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ENGR 3360U Winter 2014
Unit 6.4-6
AW of Permanents, Salvae an! "ortaes
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01
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Unit 6 Ann#al $as% &lo'
$%ane Re(or!
2014-)-01 )nitial $reation
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6.4 AW of a Permanent )nvestment
)f an investment %as no finite ((le or a ver lonestimate! life/ it is (alle! a eret#al or ermanentinvestment
)f P is t%e resent 'ort% of t%e (ost of t%e investment,
t%en t%e AW val#e is P times i
AW A Pi/AW is a(t#all t%e amo#nt of interest P 'o#l! earn ea(% ear,
forever.
Remember: P = A/i
from the previous unit
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Eamle 6.5
A roa! m#st et ast a mo#ntain. %ere are 2
otions7 t#nnel t%ro#% t%e mo#ntain or 8#il!
a roa! aro#n! it s#orte! 8 (on(rete illars.
%e (ost for t%e t#nnel is 95.5" an! t%e#sef#l life is infinite. %e roa! 'o#l! (ost
95" 8#t onl last 50 ears. Ass#me 6:.
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Sol#tion
#nnel7 A Pi. So A 5.50.06/ 9330;
Roa!7 A 5A
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6.5 Salvae >al#e
? W%en t%ere is a salvae val#e at t%e en! oft%e life of an asset, it is reresente! as a
one-time (as% flo' 8enefit at t%e en! of t%e
asset@s life. Eamle7 Salvae val#e S/ of asset 'it% a
4 ear life
0 1 2 3 4
S
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Salvae >al#e, (ont@!.
? W%en t%ere is an initial (ost P/ follo'e! 8 a salvaeval#e S/ t%e ann#al 'ort% AW/ (an 8e (om#te! 87
AW PA
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6.6 "ortaes in $ana!a
? %e leal !o(#ment7 Con term amortiDe! loan t%at is #se! for 8#in roert
)f aments are not ma!e, t%e len!er (an seiDe t%e roert
an! sell it to re(over t%e !e8t
Ceal !o(#ment o#tlines t%e terms an! (on!itions forreament of t%e loan amortiDation erio!, interest rate,
enalties, et(./
? AmortiDation7
Cent% of time it taes to a off loan ass#min7? Payments are made on time with no additional payments
? Interest rate doesn’t change
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"ortaes in $ana!a
? AmortiDation erio!s are ti(all 8et'een7 5 ears to 35 ears
%e norm is 20 or 25 ears
? erms A mortae is often ma!e # of smaller erio!s
(alle! terms@ an! a term is t%e erio! in '%i(%
t%e interest rate term@ is fie!. At t%e en! of t%e term, t%e mortae (an 8e
rene'e! for a anot%er term at t%e (#rrent interest
rate.
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es of "ortaes
? $onventional@7 &or =5: or less of t%e araise! val#e
? Ii%-ratio@ mortaes7
Ii%er t%an =5: an! #s#all reJ#ire an o#tsi!eaen( s#(% as t%e $"I$ $entral "ortae
an! Io#sin $ororation/ to ins#re t%e mortae.
? Some Kt%ers7 Ken, varia8le rate, AR", (ae! rate,
(onverti8le rate, se(on!, reverse, an! $I)P.
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"ortae EJ#it an! )nterest Rates
? EJ#it %e val#e remainin in a roert after all mortae an!
loans reistere! aainst t%e title are s#8tra(te! from its
val#e.
? )nterest Rate )nterest rate is eresse! as7
? % compounded semi-annually, not in advance
An old English term when ledgers were kept by hand
Nominal rate mortgage at % is actually !% semi-annually
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S#mmar, (ont@!.
? "ortaes in $ana!a are amortiDe! over an#m8er of ears.
? %ere are a n#m8er of tes of mortaes.
? EJ#it7 %e araise! roert val#e val#e of
mortae o'in
? )nterest rate is tra!itionall state! as7 : (omo#n!e! semi-ann#all, not in a!van(e
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$%ater S#mmar (ont.
AW met%o! is often referre! to t%e PW met%o!
AW !eals 'it% onl one life ((le of an alternative
AW offers an a!vantae for (omarin !ifferent-life
alternatives Ass#mtion for AW met%o!7 $as% flo's in one
((le are ass#me! to reli(ate t%emselves in
f#t#re ((les
&or infinite life alternatives, siml m#ltil P 8 i
to et AW val#e