7.01_econ_1_post - $ The cost of money $ Interest is the...

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1   M Pore  -  7.01  -  econ 1.ppt $   The cost of money   $ Interest is  the cost of money A dollar now can be worth two dollars later At 20 years of age, you start saving $100/month until  you are 60 years old. You retire at 60 and want  to plan to live to 100. How much can you spend  each month in your retirement?
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2   M Pore  -  7.01  -  econ 1.ppt The language of money: simple interest PV: present value FV: future value i: interest rate F = P (1+i) P = $100 F = ? i = .08 or 8% F = P (1+i) = $100 * 1.08 = $108
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3   M Pore  -  7.01  -  econ 1.ppt The language of money: compound interest PV: present value FV: future value interest periods 1 2 3 n n-1 F = P (1+i) n F = P (1+i) n  = $100 * 1.08 10  = $215.89
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4   M Pore  -  7.01  -  econ 1.ppt The language of money: annuities PV: present value FV: future value interest periods A 1 A 3 A n A n-1 A 2
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5   M Pore  -  7.01  -  econ 1.ppt Types of cash flow Single cash flow Equal (uniform) series Linear gradient series Geometric gradient series Irregular (mixed) series
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6   M Pore  -  7.01  -  econ 1.ppt Single cash flow Types of cash flow 0 2 1 3 4 5 years 0 2 1 3 4 5 years Equal (uniform) series:   A 1  = A 2  = … = A n $100 $100 $100 $100 $100 $100
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7   M Pore  -  7.01  -  econ 1.ppt Linear gradient series: A k+1  = A k  + G  or A k+1  = A 1  + k*G  Types of cash flow 0 2 1 3 4 5 years $50 $50+G $50+2G $50+3G $50+4G
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8   M Pore  -  7.01  -  econ 1.ppt Types of cash flow 0 2 1 3 4 5 years $50 $50 (1+g) $50 (1+g) 2 $50 (1+g) 3 $50 (1+g) 4 Geometric gradient series: A k+1  = A k  (1+g)  or A k+1  = A 1  (1+g) k
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9   M Pore  -  7.01  -  econ 1.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
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10   M Pore  -  7.01  -  econ 1.ppt Single cash flow:  the math PV: present value FV: future value 1 2 3 n n-1 P(1+i) P(1+i) 2 P(1+i) 3 P(1+i) n-1 P(1+i) n ( 29 ( 29 n n i F i F P - + = + = 1 1 1 ( 29 n i P F + = 1
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11   M Pore  -  7.01  -  econ 1.ppt Practice Problem If you had $2,000 now and invested it at 10%, how  much would it be worth in 8 years?  $2,000 F = ?
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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 at Austin.

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7.01_econ_1_post - $ The cost of money $ Interest is the...

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