Page 256 - Analysis, Synthesis and Design of Chemical Processes, Third Edition

financial needs and you probably have little experience in investing to secure a comfortable
lifestyle after you stop working.

There are two approaches to setting money aside for use at a later date:
• Simple savings: Put money in a safety deposit box, sugar bowl, or other such container.
• Investments: Put money into an investment.

These two approaches are considered in Example 9.1.

Example 9.1

Upon graduation, you start your first job at $50,000/yr. You decide to set aside 10%, or $5000/yr, for

retirement in 40 years’ time, and you assume that you will live 20 years after retiring. You have been
offered an investment that will pay you $67,468/yr during your retirement years for the money you invest.
a. How much money would you have per year in retirement if you had saved the money, but not
invested it, until retirement?
b. How does this compare with the investment plan offered?
c. How much money was produced from the investment?

Solution

a. Money saved: ($5000)(40) = $200,000
Income during retirement: $200,000/20 = $10,000/yr
b. Comparison: (Income from savings)/(Income from investments) = $10,000/$67,468 = 0.15
c. Money Produced = Money Received – Money Invested = ($67,468)(20) – $200,000 =
$1,149,360

The value of the investment is clear. The income in retirement from savings amounts to only 15% of the
investment income. The amount of money provided during retirement, by setting $200,000 aside, was
more than a million dollars. We will show later that this high return on investment resulted from two
factors: the long time period for the investment and the interest rate earned on the savings.

Money, when invested, makes money.

The term investment will now be defined.

An investment is an agreement between two parties, whereby one party, the investor, provides money,
P, to a second party, the producer, with the expectation that the producer will return money, F, to the
investor at some future specified date, where F > P. The terms used in describing the investment are
P: Principal or Present Value
F: Future Value
n: Years between F and P

The amount of money earned from the investment is