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Engineering Economy, 5/e

Leland Blank, Texas A&M University
Anthony Tarquin, University of Texas - El Paso

Nominal and Effective Interest Rates

Sample FE Exam Problems

How to use this section: This section includes questions and problems like those on a typical FE exam. For organization purposes only, they are presented in chapter order of the text Engineering Economy, 5^th edition, by Blank and Tarquin.

It is recommended that you read through each question carefully.


1	An interest rate of 1% per month is the same as:
		A)	Nominal 3% per quarter compounded monthly.
		B)	Effective 12.683% per year compounded monthly.
		C)	Nominal 12% per year compounded monthly.
		D)	All of the above.


2	An interest rate of effective 12% per year compounded monthly is nearest to:
		A)	1% per month.
		B)	3.04% per quarter.
		C)	6.15% per semiannual period.
		D)	Nominal 11.39% per year compounded monthly.


3	A nominal interest is similar to a(n):
		A)	effective interest rate.
		B)	simple interest rate.
		C)	compound interest rate.
		D)	inflated interest rate.


4	When no compounding period is given with an interest rate, the compounding period:
		A)	Is equal to the interest period.
		B)	Is assumed to be monthly.
		C)	Cannot be determined from the statement.
		D)	Must be less than interest period.


5	When interest is compounded continuously:
		A)	The cash flow must also occur continuously.
		B)	The cash flow must be converted into continuous cash flow.
		C)	The interest rate must be converted into an annual rate.
		D)	None of the above.


6	An interest rate stated as nominal 12% per year compounded quarterly is the same as:
		A)	effective 1% per month.
		B)	nominal 1% per month.
		C)	3% per quarter.
		D)	12.68% per year.


7	An interest rate of 12% per year compounded continuously is the same as:
		A)	Nominal 1% per month compounded continuously.
		B)	Effective 1.08% per month compounded continuously.
		C)	Effective 12.683% per year compounded continuously.
		D)	None of the above.


8	If you deposit $1000 per month into an account which pays interest at a rate of 12% per year compounded monthly, the amount of money you would have at the end of five years is nearest to:
		A)	$6,353
		B)	$68,321
		C)	$76,234
		D)	$81,670


9	The owner of a small business borrowed $70,000 with an agreement to repay the loan with quarterly payments over a five year time period. If the interest rate is 12% per year compounded quarterly, his loan payment each quarter is nearest to:
		A)	$2,605
		B)	$5,864
		C)	$9,372
		D)	$19,419


10	A metal plating company wants to set aside money now to prepare for a lawsuit it expects to face in four years. If the company wants to have $1,000,000 available at that time, how much must it set aside now in one lump sum if the account will earn 1% per month?
		A)	$620,300
		B)	$711,800
		C)	$836,400
		D)	$961,000


11	Problems 11 through 13 are based on the following statement: A small manufacturing company expects to have to replace its aging production line in five years with new equipment. The current equipment has operating costs which are expected to be $5,000 this year, $6,000 next year, with costs increasing by $1,000 per year through year five. The equipment will have a salvage value of $30,000 at the end of year five. The new equipment is expected to cost $150,000 and the company uses an interest rate of 16% per year compounded quarterly on its investments. The operating cost in year four will be:
		A)	$7,000
		B)	$8,000
		C)	$9,000
		D)	$10,000


12	The present worth of only the purchase price of the new equipment is nearest to:
		A)	$7,710
		B)	$54,768
		C)	$68,460
		D)	$71,415


13	If the $30,000 received from the salvage value of the old equipment will be used to help purchase the new equipment, how much money must the company set aside each quarter in order to have the total amount needed for the new equipment in year five?
		A)	$4,030
		B)	$5,037
		C)	$17,449
		D)	$21,812

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