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Tutorial 1 Time Value of Money

This tutorial covers topics related to the time value of money, including simple and compound interest, equal payment series, and cash flow diagrams. Examples are provided to compare different interest rates, calculate future worth of deposits, and analyze savings plans.

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Tutorial 1 Time Value of Money

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  1. Tutorial 1 Time Value of Money SEEM 2510Management Principles for Engineering Managers II

  2. Simple, compound interest • Ex1: compare the interest earned on $10M for 20 years at 7% simple interest with the amount of interest earned if interest were compounded annually. • Ex2: find the effective (equivalent) annual interest rate for an interest rate of 9% p.a. if it is compounded 1. monthly, 2. quarterly, 3. semiannual, 4. continuously

  3. Equal-payment series • Ex3: what is the future worth of a series of equal yearly deposits of $3k for 8 years in a savings account that earns 7% annual compound interest if • all deposits are made at the end of each year? • all deposits are made at the beginning of each year?

  4. Cash flow diagrams • Ex4: consider the following two savings plans that you think about starting at the age of 21. • If you were able to invest your money at 8% over the planning horizon, which plan would result in more money saved by the time you are 65?

  5. Cash flow diagrams Option1: Save $2K a year for 10 years. At the end of 10 years, make no further investments, but invest the amount accumulated at the end of 10 years until you reach the age of 65. (Assume that the first deposit will be made when you are 22.)

  6. Cash flow diagrams Option 2: Do nothing for the first 10 years. Start saving $2K a year every year thereafter until you reach the age of 65. (Assume that the first deposit will be made when you turn 32.)

  7. Reference • Chan S. Park, Fundamentals of Engineering Economics. 2nd Edition. Prentice Hall, 2008

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