Engineering Finance Test 1
compound amount factor
(1+i)^N
sinking fund factor
A = F*[i/(1+i)^N - 1] = F(A/F, i, N)
capital recovery factor
A = P*[i(1+i)^N/(1+i)^N-1] = P(A/P, i, N)
actual to constant dollars
A'n = An(P/F, f, n)
constant to actual dollars
An = A'n(F/P, f, n)
equal payment series compound amount factor
F = A*[(1+i)^N-1/i] = A(F/A, i, N)
compound interest
F = P*(1+i)^N = P(F/P, i, N)
simple interest
F = P*(1+iN)
equal payment series present worth factor
P = A*[(1+i)^N -1/i*(1+i)^N] = A(P/A, i, N)
present worth factor
P = F* [1/(1+i)^N] = F(P/F, i, N)
gradient series present worth factor
P = G[(1+i)^N -iN-1/i^2*(1+i)^N] = G(P/G, i, N)
number of interest periods (N)
a specified length of time marks the duration of the transaction
interest period (n)
determines how frequently interest is calculated
actual dollars (An)
estimates of future cash flows for year n that take into account any anticipated changes in amount caused by inflationary or deflationary effects
economic equivalence
exists between cash flows that have the same economic effect and could therefore be traded for one another in the financial marketplace
outflows
expenses or disbursements
discrete compounding
i = (1+r/CK)^C -1 C - # of interest periods per payment period K - # of payment periods per year
continuous compounding
i = e^(r/K) -1
annual effective yield
ia = (1+r/M)^M -1
inflation
inflation and deflation affect cash flows and must be accounted for in analysis
interest rate (i)
measures the cost or price of money and is expressed as a percentage over time
discrete
movement of cash to or from a project at a specific point in time
continuous
rate of cash moving from or to a project over some period of time
net cash flow
receipts - disbursements
constant dollars (A'n)
reflect constant purchasing power independent of the passage of time
cash flow diagram
represent time by a horizontal line marked off with the number of interest periods specified
future amount of money (F)
results from the cumulative effects of the interest rate over a number of interest periods
inflows
revenues or receipts
time value of money
the earlier a sum of money is received, the more it is worth because over time money can earn more money via interest
principal (P)
the initial amount of money invested or borrowed in a transaction
effective annual interest rate
the one rate that truly represents the interest earned in a year
a plan for receipts or disbursements (An)
yields a particular cash flow pattern over a specified length of time
