Engineering Fundamentals: An Introduction to Engineering, 4th ed.c

Example 20.1 Draw the cash flow diagram for an investment that includes purchasing a machine that costs

$50,000 with a maintenance and operating cost of $1000 per year. It is expected that the

machine will generate revenues of $15,000 per year for five years. The expected salvage value

of the machine at the end of five years is $8000.

The cash flow diagram for the investment is shown in Figure 20.2. Again, note the direc-

tions of arrows in the cash flow diagram. We have represented the initial cost of $50,000 and

the maintenance cost by arrows pointing down, while the revenue and the salvage value of the

machine are shown by arrows pointing up.

20.2 Simple and Compound Interest 657

■Figure 20.2

The cash flow diagram

for Example 20.1.

20.2 Simple and Compound Interest

Interest is the extra money — in addition to the borrowed amount — that one must pay for the

purpose of having access to the borrowed money.Simple interestis the interest that would be

paid only on the initial borrowed or deposited amount. For simple interest, the interest accu-

mulated on the principle each year will not collect interest itself. Only the initial principal will

collect interest. For example, if you deposit $100.00 in a bank at 6% simple interest, after six years

you will have $136 in your account. In general, if you deposit the amountPat a rate ofi% for

a period ofnyears, then the total future valueFof thePat the end of thenth year is given by

(20.1)

Example 20.2 Compute the future value of a $1500 deposit, after eight years, in an account that pays a simple

interest rate of 7%. How much interest will be paid to this account?

You can determine the future value of the deposited amount using Equation (20.1), which

results in

And the total interest to be paid to this account is

interest 1 P 21 n 21 i 2  1150021821 0.07 2 $840

FP 11 ni 2  150031  81 0.07 24 $2340

FP 1 P 21 i 21 n 2 P 11 ni 2

$50,000

$15,000

$8000

$1000

012345

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