Notes - EE 3

PRINCIPLES OF
MONEY-TIME
RELATIONSHIPS
MONEY
• 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;
CAPITAL
Wealth in the form of money or

property that can be used to
produce more wealth.
CAPITAL
• The majority of engineering economy
studies involve commitment of capital for
extended period of time, so the effect of
time must be considered.
• A dollar today is worth more than a dollar

one or more years from now because of
the interest (or profit) it can earn.
Therefore, money has a time value.
KINDS OF CAPITAL
Capital in the form of money for the people,
machines, materials, energy, and other things
needed in the operation of an organization may be
classified into two basic categories:
• Equity capital is that 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 (e.g., through the sale of
bonds) for investment. In return the lenders receive
interest from the borrowers.
Financing Definition Instrument Description
• Debt • Borrow • Bond • Promise to

financing money pay
principle &
interest;
• Equity • Sell partial • Stock • Exchange

financing ownership of shares of
company; stock for
ownership of
company;

financing money pay
principle &
interest;
• Equity • Sell partial • Stock • Exchange

financing ownership of shares of
company; stock for
ownership of
company;

financing money pay
principle &
interest;
• Equity • Sell partial • Stock •Exchange

Exchange
financing ownership of sharesfor
money of
company; stock for
shares of
ownership
stock as of
company;
proof of
partial
ownership
INTEREST
The fee that a borrower pays to a lender for the use of his or her money.
INTEREST RATE
• The percentage of money being borrowed, that is paid to the lender on
some time basis.
• Is the rate of gain received from an investment.
HOW INTEREST RATE IS
Interest DETERMINED
Rate
Quantity of Money
Interest DETERMINED
Rate
Money Demand
Quantity of Money
Interest DETERMINED
Rate Money Supply
MS1
Money Demand
Quantity of Money
Interest DETERMINED
Rate Money Supply
MS1
ie
Money Demand
Quantity of Money
Interest DETERMINED
Rate Money Supply
MS1 MS2
ie
i2 Money Demand
Quantity of Money
Interest DETERMINED
Rate Money Supply
MS3 MS1 MS2
i3
ie
i2 Money Demand
Quantity of Money
SIMPLE INTEREST
• The total interest earned or charged is linearly
proportional to the initial amount of the loan
(principal), the interest rate and the number of
interest periods for which the principal is committed.
• When applied, total interest “I” may be found by I =
( P ) ( N ) ( i ), where
– P = principal amount lent or borrowed
– N = number of interest periods ( e.g., years )
– i = interest rate per interest period
COMPOUND INTEREST
• Whenever the interest charge for any interest period is
based on the remaining principal amount plus any
accumulated interest charges up to the beginning of that
period.
Period Amount Owed Interest Amount Amount Owed
Beginning of for Period at end of period
( @ 10% ) period
1 $1,000 $100 $1,100
2 $1,100 $110 $1,210
3 $1,210 $121 $1,331
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;
– amounts 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 FOR FOUR
REPAYMENT PLANS OF AN $8,000 LOAN
• Plan #1: $2,000 of loan principal plus 10% of BOY
principal paid at the end of year; interest paid at the end
of each year is reduced by $200 (i.e., 10% of remaining
principal)
Year Amount Owed Interest Accrued Total Principal Total end
at beginning for Year Money Payment of Year
of Year owed at Payment ( BOY )
end of Year
1 $8,000 $800 $8,800 $2,000 $2,800
2 $6,000 $600 $6,600 $2,000 $2,600
3 $4,000 $400 $4,400 $2,000 $2,400
4 $2,000 $200 $2,200 $2,000 $2,200
Total interest paid ($2,000) is 10% of total dollar-years ($20,000)
• Plan #2: $0 of loan principal paid until end of fourth

