S07 Chap 3-2 - EconomicEquivalence Chapter 3-2 Contemporary...

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Economic Equivalence Chapter 3-2 Contemporary Engineering Economics Copyright © 2006
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Economic Equivalence What do we mean by “economic equivalence?” Why do we need to establish an economic equivalence? How do we establish an economic equivalence?
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Economic Equivalence Economic equivalence exists between cash flows that have the same economic effect and could therefore be traded for one another. Even though the amounts and timing of the cash flows may differ, the appropriate interest rate makes them equal.
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If you deposit P dollars today for N periods at i , you will have F dollars at the end of period N . N F P 0 N i P F ) 1 ( + = Equivalence from Personal Financing  Point of View P F
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F dollars at the end of period N is equal to a single sum P dollars now, if your earning power is measured in terms of interest rate i . N F P 0 (1 ) N P F i - = + Alternate Way of Defining Equivalence N 0 =
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Practice Problem 0 1 2 3 3 4 5 $2,042 5 F 0 At an 8% interest, what is the equivalent worth of $2,042 now in 5 years?
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