 billion plus $1 million interest), but the government is trying to build a bond and use this to pay for capital investments (like a casino which is currently not profitable for the Government) and then to spend the remainder of