S07 Chap 4-2

S07 Chap 4-2 - Contemporary Engineering Economics 4 th...

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Unformatted text preview: Contemporary Engineering Economics, 4 th edition, © 2007 Equivalence Analysis using Effective Interest Rates Lecture No.4-2 Chapter 4 Contemporary Engineering Economics Copyright © 2006 Contemporary Engineering Economics, 4 th edition, © 2007 Equivalence Calculations using Effective Interest Rates Step 1 : Identify the payment period (e.g., annual, quarter, month, week, etc) Step 2 : Identify the interest period (e.g., annually, quarterly, monthly, etc) Step 3 : Find the effective interest rate that covers the payment period. Contemporary Engineering Economics, 4 th edition, © 2007 Case I: When Payment Period is Equal to Compounding Period Step 1 : Identify the number of compounding periods ( M ) per year Step 2 : Compute the effective interest rate per payment period ( i ) i = r / M Step 3 : Determine the total number of payment periods ( N ) N = M ×(number of years) Contemporary Engineering Economics, 4 th edition, © 2007 Example 4.4: Calculating Auto Loan Payments Given : MSRP = $20,870 Discounts & Rebates = $2,443 Net sale price = $18,427 Down payment = $3,427 Dealer’s interest rate = 6.25% APR Length of financing = 72 months Find : the monthly payment ( A ) Contemporary Engineering Economics, 4 th edition, © 2007 Solution: Step 1: M = 12 Step 2: i = r / M = 6.25%/12 = 0.5208% per month Step 3: N = (12)(6) = 72 months Step 4: A = $15,000( A / P , 0.5208%,72) = $250.37...
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S07 Chap 4-2 - Contemporary Engineering Economics 4 th...

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