EQUIVALENCE OF ALTERNATIVES

inom
ieff = { (1 + )m – 1} x 100
𝒎 𝒙 𝟏𝟎𝟎
𝟏𝟎
= { (1 + )2– 1} x 100
𝟐𝒙 𝟏𝟎𝟎
= 10.25%
A1 = 1,000 x (1 + 0.1025)5 = 1,628.89

A2 = 400 x (1 + 0.1025)4 + 400 x (1 + 0.1025)3 + 400 x (1 + 0.1025)2 + 400 x (1 + 0.1025)

= 2,054.22

Hence, option 2 is preferable.

FORMULATION FOR INTEREST COMPUTATION

Three categories addressing eight commonly used interest formulations are presented here.
Example 7:

Example 8:
Example 10:
 Fig. 3.20 Cash-flow diagram for arithmetic gradient series.

Fig. Equivalent uniform series cash-flow diagram of arithmetic gradient series.

Geometric gradient Factor (GGF): In this case, the increase/decrease in
installments, whether it is payments or disbursements, follows a geometric pattern,
as shown in Figure 3.2.1. This factor GGF, is sometimes denoted as (P/c, g, i, n) and
read as ‘P given c at an increase/decrease rate g, an interest rate of i for a period of
n’. Mathematically, the factor is equal to

(P/c, g, i, n) (3.14)
Example 11:

Solution:
Capital Asset Pricing Model

The capital asset pricing model - or CAPM - is a financial model that

calculates the expected rate of return for an asset or investment.
CAPM does this by using the expected return on both the market and a risk-
free asset, and the asset's correlation or sensitivity to the market

Project Cost of Capital

The cost of capital for a project is a weighted sum of the cost of debt and the cost of
equity. The cost of capital is often used as the discount rate, the rate at which projected cash
flow is discounted to find the present value or net present value of a project.
The interest rate a company experiences is really a weighted average rate resulting from the
combined cost associated with all external and internal sources of capital funds – debt
(borrowing) equity (sale of stock), and internally generated (retained earnings).

The cost-of-capital interest rate a company experiences is also affected by the risk associated
with its business type. The market perceives the risks of the business and applies an after-tax
discount rate to the future wealth it expects to derive from the firm. Therefore, the rate that
banks charge for borrowed funds can not be taken alone as the company’s cost-of-capital
interest rate when making discounted present worth analysis.

EVALUATING ALTERNATIVES BY EQUIVALENCE

Example 12:

Solution

= 500,000 + 250,000 { }
.
. .
= 500,000 + 250,000 (6.1446)
= 2,036,150
 (6.1446)
= 1,978,920

Since the present cost for alternative B is less than that of alternative A, it is preferable
to choose alternative B.
Example 13:
Example 14:
Example 1.4:
Example 1.5: