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Unformatted text preview: an be variable) “Buy” an annuity Fixed term: standard annuity Lifetime (perpetual) annuity Contains “insurance” value Why? Cost? Receive lump sum at retirement “Roll over” to an annuity at retirement 8 ChBE 4505/4525 Discrete Compounding Schork L11 First payment at the end of the first period: n‐1 compounding Last payment at the end: No compounding 9 ChBE 4505/4525 Schork L11 Simplify by multiplying both sides by (1+i): 10 ChBE 4505/4525 Schork L11 11 ChBE 4505/4525 Schork L11 12 ChBE 4505/4525 Schork L11 Present Worth of an Annuity Combine [P/F] with [F/A] to get [P/A] Discrete compounding Continuous compounding 13 ChBE 4505/4525 Schork L11 14 ChBE 4505/4525 Schork L11 Comparing Alternatives Must compare alternatives on an equal basis So, bring each alternative to a fixed time: Present Worth (P) Future Worth (F) Annualized Cost (A) Some have different time lines 15 ChBE 4505/4525 Schork L11 16 ChBE 4505/4525 Schork L11 17 ChBE 4505/4525 Schork L11 Capitalized Costs and Perpetuities Capitalized cost, K is original cost, CI, plus perpetuity For an infinite number of replacements made every nR years Replacement cost: Interest rate r compounded m times per year: CR = CI – Sequip (Sequip = salvage value) Investment must provide a future worth, F every ny years sufficient for the replacement of the equipment and replacement of the principal, P, so that it can be invested for another ny years: 18 ChBE 4505/4525 End of L11 19 Schork L11...
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This note was uploaded on 04/10/2014 for the course CHBE 4525 taught by Professor Staff during the Spring '08 term at Georgia Institute of Technology.

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