# Contemporary Engineering Economics, 4 th edition, © 2007 Debt Management Lecture No.13 Chapter 4 Contemporary Engineering Economics Copyright © 2006.

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Contemporary Engineering Economics, 4 th edition, © 2007 Debt Management Lecture No.13 Chapter 4 Contemporary Engineering Economics Copyright © 2006

Contemporary Engineering Economics, 4 th edition, © 2007 Debt Management

Contemporary Engineering Economics, 4 th edition, © 2007 Example 4.12 Amortized Loan Given: P = \$5,000, i = 12% APR, N = 24 months Find: A A = \$5,000(A/P, 1%, 24) = \$235.37

Contemporary Engineering Economics, 4 th edition, © 2007 Loan Repayment Schedule

Contemporary Engineering Economics, 4 th edition, © 2007 Calculating the Remaining Loan Balance after Making the n th Payment

Contemporary Engineering Economics, 4 th edition, © 2007 Example 4.13 – Computing the Outstanding Loan Balance after making the 6 th payment

Contemporary Engineering Economics, 4 th edition, © 2007 Practice Problem Consider the 7 th payment (\$235.37) (a) How much is the interest payment? (b) What is the amount of principal payment?

Contemporary Engineering Economics, 4 th edition, © 2007 Solution \$5,000 A = \$235.37 0 1 2 3 4 5 6 7 22 23 24 i = 1% per month Interest payment = ? Principal payment = ?

Contemporary Engineering Economics, 4 th edition, © 2007 Solution:

Contemporary Engineering Economics, 4 th edition, © 2007 Example 4.15 Three Different Ways to Finance Your Vehicle Option A Debt Financing Option B Paying Cash Option C Lease Financing Price\$32,508 Down payment\$4,5000 APR (%)5.65% Monthly payment\$736.53\$513.76 Length42 months Fees\$994 Cash due at lease end\$395 Purchase option at lease end\$17,817 Cash due at signing\$4,500\$31,020\$1,507.76

Contemporary Engineering Economics, 4 th edition, © 2007 Which Interest Rate to Use to Compare These Options?

Contemporary Engineering Economics, 4 th edition, © 2007 Your Earning Interest Rate = 4.5% Option A: Conventional Debt Financing: P debt = \$4,500 + \$736.53(P/A, 4.5%/12, 42) - \$17,817(P/F, 4.5%/12, 42) = \$17,847  Option B: Cash Financing: P cash = \$31,020 - \$17,817(P/F,4.5%/12,42) = \$15,845 Lease Financing: P lease = \$1,507.76 + \$513.76(P/A, 4.5%/12, 42) + \$395(P/F, 4.5%/12, 42) = \$21,336