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Economical Study Methods

The document discusses various economic study methods used to evaluate investments including present worth, future worth, annual worth, internal rate of return, and external rate of return. It also defines the minimum attractive rate of return as the lowest rate of return an organization will accept for an investment. Examples are provided to illustrate how to use the formulas for present worth, future worth, and other calculations.

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Jom Ancheta Bautista
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321 views19 pages

Economical Study Methods

The document discusses various economic study methods used to evaluate investments including present worth, future worth, annual worth, internal rate of return, and external rate of return. It also defines the minimum attractive rate of return as the lowest rate of return an organization will accept for an investment. Examples are provided to illustrate how to use the formulas for present worth, future worth, and other calculations.

Uploaded by

Jom Ancheta Bautista
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 PPTX, PDF, TXT or read online on Scribd
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ECONOMICAL STUDY

METHODS
T H E M I N I M U M AT T R A C T I V E R AT E O F
RETURN

An organization's minimum attractive rate of return (MARR)


is just that, the lowest internal rate of return the organization
would consider to be a good investment. The MARR is a
statement that an organization is confident it can achieve at
least that rate of return.
BASIC ECONOMIC STUDY METHODS,.

 Present Worth
 Future Worth
 Annual Worth
 Internal Rate Return
 External Rate of Return
P R E S E N T W O RT H

 Present value (PV) is the current value of a future sum of


money or stream of cash flows given a specified rate of
return. Future cash flows are discounted at the discount
rate, and the higher the discount rate, the lower the present
value of the future cash flows.
F U T U R E W O RT H

 Future value (FV) is the value of an asset at a specific date.


It measures the nominal future sum of money that a given
sum of money is "worth" at a specified time in the future
assuming a certain interest rate, or more generally, rate of
return; it is the present value multiplied by the
accumulation function.
A N N U A L W O RT H

 Annual Worth (AW) Analysis is defined as the equivalent


uniform annual worth of all estimated receipts (income)
and disbursements (costs) during the life cycle of a project.
Initial. Cost. Annual Cost.
I N T E R N A L R AT E R E T U R N A N D E X T E R N A L R AT E O F
RETURN

 Internal rate of return (IRR) is a method of calculating an investment's rate of


return. The term internal refers to the fact that the calculation excludes
external factors, such as the risk-free rate, inflation, the cost of capital, or
financial risk. ... It is also called the discounted cash flow rate of return
(DCFROR).
 The external rate of return (ERR) is the rate of return on a project where any
“excess” cash from a project is assumed to earn interest at a pre-determined
explicit rate — usually the MARR.
EXAMPLES PROBLEM:
1. Suppose you are depositing an amount today in an account that earns 5% interest, compounded
annually. If your goal is to have $5,000 in the account at the end of six years, how much must you
deposit in the account today?
Give:

future value = $5,000 interest rate = 5 number of periods = 6


Formula: present value = future value / (1 + interest rate)number of periods (PV = FV/ (1 + r)t)

PV = $5,000 / (1 + 0.05)6
PV = $5,000 / (1.3401)

PV = $3,731
2. Suppose you will retire in exactly one year and want an account that will pay you $20,000 a
year for the next 15 years. (The fund will be depleted at the end f the fifteenth year.) Assuming a
6% annual effect interest rate, what is the amount you would need to deposit now?
Solution:
F= A(P/A, 6%, 15)
F= ($20,000) ( (1 + 0.06)15 - 1 ) . (0.06)(1 + 0.06) 15
F= ($20,000) (9. 7122) = $194,244
3. Suppose you deposited $200 at the end of every year for seven years in an account that earned
6% annual effective interest. At the end of seven years, how much would the account be worth?

Solution:
F = ($200)(F I A, 6%, 7)
F = ($200) ((1 + 0.06) 7 - 1) 0.06
F= ($200)(8.3938) = $1678.76
4. Suppose you want exactly $1600 in the previous investment account at the end of the seventh
year. By using the sinking fund factor, you could calculate the necessary annual amount you
would need to deposit.

Solution:
A= F(A/ F, 6%, 7)
A= ($1600) ( 0 · 06 ) (1 + 0.06) 7 – 1
A= ($1600)(0.1191)
A= $190.56
6.By the condition of a will the sum of P25, 000 is left to be held in trust by her guardian until it
amounts to P45, 000. When will the girl receive the money if the fund is invested at 8% compounded
quarterly?

Given:

P = P25, 000 i = 8%∕4= 2% F = P45, 000


Solution:

F = P (1+i) n 45000
F= 25000 (1+0.02)^4n 45000∕25000

F= (1.02)^4n 1.8= (1.02)^4n In (1.8)


F= 4nln (1.02) 29.682 = 4n n

F= 7.42 years
7.If you borrow money from your friend with simple interest of 12%, find the present worth of
P20, 000, which is due at the end of nine months. Solution:
Given:
Future worth: F = P20, 000 Number of interest period:
n =9/12
Simple interest i = 12%
F=P(1-ni)^-1
F=P20000((1-(9/12)(0.12)0.12)^-1
F=P18348.62
8. Atsushi has had $800 stashed under his mattress for 30 years. How much money has he lost by
not putting it in a bank account at 8 percent annual compound interest all these years?
Given:
P =$800 i =0.08 per year
N =30 years
F =P(1 +i)^ N
F=800(1 + 0.08)^30
F= 8050.13
8.You want to buy a new computer, but you are $1000 short of the amount you need. Your aunt
has agreed to lend you the $1000 you need now, provided you pay her $1200 two years from
now. She compounds interest monthly. Another place from which you can borrow $1000 is the
bank. There is, however, a loan processing fee of $20, which will be included in the loan amount.
The bank is expecting to receive $1220 two years from now based on monthly compounding of
interest. (a) What monthly rate is your aunt charging you for the loan? What is the bank charging?

Given:

P =$1000 F= $1200 N =24 months (since compounding is done monthly)


The formula F =P(1 + i) ^N must be solved in terms of i to answer the question

i = (F/P)^1/N – 1
i=(1200/1000)^(1/24) - 1

i=0.007626
 Your aunt is charging interest at a rate of approximately 0.76 percent per month. The bank
Given: P= $1020 (since the fee is included in the loan amount) F =$1220 N =24 months (since
compounding is done monthly)
i= (F/P)^1/N – 1
i= (1220/1020)^1/24 - 1
i = 0.007488
9. The Kelowna Go-Kart Club has decided to build a clubhouse and track five years from now. It
must accumulate $50,000 by the end of five years by setting aside a uniform amount from its dues
at the end of each year. If the interest rate is 10 percent, how much must be set aside each year?
(A/F,I,N) = F(i/(i+1)^n-1)

Given:

F=$50,000 A=?
i=10%

N=5
A=$50,000(0.1/(1+0.1)^5-1)

A=$8189.874
10. A car loan requires 30 monthly payments of $199.00, starting today. At an annual rate of 12
percent compounded monthly, how much money is being lent?
(P/A,i,N)=A+A(1+i)^n-1/i(1+i)^n)
Given:
A=$199 N=30-1=29
i=12%
P=$199+$199((1+0.01)^29-1/0.01(1+0.01)^29)
P=$5,187.0913
REFLECTION:

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