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7.01_econ_1_post

# 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
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
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
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
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
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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