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# Unconventional Equivalence

Calculations

Lecture No. 7
Professor C. S. Park
Fundamentals of Engineering Economics
\$200

## Cash Flows \$100 \$100 \$100

\$50

0
1 2 3 4 5 6 7 8 9

 \$43.48

## PGroup 2  \$100( P / A,15%,3)( P / F ,15%,1)

 \$198.54
PGroup 3  \$150( P / A,15%, 4)( P / F ,15%, 4)
 \$244.85
PGroup 4  \$200( P / F ,15%,9)
 \$56.85
P  \$43.48  \$198.54  \$244.85  \$56.85
 \$543.72
Unconventional Equivalence Calculations

## Situation 1: If you make

4 annual deposits of
account which earns
10% annual interest,
what equal annual
amount can be
withdrawn over 4
subsequent years?
Unconventional Equivalence Calculations

 Situation 2:
What value of A
would make the two
cash flow
transactions
equivalent if i =
10%?
Multiple Interest Rates
Find the balance at the end of year 5. F=?

6% 6% 4% 4%
5%

0
2 4 5
1 3

\$400
\$300
\$500
Solution
n  1:
\$300( F / P, 5%,1)  \$315
n  2:
\$315( F / P, 6%,1)  \$500  \$833.90
n  3:
\$833.90( F / P, 6%,1)  \$883.93
n  4:
\$883.93( F / P, 4%,1)  \$400  \$1, 319.29
n  5:
\$1, 319.29( F / P, 4%,1)  \$1, 372.06
Cash Flows with Missing Payments

P=?

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0

\$100

Solution

## P=? Add this cash flow to

\$100 offset the change

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0

\$100
Pretend that we have the 10th
i = 10% payment
Approach

P=?
\$100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0

\$100

i = 10%

## Equivalent Cash Inflow = Equivalent Cash Outflow

Equivalence Relationship

## P  \$100( P / F ,10%,10)  \$100( P / A,10%,15)

P  \$38.55  \$760.61
P  \$722.05
Unconventional Regularity in Cash Flow
Pattern
\$10,000

i = 10%

1 2 3 4 5 6 7 8 9 10 11 12 13 14
0

C C C C C C C

## Payment is made every other year

Approach 1: Modify the Original Cash
Flows
\$10,000

i = 10%

1 2 3 4 5 6 7 8 9 10 11 12 13 14
0

A A A A A A A A A A A A A A

## A  \$10, 000( A / P,10%,14)

 \$1,357.46
Relationship Between A and C
\$10,000

i = 10%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
0
C C C C C C C
\$10,000

i = 10%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
0

A A A A A A A A A A A A A A
Solution
A  \$10,000( A / P,10%,14)
 \$1,357.46

 
i = 10%

C C  A( F / P,10%,1)  A
 1.1A  A
 2.1A
A A
 2.1(\$1,357.46)
A =\$1,357.46  \$2,850.67
Approach 2: Modify the Interest Rate

##  Idea: Since cash flows occur every other

year, let's find out the equivalent compound
interest rate that covers the two-year period.
 How: If interest is compounded 10% annually,
the equivalent interest rate for two-year
period is 21%.
(1+0.10)(1+0.10) = 1.21
Solution
\$10,000
i = 21%
1 2 3 4 5 6 7
1 2 3 4 5 6 7 8 9 10 11 12 13 14
0
C C C C C C C

C  \$10,000( A / P, 21%,7)
 \$2,850.67