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Lecture4-Time Value of Money
Lecture4-Time Value of Money
Lecture No.2
E-Eco: Engineering Economy
Chapter 2
Time Value of Money
◼ Interest: The Cost of
Money
◼ Economic Equivalence
◼ Interest Formulas –
Single Cash Flows
◼ Equal-Payment Series
◼ Dealing with Gradient Power-Ball Lottery
Series
◼ Composite Cash Flows.
Decision Dilemma—Take a Lump Sum or Annual
Installments
25 $7.92 M
What Do We Need to Know?
Plan 1 Plan 2
Year 0 $20,000.00 $200.00 $200.00
Year 1 5,141.85 0
Year 2 5,141.85 0
Year 3 5,141.85 0
Year 4 5,141.85 0
Year 5 5,141.85 30,772.48
The amount of loan = $20,000, origination fee = $200, interest rate = 9% APR
(annual percentage rate)
Cash Flow Diagram
End-of-Period Convention
0
1
0 1
Methods of Calculating Interest
$1,080
$1,166.40
0 $1,259.71
1
$1,000
2
3
$1,080
$1,166.40
$1,259.71
0 1 2
n = 0: P
n = 1: F1 = P(1 + i )
n = 2 : F2 = F1 (1 + i) = P(1 + i) 2
n = N : F = P(1 + i ) N
Some Fundamental Laws
F = m a
V = i R
E = m c 2
F = P(1 + i) N
Compound Interest
F = $100.36(1 + 0.2458) 27
= $37.902 trillions
EXCEL Template
In 1626 the Indians sold Manhattan Island to Peter Minuit
Of the Dutch West Company for $24.
FV(8%,377,0,1)
= $3,988,006,142,690
$3,988, 006,142, 690
A=
275, 000, 000
= $14,502
Excel Worksheet
A B C
1 P 1
2 i 8%
3 N 377
4 FV
5 FV(8%,377,0,1)
= $3,988,006,142,690
Example
Practice Problem
◼ Problem Statement
If you deposit $100 now (n = 0) and $200 two
years from now (n = 2) in a savings account
that pays 10% interest, how much would you
have at the end of year 10?
Solution
0 1 2 3 4 5 6 7 8 9 10
0 1
$1,210
4
?
2 3
$1,000 $1,000
$1,500
$1,100
$1,000
$1,210 $2,981
$2,100 $2,310
-$1,210 + $1,500
$1,100 $2,710
Solution
End of Beginning Deposit Withdraw Ending
Period balance made balance
n=0 0 $1,000 0 $1,000