slides session 2 TVOM class Pt1 chrt 3.ppt

I 4 simple interest n 10 years interest period one

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i = 4%, simple interest n = 10 years (interest period = one year) Required: F F = P (1 + i × n ) F = 500000 (1 + 0.04 × 10) = 700 000 m.u.
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Principles of Engineering Economic Analysis , 5th edition Simple Interest Cash Flow Diagram (from the firm’s perspective) 700000
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Principles of Engineering Economic Analysis , 5th edition Compound Interest In calculation of compound interest, the interest for an interest period is calculated on the principal plus the total amount of interest accumulated in previous periods. Thus, compound interest means “interest on top of interest” (i.e., it reflects the effect of the time value of money).
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Principles of Engineering Economic Analysis , 5th edition Engineering Economics 310B 15 Compound Interest Incorporates: Charges for the accumulated interest Charges on unpaid interest
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Principles of Engineering Economic Analysis , 5th edition Engineering Economics 310B 16
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Principles of Engineering Economic Analysis , 5th edition Compound Interest Cash Flow Diagram $100 $110 Principal payment Interest payment
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Principles of Engineering Economic Analysis , 5th edition Engineering Economics 310B 18
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Principles of Engineering Economic Analysis , 5th edition Lender’s versus borrower’s perspective
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Principles of Engineering Economic Analysis , 5th edition Example 2.8 (Lender’s Perspective) Value of $10,000 Investment Growing @ 10% per year Start of Year Value of Investment Interest Earned End of Year Value of Investment 1 $10,000.00 $1,000.00 1 $11,000.00 2 $11,000.00 $1,100.00 2 $12,100.00 3 $12,100.00 $1,210.00 3 $13,310.00 4 $13,310.00 $1,331.00 4 $14,641.00 5 $14,641.00 $1,464.10 5 $16,105.10
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Principles of Engineering Economic Analysis , 5th edition Example 2.8 (Borrower’s Perspective) Value of $10,000 Investment Growing @ 10% per year
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Principles of Engineering Economic Analysis , 5th edition Discounted Cash Flow Formulas Discounted Cash Flow Formulas F = P (1 + i) n (2.8) F = P (F|P i%, n) P = F (1 + i) -n (2.9) P = F (P|F i%, n) Vertical line means “given”
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Principles of Engineering Economic Analysis , 5th edition Excel® DCF Worksheet Functions Excel® DCF Worksheet Functions F = P (1 + i) n (2.1) F = P (F|P i%, n) F =FV(i%,n,,-P) P = F (1 + i) -n (2.3) P = F (P|F i%, n) P =PV(i%,n,,-F)
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Principles of Engineering Economic Analysis , 5th edition F = P (1 + i ) n F = P ( F | P i %, n ) single sum, future worth factor F =FV( i %, n ,,- P ) P = F (1 + i ) - n P = F ( P | F i %, n ) single sum, present worth factor P =PV( i %, n ,,- F )
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Principles of Engineering Economic Analysis , 5th edition F = P(1+i) n F = P(F|P i%, n) F =FV(i%,n,,-P) P occurs n periods before F (F occurs n periods after P) …. 0 1 2 n-1 n P F P = F(1+i) -n P = F(P|F i%, n) P =PV(i%,n,,-F)
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Principles of Engineering Economic Analysis , 5th edition Additional Discounted Cash Additional Discounted Cash Flows Examples Flows Examples
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Principles of Engineering Economic Analysis , 5th edition Example 2.9 Using Tables Dia St. John borrows $1,000 at 12% compounded annually. The loan is to be repaid after 5 years. How much must she repay in 5 years?
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Principles of Engineering Economic Analysis , 5th edition Example 2.9 Dia St. John borrows $1,000 at 12% compounded annually. The loan is to be repaid after 5 years. How much must she repay in 5 years?
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