Contemporary Engineering Economics, 4 th edition © 2007 Economic Equivalence Lecture No.5 Chapter 3 Contemporary Engineering Economics Copyright © 2006.

Slides:



Advertisements
Similar presentations
Accounting & Finance for Bankers - Business Mathematics- Module A SPBT College.
Advertisements

Chapter 2 Applying Time Value Concepts Copyright © 2012 Pearson Canada Inc. Edited by Laura Lamb, Department of Economics, TRU 1.
Chapter 03: Mortgage Loan Foundations: The Time Value of Money McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Appendix 4A The Time Value of Money.
(c) 2002 Contemporary Engineering Economics 1 Chapter 4 Time Is Money Interest: The Cost of Money Economic Equivalence Development of Interest Formulas.
Borrowing, Lending, and Investing
State University of New York WARNING All rights reserved. No part of the course materials used in the instruction of this course may be reproduced in any.
Debt Management Lecture No.10 Professor C. S. Park Fundamentals of Engineering Economics Copyright © 2005.
Interest Formulas (Gradient Series)
Contemporary Engineering Economics, 4 th edition, © 2007 Variations of Present Worth Analysis Lecture No.17 Chapter 5 Contemporary Engineering Economics.
Contemporary Engineering Economics, 4 th edition, © 2007 Equivalence Calculation under Inflation Lecture No. 44 Chapter 11 Contemporary Engineering Economics.
(c) 2002 Contemporary Engineering Economics
Contemporry Engineering Economics, 4 th edition, © 2007 Equivalence Calculations with Continuous Payments Lecture No.12 Chapter 4 Contemporary Engineering.
Interest Formulas for Single Cash Flows
Contemporary Engineering Economics, 4 th edition, © 2007 Choice of MARR Lecture No. 62 Chapter 15 Contemporary Engineering Economics Copyright © 2006.
Economic Equivalence Lecture No.3 Professor C. S. Park
Contemporary Engineering Economics, 4 th edition ©2007 Time Value of Money Lecture No.4 Chapter 3 Contemporary Engineering Economics Copyright © 2006.
(c) 2002 Contemporary Engineering Economics
Interest Formulas – Equal Payment Series
Contemporary Engineering Economics, 4 th edition, © 2007 Rate of Return Analysis Lecture No. 24 Chapter 7 Contemporary Engineering Economics Copyright.
Contemporary Engineering Economics, 4 th edition, ©2007 Interest Formulas for Single Cash Flows Lecture No.6 Chapter 3 Contemporary Engineering Economics.
Contemporary Engineering Economics, 4 th edition, © 2007 Unconventional Equivalence Calculations Lecture No. 9 Chapter 3 Contemporary Engineering Economics.
Contemporary Engineering Economics, 4 th edition, © 2007 Debt Management Lecture No.13 Chapter 4 Contemporary Engineering Economics Copyright © 2006.
Interest Formulas – Equal Payment Series
Interest Formulas (Gradient Series) Lecture No.6 Professor C. S. Park Fundamentals of Engineering Economics Copyright © 2005.
Internal Rate of Return Criterion
Lecture No. 35 Chapter 11 Contemporary Engineering Economics Copyright © 2010 Contemporary Engineering Economics, 5th edition, © 2010.
Copyright © 2011 Pearson Prentice Hall. All rights reserved. The Time Value of Money: Annuities and Other Topics Chapter 6.
Example [1] Time Value of Money
Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Rate of Return Analysis Lecture No.
Contemporary Engineering Economics, 4 th edition, © 2007 Equivalence Analysis using Effective Interest Rates Lecture No.11 Chapter 4 Contemporary Engineering.
Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Equivalence Calculations with Effective.
Lecture No.11 Chapter 4 Contemporary Engineering Economics Copyright © 2010 Contemporary Engineering Economics, 5th edition, © 2010.
L3: Economic Equivalence ECON 320 Engineering Economics Mahmut Ali GOKCE Industrial Systems Engineering Computer Sciences.
Equivalence and Compound interest
Principles of Finance 5e, 9 The Time Value of Money © 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to.
Interest Formulas (Gradient Series)
Engineering Economics. Excel Financial Functions.
TIME VALUE OF MONEY A dollar on hand today is worth more than a dollar to be received in the future because the dollar on hand today can be invested to.
Lecture No.5 Chapter 3 Contemporary Engineering Economics Copyright © 2010 Contemporary Engineering Economics, 5 th edition © 2010.
Irregular Payment Series and Unconventional Equivalence Calculations
Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Interest Formulas (Gradient Series)
Lecture No. 9 Chapter 3 Contemporary Engineering Economics Copyright © 2010 Contemporary Engineering Economics, 5th edition, © 2010.
L6: Interest Formulas (Gradient Series) ECON 320 Engineering Economics Mahmut Ali GOKCE Industrial Systems Engineering Computer.
Interest Formulas for Single Cash Flows
Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Interest Formulas – Equal Payment.
Introduction to Accounting I Professor Marc Smith CHAPTER 1 MODULE 1 Time Value of Money Module 3.
Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Economic Equivalence Lecture No.
1 Engineering Economics.  Money has a time value because it can earn more money over time (earning power).  Money has a time value because its purchasing.
INTRODUCTORY MATHEMATICAL ANALYSIS For Business, Economics, and the Life and Social Sciences  2011 Pearson Education, Inc. Chapter 5 Mathematics of Finance.
Economic Equivalence Lecture No.3 Chapter 2 Fundamentals of Engineering Economics Copyright © 2008.
(c) 2002 Contemporary Engineering Economics 1. Engineers must work within the realm of economics and justification of engineering projectsEngineers must.
Faculty of Applied Engineering and Urban Planning Civil Engineering Department Engineering Economy Lecture 1 Week 1 2 nd Semester 20015/2016 Chapter 3.
1 Equivalence Between Two Cash Flows Step 1: Determine the base period, say, year 5. Step 2: Identify the interest rate to use. Step 3: Calculate equivalence.
Equivalence Calculation under Inflation
Equivalence Calculations with Effective Interest Rates
Equivalence Calculations with Continuous Payments
Equivalence Calculations with Continuous Payments
Interest Formulas – Equal Payment Series
Unconventional Equivalence Calculations
Contemporary Engineering Economics
Interest Formulas (Gradient Series)
Chapter 2. Time Value of Money
Chapter 2 Time Value of Money
Interest Formulas for Single Cash Flows
Irregular Payment Series and Unconventional Equivalence Calculations
Economic Equivalence Lecture No.5 Chapter 3
Contemporary Engineering Economics
ENGINEERING ECONOMICS
Contemporary Engineering Economics
Presentation transcript:

Contemporary Engineering Economics, 4 th edition © 2007 Economic Equivalence Lecture No.5 Chapter 3 Contemporary Engineering Economics Copyright © 2006

Contemporary Engineering Economics, 4 th edition, © 2007 Economic Equivalence What do we mean by “economic equivalence?” Why do we need to establish an economic equivalence? How do we establish an economic equivalence?

Contemporary Engineering Economics, 4 th edition, © 2007 Economic Equivalence Economic equivalence exists between cash flows that have the same economic effect and could therefore be traded for one another. Even though the amounts and timing of the cash flows may differ, the appropriate interest rate makes them equal.

Contemporary Engineering Economics, 4 th edition, © 2007 If you deposit P dollars today for N periods at i, you will have F dollars at the end of period N. N F P 0 Equivalence from Personal Financing Point of View

Contemporary Engineering Economics, 4 th edition, © 2007 F dollars at the end of period N is equal to a single sum P dollars now, if your earning power is measured in terms of interest rate i. N F P 0 Alternate Way of Defining Equivalence N0 =

Contemporary Engineering Economics, 4 th edition, © 2007 Practice Problem $2,042 5 F 0 At an 8% interest, what is the equivalent worth of $2,042 now in 5 years? If you deposit $2,042 today in a savings account that pays an 8% interest annually. how much would you have at the end of 5 years? =

Contemporary Engineering Economics, 4 th edition, © 2007 Solution

Contemporary Engineering Economics, 4 th edition, © 2007 Example 3.3 $3,000$2, At what interest rate would these two amounts be equivalent? i = ?

Contemporary Engineering Economics, 4 th edition, © 2007 Equivalence Between Two Cash Flows Step 1: Determine the base period, say, year 5. Step 2: Identify the interest rate to use. Step 3: Calculate equivalence value. $3,000$2,042 50

Contemporary Engineering Economics, 4 th edition, © 2007 Example - Equivalence Various dollar amounts that will be economically equivalent to $3,000 in 5 years, given an interest rate of 8% P F $2,042 $3,000 $2,205 $2,382 $2,778$2,572

Contemporary Engineering Economics, 4 th edition, © 2007 Equivalent Cash Flows Are Equivalent at Any Common Point in Time

Contemporary Engineering Economics, 4 th edition, © 2007 Practice Problem $100 $80 $120 $150 $200 $ V = Compute the equivalent lump-sum amount at n = 3 at 10% annual interest.

Contemporary Engineering Economics, 4 th edition, © $100 $80 $120 $150 $200 $100 V Approach

Contemporary Engineering Economics, 4 th edition, © $100 $80 $120 $150 $200 $100 V

Contemporary Engineering Economics, 4 th edition, © 2007 Given: i = 10%, Find: C that makes the two cash flow streams to be indifferent Practice Problem $500 $1, A B CC

Contemporary Engineering Economics, 4 th edition, © 2007 Approach Step 1: Select a base period to use, say n = 2. Step 2: Find the equivalent lump sum value at n = 2 for both A and B. Step 3: Equate both equivalent values and solve for unknown C. $500 $1, A B CC

Contemporary Engineering Economics, 4 th edition, © 2007 Solution For A: For B: To Find C: $500 $1, A B CC

Contemporary Engineering Economics, 4 th edition, © 2007 At what interest rate would you be indifferent between the two cash flows? $500 $1, $502 $502 $502 A B Practice Problem

Contemporary Engineering Economics, 4 th edition, © 2007 Approach Step 1: Select a base period to compute the equivalent value (say, n = 3) Step 2: Find the equivalent worth of each at n = 3. $500 $1, $502 $502 $502 A B

Contemporary Engineering Economics, 4 th edition, © 2007 Establish Equivalence at n = 3 Find the solution by trial and error, say i = 8%