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Economic Analysis (cont’d)

This lecture explains the concept of interest and showcases different types of equivalence equations used to solve cash flow problems. Examples include finding the initial amount, calculating uniform annual payments, determining the final compounded amount, and more.

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Economic Analysis (cont’d)

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  1. Economic Analysis (cont’d) Last Lecture: Cash Flow Illustrations The Concept of Interest The 5 Variables Equivalence Equations I: Case 1

  2. Equivalence Equations I Used when interest rate is… - Compounded and Constant - Compounded and changing a finite number of times

  3. Equivalence Equations I Case 2: Description: Finding the initial amount (P) that would yield a future amount (F)at the end of a given period Example: The Studbaker ’55 car currently under repair. Will be ready by 2005, at a price of $30,000. How much should Jim put away now in order to be able to pay for the car in 2005?

  4. Equivalence Equations I CASE 2 (cont’d) Problem Definition: This is a Single Payment Present Worth (SPPW) problem Cash Flow Diagram: Computational Formula: P F 2001 2005

  5. Equivalence Equations I Case 3: Description: Finding the amount of uniform annual payments (A) that would yield a certain future amount (F)at the end of a given period Example: The Studbaker ’55 antique car is currently under repair. Will be ready by 2005, at a price of $30,000. Jim agrees to pay 5 yearly amounts until 2005, starting December 2001. How much should he pay every year?

  6. Equivalence Equations I CASE 3 (cont’d) Problem Definition: This is a Uniform Series Sinking Fund Deposit (USSFD) problem Cash Flow Diagram: Computational Formula: A A A A A 2001 2005 F

  7. Equivalence Equations I Case 4: Description: Finding the final compounded amount (F) at the end of a given period due to uniform annual payments (A). Example: The Studbaker ’55 antique car is currently under repair, and will be ready by 2005. Jim agrees to pay $5,000 yearly until 2005, starting December 2001. How much will he end up paying for the car by the year 2005?

  8. Equivalence Equations I CASE 4 (cont’d) Problem Definition: This is a Uniform Series Compounded Amount (USCA) problem Cash Flow Diagram: Computational Formula: A A A A A 2001 2005 F

  9. Equivalence Equations I Case 5: Description: Finding the initial amount (P) that would yield specified uniform future amounts (A) over a given period. Example: Jim takes the car now. He has enough money to pay for it, but rather decides to pay in annual installments of $4500 over a 5-year period (now till 2005). How much should he set aside now so that he can make such annual payments?

  10. Equivalence Equations I CASE 5 (cont’d) Problem Definition: This is a Uniform Series Present Worth (USPW) problem Cash Flow Diagram: Computational Formula: P A A A A A 2001 2005

  11. Equivalence Equations I Case 6: Description: Finding the amount uniform annual payments (A) over a given period, that would completely recover an initial amount (P). E.g. credit card monthly payments Example: Jim receives a loan of $20,000 from PEFCU to pay for the car now. How much will he have to pay to the bank every year?

  12. Equivalence Equations I CASE 6 (cont’d) Problem Definition: This is a Capital Recovery (CR) problem. The bank seeks to recover its capital from Jim. Cash Flow Diagram: Computational Formula: P A A A A A 2001 2005

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