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Interest on money:
Put S .dollars in the bank
In one year the money will be equal to: S ( 1+ I )
Where I is the bank’s interest rate
If there is an inflation rate of R, one dollar in one year will be worth l / (l+R)
in its buying power.
.. The real value of the bank deposit after one year is
To avoid guessing the inflation rate we will use constant dollars, dollars that have a.
value equal. to today's value. We will then use an interest rate “i” that represents a real
increase in value.
i = I - R
Present Value
The value of a deposit is then after one year (in constant $)
V1 = S ( l + I )
In two years:
V2 = S (l + i) (l + i)
In n years:
Vn = S (l + i)** n
“Present Value” is the amount of money you commit now to have a
given number of doller in year “n”.
To have M dollars in year n:
Example I
Launch a satellite with a 7-year life. What should be the charge for
transponders?
Assumed Budget:
Development $20M 20
Launch $20x2M* 40
Spacecraft $15x3M * 45