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Chapter 2 – Factors: How Time Single Payment Transactions (F/P and P/F)
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 1 Affect Money 2
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 3 Affect Money 4
Example C1:
Single-Payment Factors (F/P and P/F) If $1,000 were deposited in a
bank savings account, how much would be
in the account in two years if the bank paid
Recall that F = P(1 + i)n 4% interest compounded annually?
Given P, to find F, (1+i)n is the F/P Solution: P = $1,000, n = 2, i = 4%, F = ?
conversion factor
) F = P (F/P) F = P(1+i)n = $1,000 (1 + 0.04)2 = $1,081.60, or
(F/P, i, n) is tabulated for different i and n table factor (F/P, 4%, 2) is 1.0816 (p. 710),
FV(i%,n,,P) in Excel therefore
F = P (F/P, 4%, 2) = $1,000 (1.0816) = $1,081.60
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 5 Affect Money 6
1
Single-Payment Factors (F/P and P/F) Single-Payment Factors (F/P and P/F)
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 7 Affect Money 8
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 9 Affect Money 10
A A A A n
P = A[ (1(1++ii))n−i1]
Objective: Find P, given A
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 11 Affect Money 12
2
Uniform-Series Factors
Uniform-Series Factors
Capital Recovery Factor (A/P)
Capital Recovery Factor (A/P)
Since n
P = A[ (1(1++ii))n−i1]
P
1 2 … n-1 n
n
A A A A
A = P[ (1i(+1i+)in)−1]
Uniform-Series Factors
Uniform-Series Factors
Uniform-Series Compound Amount Factor (F/A)
Uniform-Series Compound Amount Factor (F/A)
n
P = A[ (1(1++ii))n−i1], and F = P(1+i)
Since n
F=?
0 1 2 … n-1 n
= A[ (1+ii) −1 ]
n
F = A[ ((11++ii))n−i1](1 + i)n
n
A A A A
3
Standard Factor Notation Standard notation can be used pseudo algebraically
To Find Given Factor Equation
P F (P/F, i, n) P = F*(P/F, i, n) (X|Y, i, n) = 1/(Y|X, i, n)
F P (F/P, i, n) F = P*(F/P, i, n)
P A (P/A, i, n) P = A*(P/A, i, n)
A P (A/P, i, n) A = P*(A/P, i, n) (X|Y, i, n)*(Y|Z, i, n) = (X|Z, i, n)
A F (A/F, i, n) A = F*(A/F, i, n) for example,
F A (F/A, i, n) F = A*(F/A, i, n)
(F/A,7%,13) = (F/P,7%,13) (P/A,7%,13)
Practice deriving factor formulas using geometric sum
identity ) Make sure the values of i and n are the same
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 19 Affect Money 20
Example C3:
Tom deposits $500 in his saving account at the Solution: A = $500, i = 6%, n = 24
end of each year for 24 years and the bank
pays 6% interest per year, compounded yearly. P=?
What are the present worth and future worth of
this yearly investment.
1 2 23 24
A A A A
(1 + i ) n − 1
=$500[(1+0.06)24-1]/[(1+0.06)24(0.06)]
P = A[ (1 + i ) n i
] = $ 6275.18(or use P/A factor from the
table = 500 * 12.5504=$6275.20)
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 21 Affect Money 22
Example C4:
A proximity sensor attached to the tip of an endoscope could
Solution (cont.): reduce risks during eye surgery by alerting surgeons to the
F=? location of critical retinal tissue. If a certain eye surgeon expects
that by using this technology, he will avoid lawsuits of $0.5 and
$1.25 million 2 and 5 years from now, respectively, how much
could he afford to spend now if his out-of-pocket costs for the
0 1 2 3 22 23 24 lawsuits would be only 10% of the total amount of each suit? Use
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 23 Affect Money 24
4
Example C5:
Uniform-Series Factors
A company which uses austenitic nickel- chromium
alloys to manufacture resistance heating wire is Example C6:
considering a new annealing- drawing process to
What initial investment is needed in order that an
reduce costs. If the new process will cost $ 1.75
million dollars now, how much must be saved each income of $400 per year can be made for 5
year to recover the investment in 10 years at an years?
interest rate of 12% per year? Assume an annual interest rate of 15%.
