IEE – 3090

According to the report prepared by CardTrack.com, due to financial Illiteracy Americans are facing $2.3
trillion in their life time. I will like to quote here from “Rich Dad Poor Dad by Robert T Kiyosiki” that a
highly educated person can be financially illiterate when he does not sense a difference between an asset
and a liability in the long run, before making a financial decision. Truly speaking how it is possible to
estimate the cost of lack of financial knowledge.

So, here I am in the class of Financial Engineering to be educated financially with the perspective of
engineering. Mathematics is the main subject that is going to help me in translating financial analysis into
a set of equation and help me in understanding effect of considering time value of money and break even
analysis of an investment in an industry. In my point of view, an industry cannot be feasible if it is not
economically profitable and environment friendly. Without knowledge of cost both operational working
cost and depreciation, no one can estimate the profitability of an industry in the long run. Financial
engineering is the tool that gives answer to these question before aiming for designing an equipment, system
and on a large scale an industrial setup. The financial knowledge help an engineering the amount of raw
materials that are optimum and amount of material that should be produce to get an optimum price with
least operational cost and maximum profit as shown from the figure below.

Engineers aim at finding solution to problems that are viabale economically along with sound technical
feasibility. This involves not only formulation and estimation but also evaluation of the economic outcomes
comparing alternative solution of a problem.

In case of selection of an insulation thickness around a pipe, an engineer aims at minimizing the heat losses
to take more of the insulation thickness but on the other hand with increase in thickness of insulation cost
related to purchase of insulation increases and technical the performance of insulation reduces as the
thickness increases because of heat losses associated to increase in surface area when applying more
insulation over a pipe. So, an engineer do an optimization of cost and efficiency of the insulation to get
minimizes the losses and cost as well.
“Time value of money is the idea that money that is available at the present time is worth more than the
same amount in the future, due to its potential earning capacity. This core principle of finance holds that
provided money can earn interest, any amount of money is worth more the sooner it is received. One of the
most fundamental concepts in finance is that money has a time value attached to it. In simpler terms, it
would be safe to say that a dollar was worth more yesterday than today and a dollar today is worth more
than a dollar tomorrow “. Source = https://psu.instructure.com/courses/1806581/pages/introduction-what-
is-time-value-of-money

4. A student takes out a loan of 3000$. It is to be paid back at the end of 5 years at an annual
interest rate of 3%. How much student will pay at the end of 5 years if simple interest is used?
Simple interest:
Time period = 5 years
Annual interest = 3000$ x 3 % = 90$ /annum
Total interest I = P x R x T = 3000$ x 3 % x 5 =450$
5. Using the information from question 4, how much will the student pay at the end of 5 years if
compound interest is used?

r
A  P(1  )nt
n
A  3000(1  0.03 / 4)45  3483.5$
Where n = number of times interest is computed in an year assume = 4
For interest to be computed one time in an annum

A  3000(1  0.03 /1)5  3477.8$