year; $800 interest paid at the end of each year
Year Amount Owed Interest Accrued Total Principal Total
end at beginning for Year Money Payment
of Year of Year owed at Payment ( BOY )
end of Year
1 $8,000 $800 $8,800 $0 $800
2 $8,000 $800 $8,800 $0 $800
3 $8,000 $800 $8,800 $0 $800
4 $8,000 $800 $8,800 $8,000 $8,800
• Plan #3: $2,524 paid at the end of each year; interest paid
at the end of each year is 10% of amount owed at the
beginning of the year.
of Year owed at Payment ( BOY ) end of
Year
1 $8,000 $800 $8,800 $1,724 $2,524
2 $6,276 $628 $6,904 $1,896 $2,524
3 $4,380 $438 $4,818 $2,086 $2,524
4 $2,294 $230 $2,524 $2,294 $2,524
• Plan #4: No interest and no principal paid for first three
years. At the end of the fourth year, the original principal
plus accumulated (compounded) interest is paid.
of Year owed at Payment ( BOY )
end of Year
1 $8,000 $800 $8,800 $0 $0
2 $8,800 $880 $9,680 $0 $0
3 $9,680 $968 $10,648 $0 $0
4 $10,648 $1,065 $11,713 $8,000 $11,713
CASH FLOW DIAGRAMS / TABLE
NOTATION
i = effective interest rate per interest period
N = number of compounding periods (e.g., years)
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 first 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 NOTATION
1
1 2 3 4 5=N
1 Time scale with progression of time moving from left to

right; the numbers represent time periods (e.g., years,
months, quarters, etc...) and may be presented within a
time interval or at the end of a time interval.
1
1 2 3 4 5=N
P =$8,000 2
2 Present expense (cash outflow) of $8,000 for lender.
A = $2,524 3
1
1 2 3 4 5=N
P =$8,000 2
3 Annual income (cash inflow) of $2,524 for lender.

