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ENGR 3360U Winter 2014 Unit 4.7-8: Finding I%, N, Continuous Compounding
ENGR 3360U Winter 2014 Unit 4.7-8: Finding I%, N, Continuous Compounding
Unit 4.7-8
Finding i%, n, Continuous Compounding
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01
Change Record
2014-I-01 Initial Creation
Text references: Chapters 3 and 4
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Example 4.18
Fred buys a new car with $0 down. Total cost is $15,732 and Fred
has to pay 48 monthly payments of $398. What effective annual
interest rate is he paying?
Solution 1 15,732 = 398(P/A, i, 48) or (P/A, i, 48) = 39.5276
At 1% (P/A, 1%, 48) = 40.185 At .75%, (P/A, .75%, 48) = 37.974
So i = (40.185-39.5276)/(40.185-37.974)*0.25 + 0.75 = 0.82%
Annualized rate = (1.00082)12 - 1 = 10.3%
Solution 2 RATE(48, -398, 15732, 0) = 0.82
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Effective Interest
Example: 12% per year compounded monthly
Nominal Interest Rate:
r =12%/year compounded monthly
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Continuous Compounding
The number of compounding periods depends on the number of
subdivisions.
A nominal interest rate of 12%/year compounded:
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m = 1: yearly
m = 2: semi-annually
m = 4: quarterly
m = 52: weekly
yearly)
m = 365: daily
yearly)
m = 525600: hourly
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Summary
Interest factors exist to aid in determining
economic equivalence of various cash flow
patterns
Notation is introduced that is applied
throughout the remainder of the text
Introduction of important Excel spreadsheet
financial functions to aid in evaluation of
engineering economy problems
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Summary, contd.
Gradients
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P = A1(P/A, g, i, n)
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Summary, contd.
Nominal means in name only and cannot
be used for calculation.
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