Engineering Economy (EECon 1)

CHAPTER 3:
Money-Time Equivalence
PREPARED BY:

ENGR. ADRIAN L. PILLANO

INSTRUCTOR
 Money: Key Terms

Medium of Exchange- means of payment for goods

or services. What sellers accept and buyers pay.

Monetary Unit- considered as the standard unit

which forms the basis of a country’s domestic money
supply.

Goods- tangible economic product that country that

contributes directly or indirectly to the satisfaction of
human want.
 Money: Key Terms

Services- tangible economic activity that country

that contributes directly or indirectly to the
satisfaction of human want.

Consumer & Producer- two classifications of goods

and services

Necessity- refers to the goods and services that are

required to support human life, needs and activities?
 Money: Key Terms

Buyer/ Consumer- basic consuming or demanding

unit of a commodity.

Producer- entity which makes product, good or

services available to buyer or consumer in exchange
of monetary consideration.

Demand- refers to the need, want or desire for a

product backed by the money to purchase it
 Money: Key Terms

Supply- refers to the amount of a product made

available for sale.

Commodity- any particular raw material or primary

product such as cloth, flour, coffee, etc.

Law of Diminishing Return- “When one of the

factors of production is fixed in quantity or is difficult
to increase, increasing the other factors of production
will result in a less than proportionate increase in
output”.
 Money: Key Terms

Medium of Exchange- means of payment for goods

or services. What sellers accept and buyers pay.

Store of Value- a way to transport buying power

from one time period to another.

Unit of Account- a precise measurement of value or

worth. Allows for tabulating debits and credits.
 Kinds of Capital

Equity Capital- allowed by owned by individuals

who have invested their money or property in a
business project or venture in the hope of receiving a
profit.

Debt Capital- often called borrowed capital, is

obtained from lenders (ex. Through the sale of
bonds) for investment.
Kinds of Capital
How Interest Rate is Determined?
How Interest Rate is Determined?
 Economic Equivalence

Established when we are indifferent between a future

payment, or a series of future payments, and a present sum of
money.

Considers the comparison of alternative options, or proposals,

by reducing them to an equivalent basis depending on:
-interest rate
-amount of money involved
-timing of the affected monetary receipts and or expenditures
-manner in which the interest or profit on invested capital is
paid and the initial capital is recovered.
 Economic Equivalence

Economic Equivalence for

FOUR PAYMENT Plan of an
$8,000 loan
Economic Equivalence
Economic Equivalence
Economic Equivalence
Economic Equivalence
 Cash Flow Diagram/ Table Notation

i= effective interest rate per interest period

N= number of compounding periods
P= present sum of money; the equivalent value of one or
more cash flows at the present time reference point
F= future sum of money; the equivalent value of one or
more cash flows at a future time reference point
A= end-of-period cash flows (or equivalent end-of-period
values) in a uniform series continuing for a specified
number of periods, starting at the end of the period and
continuing through the last period
G= uniform gradient amounts- used if cash flows increase
by a constant amount in each period
Cash Flow Diagram/ Table Notation
Cash Flow Diagram/ Table Notation

Relating Present and Future Equivalent Values of a Single Cash

Flow
Cash Flow Diagram/ Table Notation
Cash Flow Diagram/ Table Notation

Relating Present and Future Equivalent Values of a Single Cash

Flow
Cash Flow Diagram/ Table Notation
Cash Flow Diagram/ Table Notation
Relating a Uniform Series (Ordinary Annuity) Present and Future
Equivalent Values Cash Flow
Cash Flow Diagram/ Table Notation
Cash Flow Diagram/ Table Notation

Relating a Uniform Series (Ordinary Annuity) Present and Future

Equivalent Values Cash Flow
Cash Flow Diagram/ Table Notation

Relating a Uniform Series (Ordinary Annuity) Present and Future

Equivalent Values Cash Flow
Cash Flow Diagram/ Table Notation
Cash Flow Diagram/ Table Notation

Relating a Uniform Series (Ordinary Annuity) Present and Future

Equivalent Values Cash Flow
Cash Flow Diagram/ Table Notation
END of Discussion
Thank you!