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After Completing This Chapter...
The student should be able to:
·Define and provide examples of thetime value of money.
·Distinguish betweensimpleandcompound interest,and use compound interest in engi-
neering economic analysis.
·Explainequivalenceof cash flows.
·Solve problems using the single payment compound interest formulas.
QUESTIONS TO CONSIDER ;:;.
1.Tobaccobonds oftenpay interest of as much as 7%, while conventionalstate government
bonds may pay only 5%. On a $1 million bond with a term of 25 years, how much does
this interest differential amount to, in total?
- Assuming a 2% interest differential, over a 25-year period, how much are states losing
by opting to take the settlement money "up front" instead of collecting the long-term
payout?
- When the money they get from sellingbonds runs out, state governmentswill have to find
a new way of closing their budget gaps. Already, some commentators are suggesting
that states may soon look to other business sectors as "deep pockets." The tobacco
industry was particularly vulnerable because it sold a product that came to be seen as
dangerous and socially undesirable. What other industries might face the same fate in
years to come? How about fast-food restaurant chains, or sellers of alcohol products?
Should a company like Anheuser-Busch be worried? Should companies in potentially
"problematic" industries consider setting aside money for future settlement costs?
