Economic Decision Making

Practical Examples

Interest

Number of periods Payments Made Each Period

Future Value

Using Excel for Year 3:

Present Value of Year 3 Costs:(2000-500)/(1+0.10)^3= $1126.97

Finding Present Value from Future Value

Interest

Number of periods

Payments (Costs) for Each Period

Additional Future Value

Using Excel to find the presentValue for the 5 years of $1500 costs each year:

Present Value of the 5 years:(2000-500)/(1+0.10)^1= $1363.63(2000-500)/(1+0.10)^2= $1239.67(2000-500)/(1+0.10)^3= $1126.97(2000-500)/(1+0.10)^4= $1024.52(2000-500)/(1+0.10)^5= $ 931.38

$ 5686

0 if Payments (Costs)made at end of period

Finding Present Value from a Series of Payments

Alternatively we can use the NPV (Net Present Value) function in Excel to capture values of each year for this cash flow diagram.

Using NPV to find Present Value with a Series of Different Values

Straight-Line Depreciation

Initial Cost

Salvage Value Periods

Declining Balance Depreciation

Initial Cost Salvage Value

Total Number of Periods

Period for which depreciationIs being calculated

Depreciation in the jth year

Sum-of-Years-Digits Depreciation

Initial Cost

Salvage ValueTotal Number of Periods

Period for which depreciationIs being calculated

Using the PMT Function to find Payments on a Loan

Principal

Number of Periods30 years*12 months

Montlye Interest rateAnnual rate/12