Survey of Finance and Engineering Economics

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# Survey of Finance and Engineering Economics - PowerPoint PPT Presentation

Survey of Finance and Engineering Economics. Presented by Mohammed Ali Alsendi Nadia Mohammed Daabis Instructor Professor Wajeeh Elali. Time Value of Money. Time value of money refers to the concept that a dollar today is worth more than a dollar tomorrow. Case study.

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### Survey of Finance and Engineering Economics

Presented by

Mohammed Ali Alsendi

Instructor

Professor WajeehElali

Time Value of Money
• Time value of money refers to the concept that a dollar today is worth more than a dollar tomorrow.
Case study
• NATASHA, 30 years old and has Bachelor of science degree in computer science.
• Working as Tier 2 field service representative for a telephony corporation located in Seattle, Washington.
• She has \$75,000 that recently inherited from her aunt, and invested this money in 10 years treasury bond.
Terms of Common Inputs
• Current Salary \$38,000/-
• She don’t expect to lose any income during the Certification or while she earning her MBA.
• In both cases, she expect her salary differential will also grow at a rate of 3% per year, for as long as she keep working.
• Keep using the interest rate as discount rate for the remainder of the problem
Timeline

\$38,000 x 3%

\$39,140x 3%

\$39,140 x 3%

(\$41,523.626+\$20,000) x 3%

\$39,140

\$40,314.20

\$41,523.626

\$63,369.33

\$38,000 x 3%

(\$39,140+\$10,000) x 3%

\$50,614.20 x 3%

\$52,132.62x 3%

\$50,614.20

\$52,132.62

\$53,696.59

\$38,000

\$39,140

t0

t1

t2

t3

t4

(\$5,000)

(\$25,000)

(\$25,000)

(\$25,000)

Option 2

Option 1

Treasury Bond
• A marketable, fixed-interest government debt security with a maturity of more than 10 years. Treasury bond make interest payment annualy and the income that holders receive is only taxed the federal level.

Amount \$75,000

Period 10 years

Rate 3.52% (1st June, 2009)*

Treasury Bond

\$9027.19

\$9027.19

\$9027.19

(\$75,000)

t0

t1

t2

…..

t10

[ ]

PVA(ordinary) = PMT 1 – (1+k)-n

K

\$75,000 = x 1 – (1+0.0352)-10

0.0352

PMT = \$9027.190

[ ]

Certificate

\$38,000 x 3%

(\$39,140+\$10,000) x 3%

\$50,614.20 x 3%

\$52,132.62x 3%

\$50,614.20

\$52,132.62

\$38,000

\$39,140

\$53,696.60

• PV4 = (FV4+TB) (1+r)-4

= (53,696.6+ 9027.19) (1+0.0352)-4

PV4 = \$54,617.934

t0

t1

t2

t3

t4

(\$5,000)

NPV = PV – Certificate cost

= 54.617.934– 5000 = \$49,617.934

MBA

\$38,000 x 3%

\$39,140x 3%

\$40,314.20 x 3%

(\$41.523.626+\$20,000) x 3%

\$38,000

\$39,140

\$40,314.20

\$41,523.626

\$62,123.626

t0

t1

t2

t3

t4

• PV4= (FV4+TB) (1+r)-4

= (62,123.626+ 9027.19) (1+0.0352)-4

PV4= \$71,151.686

(\$25,000)

(\$25,000)

(\$25,000)

1

[ ]

PMT(due) = PMT 1-(1+r)-n (1+r)

r

= 25,000 1-(1+0.0352)-2 (1+0.352)

0.352

PMT(due) = \$49,149.91

[ ]

2

PMT(MBA cost) = 25,000 + 49,149.91 = \$ 74,149.91

MBA

From 1 , 2

NPV = PV3 – Cost of MBA

= 71151.686 - 74,149.91

NPV = \$(2,998.223)