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CSULB Interest Rates Effective & Nominal Rate and Cash Flow Diagram Worksheet

CSULB Interest Rates Effective & Nominal Rate and Cash Flow Diagram Worksheet

Question Description

see the attachment file

Problem 1: Your Friend offers to pay you $3,000 five years from now. You’d prefer the money now so you can put it in a bank account at 8% interest. How much less should your friend pay you today in order to be equivalent to her original offer? Use the Formula to calculate the problem. Provide your conclusion in words explaining how much less should your friend pay you today.

Problem 2: Your APR is 10% compounded quarterly. Determine r, m, i, ia. Explain in words the difference and similarities between the effective rate approach and the nominal rate approach.

Problem 3: You buy a machine that costs $225k. It has a 10-year life span, after which it will sell for $100k. The new machine will bring in $190k each year, but maintenance and operation will cost $85k/year. It also needs a huge overhaul at year 6 that cost $75k. Draw a Cash Flow Diagram.

Problem 4: Draw a Cash Flow Diagram based on following information:

Initial cost: $20k

O&M: $2k 1st year increasing by $200/year

Overhaul: $1.5k @ Yr 3

Revenue: $7.5k/yr

Life Span: 6 years

Problem 5: Using Present Worth Analysis, determine which construction option should be taken. Utilize 7% interest rate.

Around the Lake (Option 1)

Under the Lake (option 2)


15 miles

5 miles

Initial Cost



Maintenance Cost



Project Life

15 yrs

15 Yrs

Annual Power Loss



Annual Taxes

2% of Initial Cost

2% of Initial Cost

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