Energy Project Financing : Resources and Strategies for Success

248 Energy Project Financing: Resources and Strategies for Success

lems of this type. One approach involves determining a period interest

rate; the other involves determining an effective interest rate.

To solve this type of problem using a period interest rate approach,

we must define the period interest rate:

Nominal Annual Interest Rate

Period Interest Rate = ————————————————

Number of Interest Periods per Year

In our example,

12%/yr/mo

Period Interest Rate = ——————— = 1%/mo/mo

12 mo/yr

Because the interest period and the compounding period are now

the same, the time value of money factors in Appendix 4A can be applied

directly. Note, however, that the number of interest periods (n) must be

adjusted to match the new frequency.

Example 24

$2,000 is invested in an account which pays 12% per year com-

pounded monthly. What is the balance in the account after 3 years?

Nominal Annual Interest Rate = 12%/yr/mo

12%/yr/mo

Period Interest Rate = —————— = 1%/mo/mo

12 mo/yr

Number of Interest Periods = 3 years × 12 mo/yr = 36 interest periods

(months)

F = P (F|P,i,n) = $2,000 (F|P,1,36) = $2,000 (1.4308) = $2,861.60

Example 25

What are the monthly payments on a 5-year car loan of $12,500 at

6% per year compounded monthly?

Nominal Annual Interest Rate = 6%/yr/mo

6%/yr/mo

Period Interest Rate = ——————— = 0.5%/mo/mo

12 mo/yr