Formula i 1 rm m 1 Considering previous example i 1 84 4 1 1 0084 4 1 00824 At

# Formula i 1 rm m 1 considering previous example i 1

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Formula: i = (1 + r/m) m - 1 Considering previous example: i = (1 + 8%/4) 4 1 = (1 + 0.08/4) 4 1 = 0.0824 At this point we can apply F/A equation from Chapter 2 to determine the value of F. F = \$1,000 * (F/A,8.24%,5) = \$1,000 * [(1+0.0824) 5 1]/0.0824 = \$5,894.74 The answer is slightly different from the Approach A, possibly due to accuracy levels. But usually is close within error limits. 9 IE 492 Engineering Economics Karnik

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INTEREST PERIODS LARGER THAN PAYMENT PERIODS In case interest periods are larger than payment periods, some payments may not earn interest as they are not deposited for the entire interest periods. Think about your bank account, where the account itself earns interest, but not all deposits are in the account for the same duration, and you also withdraw money at some intervals. It is likely that some deposits in the bank have not earned interest as the amounts were withdrawn before the interest period could be completed. Following approach can be taken to address such situations: Consider all deposits made in the interest periods to be made at the end of the interest period. Consider all withdrawals made in the interest periods at the beginning of the interest period. Proceed through interest periods and payment periods coincided. Work through example 4.6 in the textbook. 10 IE 492 Engineering Economics Karnik
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