Continuous payments and continuous compounding is less overall payments than

# Continuous payments and continuous compounding is

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Continuous payments and continuous compounding is less overall payments than making annual payments and having continuous compounding. IE 492 Engineering Economics Karnik 7

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CONTINUOUS PAYMENTS- EXAMPLE Let’s work through an example 5.6 in the book. In this example we are given the following: Final Value: \$10,000 (this is ‘F’) Interest rate: 5% (this is ‘r’) Period: 15 years (this is ‘n’) We are asked to find the ‘payments’ (A) made continuously. Therefore, we would apply formula 5.10 from the book: A’ = F * (A’/F,r%,n) = F * r/ ( e rn -1) = 10,000 * 0.05/ (e (0.05)(15) -1) = \$447.63 In annual compounding situation, we would apply the formula from previous chapters and obtain \$459. This is the power of continuous payments! Note the difference between annual and continuous payments for the same duration, same interest rate and same future expected amount. IE 492 Engineering Economics Karnik 8
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