7.01_econ_2

# 7.01_econ_2 - Types of cash flow \$100 \$70 Irregular(mixed...

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1   ©M Pore  -  7.01  -  econ 2.ppt Types of cash flow 0 2 1 3 4 5 years Irregular (mixed) series:   \$70 \$100 \$80 \$50 \$80 0 2 1 3 4 5 years \$100 \$100 \$100 \$100 \$100 \$110 \$110 \$110 \$110 \$110 6 8 7 9 10

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2   ©M Pore  -  7.01  -  econ 2.ppt Exercise your understanding What value of c makes the two diagrams equivalent, when i = 8%? 0 2 1 3 4 5 years \$70 \$100 \$80 \$50 \$80 0 2 1 3 4 5 years c c c c c
3   ©M Pore  -  7.01  -  econ 2.ppt Exercise your understanding What value of c makes the two diagrams equivalent, when i = 8%? 0 2 1 3 4 5 years \$70 \$100 \$80 \$50 \$80 0 2 1 3 4 5 years c c c c c ( 29 ( 29 ( 29 ( 29 517 . 448 08 . 1 70 08 . 1 100 08 . 1 80 08 . 1 50 80 4 3 2 1 = + + + + = F ( 29 8666 . 5 5 , 08 . , / 2 = = c A F c F 45 . 76 \$ 8666 . 5 517 . 448 = = c

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4   ©M Pore  -  7.01  -  econ 2.ppt Exercise your understanding 0 2 1 3 4 5 years \$70 \$100 \$80 \$50 \$80 0 2 1 3 4 5 years c c c c c 00 . 380 \$ 70 100 80 50 80 = + + + + = F 25 . 382 \$ 45 . 76 \$ 5 5 = = c Which is better?
5   ©M Pore  -  7.01  -  econ 2.ppt Multiple Interest Rates \$300 \$500 \$400 5% 6% 6% 4% 4% Find the balance at the end of year 5. 0 1 2 3 4 5 F = ?

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6   ©M Pore  -  7.01  -  econ 2.ppt Solution 1: \$300( / ,5%,1) \$315 2: \$315( / ,6%,1) \$500 \$833.90 3: \$833.90( / ,6%,1) \$883.93 4: \$883.93( / ,4%,1) \$400 \$1,319.29 5: \$1,319.29( / ,4%,1) \$1,372.06 n F P n F P n F P n F P n F P = = = + = = = = + = = =
7   ©M Pore  -  7.01  -  econ 2.ppt The language of interest rates Interest rates stated without a qulifier are annual   interest rates:  9% is 9% per year. What if the compounding is not  annual? How do we ‘sync up?’ 9% per year is 9/12 = .75% per month, and .75% = .0075. 1 2 3 12 11

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8   ©M Pore  -  7.01  -  econ 2.ppt Compounding monthly PV: present value FV: future value interest periods 1 2 3 12 11 F = P (1+i) 12 F = P (1+i) 12  = \$100 * 1.015 12  = \$119.56 r = 18% = .18 yearly rate compounded monthly  i = .18/12 = .015 monthly rate
Taking an interest 18% = .18 is the nominal interest rate . 18% is also the  annual percentage rate (APR) . But the future value of \$100

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## This note was uploaded on 03/19/2008 for the course EE 366 taught by Professor Pore during the Spring '08 term at University of Texas.

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7.01_econ_2 - Types of cash flow \$100 \$70 Irregular(mixed...

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