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Engineering Economy 4b

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37 views18 pages

Engineering Economy 4b

Uploaded by

Kejeindrran
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Engineering

Economy
ENG3102
Time value
of money

04
and the concept of
equivalence (Part II)
How much interest
should I charge if I want
to get an additional RM
500 after 3 months ?
Finding interest
rate given P, F,
and N

What is the interest rate


required to achieve
equivalence? That’s easy. Use
this equation:
!
𝑖= 𝐹# − 1
𝑃
Hmm.. Maybe I should just
invest the RM 500 I have
now. I heard I can earn
Finding the amount 10% monthly interest in
Investment A

of time needed
given P, F, and i

log(𝐹 ⁄𝑃)
𝑁=
log(1 + 𝑖)
More examples

If I invest RM 500 now, and then In a separate scenario, if I want to take out RM 800
another RM 500, 6 months from now, after a year, and still obtain RM 3,000 at the end of
how much will I get at the end of the the same investment period, how much should I
same investment period? invest now?
Uniform Series (Annuity)

A indicates end-of-period cash flows


Uniform Series (Annuity)

Finding F when given A Finding P when given A

é (1 + i ) N - 1 ù é (1 + i ) N - 1 ù
F = Aê ú = A ( F /A, i %, N ) P= Aê N ú
= A ( P /A, i %, N )
êë i úû êë i (1 + i ) úû
Summation of the
future equivalents for
each of the cash flow

“Uniform series compound amount factor” “Uniform series present worth factor”
Class Exercise
Finding A when given F
i. Future equivalent value after yearly
investment of RM 10,000 for 30 years
é i ù earning annual interest of 7%
A= Fê ú = F ( A/F , i %, N ) ii. Find the principal value if investor
êë (1 + i ) - 1 úû
N
intends to take RM 20,000 yearly from
a 10 years investment at 5% annual
interest
iii. How much should one invest yearly to
have RM 100,000 if the interest earned
Finding A when given P annually from a 20 years investment is
8%
é i (1 + i ) N ù iv. A loan of RM 150,000 was taken with
A= Pê ú = P ( A/P, i %, N ) interest of 2.8%. How much is the
ëê (1 + i ) - 1 ûú
N
monthly repayment if the loan term is 9
years?
Solving for N and i

● We may know P, A, and i and want


to find N Madan took a business loan of RM
100,000 from a local bank, which
● We may know P, A, and N and want charges him an interest rate of 7%
to find i per year. If Madan pays the bank
RM 11,000 per year, how many
This can be solved by using the interest years will it take to pay off the
tables or interpolation or spreadsheet. loan?
Deferred
Annuities
• Cash Flows that do not
occur until some time
in the future
1. Use (P/A, i%, N-J) find the value of the
• If the annuity is deferred annuity at the end of period J
deferred J periods, then (where there are N-J cash flows in the
the first payment (cash annuity).
flow) begins at the end 2. Use (P/F, i%, J) to find the value of the
deferred annuity at time zero.
of period J+1
P0 = A ( P /A, i %, N - J )( P /F , i %, J )
Deferred Annuities (class exercise)
Arsyad is buying a car, which he intends to use for 9 years. The car comes
with full warranty for the first 5 years. Arsyad plans to allocate at least RM
2,000 per year for the remaining 4 years. How much should he put in his
saving account now, if the account earns an annual interest of 4%?

Arsyad is now planning to include the cost of road tax and insurance
renewal into his yearly car allocation, which will add RM 1,000 to the annual
maintenance cost. How much should he put in his saving account now?
Arithmetic Gradient
Series
1 é (1 + i ) -1 N ù
N

( P /G, i %, N ) = ê - N ú
i ëê i (1 + i ) N
(1 + i ) ûú

1 N
( F /G, i %, N ) = ( F /A, i %, N ) -
i i

1 N
( A/G, i %, N ) = -
i (1 + i ) N - 1
Class Exercise
End of Year Cash Flows
(RM)
1 2,000
2 3,000
3 4,000
4 5,000

Find F and find the annual equivalent value


Geometric Gradient
Series
If 𝑓 ̅ ≠ 𝑖, then P =
̅ 𝑁 ]
𝐴! [1 − 𝑃 ⁄𝐹 , 𝑖%, 𝑁 𝐹 ⁄𝑃 , 𝑓%,
𝑖 − 𝑓̅

If 𝑓 ̅ = 𝑖, then P =

𝐴! 𝑁 𝑃 ⁄𝐹 , 𝑖%, 1
Class Exercise

Nihon projects good things for their new digital


camera. Revenues this year are expected to be $1.1
million, and Nihon believes they will increase 15% per
year for the next 5 years. What are the present value
and equivalent annual amount for the anticipated
revenues? Nihon uses an interest rate of 20%.
Should I pay:
i. lump sum at the end of
3 months?
ii. only the interest for the
first couple of months
and the balance in the

The concept
final month?
iii. equal payment amount
each month for 3

of equivalence
months?
Summary
01. 02. 03.
Standard notation &
Interest cash flow diagram
Single payment
Simple vs Compound Notation for compound Single present/future
interest factor & general diagram value

04. 05. 06.


Gradient Concept of
Uniform annuities
annuities equivalence
Regular uniform cash Uniformly increasing How alternatives can be
flows cash flows compared
Thanks!
Do you have any questions?

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