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:…
It is difficult to solve a problem if you cannot see it. The easiest way to approach problems in economic analysis is to draw a picture. The picture should show three things: 1. A time interval divided into an appropriate number of equal periods 2. All cash outflows (deposits, expenditures, etc.) in each period 3. All cash inflows…
Cash flow is the stream of monetary (dollar) values— costs (inputs) and benefits (outputs)—resulting from a project investment. Time Value of Money The following are reasons why $1000 today is “worth” more than $1000 one year from today: 1. Inflation 2. Risk 3. Cost of money Of these, the cost of money is the most predictable,…
Meaning of Engineering Economics: Engineering is the profession in which knowledge of the mathematical and natural sciences gained by study experience and practice is applied with judgment to develop ways to utilise economically the material and forces of nature for the benefit of mankind. Engineering Economics is a subject of vital importance to Engineers. This subject helps…
It is interesting to know that the first A.C. drive (400 HP) based on thyratron cycloconverter-fed WRIM was installed in 1932 by F.E. Alexanderson of General Electric in the Logan Power Station of Pacific Gas and Electric Company. From then industrial drives have evolved rapidly by dedicated effort of many scientists and engineers all over the world…