Download presentation

Presentation is loading. Please wait.

Published byAlexis Kettel Modified over 3 years ago

1
**Econ. Lecture 3 Economic Equivalence and Interest Formula’s Read 45-70**

Problems 2.6, 2.8, 2.11, 2.14, 2.15

2
**First an example from last lecture**

Single Payment To Find Given Functional Notation Compound Amount Factor F P (F/P, i, n) Present Worth Factor P F (P/F, i, n) This notation refers to interest tables in the back of your text, Appendix C. The table works out multiplication factors for a given interest rate over a given number of years.

3
Example: To raise money for a business, a person asks for a loan from you. They offer to pay you $3000 at the end of four years. How much should you give him if you want 12%/year on your money? P = unknown n = 4 years i = 12% F = $3000 P = F/(1+i)n = 3000/ (1+0.12)4 = $

4
**With the Interest Tables**

P = F(P/F,i,n) = 3000(P/F,12%,4) = 3000 (0.6355) = $ Slight difference in the answer that you get is minimal.

5
Back to Equivalence Economic equivalence – exists between cash flows that have to same economic effect Economic indifference – if two cash flows are equal to each other, we don’t care which is chosen

6
**There are four simple principles of Equivalence:**

1) Alternatives require a common time basis – A point in time will be used that best fits the analysis of our alternatives, given P,F 2) Dependent on interest rate 3) May require conversion of multiple payments to a single payment 4) Equivalence is maintained regardless frame of reference

7
**Example of Principle One:**

Deposit $4000 today and 10%. In 15 years you have $16, How much do you have after 10 years?

8
**From both time directions find V10?**

F = $4000(F/P,10%,10)= $4000 (2.5937) = $ P = $16,708.80(P/F, 10%,5) = $16, (0.6209) = 10,374.49 Equal in time!

9
**Five types of cash flows**

1) Single Cash Flow – one P or F 2) Uniform Series – equal payment series, equal series of payments for n years 3) Linear Gradient – changing payment by a constant amount G, in each cash flow

10
**4) Geometric Gradient – changing. payment by a constant**

4) Geometric Gradient – changing payment by a constant percentage, g, in each cash flow 5) Irregular Series – no overall regular pattern in payment scheme

12
Uneven Cash Flow When presented with an uneven payment series, the F or P can be calculated by summing the individual payments.

13
**Example: For the given cash flow, determine F at 30 years, 4%.**

Example: For the given cash flow, determine F at 30 years, 4%. F? 7 10 13 25 30 800 400 3000 3800

14
**F = 3000(F/P,4%,23) + 800(F/P,4%,20) + 3800(F/P,4%,17) + 400(F/P,4%,5)**

= 3000*(2.4647) + 800*(2.1911) *(1.9479) + 400*(1.1699) = = $17,016.96

15
**Uniform Payment Series**

16
**Consider the following situation:**

17
F = A + A(1+i) + A(1+i)2 (1) In this case, n = 3, equation (1) can be written as: F = A + A(1+i) + A(1+i)n-1 (2)

18
Multiplied by (1+i): (1+i)F = A(1+i) +A(1+i)n-1 +A(1+i)n (3) Subtract (2) F = A + A(1+i) + A(1+i)n-1 Equals iF = -A + A(1+i)n

19
**Equal Payment Series compound amount Factor or**

Uniform Series Compound Amount (F/A,i,n)

Similar presentations

OK

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford Unversity Press, Inc.1 Engineering Economic Analysis 9th.

Engineering Economic Analysis - Ninth Edition Newnan/Eschenbach/Lavelle Copyright 2004 by Oxford Unversity Press, Inc.1 Engineering Economic Analysis 9th.

© 2018 SlidePlayer.com Inc.

All rights reserved.

To ensure the functioning of the site, we use **cookies**. We share information about your activities on the site with our partners and Google partners: social networks and companies engaged in advertising and web analytics. For more information, see the Privacy Policy and Google Privacy & Terms.
Your consent to our cookies if you continue to use this website.

Ads by Google

Ppt on steve jobs leadership style Ppt on reuse of waste material Ppt on history of world wide web Ppt on equality in indian democracy Ppt on p&g products images Ppt on synthesis and degradation of purines and pyrimidines are what Ppt on nepal earthquake Ppt on political parties and electoral process in canada Ppt on different occupations in the art Ppt on unity in diversity of india