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IE - 203
ENGINEERING ECONOMY
BORA TOKGÖZ
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Geometric Gradients
Geometric gradients change by the same percentage each period
Cash flow diagram for present worth
of geometric gradient
There are no tables for geometric factors
Pg = ? Use following equations:
1 2 3 4 n
0
A1
A 1(1+g)1
A 1(1+g)2
Note: g starts between where: A1 = cash flow in period 1
A 1(1+g)n-1
periods 1 and 2 g = rate of increase
Note: If g is negative, change signs in front of both g values
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Shifted
Uniform
Series
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Using P/A
Factor:
Shifted
Uniform
Series
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Using F/A
Factor:
Shifted
Uniform
Series
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Shifted
Arithmetic
Gradient
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Compound Interest Factors i=8%
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Compound Interest Factors i=9%
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Compound Interest Factors i=10%
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Example: Series and Random Single
Amounts
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Alternative solution
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More About Interest Rate Terminology
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Effective Annual Interest Rates
month
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Effective Interest Rates
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Effective Interest Rate
u The Seven-Ten Rule
u Doubling time -> 72/i (when i<20%)
u Intervals: yearly, quarterly, monthly..
u Effective interest rate vs nominal interest rate
(1+r/m)m
u Continuous compounding
er
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Single Amounts with PP > CP
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Example: Single Amounts with PP ≥ CP
How much money will be in an account in 5 years if $10,000 is deposited
now at an interest rate of 1% per month? Use three different interest
rates: (a) monthly, (b) quarterly , and (c) yearly.
(a) For monthly rate, 1% is effective [n = (5 years)×(12 CP per year = 60]
F = 10,000(F/P,1%,60) = $18,167
months i and n must always
effective i per month have same time units
(b) For a quarterly rate, effective i/quarter = (1 + 0.03/3)3 –1 = 3.03%
F = 10,000(F/P,3.03%,20) = $18,167
quarters i and n must always
effective i per have same time units
quarter
(c) For an annual rate, effective i/year = (1 + 0.12/12)12 –1 = 12.683%
F = 10,000(F/P,12.683%,5) = $18,167
years i and n must always
effective i per year have same time units
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Example: Series with PP ≥ CP
How much money will be accumulated in 10 years from a deposit
of $500 every 6 months if the interest rate is 1% per month?
Solution: First, find relationship between PP and CP
PP = six months, CP = one month; Therefore, PP > CP
Since PP > CP, find effective i per PP of six months
Step 1. i /6 months = (1 + 0.06/6)6 – 1 = 6.15%
Next, determine n (number of 6-month periods)
Step 2: n = 10(2) = 20 six month periods
Finally, set up equation and solve for F
F = 500(F/A,6.15%,20) = $18,692 (by factor or spreadsheet)
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Series with PP < CP
A person deposits $100 per month into a savings account for 2 years.
If $75 is withdrawn in months 5, 7 and 8 (in addition to the deposits),
construct the cash flow diagram to determine how much will be in the
account after 2 years at i = 6% per year, compounded quarterly.
Assume there is no interperiod interest.
Solution:Since PP < CP with no interperiod interest, the cash flow
diagram must be
changed using quarters as the time periods F=
F=? 75 150 ?
75 75 75
from to
0 1 2 3 4 5 6 7 8 9 10 23 24
0 1 2 3 4 5 6 7 8 9 10 21 24 Months
this 1 2 3 7 8 Quarters
this
100 300 300 300 300 300
