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Unformatted text preview: Engineering Economics Prof.Dr. Cengiz Kahraman ITU Industrial Engineering Department Engineering Economics Interest Tables In order to simplify the routine engineering economy calculations involving the factors, tables of factor values are prepared for some certain interest rates: 1Discrete Tables 2Continuous Tables Engineering Economics Compound Interest Rates 1 Nominal Interest Rate Nominal interest is the annual interest rate without considering the effect of any compounding. where interest rate / interest period m = number of compoundings per year m mi NIR = = m i Engineering Economics 2 Effective Interest Rate (EIR) Effective interest is the annual interest rate , taking into account the effect of compounding during the year. where i m = interest rate / interest period m = number of compoundings per year ( 29 1 min 1 1 1 + = + = m m al no i m m i EIR Engineering Economics Example: Consider the situation if a person deposited $100 in a bank that pays 5% interest, compounded semiannually. How much would be in the savings account at the end of one year? Solution: 5% interest, compounded semiannually, means that the bank pays 2.5% every six months. The total money at the end of one year is What annual interest rate yields the same amount of money, $105.06? 06 . 105 $ 2 025 . 1 100 = + = F Engineering Economics takes into account the effect of compounding during the year. So, it is EIR. 5% interest, compounded semiannually does not take into account the effect of compounding during the year. So, it is NIR. ( 29 ( 29 06 . 105 $ 1 1 100 $ 1 = + = + = annual i n i P F % 06 . 5 = annual i annual i Engineering Economics Using the formulas of EIR and NIR, Example: If a savings bank pays 1.5% interest every three months, what are the nominal and the effective interest rates? (NIR=6%, EIR=6.1%) Example: An engineer deposits $1,000 in a savings account at the end of each year. If the bank pays interest at the rate of 6% per year, compounded quarterly, how much money will have accumulated in the account after 5 years? ($5,652.40) ( 29 ( 29 % 06 . 5 1 2 025 . 1 1 1 = + = + = n i EIR ( 29 % 5 025 . 2 = = = m mi NIR Engineering Economics Interpolation Sometimes it is necessary to locate a factor value for an interest rate i or number of periods n that is not in the interest tables. When this occurs, the desired factor value can be obtained in one of two ways: 1 by using the formulas, or...
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 Spring '11
 hjtuk
 Industrial Engineering, Net Present Value

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