Solution
A = 1.75 million (A/P,12%,10) = $309,715
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 25 Affect Money 26
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 27 Affect Money 28
Solution:
Example C7. Billy wishes to save enough money to buy a
new car. He will place a sum in a savings account today and 15,000 = S(1+i)5 + S(1+i)2 = S(1.12)5 + S(1.12)2
again in three years in anticipation of spending $15,000 in = S (3.016742)
S = $15,000 / 3.016742 = $4,972
five years. What should the amount be? Take i = 12%.
Alternatively,
$15 K
S S [S(1+i)3 + S] (1+i)2 = 15,000
S(1+i)5 + S(1+i)2 = 15,000
1 2 3 4 5 S = $4,972
i = 12%
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 29 Affect Money 30
5
Alternatively
Example C8:
Using Tables
Bill wants to make deposits each year for
15,000 = S (F|P, 12%, 5) + S (F|P, 12%, 2) five years to buy the $15,000 car. His
= S (1.7623) + S (1.2544)
first payment will be oneyear from today.
= S (3.0167)
How big must the deposits be if interest
S = $15,000/3.0167 = $4,972 is 12% per year?
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 31 Affect Money 32
A = PMT(12%,5,,15000) = $ 2,361.15
1 2 3 4 5
A A A A A
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 33 Affect Money 34
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 35 Affect Money 36
6
Arithmetic Gradient Factors Arithmetic Gradient Factors
Base Amount ...
0 1 2 3 n -1 n
(n -1)G
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 37 Affect Money 38
We will study the following three cases: Case 1: Find P given G and A1
Case 1: Find P given G The total present worth PT can be found as
Case 2: Find F given G the sum of the present values of the series
Case 3: Find A given G of base payments PA and the present
worth of the series of gradient payments
PG:
PT = P A + PG
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 39 Affect Money 40
= G (P/G, i, n)
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 41 Affect Money 42
7
Arithmetic Gradient Factors Arithmetic Gradient Factors
Case 2: Find F given G and A1
Similarly, FT = FA +FG Case 3: Find A given G and A1
n AT = A1 +AG
Since
PG = i (1G+i)n [ (1+ii) −1
− n] and F = P(1+i)n
n
Since FG = Gi [(1+ii) −1 − n] and A = F [ (1+ ii) n −1 ]
n
FG = G
[ (1+ ii) −1
− n] i
= G[1i − (1+in)n −1]
n
i AG = Gi [ (1+ii) −1 − n][ ]
(1 + i)n − 1
Also, n
FA = A1[ (1+ii) −1 ] = A1 (F/A, i, n)
= G (A/G, i, n)
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 43 Affect Money 44
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 45 Affect Money 46
($200)
Period ($500)
($1,000)
What are the values for PT and AT?
Period
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 47 Affect Money 48
8
Arithmetic Gradient Factors Geometric Gradient Series Factors
Solution:
A cash flow series that either increases or
decreases from period to period by a
PT = FT (P/F, 7%, 10) = $-3473.64 constant percentage.
AT = FT (A/F, 7%, 10) = $-494.63 g: constant rate of change, in decimal form,
by which amounts increase or decrease
from one period to the next (it’s the
geometric gradient).
Initial amount A1 in year 1, year 2 cash flow
is A1(1+g),…., year n cash flow is A1(1+g)n-1
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 49 Affect Money 50
Pg is the total present worth for the entire cash flow Geometric Gradient Series Factors
series
Example C10:
1+ g
n
1 − A pick-up big wheel modification costs $8000
a) g ≠ i, Pg = A1 1+ i and is expected to last 6 years with a $1300
i− g
salvage value. The maintenance cost is
expected to be $1700 for the first year,
increasing
b) g = i, Pg = nA1/(1+i)
11% per year thereafter. Determine the total
equivalent present worth of modification if the
interest rate is 8% per year.
Chapter 2 Factors: How Time and Interest Chapter 2 Factors: How Time and Interest
Affect Money 51 Affect Money 52
PT = -8,000 – Pg + 1,300(P/F,8%,6)
= -8,000 -1,700[1-(1.11/1.08)6]/(-0.03)
+ 1,300(0.6302)