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3. Linear gradient series: A series of flows increasing or decreasing by a fixed
Cash flow patterns are significant because thev allow us to develop interest
formulas, which streamline the solution of equivalence problems. Table 2.4
summarizes the important interest formulas that form the foundation for all
other analyses you will conduct in engineering economic analysis.
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Methods of Colculoting Interest
What is the amount of interest earned on $3,000
for five years at 9% simple interest per year?
You deposit $2,000 in a savings account that
earns 8% simple interest per year. How many
years will it take to double your balance? If
instead you deposit the $3,000 in another savings account that earns 7% interest compounded yearly, how many years will it take to
double your balance?
Suppose that, to cover some of your college expenses, you are obtaining a personal loan from
your uncle in the amount of $20,000 (now) to be
repaid in two years. If your uncle always earns
10% interest (compounded annually) on his
money invested in various sources, what minimum lump-sum payment two years front now
would make your uncle happy economically?
Problems
(a) $7,000 in 8 years at 9% compounded annually.
(b) $1,250 in 12 years at 4% compounded annuallv.
(c) $5,000 in 31 years at 7% compounded annually.
(d) $20.00fJ in 7 years at 6 % compounded annually.
Amount
$3,000
$3,500
$4,000
$6,000
70
CHAPTER 2
2.23 The accompanying diagram shows the anticipated cash dividends for Delta Electronics
over the next four years. John is interested in
buying some shares of this stock for a total of
$100 and will hold them for four years. If
Johns interest rate is known to be 8%
compounded annually, what would be the
desired (mini- mum) total selling price for the
set of shares at the end of the fourth year?
200
$9
Years
200?
2004
2005
2006
Years
P $80
Equal-Payment Series
2.24 What is the future worth of a series of equal yearend deposits of $3,000 for 8 years in a savings
account that earns 7% annual compound interest if
What is the future worth of a series of equal for
Years
$20.000
Problems
(a) $5,000 at the end of each year for six years
at 6% compounded annually.
(b) $9,000 at the end of each year for nine
years at 7.25 % compounded annually.
(c) $12,000 at the end of each year for 25
years at 8% compounded annually.
(d) $6,000 at the end of each year for 10 years
at 9.75% compounded annually.
What equal annual series of payments must be
paid into a sinking fund in order to accumulate
the following amounts?
eight
years
years
years
CHAPTER 2
(c) C = $394.65.
deposit.
(d) C = $458.90.
End of
Period
Withdrawal
$1,000
800
Deposit
600
400
4
200
6
$150 $150
6
7
Years
10
36
4C
10
SC
11
2.39 The maintenance expense on a machine is expected to be $1000 during the first year and to increase
$250 each year for the following seven
years. What present sum of money should be
set aside now to pay for the required maintenance expenses over the eight-year period?
(Assume 9% compound interest per year.)
2.40 Consider the cash flow series given in the accompanying table. Which of the following values of C makes the deposit series equivalent
to the withdrawal series at an interest rate of
12% compounded annually?
(a) C = $200.00.
(b) C $282.70.
Problems
(b) P
i. 4) ( P / F, i, 7).
2.43 What is the amount of 10 equal annual deposits that can provide five annual withdrawals, where
a first withdrawal of $3,000 is made at the end of year
11 and subsequent withdrawals increase at the rate of
6 % per year over the previous years. if
(a) the interest rate is 8 O compounded annually?
(b) the interest rate is 6% compounded annually?
Equivalence Calculations
Years
Years
Years
74
CHAPTER 2
Years
$5,000 $5,000
2
Years
$100
The following equation describes the conversion of a cash flow into an equivalent equalpayment series with N 10:
$100
Years
Years
2.52 Consider the accompanying cash flow diagram. What value of C makes the inflow series
equivalent to the outflow series at an interest
rate of 12% compounded annually?
$60
$800
$800
$40
Years
2.53
Problems
$400
$400
$200
Years
2s
$100
Years
Years
Payment
$500
$1,000
CHAPTER 2
$100
Years
4)]( F / P, i . 4).
Yeurs
Years
Problems
invested in interest-bearing government bonds
that finance the day-to-day expenses of the
federal government. Discuss the economics of
Senator Bob Kerrey s Social Security savings
plan.