ECONOMICS Flashcards
Involves the analysis of problems for manufacturing a product or rendering a service based in present or immediate cost
Present economy
A concept that explains the change in the amount of money over time for funds that are owned (invested) or owed (borrowed.
Time value of money
Used to designate the rental for the use of money. Amount of money paid out as a result of borrowing funds or Amount of money received as a result of investment
Interest
Economic concept that means that different sums of money at different time can be equal in economic value.
Equivalence
The reward of the money borrowed or invested
Interest
Are the amounts of money estimated for future projects or observed for projects or observed for project events that have taken place.
Cash flows
Are the receipts, revenues, incomes, and savings generated by project and business activity
Cash inflows
Are costs, disbursement, expenses, and taxes caused by projects and business.
Cash outflows
Cash inflows - Cash outflows
Net cash flow.
Means that all cash inflows and all cash outflows are assumed to take place at the end of the interest period in which they actually occur.
End of period convention
When there is an interest in zero day.
Beginning of period convention
Calculated using the principle only, ignoring any interest accrued in preceding interest period
Simple interest
Computer on the basis of 12 months of 30 days each or 360 days a year.
Ordinary simple interest
Based on exact no. of days in a year
Exact simple interest
The interest accrued for each interest period is calculated on the principal plus the total amount of interest accumulated in all previous periods
Compound interest
Formula for discrete compouding
F= P (1+i)^2
The interest is compounded at the end of each finite length period such as a month, a quarter or a year
Discrete compouding
It is assumed that cash payments occur ince a year, but the compounding is continuous throughout the year.
Continuous compounding
Formula for continuous compounding.
F= Pe^rn
Specifies the rate of interest and a no. of interest periods in one year
Nominal rate of interest
The actual or exact rate of interest on the principal during one year
Effective rate of interest
Formula for effective rate of interest
Ie = (1+i)^m -1 or
e^r -1 (continuous)
An estimate of how much less something is worth if it us received in the future
Discount rate
Measures the value of a currency in terms of the quantity and quality of goods or services that one unit of money will purchase
Purchasing power or buying power
When _____ is present, the purchasing power of the monetary unit is greater in the future than at present.
Deflation
An increase in the amount of money necessary to obtain the same amount of goods or services before the inflated price was present.
Inflation
Formula for discount rate.
d = (i / (1+i) )
Formula for inflation rate
Inflation rate = i + f + i (f)
A series if equal payments occuring at equal periods of time
Annuity
Annuity occurs in the following instances
- payment of a debt by a series of equal payments at equal intervals of time
- accumulation of a certain amount by setting equal amounts periodically
- substitution of a series of equal amounts periodically in lieu of a lumps sum at retirement of an individual
One where the equal payments are made at the end of each payment period starting from the first period
Ordinary annuity
Formula for the Uniform present worth. (P/A,i,n)
P=A[(1+i)^n -1] / i(1+i)^n
Formula for Capital Recovery (A/P,i,n)
A=P[i(1+i)^n]/ (1+i)^n -1
Uniform series compound amount
(F/A,i,n)
F=A[(1+i)^n -1] / i
Formula for sinking fund
A/F,i,n
A=F (i) /[ (1+i)^n -1]
One where the first payment is made several periods after the beginning of the annuity.
Deferred Annuity
