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Unformatted text preview: Engineering Orientation Engineering Economics Engineering Economics Value and Interest Cost of Money Simple and Compound Interest Cash Flow Diagrams Cash Flow Patterns Equivalence of Cash Flow Patterns Value and Interest Value is not synonymous with amount. The value of an amount of money depends on when the amount is received or spent. First Cost is what you pay for an item when you buy it Value and Interest The difference between the anticipated amount in the future and its current value is called interest. At an interest rate of 10% what is the value now of the expectation of receiving $1 in one year? Cost of Money Interest that could be earned if the amount invested in a business or security was instead invested in government bonds or in time deposit. Cost of Money Buy a car for $20,000 of your own cash vs. US bonds returning 5%/yr ($1,000 forever) In effect you are paying $1,000 for ever (even after the car is a certifiable clunker destined for destruction) Simple and Compound Interest You have a business project costing $100,000 You get a loan for 7.5% yearly for 5 years at simple interest payable at the end of the loan The loan costs $7,500 for each of five years for a total interest of $37,500 Total cost over 5 years = $137,500 Simple and Compound Interest Is the banker really willing to lend you money for 5 years? Isnt he also lending you $7,500 for four years, $7,500 for three years, $7,500 for two years, $7,500 for one year Terms and formulae P or PV Principal is the amount borrowed...
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 Fall '09

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