VALUE OF MONEY EQUIVALENCE 13

are negligible? By Eq. (2-6) and trial and error, trying 6 per cent,

(1 + 0.06) 10 =
j _ (1,0oo/135.9)o.06
1.791 = 1.791

The unknown interest being earned on the $1,000 investment is 6 per

cent. This problem may be solved also by use of Fig. 2-2, since from
Eq. (2-2)

Pr - PR _~ 1,000
13^9
_
~ 7 3b

This value of PF for n = 10 periods occurs at i = 6 per cent on Fig. 2-2.

Equation (2-6) or (2-7) or Fig. 2-2 may also be used to estimate the
payout time for the above meter installation where the interest rate that
such investments must return is fixed. For this case, if such a rate is
6 per cent, then, by "solving," the payout time will be 10 years. (Note:
In general practice, such investments must earn two or three times a 6 per
cent return and, in addition, must pay out in much less than 10 years
for management to consider them seriously.) Payout time is discussed
further in Chap. 7.
Equation (2-8) is used to determine what the worth at the present time
is for a perpetual series of uniform annual payments in the future. Such
relations are used to establish the equivalent "capitalized cost" of a
series of annual repairs or operating costs that must be paid for an
indefinite number of periods in the future in order to continue a given
service. Thus, if repairs on a power distribution system or railroad
maintenance within a plant cost $135.90 each year, the capitalized cost
is,

of such continuous expense at an interest rate of 6 per cent by Eq.

(2-8),
p' - w- $2'265

This sum must be added to the initial cost to obtain the total capitalized
cost for the service. Capitalized cost also used to estimate the present
is

value at some rate of return of going concern with average annual

a

earnings equal to R' earning at rate i'.

a

As will be discussed more completely in Chap. sinking fund

is
3,

a
a

separate fund into which a periodic deposit made such that the sum
is

of the deposits plus the accumulated interest on the deposits will, at the
end of given time, be equal to certain sum of money. Thus, only
if
a
a

$1,000 without interest to be repaid at the end of 10 years, the sinking-

is

fund deposit, from Eq. (2-9),

is

R" = 1,000
_ = 1,000 X 0.0759 = $75.90
x