p_eval04_l6_equi

p_eval04_l6_equi - 1.011 Project Evaluation Time &...

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1.011 Project Evaluation The Principle of Equivalence Carl D. Martland Engineering Economics, Chapter 3, Sections 3.1-3.10 1. Equivalence in Cash Flows 2. Discounting Cash Flows 3. Discrete Annuities
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Concept of Equivalence "Economic equivalence is established, in general, when we are indifferent between a future payment, or series of future payments, and a present sum of money." EE p. 72 Why is this critical? We often have various options expressed as time streams of costs and benefits expressed in financial terms. Which is the best? Why does this get complex - and interesting? What is equivalent for you might not be for me! This is often the basis for negotiation & planning.
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Using Equivalence If we have an appropriate discount rate, we can convert any arbitrary stream of cash flows to various equivalent (but more easily understood) cash flows: P = present value F = future value at time t A = annuity of A per period for N periods To make these conversions, we first need to understand the "time value of money"
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p_eval04_l6_equi - 1.011 Project Evaluation Time &...

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