Interest Formulas – Equal

Payment Series

Lecture No.7
Chapter 3
Contemporary Engineering Economics
Copyright © 2006

Contemporary Engineering Economics, 4th

edition, © 2007
Equal Payment Series
F

0 1 2 N
A A A

P
0 1 2 N

0 N

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Equal Payment Series – Compound Amount
Factor
F

A A A

0 1 2 N
0 1 2 N

0 1 2
= N

A A A
Contemporary Engineering Economics, 4th
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Process of Finding the Equivalent Future
Worth, F F
A

A(1+i)N-2
A A A

A(1+i)N-1

0 1 2 N 0 1 2 N

N −1 N −2  (1 + i ) N
− 1
F = A(1 + i) + A(1 + i) + L + A = A  
 i 
Contemporary Engineering Economics, 4th
edition, © 2007
Another Way to Look at the Compound
Amount Factor

Contemporary Engineering Economics, 4th

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Equal Payment Series Compound Amount Factor
(Future Value of an Annuity)
F
(1 + i ) N − 1
0 1 2 3 F=A
N i
A
= A( F / A, i , N )
Example:
◼ Given: A = $5,000, N = 5 years, and i = 6%

◼ Find: F

◼ Solution: F = $5,000(F/A,6%,5) = $28,185.46

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Validation

$5,000(1 + 0.06) = $6,312.38

4 F =?

$5,000(1 + 0.06)3 = $5,955.08 i = 6%

$5,000(1 + 0.06) = $5,618.00

2
0 1 2 3 4 5

$5,000(1 + 0.06)1 = $5,300.00

$5,000 $5,000 $5,000 $5,000 $5,000
$5,000(1 + 0.06) = $5,000.00
0

$28.185.46

Contemporary Engineering Economics, 4th

edition, © 2007
Finding an Annuity Value

F
i
A= F
0 1 2 3 (1 + i ) − 1
N
N

A=? = F ( A / F ,i, N )

Example:
◼ Given: F = $5,000, N = 5 years, and i = 7%

◼ Find: A

◼ Solution: A = $5,000(A/F,7%,5) = $869.50

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edition, © 2007
Handling Time Shifts in a Uniform Series

F=?
First deposit occurs at n = 0

i = 6%

0 1 2 3 4 5

$5,000 $5,000 $5,000 $5,000 $5,000

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❑ Annuity Due
F5 = $5,000( F / A,6%,5)(1.06)
= $29,876.59
❑ Excel Solution
Beginning period
=FV(6%,5,5000,0,1)

Contemporary Engineering Economics, 4th

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Sinking Fund Factor

F
L
A = FM
i O
P
0 1 2 3
N
N Q
(1 + i ) − 1 N

A = F( A / F, i, N )
Example: College Savings Plan
◼ Given: F = $100,000, N = 8 years, and i = 7%

◼ Find: A

◼ Solution:

A = $100,000(A/F,7%,8) = $9,746.78
Contemporary Engineering Economics, 4th
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Excel Solution

◼ Given:
❑ F = $100,000
$100,000
❑ i = 7%
❑ N = 8 years
Current age: 10 years old

• Find:
0
1 2 3 4 5 6 7 8

=PMT(i,N,pv,fv,type)
=PMT(7%,8,0,100000,0) A=?

i = 8%
=$9,746.78

Contemporary Engineering Economics, 4th

edition, © 2007
Example 3.15 Combination of a Uniform Series
and a Single Present and Future Amount

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Solution: A Two-Step Approach

◼ Step 1: Find the required FC = $500( F / P,7%,5) = $701.30

savings at n = 5.
FRequired Savings = $5,000 − $701.30 = $4,298.70

◼ Step 2: Find the required A = $4,298.70( A / F ,7%,5)

annual contribution (A)
over 5 years. = $747.55

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Comparison of Three Different
Investment Plans – Example 3.16

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Solution:
Balance at the end of 10 years
644444 47444444 8
◼ Investor A: F65 = $2,000( F / A,9.38%,10)(1.0938)( F / P,9.38%,31)
144444 42444444 3
$33,845

= $545,216

◼ Investor B: F65 = $2, 000( F / A,9.38%,31) (1.0938)

1444424444 3
$322,159

= $352,377

◼ Investor C: F65 = $2, 000( F / A,9.38%, 41) (1.0938)

1444424444 3
$820,620

= $897,594

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How Long Would It Take to Save $1
Million?

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 Capital Recovery Factor

P
i (1 + i )N
A= P
1 2 3 (1 + i ) − 1
N

0 N

A=?
= P( A / P, i , N )

Example: Paying Off an Educational Loan

◼ Given: P = $21,061.82, N = 5 years, and i = 6%

◼ Find: A

◼ Solution: A = $21,061.82(A/P,6%,5) = $5,000

Contemporary Engineering Economics, 4th

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Example 3.17 Loan Repayment

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Solution:

◼ Using Interest Factor:

A = $250,000( A / P,8%,6)
= $250,000(0.2163)
= $54,075

◼ Using Excel:
= PMT(i, N , P)
= PMT(8%,6, −250000)
= $54,075
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edition, © 2007
Example 3.18 – Deferred Loan
Repayment
p=

n 1
(1+i) = (1.08)

Contemporary Engineering Economics, 4th

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A Two-Step Procedure

P ' = $250, 000( F / P,8%,1)

= $270, 000
A ' = $270, 000( A / P,8%, 6)
= $58, 401 n n
a = p . i(1+i) / (1+i) -1

Contemporary Engineering Economics, 4th

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Present Worth factor – Find P, Given A, i,
and N

P=? (1 + i ) − 1
N
P= A
i (1 + i ) N
1 2 3
0 N
= A( P / A, i , N )
A

Contemporary Engineering Economics, 4th

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Example 3.19 Louise Outing’s Lottery
Problem
◼ Given:
❑ A = $280,000
❑ i = 8%
❑ N = 19
◼ Find: P
❑ Using interest factor:
P =$280,000(P/A,8%,19)
= $2,689,008

❑ Using Excel:
=PV(8%,19,-280000)
= $2,689,008

Contemporary Engineering Economics, 4th

edition, © 2007