A = $2,524 3
1
1 2 3 4 5=N
P =$8,000 2 4 i = 10% per year

4 Interest rate of loan.

A = $2,524 3 5
1
1 2 3 4 5=N
P =$8,000 2 4 i = 10% per year

4 Interest rate of loan. 5 Dashed-arrow line indicates

amount to be determined.
INTEREST FORMULAS FOR ALL OCCASIONS
• relating present and future values of single cash flows;
• relating a uniform series (annuity) to present and
future equivalent values;
– for discrete compounding and discrete cash flows;
– for deferred annuities (uniform series);
• equivalence calculations involving multiple interest;
• relating a uniform gradient of cash flows to annual and
present equivalents;
• relating a geometric sequence of cash flows to present
and annual equivalents;
INTEREST FORMULAS FOR ALL OCCASIONS
• relating nominal and effective interest rates;
• relating to compounding more frequently than
once a year;
• relating to cash flows occurring less often than
compounding periods;
• for continuous compounding and discrete cash
flows;
• for continuous compounding and continuous
cash flows;
RELATING PRESENT AND FUTURE
EQUIVALENT VALUES OF SINGLE CASH
FLOWS
• Finding F when given P:
• Finding future value when given present value
• F = P ( 1+i ) N
– (1+i)N single payment compound amount factor
– functionally expressed as F = ( F / P, i%,N )
– predetermined values of this are presented in
column 2 of Appendix C of text.
P
N=
0
F=?
RELATING PRESENT AND FUTURE
EQUIVALENT VALUES OF SINGLE CASH
FLOWS
• Finding P when given F:
• Finding present value when given future value
• P = F [1 / (1 + i ) ] N
– (1+i)-N single payment present worth factor
– functionally expressed as P = F ( P / F, i%, N )
– predetermined values of this are presented in
column 3 of Appendix C of text;
F
0 N=
P=?
RELATING A UNIFORM SERIES (ORDINARY
ANNUITY) TO PRESENT AND FUTURE EQUIVALENT
VALUES
• Finding F given A:
VALUES
• Finding future equivalent income (inflow) value given
a series of uniform equal Payments
VALUES
(1+i)N-1
• F=A
i
VALUES
(1+i)N-1
• F=A
i
– uniform series compound amount factor in [ ]
VALUES
(1+i)N-1
• F=A
i
– functionally expressed as F = A ( F / A,i%,N )
VALUES
(1+i)N-1
• F=A
i
– predetermined values are in column 4 of Appendix
C of text
VALUES
• Finding future equivalent income (inflow) value given a
series of uniform equal Payments
(1+i)N-1
• F=A
i
– predetermined values are in column 4 of Appendix C
of text
F=?
1 2 3 4 5 6 7 8
A=
( F / A,i%,N ) = (P / A,i,N ) ( F / P,i,N )
N
( F / A,i%,N ) = F / P,i,N-k )
k=1
VALUES
• Finding P given A:
VALUES
• Finding present equivalent value given a series of
uniform equal receipts
VALUES
(1+i)N-1
• P=A
i(1+i)N
VALUES
(1+i)N-1
• P=A
i(1+i)N
– uniform series present worth factor in [ ]
VALUES
(1+i)N-1
• P=A
i(1+i)N
– functionally expressed as P = A ( P / A,i%,N )
VALUES
(1+i)N-1
• P=A
i(1+i)N
C of text
VALUES
(1+i)N-1
• P=A
i(1+i)N
C of text A= 1 2 3 4 5 6 7 8
P
N
( P / A,i%,N ) = P / F,i,k )
k=1
VALUES
• Finding A given F:
VALUES
• Finding amount A of a uniform series when given the
equivalent future value
VALUES
i
A=F
( 1 + i ) N -1
VALUES
i
A=F
( 1 + i ) N -1
– sinking fund factor in [ ]
VALUES
i
A=F
( 1 + i ) N -1
– functionally expressed as A = F ( A / F,i%,N )
VALUES
i
A=F
( 1 + i ) N -1
C of text
VALUES
i
A=F
( 1 + i ) N -1
C of text F=
1 2 3 4 5 6 7 8
A =?
( A / F,i%,N ) = 1 / ( F / A,i%,N )
( A / F,i%,N ) = ( A / P,i%,N ) - i
VALUES
• Finding A given P:
VALUES
equivalent present value
VALUES
i ( 1+i )N
A=P
( 1 + i ) N -1
VALUES
i ( 1+i )N
A=P
( 1 + i ) N -1
– capital recovery factor in [ ]
VALUES
i ( 1+i )N
A=P
( 1 + i ) N -1
– functionally expressed as A = P ( A / P,i%,N )
VALUES
i ( 1+i )N
A=P
( 1 + i ) N -1
C of text
VALUES
i ( 1+i )N
A=P
( 1 + i ) N -1
C of text P=
1 2 3 4 5 6 7 8
A =?
( A / P,i%,N ) = 1 / ( P / A,i%,N )
RELATING A UNIFORM SERIES (DEFERRED
ANNUITY) TO PRESENT / FUTURE
EQUIVALENT VALUES
• If an annuity is deferred j periods, where j < N
• And finding P given A for an ordinary annuity is
expressed by: P = A ( P / A, i%,N )
• This is expressed for a deferred annuity by: A
( P / A, i%,N - j ) at end of period j
• This is expressed for a deferred annuity by: A
( P / A, i%,N - j ) ( P / F, i%, j ) as of time 0 (time
present)
EQUIVALENCE CALCULATIONS INVOLVING
MULTIPLE INTEREST
• All compounding of interest takes place once per time
period (e.g., a year), and to this point cash flows also occur
once per time period.
• Consider an example where a series of cash outflows
occur over a number of years.
• Consider that the value of the outflows is unique for each
of a number (i.e., first three) years.
• Consider that the value of outflows is the same for the last
four years.
• Find a) the present equivalent expenditure; b) the future
equivalent expenditure; and c) the annual equivalent
expenditure
PRESENT EQUIVALENT EXPENDITURE
• Use P0 = F( P / F, i%, N ) for each of the unique years:
-- F is a series of unique outflow for year 1 through year 3;
-- i is common for each calculation;
-- N is the year in which the outflow occurred;
-- Multiply the outflow times the associated table value;
-- Add the three products together;
• Use A ( P / A,i%,N - j ) ( P / F, i%, j ) -- deferred annuity -- for
the remaining (common outflow) years:
-- A is common for years 4 through 7;
-- i remains the same;
-- N is the final year;
-- j is the last year a unique outflow occurred;
-- multiply the common outflow value times table values;
-- add this to the previous total for the present equivalent
expenditure.
RELATING A UNIFORM GRADIENT OF CASH
FLOWS TO FUTURE EQUIVALENTS
• Find F when given G:


• Find the future equivalent value when given the
uniform gradient amount

(1+i)N-1 -1 (1+i)N-2 -1 (1+i) 1 -1
• F=G + + ... +
i i i

(1+i)N-1 -1 (1+i)N-2 -1 (1+i) 1 -1
• F=G + + ... +
i i i
• Functionally represented as (G/ i) (F/A,i%,N) - (NG/ i)

