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Engineering Economics Analysis Lecture 4

Engineering Economics Analysis Lecture 4

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Abdulaziz Alzahrani
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© © All Rights Reserved
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8 views

Engineering Economics Analysis Lecture 4

Engineering Economics Analysis Lecture 4

Uploaded by

Abdulaziz Alzahrani
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Interest Formulas for Single

Cash Flows

Lecture No.4
Professor C. S. Park
Fundamentals of Engineering Economics
Copyright © 2005
Single Cash Flow Formula

 Single payment F
compound amount F  P(1  i )N

factor (growth factor) F  P( F / P, i, N )


 Given:
0
i  10%
N  8 years N
 Find: F P  $2,000
P
F  $2,000(1  010
. )8
 $2,000( F / P,10%,8 )
 $4,28718
.
Practice Problem
 If you had $2,000 now and invested it at
10%, how much would it be worth in 8
years?

F=?
i = 10%
0
8
$2,000
Solution
Given:
P  $2, 000
i  10%
N  8 years

Find: F

F  $2, 000(1  0.10)8


 $2, 000( F / P,10%, 8)
 $4, 287.18
EXCEL command:
=FV(10%,8,0,2000,0)
=$4,287.20
Single Cash Flow Formula
 Single payment P  F(1  i)  N F
present worth factor
(discount factor) P  F ( P / F , i, N )
 Given:
i  12% 0
N  5 years N
F  $1,000
 Find:
P
5
P  $1,000(1  0.12 )
 $1,000( P / F,12%,5)
 $567.40
Practice Problem

 You want to set aside a lump sum amount


today in a savings account that earns 7%
annual interest to meet a future expense in
the amount of $10,000 to be incurred in 6
years. How much do you need to deposit
today?
Solution
$10,000

P
P  $10, 000(1  0.07) 6
 $10, 000( P / F , 7%, 6)
 $6, 663
Multiple Payments
 How much do you need
to deposit today (P) to
$25,000
withdraw $25,000 at n
$3,000 $5,000
=1, $3,000 at n = 2, and
0 $5,000 at n =4, if your
1 2 3 4
account earns 10%
annual interest?
P
$25,000

Uneven $3,000 $5,000


0
Payment Series 1 2 3 4

$25,000

$3,000 $5,000
0 0 0

1 2 3 4
+ 1 2 3 4
+ 1 2 3 4

P2
P4
P1
P1  $25, 000( P / F ,10%,1) P2  $3, 000( P / F ,10%, 2) P4  $5, 000( P / F ,10%, 4)
 $22, 727  $2, 479  $3, 415

P  P1  P2  P3  $28, 622
Check

0 1 2 3 4
Beginning 0 28,622 6,484.20 4,132.62 4,545.88
Balance
Interest 0 2,862 648.42 413.26 454.59
Earned
(10%)
Payment +28,622 -25,000 -3,000 0 -5,000

Ending $28,622 6,484.20 4,132.62 4,545.88 0.47


Balance

Rounding error
It should be “0.”

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