The term discount rate is often used for the interest rate when comparing alternative projects or strategies. Selection of discount rate: If costs and benefits accrueequally over the life of a project or strategy, the selection of discount rate will have little impact on the estimated benefit-cost ratios. However, most benefits and costs oc-cur at different times over the…
Most decisions are based on economic criteria. In-vestments are unattractive, unless it seems likely they will be recovered with interest. Economic decisions can be di-vided into two classes: 1. Income-expansion—that is, the objective of capitalism 2. Cost-reduction—the basis of profitability engineering economic analysis are pri-marily concerned with cost-reduction decisions, finding the least expensive way to fulfill certain…
Additional concepts involved in interest calculations include continuous cash flow, capitalized costs, begin-ning of period payments, and gradients. Continuous cash flow: Perhaps the most useful func-tion of continuous interest is its application to situations where the flow of money is of a continuous nature. Con-tinuous cash flow is representative for 1. A series of regular payments for which the interval be-tween payments…
As with the other factors,there is a corresponding inverse to the capital recovery factor. The series present worth factor is found by solving the capital recovery equation for P. or, symbolically P =A(P/A, i, N)
It is also important to be able torelate regular periodic payments to their present worth; for example, what monthly installments will pay for a $10,000 car in 3 yr at 15 percent? Substituting the compounding equation F =P(F/P, i, N) in the sinking fund equation, A = F (A/F, i, N), yields A = P(F/P, i, N)(A/F, i, N) And, substituting the corresponding interest factors gives In this equation, the interest expression…
The process corresponding to theinverse of series compounding is referred to as a sinking fund; that is, what size regular series payments are neces-sary to acquire a given future amount? Solving the series compound amount equation for A,
Normally, but not always, the interest period is taken as 1 yr. There may be subperiods of quarters, months, weeks, and so forth. Nominal versus effective interest: It is generally as-sumed that interest is compounded annually. However, interest may be compounded more frequently. When this occurs, there is a nominal interest or annual percentage rate and an effective interest, which is the figure…
Present worth is the value found by discounting fu-ture cash flows to the present or base time. Discounting: The inverse of compounding is determin-ing a present amount which will yield a specified future sum. This process is referred to as discounting. The equa-tion for discounting is found readily by using the com-pounding equation to solve for P in terms of F: P = F (1+ i )–N EXAMPLE: What present…
Interest factors are multiplicative numbers calculated from interest formulas for given interest rates and peri-ods. They are used to convert cash flows occurring at dif-ferent times to a common time. The functional formats used to represent these factors are taken from ANSI Z94, and they are summarized in Appendix B to this chapter. Compound Amount Factor In the…
Interest is the money paid for the use of borrowed money or the return on invested capital. The economic cost of construction, installation, ownership, or operation can be estimated correctly only by including a factor for the economic cost of money. Simple interest: To illustrate the basic concepts of inter-est, an additional notation will be used:…