FE Review

Engineering Economics
Compounding Annually

•  find the equivalent amount F given the amount P compounded at an

interest rate i for n interest periods.

F = future worth
P = present worth
i = annual interest rate
n = number of years
Compounding periodically (non-annual)
=

r is the nominal annual interest rate

p is the number of interest periods per year
Time Value of Money Example
• Example: borrow $1,000 for 6 years at 10% annual interest rate,
the amount we must repay at the end of 6 years is:

• If compounding annually
• F = $1,000(1+0.1)6 = $1,771.6

• If compounding monthly
• F = $1,000(1+0.1/12)6*12 = $1,817.6
Cash Flow
Cash Flow – Uniform Series (A) vs. Gradient
(G)

 1  i n  1 n 
P  G 2  
n 
 i 1  i  i 1  i  
n

 1  i n  1 n 
F  G 2
 

 i i 
Uniform Cash Flow Example
Gradient Cash Flow Example
Depreciation
• Goods reduce value over time
Depreciation – Straight Line
• Annual depreciation amount

• Book value at jth year

Depreciation – Modified Accelerated Cost
Recovery System (MARCS)
• Annual depreciation amount
Depreciation Example
Depreciation Example – Straight Line
Depreciation Example –
MARCS
Capitalized Cost – Infinite Series
Bonds
Inflation
Federal Business
Tax Bracket for the
US
Tax Calculation Example
Tax Calculation Example
Alternative Comparisons – Present Worth
Alternative Comparison – Annual Cost
Alternative Comparison – (Internal) Rate of Return
• Calculate the interest rate i to make NPW = 0
Alternative Comparisons – Benefit-Cost