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NE 364 Engineering Economy: Money-Time Relationships and Equivalence (Part 2: Uniform Series)
NE 364 Engineering Economy: Money-Time Relationships and Equivalence (Part 2: Uniform Series)
NE 364
Engineering Economy
Lecture 4 A
Money-Time Relationships
and Equivalence
(Part 2: Uniform Series)
Revision
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2/22/2018
Uniform Series
Necessary Conditions:
Proof:
F=
A(F/P,i%,N−1)+A(F/P,i%,N−2)+…+A(F/P,i%,1)+A(F/P,i%,0)
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Example 1
How much will you have in 40 years if you
save $3,000 each year and your account
earns 8% interest each year?
Interest Tables
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Example 2
A recent government study reported that a college degree
is worth an extra $23,000 per year in income (A)
compared to what a high-school graduate makes. If the
interest rate (i) is 6% per year and you work for 40 years
(N), what is the future compound amount (F) of this extra
income?
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Example 3
How much would you need to set aside each
year for 25 years, at 10% interest, to have
accumulated $1,000,000 at the end of the 25
years?
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From : and
It results:
N
Dividing both sides by (1+i) , hence:
Example 4
How much is needed today to provide an
annual amount of $50,000 each year for 20
years, at 9% interest each year?
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Example 5
If a certain machine undergoes maintenance now, its
output can be increased by 20% - which translates into
additional cash flow of $20,000 at the end of each year for
five years. If i=15% per year, how much can we afford to
invest to maintain this machine?
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Example 6
If you had $500,000 today in an account
earning 10% each year, how much could you
withdraw each year for 25 years?
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Example 7
You borrow $15,000 from your credit union to purchase a
used car. The interest rate on your loan is 0.25% per
month and you will make a total of 36 monthly payments.
What is your monthly payment?
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What if i is unknown?
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Example 5 (Finding i)
After years of being poor, debt-encumbered college
student, you decide that you want to pay for your dream
car in cash. Not having enough money now, you decide to
specifically put money away each year in a "dream car"
fund.
The car you want to buy will cost $60,000 in eight years.
You are going to put aside $6,000 each year (for eight
years) to save for this.
At what interest rate must you invest your money to
achieve your goal of having enough to purchase the car
after eight years?
Solution
The car you want to buy will cost $60,000 in eight years
means F8=$60,000.
You are going to put aside $6,000 each year (for eight
years) means A=$6,000 for 8 years.
So,
F8= A * (F/A, i%, 8)
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Solution cont.
So we are looking for a factor (F/A, i%, 8) which is
equal to 10.
Solution cont.
The interest rate we are searching for is between 6%
and 7%.
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Solution cont.
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What if N is unknown?
Example 7
Joe borrowed $100,000 from a local bank, which charges
him an interest rate of 7% per year. If Joe pays the bank
$8,000 per year, how many years will it take to pay off the
loan?
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Solution
Joe borrowed $100,000 from a local bank means
P0=$100,000
If Joe pays the bank $8,000 per year means
A=$8,000 for N years but N is unknown.
So,
P0 = A * (P/A, 7%, N)
$100,000=$8,000 * (P/A, 7%, N)
12.5 = (P/A, 7%, N)
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Solution cont.
The factor at 30 years = 12.4090 not 12.5
The factor at 35 years = 12. 9477 not 12.5
This means that if Joe paid for 30 years $8,000, this will
not cover his $100,000 loan. And if he paid for 35 years
$8,000 it will be more than his loan.
So, let’s assume he will pay for 31 years and calculate
the amount of the loan he will cover.
The row 31 is not calculated in the 7% table and
therefore we will use the equation of the P/A factor.
Solution cont.
P0new= $8,000 * (P/A, 7%, 31)
= $8,000 * ((1.07)31 – 1 ) / (0.07 * (1.07)31)
= $100,254.51
This is more than he owes the bank. This means that
his last payment on the 31st year should not be $8,000
but less. How much less?
We should calculate how much the extra $254.51 are
worth in the 31st year and subtract it from the $8,000
payment
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Solution cont.
F31 = $254.51 * (F/P, 7%, 31)
= $254.51 * (1.07)31
= $2,073
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EXCEL
Solving for N Solving for i
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