Presentation Transcript
Slide 1:Examples on the time value of money
Example :Example In SPIMACO, there is a very expensive machine used for packing drugs in PROTON production line.
The machine has been in service for 10 years.
The industrial engineer has found that a complete overhaul of the machine would cost SR130,000, and that will keep it running for 5 years more without breaking down.
He also has determined that the annual repair cost for the following 5 years are:
Slide 3:If the company can invest their money with interest rate of 6% compounded annually, which option is better in an economic sense?
Compute the present worth of the future payments:
P = 25,600 + 27,200 (P/F,6%,1) + 28,700
(P/F,6%,2) + 30,100 (P/F,6%,3) + 31,600 (P/F,6%,4) = 127,106 < 130,000
It is better not to overhaul the machine.
Example :Example Saudi Arabian Airlines has gone through a restructuring plan ahead of its privatization target.
It has offered its employees who have served the company 20 years or more an early retirement plan.
The plan will give the employee SR 79,200 per year for 25 years.
If you can invest your money in an investment account that will give you 8% interest per year, what is the present worth of these future payments?
Slide 5:The present worth is P = 79,200 (P/A, 8%, 25) = 79,200 (10.6748) = 845,444.16 riyals
Example :Example Dhahran Public Library will be built and it has been estimated that the library will require 2 million riyals in real terms per year for electricity bills, water, cleaning, and acquisition of new books.
An investment account will be created to deposit an initial amount that will pay 2 million riyals per year for the life the library, which is assumed to be very long.
If the investment account can pay 8% interest compounded annually, how much the initial deposit has to be?
Slide 7:The capitalized cost is
CE(8%) = 2 / 0.08 = 25 million
Hence, 25 million riyals has to be deposited in the investment account that will generate 2 million every year for ever.