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Warning: State University of New York

Eng Economics

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31 views13 pages

Warning: State University of New York

Eng Economics

Uploaded by

Sajid Iqbal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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WARNING

All rights reserved. No part of the course materials


used in the instruction of this course may be
reproduced in any form or by any
electronic or mechanical means, including the use
of information storage and retrieval systems,
without written approval from the copyright owner.

©2006 Binghamton University


State University of New York
ISE 211
Engineering Economy
Chapter 4
More Interest Formulas
(cont’d)
Continuous Compounding
 As m, the number of compounding sub-periods per
year, grows, to , the interest compounds continuously:

 Under continuous compounding, the effective


interest rate per year is given as: ia = er – 1
 Single Payment – continuous compounding:
 Compound Amount: F = P[er*n] = P[F/P,r,n]
 Present worth: P = F[e-r*n] = F[P/F,r,n]
Examples
1) What is the amount of interest earned on $2000 for
two years earning 5% nominal interest rate
compounded continuously?

2) A bank offers to sell savings certificates that will pay


the purchaser $5000 at the end of 10 years but will pay
nothing to the purchaser in the meantime. If interest is
computed at 6% compounded continuously, at which
price is the bank selling the certificates?
Examples (cont’d)

3) How long will it take for money to double at 10%


nominal interest, compounded continuously?

4) What is the effective annual interest rate of 6%,


compounded continuously?
Uniform Payment Series-Continuous Compounding at
Nominal Rate r per Period
Substitute i = er – 1 into the equations for periodic compounding.
Continuous Compounding Sinking Fund:
[A/F,r,n] = er – 1
er*n – 1
Continuous Compounding Capital Recovery:
[A/P,r,n] = er*n (er – 1)
er*n – 1
Continuous Compounding Series Amount:
[F/A,r,n] = er*n – 1
er – 1
Continuous Compounding Series Present Worth:
[P/A,r,n] = er*n – 1
er*n (er – 1)
Example 1

How much money will accrue in an


account earning 5% compounded
continuously for 5 years, if $500 is
deposited each year?

Solution:
Example 2

Jim wished to save a uniform amount each month so he


would have $1000 at the end of one year. Based on 6%
nominal interest, compounded monthly, he had to
deposit $81.10 per month. How much would he have to
deposit if his credit union paid 6% nominal interest,
compounded continuously?

Solution:
Continuous Uniform Cash Flow (One Period) With
Continuous Compounding at Nominal Interest Rate r

 This is the situation when a continuous uniform cash flow


occurs during one period only, with continuous compounding.

 Examples: Amount of money out of an ATM, amount of


money into a credit card company in the form of payments,
etc.
P

F=?
Continuous Uniform Cash Flow (One Period) With Continuous
Compounding at Nominal Interest Rate r (cont’d)

 The amount of money, F, at the end of one period can be

obtained as follows: F = P ((er – 1) / r)

 To find the amount for any future time, n:


P
F = P (er – 1) ern
1 2 3 … n rer
F=?
1
 For any present time: F P = F (er – 1)
1 2 3 … n
rern
P= ?
Example

A self-service gasoline station has been equipped with an


ATM. Customers may obtain gasoline simply by inserting
their ATM card into the machine and filling their car with
gasoline. When they have finished, the ATM unit
automatically deducts the gasoline purchase price from the
customer’s bank account and credits it to the gas station’s
bank account. The gas station receives $40,000 per month in
1
this manner with the cash flowing uniformly throughout the
month. If the bank pays 9% nominal interest, compounded
continuously, how much will be in the gasoline station bank
account at the end of the month?
Homework # 04 (Chapter # 4)
1 6 13 16

20 34 42 48

49 9 17 50

52 54 66 70
Homework # 04 (Chapter # 4) – cont’d
73 75 77 81

85 86 96 97

101 102 104 108

110 116

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