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7.01_econ_0+a

# 7.01_econ_0+a - Time Value of Money 1 M Pore 7.01 econ 0 A...

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1   M Pore  -  7.01  -  econ 0+A.ppt Time Value of Money

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2   M Pore  -  7.01  -  econ 0+A.ppt Time Value of Money Money has a time value  because it can earn more  money over time ( earning  power ). Money has a time value  because its purchasing power  changes over time ( inflation ). Time value of money is  measured in terms of  interest  rate . Interest is the cost of money— cost  to the borrower and an  earning  to the lender This a two-edged sword whereby earning grows, but purchasing power decreases (due to inflation), as time goes by.
3   M Pore  -  7.01  -  econ 0+A.ppt The Interest Rate

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4   M Pore  -  7.01  -  econ 0+A.ppt Cash Flow Transactions for Two Types of Loan Repayment End of Year Receipts Payments Plan 1 Plan 2 Year 0 \$20,000.00  \$200.00 \$200.00 Year 1 5,141.85 0 Year 2 5,141.85 0 Year 3 5,141.85 0 Year 4 5,141.85 0 Year 5 5,141.85 30,772.48 The amount of loan = \$20,000, origination fee = \$200, interest rate = 9% APR (annual  percentage rate)
5   M Pore  -  7.01  -  econ 0+A.ppt Cash Flow Diagram for Plan 2

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6   M Pore  -  7.01  -  econ 0+A.ppt End-of-Period Convention
7   M Pore  -  7.01  -  econ 0+A.ppt Methods of Calculating Interest Simple interest : the practice of charging an interest  rate only to an initial sum (principal amount). Compound interest : the practice of charging an  interest rate to an initial sum and to any previously  accumulated interest that has not been withdrawn.

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8   M Pore  -  7.01  -  econ 0+A.ppt Simple Interest P  = Principal amount = Interest rate N  = Number of interest  periods Example: P  = \$1,000 i  = 10% N  = 3 years End of  Year Beginning  Balance Interest  earned Ending  Balance 0 \$1,000 1 \$1,000 \$100 \$1,100 2 \$1,100 \$100 \$1,200 3 \$1,200 \$100 \$1,300
9   M Pore  -  7.01  -  econ 0+A.ppt Simple Interest Formula ( ) where = Principal amount = simple interest rate = number of interest periods = total amount accumulated at the end of period F P iP N P i N F N = + \$1,000 (0.10)(\$1,000)(3) \$1,300 F = + =

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10   M Pore  -  7.01  -  econ 0+A.ppt Compound Interest P  = Principal amount = Interest rate N  = Number of interest  periods Example: P  = \$1,000 i   = 10% N  = 3 years End of  Year Beginning  Balance Interest  earned Ending  Balance 0 \$1,000 1 \$1,000 \$100 \$1,100 2 \$1,100 \$110 \$1,210 3 \$1,210 \$121 \$1,331
11   M Pore  -  7.01  -  econ 0+A.ppt Compounding Process \$1,000 \$1,100 \$1,100 \$1,210 \$1,210 \$1,331 0 1 2 3

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12   M Pore  -  7.01  -  econ 0+A.ppt 0 \$1,000 \$1,331 1 2 3 3 \$1,000(1 0.10) \$1,331 F = + = Cash Flow Diagram
13   M Pore  -  7.01  -  econ 0+A.ppt Relationship Between Simple Interest and Compound Interest

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14   M Pore  -  7.01  -  econ 0+A.ppt Compound Interest Formula 1 2 2 1 0: 1: (1 ) 2: (1 ) (1 ) : (1 ) N n P n F P i n F F i P i n N F P i = = = + = = + = + = = + M
15   M Pore  -  7.01  -  econ 0+A.ppt Some Fundamental Laws 2 F m a V i R E m c = = = The Fundamental Law of Engineering Economy (1 ) N F P i = +

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16   M Pore  -  7.01  -  econ 0+A.ppt
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7.01_econ_0+a - Time Value of Money 1 M Pore 7.01 econ 0 A...

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