Consumer Economics: Time Value of Dollars and Sense for Money Management

By Deji Badiru

Many consumers dont understand why or how interest rates work over time. In Consumer Economics, author Deji Badiru provides a concise guide to a better understanding of the time value of money based on the compounding effect of interest ratesthe idea that time is a critical element in accumulating future values from a present cash flow value.

Badiru helps consumers understand the underpinning theories and principles of different loan scenarios and cash flow profiles. He covers cash flow diagrams, present value, future value, simple and compound interest rates, annual percentage rate, annuity, compounding of interest, capitalized cost, perpetual cash flow, rule of seventy-two, payback period, benefit-cost ratio, mortgage loan analysis, and equity breakeven point.

Consumer Economics offers the layperson important and useful information about interest rates, how to calculate their effect, and how to use this knowledge to their advantage. It communicates the importance of placing ones money in interest-bearing bank accounts or other investment vehicles to get the most from ones money.

• Language: English
• Publisher: iUniverse
• Release date: Dec 8, 2014
• ISBN: 9781491753071

Deji Badiru

Deji Badiru is a Professor of Systems Engineering in Dayton, Ohio. He is a registered professional engineer and a fellow of the Institute of Industrial Engineers as well as a Fellow of the Nigerian Academy of Engineering. He has a BS degree in Industrial Engineering, MS in Mathematics, and MS in Industrial Engineering from Tennessee Technological University, and Ph.D. in Industrial Engineering from the University of Central Florida. He is the author of several books and technical journal articles.

Book preview

Consumer Economics

Time Value of Dollars and Sense for Money Management

Copyright © 2015 Deji Badiru.

All rights reserved. No part of this book may be used or reproduced by any means, graphic, electronic, or mechanical, including photocopying, recording, taping or by any information storage retrieval system without the written permission of the publisher except in the case of brief quotations embodied in critical articles and reviews.

The information, ideas, and suggestions in this book are not intended to render professional advice. Before following any suggestions contained in this book, you should consult your personal accountant or other financial advisor. Neither the author nor the publisher shall be liable or responsible for any loss or damage allegedly arising as a consequence of your use or application of any information or suggestions in this book.

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ISBN: 978-1-4917-5308-8 (sc)

ISBN: 978-1-4917-5307-1 (e)

Library of Congress Control Number: 2014920539

iUniverse rev. date: 12/05/2014

Contents

Dedication

Acknowledgments

Preface

Author’s Credentials

Chapter 01 Time Value of a Dollar

Chapter 02 The Sense of Money

Chapter 03 Financial Decision Processes

Chapter 04 Cash Flow Diagrams

Chapter 05 Simple and Compound Interest

Chapter 06 Effective Interest Rate

Chapter 07 Cash Flow Equivalence

Chapter 08 Using Interest Tables

Chapter 10 Arithmetic Gradient Series

Chapter 11 Geometric Series Cash Flow

Chapter 12 Benefit-Cost Ratio

Chapter 13 Payback Period

Chapter 14 Fixed and Variable Interest Rates

Chapter 15 Mortgage Loan Analysis

Chapter 16 Equity Break-Even Point

Chapter 17 Accelerated Mortgage Payoff

Chapter 18 Rule of 72

Chapter 19 Tips for Consumer Economics

Chapter 20 Examples to Ponder

About the author

Appendix Common Interest Rate Formulas and Tables

Dedication

Dedicated to the time-based growth of money

Acknowledgments

I thank all my past students, research assistants, and teaching assistants of engineering economic analysis who gave me diverse perspectives on cash flow modeling, calculations, and analysis. Particular thanks go to Dave Sieger, Milan Milatovic, and Femi Omitaomu.

Preface

Time is the critical element in accumulating future values from a present cash flow value. Consumer economics: Time Value of Dollars and Sense for Money Management is a brief introduction to the manipulation of cash flows to leverage the power of interest rates with respect to the passage of time. Consumer Economics is a title created by the author to generalize the contents of the book for the general public. The title does not convey direct inference to conventional theory and principles of economics. The contents are simplified and pared down adaptations of the same methodologies and computational techniques used by large corporations, banks, lenders, investors, and global conglomerates. Money under the mattress, although flat in magnitude and hyperbolically declining in value due to inflation, used to be safe and secure in the bygone eras. Although that approach is still preferred by some people, it is advisable to put our money in interest-bearing bank accounts or other investment vehicles nowadays.

Most consumers don’t understand why or how interest rates work over time. The goal of this book is to provide a concise guide to a better understanding of the time value of money based on the compounding effect of interest rates. The contents of Consumer Economics can help readers understand the underpinning theories and principles of different loan scenarios and cash flow profiles. Topics covered include cash flow diagrams, present value, future value, simple and compound interest rates, annual percentage rate, annuity, compounding of interest, capitalized cost, perpetual cash flow, rule of 72, payback period, benefit-cost ratio, mortgage loan analysis, and equity breakeven point.

The topic of equity breakeven point is particularly useful for analyzing when sufficient mortgage equity has been accumulated to offset the unpaid balance of the mortgage loan. Equity breakeven point is where the ratio of principal payment to interest payment becomes favorable for the consumer. In Consumer Economics, the usual mathematical complexity and jargons of economic analysis have been toned down to a consumer level to facilitate ease of understanding by readers. For those interested, one relevant general reference for the contents of Consumer Economics is the author’s co-authored textbook listed below.

Badiru, Adedeji B. and O. A. Omitaomu, Computational Economic Analysis for Engineering and Industry, Taylor and Francis/CRC Press, Boca Raton, FL, 2007. Readers are particularly encouraged to review the illustrative example provided on Page 29 of Consumer Economics.

Author’s Credentials

Deji Badiru is the Dean and senior academic officer for the Graduate School of Engineering and Management at the Air Force Institute of Technology (AFIT). He is responsible for planning, directing, and controlling all operations related to granting doctoral and master’s degrees, professional continuing cyber education, and research and development programs. In his post-high-school days, Deji worked as a graphic artist for children television programs, as a writer and columnist for community newspapers, and as an accounts clerk. These are practical skills that he frequently uses, even today, in his administrative and professional duties.

Deji Badiru was previously Professor and Head of Systems Engineering and Management at AFIT, Professor and Department Head of Industrial & Information Engineering at the University of Tennessee in Knoxville, and Professor of Industrial Engineering and Dean of University College at the University of Oklahoma, Norman. He is a registered professional engineer (PE), a certified Project Management Professional (PMP), a Fellow of the Institute of Industrial Engineers, and a Fellow of the Nigerian Academy of Engineering. He holds BS in Industrial Engineering, MS in Mathematics, and MS in Industrial Engineering from Tennessee Technological University, and Ph.D. in Industrial Engineering from the University of Central Florida. His areas of interest include mathematical modeling, systems efficiency analysis, and high-tech product development. He is the author of over 30 books, 35 book chapters, 75 technical journal articles, 115 conference proceedings and presentations. He also has published 30 magazine articles and 20 editorials and periodicals. He is a member of several professional associations and scholastic honor societies.

Deji Badiru has won several awards for his teaching, research, and professional accomplishments. Pertinent to the premise of this book, Deji won the 1994 Eugene L. Grant Award for Best Paper in Volume 38 of The Engineering Economist journal, awarded by American Society for Engineering Education (ASEE). He is the recipient of the 2009 Dayton Affiliate Society Council Award for Outstanding Scientists and Engineers in the Education category with a commendation from the 128th Senate of Ohio. He also won 2010 IIE Joint Publishers Book-of-the-Year Award from the Institute of Industrial Engineers. He also won 2010 ASEE John Imhoff Award