Question

Q) A company XYZ plans to purchase a production line that costs annually 5000 AED paid at the end of each year for ten years. Starting the end of second year, the annual payment decreases by amount of 5% every for the 10 year period, for 10% interest rate, the total present worth is ?

Q) Ahmed takes out a loan of AED 4228 for 5 years. After 5 years he will payback AED 8,400 to clear his debt. What is the simple interest rate charged. Your answer needs to be entered as fraction between 0 and 1 e.g. 0.1151

Answer 1

Q1) According to my understanding , Every year annual payment decreases by 5% . Initial payment = AED 5000

Cash flow can be calculated using current cost C_i = C_i-1 * ( 1- 5%)

To calculate present value using 10% interest rate for 10 years cash flow , NPV is used as follows :

Thus present value = AED 25638.7

Q2) Simple interest = Principal amount * No. of years * annual rate of interest

At the end of period Principal and interest both are returned. Thus 8400 = Principal amount +Interest.

Given Principal amount = AED 4228

Thus Interest = 8400-4228 = AED 4172

Using simple interest formula , AED 4172 = AED 4228 * 5 years * annual rate of interest

annual rate of interest = 0.197351