Lecture 6
Examples
HUM 2107
Engineering Economy
Zahid Hasan Shuvo
Industrial and Production Engineering
Department of MPE
Example
Determine the value of the A/P factor for an interest rate 7.3% and n
of 10 years.
Solution:
7.3 − 7 𝑥 − 0.14238
=
8−7 0.14903 − 0.14238
Find the value of 𝑥 from the above equation.
2
Factor Table
3
Factor Table
4
Example
Parents wishing to save money for their child's education purchased
an insurance policy that will yield $10,000 fifteen years from now. The
parents must pay $500 per year starting 1 year from now. What will
be the rate of return on this investment?
Solution:
Here, F= 10000, A= 500, n= 15, i= ???
So,
5
Example
Suppose you buy a share for $10 and sell it for $20. Then your profit
is $10. If that happens within a year, your rate of return is an
impressive 100% If it takes five years, what would be the average
annual rate of return on your investment? (3.9)
𝑃 = $10, 𝐹 = $20, 𝑁 = 5,
𝐹𝑖𝑛𝑑 𝑖.
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Problem
If a person can make a business investment requiring an
expenditure of $3,000 now in order to receive $5000 five years
from now. What would be the rate of return on the investment?
How long will it take $1,000 to double if the interest rate is 5% per
year?
7
Inflation
Inflation is the rate at which the general level of prices and goods
and services is rising, and, subsequently, purchasing power is falling.
A loss in the purchasing power of money over time.
Inflation means that the cost of an item tends to increase over
time, or, to put it another way, the same dollar amount buys less of
an item over time.
Deflation is the opposite of inflation, in that prices usually decrease
over time; hence, a specified dollar amount gains in purchasing
power.
8
Consumer Price Index (CPI)
CPI is an inflationary indicator that measures the change in the cost
of a fixed basket of products and services.
It is based on a typical market basket of goods and services
required by the average consumer.
This market basket normally consists of items from eight major
groups: (1) food and alcoholic beverages, (2) housing, (3) apparel,
(4) transportation, (5) medical care, (6) entertainment, (7) personal
care, and (8) other goods and services.
9
Average Inflation Rate (f )
To account for the effect of varying yearly inflation rates over a
period of several years, we can compute a single rate that
represents an average inflation rate.
Since each individual year’s inflation rate is based on the previous
year’s rate, all these rates have a compounding effect.
For average inflation rate, we can use the formula given below:
𝐹 = 𝑃(1 + 𝑓)𝑁
10
Example
11
Example (Cont.)
12
Example (Cont.)
Consider again the price increases for the 15 items listed in the table
from the table given. Determine the average inflation rate for each
item over the two-year period shown.
Solution:
13
Example (Cont.)
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