Dr.

Ako Rashed Hama

 Chap 2: Factors

How Time and Interest Affect Money

1. Single-Payment Formulas (𝑭⁄𝑷 & 𝑷⁄𝑭 ):

determining F accumulated after n years (or periods) from a single P,
with interest compounded one time per year (or period)

𝑛
𝐹 =𝑃 1+𝑖 [2.1] ≡ [1.4]

𝑛
1+𝑖 : single-payment compounded amount factor (SPCAF) or 𝑭⁄𝑷

1
𝑃=𝐹 [2.2]
1+𝑖 𝑛
1
: single-payment present worth factor (SPPWF) or 𝑷⁄𝑭
1+𝑖 𝑛

single payments = finding P or F when having only one payment or receipt!

 Chap 2: Factors

How Time and Interest Affect Money

1. Single-Payment Formulas (𝑭⁄𝑷 & 𝑷⁄𝑭 ):

&

Standard notation: 𝑋⁄𝑌, 𝑖, 𝑛 find/given

 Chap 2: Factors

How Time and Interest Affect Money

1. Single-Payment Formulas (𝑭⁄𝑷 & 𝑷⁄𝑭 ):

1 1
from [2.2]: 𝑃⁄𝐹 = = =0.6139
1+𝑖 𝑛 1+0.05 10
 Chap 2: Factors

How Time and Interest Affect Money

2. Uniform Series Formulas (𝑷⁄𝑨, 𝑨⁄𝑷, 𝑭⁄𝑨 & 𝑨⁄𝑭 ):

The cash flow occurs in consecutive interest periods

A:
The cash flow amount is the same in each period

1+𝑖 𝑛 −1 𝑖 1+𝑖 𝑛
I: 𝑃 = 𝐴 II: 𝐴 = 𝑃
𝑖 1+𝑖 𝑛 1+𝑖 𝑛 −1

1+𝑖 𝑛 −1 𝑖
III: 𝐹 = 𝐴 IV: 𝐴 = 𝐹
𝑖 1+𝑖 𝑛 −1

* P and the first A value are separated by one interest period

** n is always equal to the number of A values
 Chap 2: Factors

How Time and Interest Affect Money

2. Uniform Series Formulas (𝑷⁄𝑨, 𝑨⁄𝑷, 𝑭⁄𝑨 & 𝑨⁄𝑭 ):

I II

IV III
 Chap 2: Factors

How Time and Interest Affect Money

2. Uniform Series Formulas (𝑷⁄𝑨, 𝑨⁄𝑷, 𝑭⁄𝑨 & 𝑨⁄𝑭 ):

Standard notation: 𝑋⁄𝑌, 𝑖, 𝑛 find/given

 Chap 2: Factors

How Time and Interest Affect Money

Example 1

Table 13 (8%, 24), page 400 Calculation, Eq. [2.1]

Spreadsheet, Excel function =FV(8%,24,,$12000)

($76,094)
 Chap 2: Factors

How Time and Interest Affect Money

Example 2

Excel example. 2.a ($124,416)

Excel example. 2.b ($28,935.19)

 Chap 2: Factors

How Time and Interest Affect Money

Example 3

1st approach:

2nd approach:
 Chap 2: Factors

How Time and Interest Affect Money

Example 4
 Chap 2: Factors

How Time and Interest Affect Money

Example 5
 Chap 2: Factors

How Time and Interest Affect Money

3. Gradient Formulas (𝑷⁄𝑮 & 𝑨⁄𝑮 ):

• when different magnitude A in each interest period >>> gradient 𝑮 or 𝒈
• predictable gradients (slops or changes): arithmetic 𝑮 & geometric 𝒈
Arithmetic Gradient:
cash flow increases/decreases by same amount G each period

base
amount
A1

cash flow in period 1=$800 (base)

e.g. increasing by $100 >>> arithmetic gradient=$100
cash flow in period 2=$900
 Chap 2: Factors

How Time and Interest Affect Money

3. Gradient Formulas (𝑷⁄𝑮 & 𝑨⁄𝑮 ):

Present worth of gradient amount, 𝑃⁄𝐺 factor (not the base amount!)

𝐺 1+𝑖 𝑛 −1 𝑛
𝑃= − [2.3a]
𝑖 𝑖 1+𝑖 𝑛 1+𝑖 𝑛

Annual equivalent of an arithmetic gradient or 𝐴⁄𝐺 factor (for gradient only!)

