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Engineering Economy AuthorMessage

Posts : 38
Join date : 2009-10-23  Subject: Engineering Economy Sat Jan 02, 2010 2:05 am Engineering EconomyThe following variables will be used throughout the presentation P = Principal (Present Sum) S = Future Sum N = Number of Payments I = Interest RateSimple InterestEquation: S = P + N I P = P (1 + N I)Example: If \$100.00 was deposited at 6% yearly interest, your account would have these balances after each year. Year Balance 0 100.00 1 106.00 2 112.00 3 118.00 4 124.00Compound Interest"Interest on the Accrued Interest"Equation: S = P (1 + I)^NExample: If \$100.00 was deposited at 6% interest and compounded annually, your account would have these balances after each year: Year Balance Equation 0 100.00 P 1 106.00 P(1+I)^1 2 112.36 P(1+I)^2 3 119.10 P(1+I)^3 4 126.25 P(1+I)^4Example: If you deposit \$2000.00 today at 7% interest compounded annually, what will be the balance in 3 years? Compound Interest Time Line"Backward Time"Example:If \$4000.00 is needed in 3 years, how much money should be deposited today, assuming 7% interest compounded yearly? Solution: P = Present Value = S (1 + I)^-N = \$4000.00 (1 + 0.07)^-3 = \$3265.19References:Lecture written by: Dr. Larry GenaloAuthored for presentation by: David KilzerRevised by Mark Sobek and Lex JacobsonHTML documentation by: Larry Genalo Jr.Date last updated: 8/1/95    Posts : 38
Join date : 2009-10-27
Location : UNITED STATE OF AMERICA, STATE COLLEGE,PA  Subject: Re: Engineering Economy Sat Jan 02, 2010 10:38 pm [size=12][font=Times New Roman]Tips for Doing ProblemsWhen doing engineering economy problems, make sure:"TIME FRAMES" MATCH:If one period equals one quarter, then the interest rate should be quarterly and compounded quarterly. For example, if a yearly interest rate is given but interest is compounded monthly, divide the interest rate by 12.ANSWER IS REASONABLEANSWER IS ROUNDED TO THE NEAREST PENNYSinking Fund Definition: A sinking fund differs from compound interest in that we now have uniform payments over time in addition to the compound interest.Sinking Fund Time LineExample #1Example: If you deposit \$50 per month into an account that pays 6% interest, compounded monthly, for 2 years, how much is in the account immediately after the last deposit? Please Note: Yearly interest in the equation is divided by 12 since payments are on a per-month basis.Also Note: There are 24 payments, not 23 months.Sinking Fund Time LineExample #2Example: Which is of more value to receive:(a) \$8000 today or(b) 5 annual payments of \$2000, beginning in 1 year?(Assume 8% interest compounded annually.) Sinking Fund Time LineExample #3Example: Which is of more value to receive: (a) \$8000 today or (b) 5 annual payments of \$2000, beginning in 1 year? (c) 5 annual payments of \$2000, beginning today? (Assume 8% interest compounded annually.)  AnnuityNOTE: Follow the algebraic steps used to find the present value of a sinking fund. This is the formula for an annuity.http://www.eng.iastate.edu/efmd/Captures/annline1.gifAPPLICATION: The first application of the annuity formula is to find the present value of a sinking fund. The second is using the formula in situations like the following example.EXAMPLE: You borrow \$5000 to buy a car. If you repay the loan with 36 monthly installments at 18% interest, what is the amount of each payment? SummaryCompound Interest Equation: S = P (1 + I)^N Sinking Fund     Engineering Economy Page 1 of 1
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