(1+i)N-1 -1 (1+i)N-2 -1 (1+i) 1 -1
• F=G + + ... +
i i i
• Functionally represented as (G/ i) (F/A,i%,N) - (NG/ i)
• Usually more practical to deal with annual and present
equivalents, rather than future equivalent values
Cash Flow Diagram for a Uniform Gradient
Increasing by G Dollars per period
i = effective interest rate (N-1)G

per period
(N-2)G
(N-3)G
3G
2G
G
1 2 3 4 N-2 N-1 N
End of Period
FLOWS TO ANNUAL AND PRESENT
EQUIVALENTS
• Find A when given G:
EQUIVALENTS
• Find the annual equivalent value when given the
EQUIVALENTS
1 N
• A=G -
i (1 + i ) N - 1
EQUIVALENTS
1 N
• A=G -
i (1 + i ) N - 1
• Functionally represented as A = G ( A / G, i%,N )
EQUIVALENTS
1 N
• A=G -
i (1 + i ) N - 1
• Functionally represented as A = G ( A / G, i%,N )
• The value shown in [ ] is the gradient to uniform series
conversion factor and is presented in column 9 of
Appendix C (represented in the above parenthetical
expression).
EQUIVALENTS
• Find P when given G:
EQUIVALENTS
• Find the present equivalent value when given the
EQUIVALENTS
1 (1 + i ) N-1 N
• P=G -
i i (1 + i ) N (1 + i ) N
EQUIVALENTS
1 (1 + i ) N-1 N
• P=G -
i i (1 + i ) N (1 + i ) N
• Functionally represented as P = G ( P / G, i%,N )
EQUIVALENTS
1 (1 + i ) N-1 N
• P=G -
i i (1 + i ) N (1 + i ) N
• Functionally represented as P = G ( P / G, i%,N )
• The value shown in{ } is the gradient to present
equivalent conversion factor and is presented in
column 8 of Appendix C (represented in the above
parenthetical expression).
RELATING GE0METRIC SEQUENCE OF CASH
FLOWS TO PRESENT AND ANNUAL EQUIVALENTS
• Projected cash flow patterns changing at an average
rate of f each period;
• Resultant end-of-period cash-flow pattern is referred
to as a geometric gradient series;
• A1 is cash flow at end of period 1
• A k = (A k-1) ( 1 +f ),2 < k < N
• A k = (A k-1) ( 1 +f ),2 < k < N
• AN = A1 ( 1 + f ) N-1
• A k = (A k-1) ( 1 +f ),2 < k < N
• AN = A1 ( 1 + f ) N-1
• f = (A k - A k-1 ) / A k-1
• A k = (A k-1) ( 1 +f ),2 < k < N
• AN = A1 ( 1 + f ) N-1
• f = (A k - A k-1 ) / A k-1
• convenience rate = i cr = [ ( 1 + i ) / ( 1 + f ) ] - 1
=(i-f)/(1+f)
AN =A1(1+f )N - 1
A3 =A1(1+f )2
A2 =A1(1+f )
A1
0 1 2 3 4 N
End of Period
Cash-flow diagram for a Geometric Sequence of

