Lecture No.

9
Chapter 3
Contemporary Engineering Economics
Copyright © 2010

Contemporary Engineering Economics, 5th edition, © 2010

Composite Cash
Flows
 Situation 1: If you
make 4 annual deposits
of $100 in your savings
account which earns a
10% annual interest,
what equal annual
amount (A) can be
withdrawn over 4
subsequent years?
 Situation 2: What
value of A would make
the two cash flow
transactions equivalent if
i = 10%?

Contemporary Engineering Economics, 5th edition, © 2010

Establishing Economic Equivalence
Method 1: at n = 0 Method 2: At n = 4

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.26 Cash
Flows with
Subpatterns
 Given: Two cash flow
transactions, and i = 12%

 Find: C

 Strategy: First select

the base period to use in
calculating the
equivalent value for each
cash flow series (say, n =
0). You can choose any
period as your base
period.

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.27
Establishing a
College Fund
 Given: Annual college
expenses = $40,000 a
year for 4 years, i = 7%,
and N = 18 years

 Find: Required annual

contribution (X)
 Strategy: It would be
computationally efficient
if you choose n = 18 (the
year she goes to college)
as the base period.

Contemporary Engineering Economics, 5th edition, © 2010

Validation
EOY Standing Beginning Interest Payment Ending
balance earned balance
18 Freshman $144,973 - $40,000 $104,973
19 Sophomore $104,973 $7,348 $40,000 $72,321
20 Junior $72,321 $5,062 $40,000 $37,383
21 Senior $37,383 $2,617 $40,000 0

Interest earned is:

I19 = $104,972 × 0.07 = $7,348

I 20 = $72,320 × 0.07 = $5,062

I 21 = $37,382 × 0.07 = $2,618

Contemporary Engineering Economics, 5th
edition, © 2010
Cash Flows with
Missing Payments
 Given: Cash flow series with
P=?
a missing payment, i = 10%
 Find: P
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
 Strategy: Pretend that we 0
have the 10th missing payment
so that we have a standard $100
uniform series. This allows us to
i = 10% Missing payment
use (P/A,10%,15) to find P. Then
we make an adjustment to this
P by subtracting the equivalent P=? Add $100 to
amount added in the 10th $100 offset the change

period.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
P + $100(P / F ,10%,10) = $100(P / A,10%,15) 0

P + $38.55 = $760.61 $100

P = $722.05 Pretend that we have the 10th
i = 10% Payment in the amount of $100

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.28 Calculating
an Unknown Interest
Rate
Option 1: Take a lump sum payment in the amount of $167M.
 Given: Two payment 
 Option 2: Take the 26-installment option.
options

 Find: i at which the two

options are equivalent

 Excel Solution:

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.29
Unconventional Regularity in
Cash Flow Pattern
 Given: Payment series given, i  Equivalence Calculations for a
= 10%, and N = 12 years
skipping cash flow pattern
 Find: P

 Strategy: Since the cash

flows occur every other year,
find out the equivalent
compound interest rate that
covers the two-year period.

1 + 0.1 1 + 0.1 = 1 + 𝑖𝑖𝑒𝑒𝑒𝑒 ⇒ 𝑖𝑖𝑒𝑒𝑒𝑒 =21% Actually, $10,000 payment occurs

every other year for 12 years at 10%.
Solution: We can view this same cash flow series
as having $10,000 payment occurs every period
at an interest rate of 21% over 6 years.

Contemporary Engineering Economics, 5th edition, © 2010