The equations and procedures of engineering economy utilize the following terms and symbols. Sample units are indicated.

symbols

Definitions

P

Value or amount of money at a time designated as the present or time 0. Also, P is referred to as present worth (PW), present value (PV), net present value (NPV), discounted cash flow (DCF), and capitalized cost (CC); monetary units, such as dollars

F

Value or amount of money at some future time. Also, F is called future worth (FW) and future value (FV); dollars

A

Series of consecutive, equal, end-of-period amounts of money. Also, A is called the annual worth (AW) and equivalent uniform annual worth (EUAW); dollars per year, euros per month

n

Number of interest periods; years, months, day

i

Interest rate per time period; percent per year, percent per month

t

Time, stated in periods; years, months, days

 

 

Today, Julie borrowed $5000 to purchase furniture for her new house. She can repay the loan in either of the two ways described below. Determine the engineering economy symbols and their value for each option.

 

1-       Five equal annual installments with interest based on 5% per year.

2-       One payment 3 years from now with interest based on 7% per year.

 

1-      The repayment schedule requires an equivalent annual amount A, which is unknown.


1-      Repayment requires a single future amount F, which is unknown.

 

You plan to make a lump-sum deposit of $5000 now into an investment account that pays 6% per year, and you plan to withdraw an equal end-of-year amount of $1000 for 5 years, starting next year. At the end of the sixth year, you plan to close your account by withdrawing the remaining money. Define the engineering economy symbols involved.

 

All five symbols are present, but the future value in year 6 is the unknown.

P = $5000

A = $1000 per year for 5 years

F = ? at end of year 6

i = 6% per year

 

n = 5 years for the A series and 6 for the F value

 

Last year Jane’s grandmother offered to put enough money into a savings account to generate $5000 in interest this year to help pay Jane’s expenses at college.

1-      Identify the symbols,

2-      Calculate the amount that had to be deposited exactly 1 year ago to earn $5000 in interest now, if the rate of return is 6% per year.

 

1-      Symbols P (last year is -1) and F (this year) are needed.

P = ?

i = 6% per year

n = 1 year

F = P + interest = ? + $5000

1-      Let F = total amount now and P = original amount. We know that F – P = $5000 is accrued interest. Now we can determine P. Refer to Equations (1-1) through (1- 4).

The $5000 interest can be expressed as