Cash Flows
RELATING A GEOMETRIC SEQUENCE OF
CASH FLOWS TO ANNUAL AND PRESENT
EQUIVALENTS
• Find P when given A:
EQUIVALENTS
annual equivalent value ( i = f )and ( icr = 0 )
EQUIVALENTS
A1
P= ( P / A, iCR%, N )
(1+f)
EQUIVALENTS
A1
P= ( P / A, iCR%, N )
1+f
• Functionally represented as A = P (A / P, i%,N )
EQUIVALENTS
A1
P= ( P / A, iCR%, N )
1+f
• The year zero “base” of annuity, increasing at
constant rate f % is A0 = P ( A / P, f %, N )
EQUIVALENTS
A1
P= ( P / A, iCR%, N )
1+f
• The future equivalent of this geometric gradient is F
EQUIVALENTS
EQUIVALENTS
EQUIVALENTS
NA1
P=
1+f
EQUIVALENTS
NA1
P=
1+f
EQUIVALENTS
NA1
P=
1+f
constant rate f% is A0 = P ( A / P, iCR%, N )
EQUIVALENTS
NA1
P=
1+f
• The future equivalent of this geometric gradient is F
INTEREST RATES THAT
VARY WITH TIME
• Find P given F and interest rates that vary over
N
INTEREST RATES THAT
VARY WITH TIME
N
• Find the present equivalent value given a
future value and a varying interest rate over the
period of the loan
INTEREST RATES THAT
VARY WITH TIME
N
• Find the present equivalent value given a
future value and a varying interest rate over the
period of the loan
• FN
P = -----------------
 N
k+1
k+1
(1 + i k )
NOMINAL AND EFFECTIVE INTEREST RATES
• Nominal Interest Rate - r - For rates compounded more
frequently than one year, the stated annual interest rate.
• Effective Interest Rate - i - For rates compounded more
frequently than one year, the actual amount of interest
paid.
• i = ( 1 + r / M )M - 1 = ( F / P, r / M, M ) -1
– M - the number of compounding periods per year
• Annual Percentage Rate - APR - percentage rate per
period times number of periods.
– APR = r x M
COMPOUNDING MORE OFTEN THAN ONCE A
YEAR
Single Amounts
• Given nominal interest rate and total number of
compounding periods, P, F or A can be determined
by
F = P ( F / P, i%, N )
i% = ( 1 + r / M ) M - 1
Uniform and / or Gradient Series
• Given nominal interest rate, total number of
compounding periods, and existence of a cash flow
at the end of each period, P, F or A may be
determined by the formulas and tables for uniform
annual series and uniform gradient series.
CASH FLOWS LESS OFTEN THAN
COMPOUNDING PERIODS
• Find A, given i, k and X, where:
– i is the effective interest rate per interest period
– k is the period at the end of which cash flow occurs
– X is the uniform cash flow amount
Use: A = X (A / F,i%, k )
• Find A, given i, k and X, where:
– i is the effective interest rate per interest period
– k is the period at the beginning of which cash flow
occurs
– X is the uniform cash flow amount
Use: A = X ( A / P, i%, k )
CONTINUOUS COMPOUNDING AND DISCRETE
CASH FLOWS
CASH FLOWS
• Continuous compounding assumes cash flows occur

at discrete intervals, but compounding is continuous
throughout the interval.
CASH FLOWS

• Given nominal per year interest rate -- r,
compounding per year -- M one
unit of principal = [ 1 + (r / M ) ] M
CASH FLOWS

• Given M / r = p, [ 1 + (r / M ) ] M = [1 + (1/p) ] rp
CASH FLOWS

• Given M / r = p, [ 1 + (r / M ) ] M = [1 + (1/p) ] rp
• Given lim [ 1 + (1 / p) ] p = e1 = 2.71828
p
CASH FLOWS

• Given M / r = p, [ 1 + (r / M ) ] M = [1 + (1/p) ] rp
• Given lim [ 1 + (1 / p) ] p = e1 = 2.71828
p
• ( F / P, r%, N ) = e rN
CASH FLOWS

