Engineering Economics

GSOE 9830-Engineering Economics- Assignment 1

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1. As per the question, Enrico plans to save money for buying his replacement car once he pays of his debts for his present car. After the entire car loan was paid off, he plans to save the same amount that he was paying for his car now at a rate of 3% compounded monthly.
So after the initial 5year period that he took to pay off the car loan, he has saved the amount for the next 5 years. The question asks us to find how much he would have saved after the initial 10year period.

The amount he paid for the car loan was A= $311.40(without the insurance and fuel expenses)
Interest rate is 3% monthly so the actual interest per month is 3/12 = 0.25%
The time period for which he saves is 5years that is n = 60months.

So the total amount Enrico has saved can be found by

F = A (F/A, i %, n)
F = 311.40 (F/A, 0.25%, 60)
F = 311.40 (64.646)
F = 20130.98
Therefore the amount saved by Enrico towards buying his new car is $20,130.98.

2. Enrico has planned to save $40000 by the end of 10years to make an initial down payment on a condo. It is assumed that the property tax and insurance rate equal 25% of the monthly principal and interest amount. Enrico has also planned to maintain the same living costs($950/month). The question asks to find the amount he can afford to pay for the condo once he has bought it, if he intends to maintain the same living expenses

It is assumed that the utility costs are $150/month.
So he spends $800 towards the rent alone.
It is assumed that the insurance and property tax can be 25% of the amount.
He has to make monthly payments towards the condo from year 10 for the next 30 year period, so n = 360 months.
The mortgage is taken at a rate of 6% compounded monthly, so the actual rate is 0.5%

So he can afford to pay the following amount monthly:
P + 0.25P = 800
1.25P = 800
P = 800/1.25
P = $640.
So the price of the condo he can afford is
= 640 (P/A, 0.5, 360) + 40000
= 106,747 + 40,000
= $146747
The price he can afford for the condo is $146747, if he wants to maintain the current living expenses.

3. Enrico plans to invest in more daring options for his retirement investment saving. He plans to invest so as to obtain average of 10% per year.

It stated that Enrico sets aside 10% of his monthly salary of which he gets only 80%.
So Enrico can set aside 10% of (4000*0.80) = $ 320.

If Enrico invests at a rate of 10% per year, he would have accumulated
F = A(F/A, i%, n)
F = 320(F/A, 10/12%, 120)
F = 320(204.84)
F = 65,550.40
So Enrico would have accumulated $65,550.40 for his retirement at the end of the 10year period.

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