University of Illinois at Urbana-Champaign Department of Industrial and Enterprise Systems Engineering IE 430 Engineering Economy (Fall 2016)...

A man is planning to retire in 15 years. Money can be deposited at 8% compounded quarterly. What quarterly deposit must be made at the end of each quarter until he retires so that he can make a withdrawal of $25,000 semiannually over the first five years of his retirement? Assume that his first withdrawal occurs at the end of six months after his retirement. 1

6. Tesla Motors manufactures high-performance battery electric vehicles. An engineer is on a Tesla committee to evaluate bids for new-generation coordinate-measuring machinery to be directly linked to the automated manufacturing of high-precision vehicle components. Three bids include the interest rates that vendors will charge on unpaid balances. To get a clear understanding of fi nance costs, Tesla management asked the engineer to determine the effective semiannual and annual interest rates for each bid. The bids are as follows:

• Bid 1: 9% per year, compounded quarterly • Bid 2: 3% per quarter, compounded quarterly • Bid 3: 8.8% per year, compounded monthly

(a) Determine the effective rate for each bid on the basis of semiannual periods. (b) What are the effective annual rates? These are to be a part of the final bid selection.

(c) Which bid has the lowest effective annual rate?