• Given M / r = p, [ 1 + (r / M ) ] M = [1 + (1/p) ] rp
• Given lim [ 1 + (1 / p) ] p = e1 = 2.71828
p
• ( F / P, r%, N ) = e rN
• i=er-1
CONTINUOUS COMPOUNDING AND
DISCRETE CASH FLOWS
Single Cash Flow
• Finding F given P
• Finding future equivalent value given present
value
• F = P (e rN)
• Functionally expressed as ( F / P, r%, N )
• e rN is continuous compounding compound
amount
• Predetermined values are in column 2 of appendix
D of text
DISCRETE CASH FLOWS
Single Cash Flow
• Finding P given F
• Finding present equivalent value given future value
• P = F (e -rN)
• Functionally expressed as ( P / F, r%, N )
• e -rN is continuous compounding present equivalent
• Predetermined values are in column 3 of appendix
D of text
DISCRETE CASH FLOWS
Uniform Series
• Finding F given A
• Finding future equivalent value given a series
of uniform equal receipts
• F = A (e rN- 1)/(e r- 1)
• Functionally expressed as ( F / A, r%, N )
• (e rN- 1)/(e r- 1) is continuous compounding
compound amount
• Predetermined values are in column 4 of
appendix D of text
DISCRETE CASH FLOWS
Uniform Series
• Finding P given A
• Finding present equivalent value given a series
of uniform equal receipts
• P = A (e rN- 1) / (e rN ) (e r- 1)
• Functionally expressed as ( P / A, r%, N )
• (e rN- 1) / (e rN ) (e r- 1) is continuous
compounding present equivalent
appendix D of text
DISCRETE CASH FLOWS
Uniform Series
• Finding A given F
• Finding a uniform series given a future value
• A = F (e r- 1) / (e rN - 1)
• Functionally expressed as ( A / F, r%, N )
• (e r- 1) / (e rN - 1) is continuous compounding
sinking fund
appendix D of text
DISCRETE CASH FLOWS
Uniform Series
• Finding A given P
• Finding a series of uniform equal receipts given
present equivalent value
• A = P [e rN (e r- 1) / (e rN - 1) ]
• Functionally expressed as ( A / P, r%, N )
• [e rN (e r- 1) / (e rN - 1) ] is continuous
compounding capital recovery
appendix D of text
CONTINUOUS CASH FLOWS
• Continuous flow of funds suggests a series of cash
flows occurring at infinitesimally short intervals of
time
time
• Given:
– a nominal interest rate or r
– p is payments per year
time
• Given:
[ 1 + (r / p ) ] p - 1
P = ------------------------------
r[1+(r/p)]p
time
• Given:
[ 1 + (r / p ) ] p - 1
P = ------------------------------
r[1+(r/p)]p
• Given Lim [ 1 + ( r / p ) ] p = e r
p --> oo
flows occurring at infinitesimally short intervals of time
• Given:
[ 1 + (r / p ) ] p - 1
P = ------------------------------
r[1+(r/p)]p
• Given Lim [ 1 + ( r / p ) ] p = e r
• For one year ( P / A, r%, 1 ) = ( e r - 1 ) / re r
p --> oo
• Finding the future equivalent given the
continuous funds flow
• F = A [ ( erN - 1 ) / r ]
• F = A [ ( erN - 1 ) / r ]
• F = A [ ( erN - 1 ) / r ]
• ( erN - 1 ) / r is continuous compounding
compound amount
• F = A [ ( erN - 1 ) / r ]
• ( erN - 1 ) / r is continuous compounding
compound amount
• Predetermined values are found in column 6 of
appendix D of text.
• Finding the present equivalent given the
• P = A [ ( erN - 1 ) / rerN ]
• P = A [ ( erN - 1 ) / rerN ]
• P = A [ ( erN - 1 ) / rerN ]
• ( erN - 1 ) / rerN is continuous compounding
present equivalent
• P = A [ ( erN - 1 ) / rerN ]
• ( erN - 1 ) / rerN is continuous compounding
present equivalent
• Predetermined values are found in column 7 of
appendix D of text.
• Finding the continuous funds flow given the
future equivalent
future equivalent
• A = F [ r / ( erN - 1 )]
future equivalent
• A = F [ r / ( erN - 1 )]
future equivalent
• A = F [ r / ( erN - 1 )]
• r / ( erN - 1 ) is continuous compounding sinking
fund
present equivalent
present equivalent
• A = P [ r / ( erN - 1 )]
present equivalent
• A = P [ r / ( erN - 1 )]
present equivalent
• A = F [ rerN / ( erN - 1 )]
• rerN / ( erN - 1 ) is continuous compounding
capital recovery

Notes - EE 3

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Notes - EE 3

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PRINCIPLES OF

Wealth in the form of money or

• A dollar today is worth more than a dollar

• Equity capital is that owned by individuals who have

• Debt • Borrow • Bond • Promise to

• Equity • Sell partial • Stock • Exchange

• Debt • Borrow • Bond • Promise to

• Equity • Sell partial • Stock • Exchange

• Debt • Borrow • Bond • Promise to

• Equity • Sell partial • Stock •Exchange

• Plan #2: $0 of loan principal paid until end of fourth

1 Time scale with progression of time moving from left to

3 Annual income (cash inflow) of $2,524 for lender.

1 Time scale with progression of time moving from left to

3 Annual income (cash inflow) of $2,524 for lender.

4 Interest rate of loan.

1 Time scale with progression of time moving from left to

3 Annual income (cash inflow) of $2,524 for lender.

4 Interest rate of loan. 5 Dashed-arrow line indicates

• Find F when given G:

• Find F when given G:

• Find F when given G:

• Find F when given G:

• Find F when given G:

i = effective interest rate (N-1)G

Cash-flow diagram for a Geometric Sequence of

• Continuous compounding assumes cash flows occur

• Continuous compounding assumes cash flows occur

• Continuous compounding assumes cash flows occur

• Continuous compounding assumes cash flows occur

• Continuous compounding assumes cash flows occur

• Continuous compounding assumes cash flows occur

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