Notes On Industrial Economics

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IEOR E4003 Industrial Economics
Professor Soulaymane Kachani
Class Exercise 1:
Find the effective interest rate per quarter at a nominal rate of 18% compounded a- Quarterly b- Monthly c- Continuously
Class Exercise 2:
Suppose we are in the market for a medium-sized used car. We have surveyed the dealers’ advertisements in the newspaper and have found a car that should fulfill our needs. The asking price for the car is $7,500, and the dealer proposes that we make a $500 down payment now and pay the rest of the balance in equal end-month payments of $194.82 each over a 48-month period. Consider the following situations.
1. Instead of using the dealer’s financing, we decide to make a down-payment of $500 and borrow the rest from a bank at 12% compounded monthly. What would be our monthly payment to pay off the loan in 4 years?
2. We are going to accept the dealer’s offer but we want to know both the monthly APR and the EAR that the dealer is charging.
Class Exercise 3:
Find the future value of the following cash profile: n 0 1 2 3 4 5 6 7 8
Fn 0 100 106 112 118 124 130 136 142 i ==10%

Class Exercise 4:
A mining company is concerned about the increasing cost of diesel fuel for their mining operation. A special piece of mining equipment, a tractor-mounted ripper, is used to loosen the earth in open-pit mining operations. The company thinks that the diesel fuel consumption will escalate at the rate of 10% per year as the efficiency of the equipment decreases. The company’s records indicate that the ripper averages 18 gallons per operational hour in year 1, with 2,000 hours of operation per year. What would be the present worth of the cost of fuel for this ripper for the next five years if the interest rate is 15% compounded annually?
Class Exercise 5:
A series of equal quarterly payments of $1,000 extends over a period of 5 years. What is the
present
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