1. Contemporary Engineering Economics, 4 th edition, © 2007 Debt Management Lecture No.13 Chapter 4 Contemporary Engineering Economics Copyright © 2006

2. Contemporary Engineering Economics, 4 th edition, © 2007 Debt Management

3. Contemporary Engineering Economics, 4 th edition, © 2007 Example 4.12 Amortized Loan Given: P = $5,000, i = 12% APR, N = 24 months Find: A A = $5,000(A/P, 1%, 24) = $235.37

4. Contemporary Engineering Economics, 4 th edition, © 2007 Loan Repayment Schedule

5. Contemporary Engineering Economics, 4 th edition, © 2007 Calculating the Remaining Loan Balance after Making the n th Payment

6. Contemporary Engineering Economics, 4 th edition, © 2007 Example 4.13 – Computing the Outstanding Loan Balance after making the 6 th payment

7. Contemporary Engineering Economics, 4 th edition, © 2007 Practice Problem Consider the 7 th payment ($235.37) (a) How much is the interest payment? (b) What is the amount of principal payment?

8. Contemporary Engineering Economics, 4 th edition, © 2007 Solution $5,000 A = $235.37 0 1 2 3 4 5 6 7 22 23 24 i = 1% per month Interest payment = ? Principal payment = ?

9. Contemporary Engineering Economics, 4 th edition, © 2007 Solution:

10. Contemporary Engineering Economics, 4 th edition, © 2007 Example 4.15 Three Different Ways to Finance Your Vehicle Option A Debt Financing Option B Paying Cash Option C Lease Financing Price$32,508 Down payment$4,5000 APR (%)5.65% Monthly payment$736.53$513.76 Length42 months Fees$994 Cash due at lease end$395 Purchase option at lease end$17,817 Cash due at signing$4,500$31,020$1,507.76

11. Contemporary Engineering Economics, 4 th edition, © 2007 Which Interest Rate to Use to Compare These Options?

12. Contemporary Engineering Economics, 4 th edition, © 2007 Your Earning Interest Rate = 4.5% Option A: Conventional Debt Financing: P debt = $4,500 + $736.53(P/A, 4.5%/12, 42) - $17,817(P/F, 4.5%/12, 42) = $17,847  Option B: Cash Financing: P cash = $31,020 - $17,817(P/F,4.5%/12,42) = $15,845 Lease Financing: P lease = $1,507.76 + $513.76(P/A, 4.5%/12, 42) + $395(P/F, 4.5%/12, 42) = $21,336