Northern Arizona UniversityCollege of Engineering, Forestry, and Natural Sciences
CENE 286: Engineering Economics
Engineering Economics Homework 2
100 points Due: Start of Class, Section 1: 03/23/2016, Section 2 03/24/2016
Engineering Economics Homework
You will evaluate the student loan conditions identified below. This work is to be
completed and submitted as an individual.
Problem:
You are going to begin your freshmen year of college and you will be getting a student
loan to help pay for your schooling. You will have four different options that you will
need to analyze to answer the questions identified below. The option and the terms of
the loans are provided below.
Loan Terms:
 All loans shall be computed at an annual percentage interest rate (APR) of
3.75%
 It is assumed that you will need the loan for four years (eight semesters)
 It is assumed that you will be gainfully employed upon graduation and will begin
repaying the principle four calendar years after the loan(s) began
 You will not make any payments towards the principle of the loans while you are
attending college
 It has been determined that you will need $48,000 ($6000 a semester) to finish
school
Loan Options:
1. You can take the loan in one lump sum of $48000 at the beginning of the four
years. Using this option you will also be able reinvest the remainder of the loan
into a CD for six months each time; i.e. after paying for the first semester you can
invest $42000 and after paying for the second semester you can invest $36000,
after the third semester you can invest $30000, etc…. This CD will return an
annual percentage interest rate (APR) of 1.25%. For this option you will not be
making any payments on the interest (from the loan) generated from the principle
while you are attending school, so no payments for four years.
2. You can take the loan in one lump sum of $48000 at the beginning of the four
years. Using this option you will also be able reinvest the remainder of the loan
into a CD for six months each time; i.e. after paying for the first semester you can
invest $42000 and after paying for the second semester you can invest $36000,
after the third semester you can invest $30000, etc…. This CD will return an
annual percentage interest rate (APR) of 1.25%. For this option you will be
making monthly payments on the interest (from the loan) generated from the
principle while you are attending school.
3. You can take the $6000 at the beginning of each semester. You will not be given
the chance to reinvest anything this time because you will use the principle every
semester to pay for school. For this option you will not be making any payments
on the interest (from the loan) generated from the principle while you are
attending school, so no payments for four years.
4. You can take the $6000 at the beginning of each semester. You will not be given
the chance to reinvest anything this time because you will use the principle every
semester to pay for school. For this option you will be making monthly payments
on the interest (from the loan) generated from the principle while you are
attending school.
Deliverable:
On engineering paper you need to provide the following information:
1. Draw a cash flow diagram for each option (8 points each option)
2. For each option you need to have hand calculations that determine the total
amount owed and income generated at the end of the four years (8 points
each option)
3. For each option you need to have hand calculations that determine the
annual percentage yield for each option (5 points each option)
4. Explain which option is ultimately the most expensive and why you think it is
(4 points for each part)
5. Explain which option is ultimately the least expensive and why you think it is
(4 points for each part)