lec.3.solved.pdf

# Number of periods time value of money example 1 1000

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= number of periods Time Value of Money Example 1: \$1,000 is deposited in a CD at 6% (annual rate) for 12 months. What will be the value in one year? Time Value of Money Explain the following notations F = P(F/P, i, n) P = F(P/F, i, n) F = A(F/A, i, n) A = F(A/F, i, n) P = A(P/A, i, n) A = P(A/P, i, n) Time Value of Money Example 2: Contractor desires to replace a unit of equipment in 6 years and expects to need \$250,000 (at that time) to do so. At a growth of 8% per year, how much should be set aside? P = F(P/F, 8, 6)

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Time Value of Money Time Value of Money P = Time Value of Money How much to do the same with uniform installments? Time Value of Money 4
Time Value of Money A = Analyzing Alternatives Evaluating Alternatives Net Present Worth (NPW) Analysis Annualized Cost Method Rate of Return (ROR) Analysis Analyzing Alternatives Cash flow diagrams Schematic representation of cash flow series Horizontal line time Arrow up ( n ) income/receivable Arrow down ( p ) cost/expense \$5K n =10 \$20K 5 Analyzing Alternatives Minimum Attractive Rate of Return (MARR) accounts for costs Money (interest) Taxes Storage cost Insurance

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Analyzing Alternatives NPW NPW Analysis Choose highest net present value Compare options with equal lives If unequal, two choices Truncate longer life and assume salvage value Least common multiple of lives Analyzing Alternatives

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