1 𝑛
𝐴=𝐺 − [2.3b]
𝑖 1+𝑖 𝑛 −1

similar to other factors, 𝑃⁄𝐺 and 𝐴⁄𝐺 factors are also tabulated in text books
 Chap 2: Factors

How Time and Interest Affect Money

3. Gradient Formulas (𝑷⁄𝑮 & 𝑨⁄𝑮 ):

general equation to find the present worth of an arithmetic gradient

P = present worth of base amount + present worth of gradient amount

𝑃 = 𝐴 𝑃⁄𝐴 , 𝑖%, 𝑛 + 𝐺(𝑃⁄𝐺 , 𝑖%, 𝑛) [2.4]

𝐴 or 𝐴1 : amount of money in period 1

Using Excel functions:

= NPV(i%,second_cell:last_cell) + first_cell
= PMT(i%,n,cell_with_PG)
 Chap 2: Factors

How Time and Interest Affect Money

3. Gradient Formulas (𝑷⁄𝑮 & 𝑨⁄𝑮 ):

Geometric Gradient:
cash flow increases/decreases by constant percentage g each period

A1(1+g)n-1

P=?

A1(1+g)2
A1(1+g)
A1

0 1 2 3 n-2 n-1 n
 Chap 2: Factors

How Time and Interest Affect Money

3. Gradient Formulas (𝑷⁄𝑮 & 𝑨⁄𝑮 ):

Present worth of a geometric gradient, 𝑃⁄𝐴 factor (for all cash flows and 𝐴1 !)

1+𝑔 𝑛
1−
𝑃𝑔 = 𝑃 = 𝐴1 1+𝑖
𝑔 ≠ 𝑖 [2.7]
𝑖−𝑔

• standard notation: (P/A,g,i%,n) factor

• 𝑃⁄𝐴 factor is not tabulated in text books

 Chap 2: Factors

How Time and Interest Affect Money

Example 6

A=$5,000, i=10%, n=10, G=$500, P=?

From Eq. [2.4]:

𝑃 = 𝐴 𝑃⁄𝐴 , 𝑖%, 𝑛 + 𝐺(𝑃⁄𝐺 , 𝑖%, 𝑛)
 Chap 2: Factors

How Time and Interest Affect Money

Example 7

1+𝑔 𝑛
1−
From Eq. [2.7]: 𝑃𝑔 = 𝑃 = 𝐴1 1+𝑖
𝑖−𝑔
 Chap 2: Factors

How Time and Interest Affect Money

Example 8
The present worth of income from an investment that follows an arithmetic
gradient was projected to be $475,000. If the income in year one is expected
to be $25.000, how much would the gradient have to be in each year through
year 8 if the interest rate is 10% per year?

P=$475,000, A=$25,000, n=8, i=10%, G=?

From Eq. [2.4]:

𝑃 = 𝐴 𝑃⁄𝐴 , 𝑖%, 𝑛 + 𝐺 𝑃⁄𝐺 , 𝑖%, 𝑛

475,000 = 25,000(P/A,10%,8) + G(P/G,10%,8)

G(16.0287) = 475,000 - 25,000(5.3349)
16.0287G = 341,627.50
G = $21,313.49
 Chap 2: Factors

How Time and Interest Affect Money

Example 9
Determine how much money would be in a savings account that started with a
deposit of $2000 in year 1 with each succeeding amount increasing by 15% per
year. Use an interest rate of 10% per year and a 7-year time period.
A1=$2,000, g=15%, i=10%, n=7, Pg=?, F=?

From Eq. [2.7] & Eq. [2.1]:

1+𝑔 𝑛
1− 1+𝑖
𝑛
𝑃𝑔 = 𝐴1 & 𝐹 =𝑃 1+𝑖
𝑖−𝑔

Pg = 2000[1 – (1.15/1.10)7]/(0.10 – 0.15) = $14,600

F = 14,600(F/P,10%,7) = 14,600(1.9487) = $28,452

 Chap 2: Factors

How Time and Interest Affect Money

Example 10
Estimated annual revenue is $5,000 increasing by $500 per year starting next year.
Find P and A equivalent over an 8-year period at i = 10%.

Base Gradient, G = $500

P = $? $8500

A1 = $5000 $8000
$7500 A = $?
$7000
$6500
$6000
$5500
$5000

0 1 2 3 4 5 6 7 8
 Chap 2: Factors

How Time and Interest Affect Money

Example 10
From Eq. [2.4]:
P = A(P/A,i%,n) + G(P/G,i%.n) = 5000(P/A,10%,8) + 500(P/G,10%,8)
= $34,689
From Eq. [2.3b]:
A = 5000 + 500(A/G,10%,8) = 5000 + 500(A/G,10%,8)
= $6502 per year