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Lecture 5

# Lecture 5

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Engineering Economics 390. Courtesy of Atre, Sundar V Associate Professor, Oregon State University.
Engineering Economics 390. Courtesy of Atre, Sundar V Associate Professor, Oregon State University.

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01/01/2013

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ENGR 390 Lecture 5: Understanding Money& Its Management -2Winter 2007S.V. Atre1
Chapter 5: UnderstandingMoney & Its Management
1.If interest periodis other thaannual, how do we calculate economic equivalence? 2. If paymentsoccur more frequently than annual, how do we calculate economic equivalence?
Nominal and Effective Interest Rateswith Different Compounding Periods
12.7412.6812.5512.3612.0012 11.6211.5711.4611.3011.0011 10.5210.4710.3810.2510.0010 9.429.389.319.209.009 8.338.308.248.168.008 7.257.237.197.127.007 6.186.176.146.096.006 5.135.125.095.065.005 4.08%4.07%4.06%4.04%4.00%4%
CompoundingDailyCompoundingMonthlyCompoundingQuarterlyCompoundingSemi-annuallyCompoundingAnnuallyNominal Rate
Effective Rates

ENGR 390 Lecture 5: Understanding Money& Its Management -2Winter 2007S.V. Atre2
Effective Annual Interest Rates(9% compounded quarterly)
= \$10,690.30+ \$240.53= \$10,930.83= New base amount+ Interest (2.25 %)= Value after one year
Fourth quarter
= \$10,455.06+\$235.24= New base amount+ Interest (2.25%)
Third quarter
= \$10,225+\$230.06= New base amount+ Interest (2.25%)
Second quarter
\$10,000+ \$225Base amount+ Interest (2.25%)
First quarter
Effective Annual Interest Rate
= nominal interest rate per year
= effective annual interest rate
= number of interest periods per year
1) / 1(
+=
a
i

ENGR 390 Lecture 5: Understanding Money& Its Management -2Winter 2007S.V. Atre3
Equivalence Analysis using EffectiveInterest Rate
Identify the compounding period(e.g.,annually, quarterly, monthly
Identify the payment period(e.g., annual,quarter, month, week, etc), etc)
Find the effective interest ratethatcovers the payment period.
When Payment Periods andCompounding Periods Coincide
Step 1:Identify the number of compoundingperiods (
) per yearStep 2:Compute the effective interest rate perpayment period (
)
=
/
Step 3:Determine the total number of paymentperiods (
)
=
(number of years)Step4:Use the appropriate interest formulausing
and
above