ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
Question
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Chapter 4, Problem 93P
To determine

(a)

Effective annual interest rate.

Expert Solution
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Answer to Problem 93P

Effective annual interest rate is 12.36%.

Explanation of Solution

Given information:

Loan amount: $5,000

Interest rate: 12% per annum, compounded semi-annually.

Loan amount is $5,000 and Rate of Interest is 12% compounded semi-annually.

Effective annual interest rate is calculated as periodic interest rate expressed in terms of a year.

Effective Interest rate is calculated using the following formula:

E=(1+i/n)n-1Where;i=Annual interest raten=Number of periodsIn the given scenario, i = 6% since interest is compounded semi-annuallyn = 2 since interest is compounded monthlySubstituting values in the above equation, we get,E = (1+6%)21E = 12.36%

Substituting the above values in the equation we get effective interest rate as 12.36%.

Conclusion:

Hence the Effective annual interest rate is calculated.

To determine

(b)

Amount of semi-annual payment.

Expert Solution
Check Mark

Answer to Problem 93P

Amount of semi-annual payment is $ 1442.96.

Explanation of Solution

Given information:

Loan amount: $5,000

Interest rate: 12% per annum, compounded semi-annually.

Duration: 4 Periodic repayments.

The periodic payment to be made is calculated as per the following formula:

P=(R/(1(1+R)N)LWhere;P=Periodic RepaymentR=Periodic  Rate of Interest N= Duration of the LoanL=Loan AmountP = (0.0618 / (1 - ( ( 1+0.0618 ) 4)) ×5,000P = $ 1448.91

Loan amount is $5,000, Interest rate per period is 12.36% per annum, compounded semi-annually, and Duration is 4 repayments.

Substituting values in the above equation, we get the periodic payment as $1,448.91.

Conclusion:

Hence the amount of monthly payment is calculated.

To determine

(c)

Total interest paid.

Expert Solution
Check Mark

Answer to Problem 93P

Total interest paid is $795.64.

Explanation of Solution

Given information:

Loan amount: $5,000

Interest rate: 12% per annum, compounded semi-annually.

Duration: 4 Periodic repayments.

The periodic payment to be made is calculated as per the following formula:

P=(R/(1(1+R)N)LWhere;P=Periodic RepaymentR=Periodic  Rate of Interest N= Duration of the LoanL=Loan AmountP = (0.0618 / (1 - ( ( 1+0.0618 ) 4)) ×5,000P = $ 1448.91

Loan amount is $5,000, Interest rate per period is 12% per annum, compounded semi-annually, and Duration is 4 repayments.

Substituting values in the above equation, we get the periodic payment as $1,448.91.

Total interest paid is calculated using the following formula:

I = (P x N) – L Where: I = Interest paid P = Periodic repayment N = Number of repayments L = Original Loan amount Substituting values,in the above equation, we get; I = ($1,448.91 x 4) - $5,000 I = $ 795.64

Hence the total interest paid is $795.64.

Conclusion:

Hence the total interest paid is calculated.

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Chapter 4 Solutions

ENGR.ECONOMIC ANALYSIS

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