MetE 15 Reading Assignment

Due: Next Meeting February 15, 2017

I. Topics: Equivalence, Single Cash Flow, Nominal and Effective Interest

II. Possible References:

Park, Chan S., Contemporary Engineering Economics, 2nd Ed., Addison-Wesley,

1997.
DeGarmo, P., Sullivan, W.,Bontadelli, J., Engineering Economy, 9th Ed., McMillan.
Newnan, Donald G., Lavelle, Jerome P., Eschenbach, Ted G., Engineering Economic
Analysis, 8th Ed.
Samuelson, Paul A., Nordhaus, William D., Economics International Ed. McGraw-
Hill, 2001.

III. At the end of the reading assignment, the student should be able to answer the following

1. What is economic equivalence and why is it important?

2. Demonstrate the concept of equivalence using the different loan repayment plans described
below. Each plan repays $5000 loan in 5 years at 8% interest rate.
a. Plan A. Simple interest, pay all at end
b. Plan B. Compound interest, pay all at end
c. Plan C. Simple interest paid annually, principal repaid at end
d. Plan D. Compound interest paid annually, principal repaid at end
3. What is the notation and equation for single-payment compound amount?
4. What is the notation and equation for single-payment present worth?
5. If payments occur more frequently than annual, how do we calculate the economic
equivalence?
6. If interest period is other than annual, how do you calculate the economic equivalence?
7. Complete the table given the nominal interest rate. Compute the effective rate based on
compounding period. Show the equations used for calculating the effective interest rate.

Effective Rate
Nominal Rate Compounding Compounding Compounding Compounding
Annually Semi-Annually Quarterly Monthly
4% 4.00 % 4.04 % 4.06 % 4.07 %
5%
6%
7%
8%
9%
10 %

Metallurgical Engineering 15 2nd Sem A.Y. 2016-2017