Lec%2010_Full

Lec%2010_Full - IE 343 Engineering Economics Lecture 10...

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IE 343 Engineering Economics Lecture 10: Chapter 4 – The Time Value of Money Instructor: Tian Ni Sep. 14, 2011 IE 343 Fall 2011 1
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Economic Equivalence Cash Flow Diagram Interest Formulas – Find F Given P: F = P(F/P, i%, N) – Find P Given F: P = F(P/F, i% , N) IE 343 Fall 2011 Last Time … 2 N i P F ) 1 ( + = N N i F i F P + = + = ) 1 ( ) 1 1 (
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Definition: Cash flows that have the same economic effect are said to be economically equivalent. Economic Equivalence IE 343 Fall 2011 3
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When comparing the alternatives, we should consider: – the interest rate – the amounts of money involved – the timing of the monetary receipts or expenses – the manner in which the interest (or profit) is paid Economic Equivalence IE 343 Fall 2011 4
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Elements in a cash-flow diagram: Horizontal Line represents time scale Arrows represent cash flows. Downward arrows represent expenses (negative cash flows or cash outflows) and upward arrows represent receipts (positive cash flows or cash inflows). The cash-flow diagram is dependent on the point of view . In the course, without explicitly mention, the company’s (investor’s) point of view will be taken . IE 343 Fall 2011 Cash-Flow Diagrams 5
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IE 343 Fall 2011 Cash-Flow Diagrams – General Setting 6
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Question : You are analyzing a project with five-year life. The project requires a capital investment of $50,000 now, and it will generate uniform annual revenue of $6,000. Further, the project will have a salvage value of $4,500 at the end of the fifth year and it will require $3,000 each year for the operations. Develop the cash-flow diagram for this project from the investor’s viewpoint . IE 343 Fall 2011 Cash-Flow Diagrams - Example 4.7 7
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IE 343 Fall 2011 Example 4.7 – Solution 8
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IE 343 Fall 2011 Example 4.7 – Solution 0 1 2 3 4 5 $50,000 $3,000 $3,000 $3,000 $3,000 $7,500 End of year (EOY) 9
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Three Rules for performing arithmetic calculations with cash flows: 1) Cash flows cannot be added or subtracted unless they occur at the same point in time . 2) To move a cash flow forward in time by one time unit, multiply the magnitude of the cash flow by (1 + i ). 3) To move a cash flow backward in time by one
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This note was uploaded on 01/28/2012 for the course IE 343 taught by Professor Vincent,g during the Winter '08 term at Purdue.

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Lec%2010_Full - IE 343 Engineering Economics Lecture 10...

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