Engineering Economic Analysis

FOURTEENTH EDITION

Appendix B Donald G. Newnan

San Jose State University

Time Value of Money Ted G. Eschenbach

University of Alaska Anchorage

Calculations Using Jerome P. Lavelle

North Carolina State University

Spreadsheets & Neal A. Lewis

Fairfield University
Calculators
Copyright Oxford University Press 2019 B-1
 Appendix Outline

 Basics of a 5-Button Spreadsheet Calculator

 Spreadsheets, Calculators, & the FE Exam
 Additional Spreadsheet & Calculator Capabilities
 More Complex Examples
 Possible Errors & their Solutions

Copyright Oxford University Press 2019 B-2

 Basics of a 5-Button Spreadsheet
Calculator

Copy needed rows into your solution to each problem; this creates
a paper trail for later study. Columns A-G are the data block.
Copyright Oxford University Press 2019 B-3
 Example B-1, Present Value

Find present value of $110.25 received in two years at

interest rate = 5%.

Using interest factors,

P = 110.25(P/F, 5%, 2) = 110.25(0.9070) = $100.00

Using a spreadsheet, =PV(rate, nper, pmt, fv)

Copyright Oxford University Press 2019 B-4

 Example B-3, uniform value

Find equivalent uniform value of $1500 now & $200 in

three years; interest rate = 3.5%.

Using interest factors,

A = 1500(A/P, 3.5%, 3) + 200(A/F, 3.5%, 3) =
1500(0.3569) + 200(0.3219) = $599.73

Using a spreadsheet, =PMT(rate, nper, pv, fv) in one

step

Copyright Oxford University Press 2019 B-5

 Spreadsheet, Calculators, & the FE
Exam
 Spreadsheets use Eq. B-1 to solve for the unknown
variable

 Calculators use Eq. B-3 to solve for the unknown variable

 One of PMT, FV, or PV must be different in sign

Copyright Oxford University Press 2019 B-6

 Factors & Functions

Typical
Engineering
Variable Spreadsheets Calculator
Economy
Button
Present value P PV PV
Future value F FV FV
Uniform A PMT PMT
series
Interest rate i RATE I/Y
Number of n NPER N
periods

Copyright Oxford University Press 2019 B-7

 Types of Calculators
 Financial or business calculators
 i, N, PMT, PV, FV buttons
 Some need to have payments/period changed to 1
 Graphing calculators
 TVM calculations in a menu
 Programmable scientific calculators
 Equation can be entered
 HP 33s & HP 35s currently allowed on FE exam
 Phone apps now widely available

Copyright Oxford University Press 2019 B-8

 Excel financial functions

=PV(rate, nper, pmt, [fv], [type])

=FV(rate, nper, pmt, [pv],[type])
=PMT(rate, nper, pv,[fv],[type])
=NPER(rate, pmt, pv, [fv], [type])
=RATE(nper, pmt, pv, [fv], [type],[guess])

Copyright Oxford University Press 2019 B-9

 Additional Capabilities of
Spreadsheets & Calculators
 [type]
 End of period cash flows, [type] = 0
 This is the default
 [type] >0 is beginning of period cash flow
 [guess]
 Sometimes used for RATE calculation
 Default = 10%; starting point for calculation
 If you get an error, change the [guess]

Copyright Oxford University Press 2019 B-10

 Example B-6

Car loan for $14,000; financing for 5 years at 6.5% interest.

What is the monthly payment?

Convert period & interest rate to months; 60 monthly

payments at 6.5%/12 = 0.5417%.

Copyright Oxford University Press 2019 B-11

 Exercise 1

Borrow $15,000 at 10% over 5 years. What is the

annual payment?
A. −3957
B. 3957
C. 1943
D. 3009

E. I don’t know

Copyright Oxford University Press 2019 B-12

 Exercise 1

Borrow $15,000 at 10% over 5 years. What is the

annual payment?
A. −3957 =PMT(10%,5,15000,0) = EUAW =
equivalent cash flow
B. 3957 = payment (payments are negative cash flows)
C. 1943
Excel & calculators solve B-1 & B-3 so
D. 3009 sign of result in A. is negative because
E. I don’t know $15,000 is positive.

Copyright Oxford University Press 2019 B-13

 Exercise 2

Borrow 150,000 over 30 years at 6%. What is the

monthly payment?
A. 899.33
B. 10,897
C. 908.11
D. 416.67

E. I don’t know

Copyright Oxford University Press 2019 B-14

 Exercise 2

Borrow 150,000 over 30 years at 6%. What is the

monthly payment?
A. 899.33 =PMT(.005,360,150000,0)
Need to convert 30 years to 360 months
B. 10,897 Need to convert 6% to ½% monthly interest
C. 908.11
D. 416.67

E. I don’t know

Copyright Oxford University Press 2019 B-15

 Example B-7

Automating process costs $8000, saves $2200 annually for 5

years; salvage value = $1500. What is PW if i = 10%.

The PW of the savings & salvage value is found in one step.

Then subtract the cost.

Excel & calculators solve B-1 & B-3 so sign in

H2 is negative; since savings have PW > 0
sign for H2 changed in H3.

Copyright Oxford University Press 2019 B-16

 Example B-8

New system costs $76,000, saves $22,000 annually;

discounted payback of no more than 4 years at i = 10%.
Should the firm invest?

Use the NPER function.

The project would not be approved.

Copyright Oxford University Press 2019 B-17

 Example B-9

Equipment leased for 4 years at $15,000 annually, or can be

bought for $60,000 & sold for $35,000 at project’s end.
What is rate of return for owning?

This is a lease, so TYPE >0 (such as 1).

A financial calculator must be shifted into begin rather than

end mode.

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 Example B-11

How long does it take for money to double if i = 7%?

Triple? Quadruple?

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 Possible Errors & Solutions

 RATE & IRR

 #NUM! error may occur
 Functions are solved iteratively
 Default starting point (guess) = 10%
 If solution not found within 20 iterations, error occurs
 Solution: add a [guess]

Copyright Oxford University Press 2019 B-20

 Example B-12

Account having $800,000 used to make 20 annual payments

of $150,000 each. What interest rate is needed?

Adding a [guess] solves the problem.

Copyright Oxford University Press 2019 B-21

 Example B-13

Account having $600,000 used to make annual payments of

$45,000 each at 7.5% per year. How many years will
payments be made?

NPER returns an error; n is increasing rapidly with small

changes in interest rate. GOAL SEEK may be used to solve.

H3 = 0 is goal. Cell C3 is
specified in earlier GOAL SEEK
window as cell to change.

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