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    41 views13 pages

    Lecture No5 - Equal-Payment - Series-Modified

    Uploaded by

    poqwuradfo apdsoaaf

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
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    of 13

    Lecture No.

    4
    Chapter 3
    Contemporary Engineering Economics
    Copyright © 2010

    Contemporary Engineering Economics, 5th edition, © 2010


    Equal Payment Series
    F

    0 1 2 N
    A A A

    P
    0 1 2 N

    0 N

    Contemporary Engineering Economics, 5th edition, © 2010


    Equal-Payment Series Compound Amount Factor
     Formula

    A A A

    0 1 2 N
    0 1 2 N

    0 1 2
    = N

    A A A

    Contemporary Engineering Economics, 5th edition, © 2010


    An Alternate Way of Calculating the
    Equivalent Future Worth, F F
    A

    A(1+i)N-2
    A A A

    A(1+i)N-1

    0 1 2 N 0 1 2 N

     (1 + i)N − 1 
    F = A(1 + i)N −1 + A(1 + i)N −2 + + A = A 
     i 
    Contemporary Engineering Economics, 5th edition, © 2010
    Example 3.14 Uniform Series: Find F, Given i, A, and N

    ❑ Given: A = $3,000, N = 10
    years, and i = 7% per year

    ❑ Find: F

    ❑ Excel Solution:

    Contemporary Engineering Economics, 5th edition, © 2010


    Example 3.15 Handling Time Shifts: Find F, Given i, A, and N

    ❑ Given: A = $3,000, N = 10
    years, and i = 7% per year

    ❑ Find: F

    o Each payment has been shifted to one year


    earlier, thus each payment would be compounded
    ❑ Excel Solution: for one extra year

    Contemporary Engineering Economics, 5th edition, © 2010


    Sinking-Fund Factor: Find A, Given i, N, and F

    ❑ Given: F = $5,000, N = 5  Formula – Sinking Fund Factor


    years, and i = 7% per year

    ❑ Find: A

    A = $5,000(A / F ,7%,5) A = $5,000(A / F ,7%,5)


    = $869.50 = $869.50

    $5,000
    ❑ Excel Solution:
    0 1 5
    =PMT(7%,5,0,5000)

    Contemporary Engineering Economics, 5th edition, © 2010


    Example 3.17 Comparison of Three Different Investment Plans

    Consider three investment


    plans at an annual interest
    rate of 8% :
    • Investor A. Invest $2,000 per
    year for the first 10 years of
    your career. At the end of 10
    years, make no further
    investments, but reinvest the
    amount accumulated at the
    end of 10 years for the next 31
    years.
    • Investor B. Do nothing for the
    first 10 years. Then start
    investing $2,000 per year for
    the next 31 years.
    • Investor C. Invest $2,000 per
    year for the entire 41 years.

    Contemporary Engineering Economics, 5th edition, © 2010


    Example 3.17 Comparison of Three Different Investment Plans

    ❑ Given: Three investment plans and i = 8%


    ❑ Find: Balance at N=41.

    41

    41

    41

    Contemporary Engineering Economics, 5th edition, © 2010


    Example 3.18 Uniform Series: Find A, Given P, i, and N
    BioGen Company, a small biotechnology firm, has borrowed $250,000 to purchase laboratory
    equipment for gene splicing. The loan carries an interest rate of 8% per year and is to be repaid
    in equal installments over the next six years. Compute the amount of the annual installment.

    ❑ Given: P = $250,000, N = 6 yrs,  Capital Recovery Factor


    and i = 8% per year
    ❑ Find: A
    ❑ Formula to use:

    ❑ Excel Solution:

    Contemporary Engineering Economics, 5th edition, © 2010


    Example 3.19 – Deferred Loan Repayment
    Suppose that BioGen wants to negotiate with the bank to defer the first loan repayment until the
    end of year 2 (but still desires to make six equal installments at 8% interest). If the bank wishes to
    earn the same profit, what should be the annual installment, also known as deferred annuity.

    ❑ Given: P = $250,000, N = 6
    years, and i = 8% per year, but
    the first payment occurs at the
    end of year 2
    ❑ Find: A
    ❑Step 1: Find the equivalent
    amount of borrowing at the end
    of year 1:

    ❑ Step 2: Use the capital


    recovery factor to find the size
    of annual installment:

    Contemporary Engineering Economics, 5th edition, © 2010


    Chapter
    Opening Story
    —Take a Lump
    Sum or Annual
    Installments
    ❑Mr. Robert Harris won a lottery
    worth $275 million.

    ❑ He had two options:


    ❑ Option 1: Take a smaller
    cash payment of $167M.
    ❑ Option 2: Take an annuity
    payment of $10.57M a year
    for 26 years.

    ❑ Mr. Harris took Option 1. What


    basis do we compare these two
    payment options?
    What can we say about Mr. Harris’
    decision?

    Contemporary Engineering Economics, 5th edition © 2010


    Example 3.20
    Uniform Series: Find
    P, Given A, i, and N
    ❑ Given: A = $10,576,923, N =  Present Worth Factor
    26 years, and i = 5% per year
    ❑ Find: P
    ❑ Formula to use:

    ❑ Excel Solution:

    Contemporary Engineering Economics, 5th edition, © 2010

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