What is equivalence means in economic terms? Explain using an example. List the

Question

What is equivalence means in economic terms? Explain using an example. List the specific symbols and their respective definitions has been developed for use in engineering economy. An investor borrow $10,000 from the bank for a period of 5 years. Repayment schedule is as follows for the next five years: Year 1 is 2000: Year 2 is 1500: Year 3 is 2200: Year 4 is 2400 and Year 5 is 1800. Draw the Cashflow Diagram. Your firm invests $17,500 and $12,500 at the beginning and end of the first year respectively in a new system. Revenues from the new system are projected at $3,000 in the second year, $7,500 each in the third year and fourth year, $10,000 each in the fifth and sixth year. It is anticipated the system will have a salvage value of $5,000 at the end of the sixth year. Draw a cash flow diagram for this system.

Explanation / Answer

Hi,

Thanks.

Economic equivalence is a combination of time value of money and interest rate that makes different sums of money in different period and have same economic value.

In other words, economic equivalence exists between cash flows which have the smae economic effect and could therefore be traded for one other.So, even though the amounts and timing of the cash flows differs, the appropriate interest rate makes them equal.

Example:

If you deposit P dollars today for N periods at rate of interest i, you will have F dollars at the end of period N.

SO, equivalence from personal financing point of view will be P = F

F = P [(1+i)]^N

Note:

Plz mention if you want any specific question to solve.

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