This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ll cost alternatives problems)
(most It’s a method of solution Done in most fields because it presents the
Done
answer in one number easy for someone in the
business to understand
business If I tell you it costs 25 cents/mile to own and operate an
If
automobile you understand fast
automobile Done because it covers up nasty practical
Done
problems with simple All Cost Alternatives
problems Especially the infamous unequal lives problem Summary of 5 Types of
Problems
Problems Invest and Earn Problem
All Cost Alternatives Problem
Incremental Investment Problem
Competing Investments Problem
Unit Cost Problem Basics Needed
Basics Identify the investor and build a cash flow
Identify
showing money in and out of his pocket
showing Identify the point of decision and put the
Identify
pot at that location
pot iidentify needed locations for any temporary
dentify
pots
pots The Six Magic Numbers
The P/F
F/P
P/A
A/P
F/A
A/F
There are a few other minor numbers Interest Rates
Interest Interest Rates are almost always
Interest
reported annually
reported can be adjusted to other compounding
can
periods so they can be used as i in magic
numbers
numbers Example  Convert to Monthly Interest Annual Rate% / 12 (convert to months) / 100
Annual
(convert from percent to fraction)
(convert Components of Interest
Components Safe Rate (about 2%)
Inflation Rate (now around 4%)
Risk Premium (depends on investment)
Motivation Premium (usually small)
Dealt with by Multiplication (1.02)(1.04)(1.09)(1.001) = 1.1574 15.74% If inflation is not included = Real Rate If inflation is included = Nominal Rate...
View
Full
Document
 Spring '13
 paulbradley
 Economics

Click to edit the document details