Class_Nov12_2013_Lec22_ISE460(1)(1)

f example 117 adjusteddiscounted method given

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Unformatted text preview:  ­ Step 1: Bring all cash flows to have common purchasing power.  ­ Step 2: Consider the earning power. •  Method 2: Adjusted ­discount Method  ­ Combine Steps 1 and 2 into one step. Example 11.6 – Defla%on Method Step 1: Conver%ng Actual Dollars into Step 2: Calcula%ng Equivalent Constant Dollars Present Worth Graphical Overview on Defla%on Method (Example 11.6): Conver%ng actual dollars to constant dollars and then to equivalent present worth n=0 n=1 n=2 n=3 n=4 n=5 Actual Dollars Constant Dollars Present Worth -$75,000 -$75,000 $32,000 $35,700 $32,800 $29,000 $58,000 $30,476 $32,381 $28,334 $23,858 $45,455 $28,218 -$75,000 $27,706 $26,761 $21,288 $16,295 $45,268 Adjusted ­Discount Method – Perform Defla%on and Discoun%ng in One Step An (1 + f ) n Pn = (1 + i ' ) n Step 2 = = o  Discrete Compounding Step 1 Pn = An An = n (1 + i)n Ⱥ(1 + f )(1 + i ')Ⱥ Ⱥ Ⱥ An (1 + f )n (1 + i ')n An Ⱥ(1 + f )(1 + i ')Ⱥ Ⱥ Ⱥ An (1 + i)n (1 + i) = (1 + f )(1 + i ') = 1 + i '+ f + i ' f n i = i '+ f + i ' f o  Con%nuous Compounding i = i '+ f Example 11.7 Adjusted ­Discounted Method Given: infla%on ­free interest rate = 0.10, general infla%on rate = 5%, and cash flows in actual dollars Find: i and NPW i = i '+ f + i ' f = 0.10 + 0.05 + (0.10)(0.05) = 15.5% n Cash Flows in Actual Dollars Multiplied by Equivalent Present Worth 0 -$75,000 1 -$75,000 1 32,000 (1+0.155)-1 27,706 2 35,700 (1+0.155)-2 26,761 3 32,800 (1+0.155)-3 21,288 4 29,000 (1+0.155)-4 16,296 5 58,000 (1+0.155)-5 28,217 $45,268 Graphical Overview on Adjusted Discount Method: Conver%ng actual dollars to present worth dollars by applying the market interest rate n=0 Actual Dollars n=1 -$75,000 $32,000 n=2 n=3 n=4 $35,700 $32,800 $29,000 $58,000 i = i+ + f + i+ f = 15.5% Present Worth $28,218 -$75,000 $27,706 n=5 $26,761 $21,288 $16,295 $45,268 Mixed ­Dollar Analysis – College Savings Plan  ­ Equivalence Calcula%on wit...
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