Cost and Time Value of $$. Prof. Eric Suuberg ENGINEERING 90. Cost and Time Value Lecture. What is our goal? To gain an understanding of what is and what is not a good project to undertake from a financial point of view. What are our tools? Material presented by Prof. Crawford
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Prof. Eric Suuberg
Profit = Sales (revenues) - expenses (costs)
Compound Interest Law
S1 = P (1+i) at the end of one year
S2 = S1(1+i) = P(1+i)2 at end of year 2
Sn = P (1+i)n at end of year n
P = Sn / (1 + i)n
= Sn (1 + i)-n
(1 + i)-n = Present Value Factor or
The promise of $1 million at a time 50 years in the future @ i = 15%/yr
P = $1,000,000(1+0.15)-50 = $923
What are we doing here?
Link to summary of useful formulae
DATA (neglect tax effects)
Options Stick w/old Buy newPurchase Price ($) 0 4000Operating Cost ($/yr) 2000 500Lifetime (yrs) 4 4
If management demands i = 20 %/yrPold=$5180, Pnew=$5295 old is better choiceThe Key Role of Interest Rates
20 year life
2 year life
In this case, choose alternative 1 because yearly cost is lower.