Matakuliah : D0762 Ekonomi Teknik

Tahun : 2009
Factors - Extra Problems
Course Outline 3
Outline
Problems - Single Payment (P and F)
Problems - Uniform Series
Problems Gradient
Problems Nominal and Effective Interest



References :
- Engineering Economy Leland T. Blank, Anthoy J. Tarquin p.44-99
- Engineering Economic Analysis, Donald G. Newman, p. 41-86
- Engineering Economy, William G. Sulivan, p.137-194, p. 135-140




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Mathematical Factor
Single Payment Compound Formula

If you put P in the bank now at an interest rate of i% for n years,
the future amount you will have after n years is given by
F = P (1+i)
n


The term (1+i)
n
is called the single payment compound factor.

The factor is used to compute F, given P, and given i and n.
Handy Notation.
(F/P,i,n) = (1+i)
n

F = P (1+i)
n
= P (F/P,i,n).

Single Payment Present Worth Formula
P = F/(1+i)
n
= F(1+i)
-n


3
Problems Single Payment
Define the symbol for the problems :
1. What amount would have to be invested for five years, earning an
annual interest rate of 10 %, to have $805.26? In other words, what is
the present value of 805.26 discounted back five years at an annual
rate of 10 %.
2. If you put the money $45,000 at the Bank right now, earning 10% of
annual interest, what would you have in 10 years?
4
a n s w e r
n o . 1 - F = $ 8 0 5 . 2 6 , n = 5 , I 1 0 % , P ? ;
P = F / ( 1 + i )
n
= F ( 1 + i )
- n

A n s w e r n o . 2
P = $ 4 5 , 0 0 0 , n = 1 0 y e a r s , i = 1 0 % , F ?
F = P ( 1 + i )
n

Problems Single Payment
3. Suppose at year 0 (now) you offered a piece of
paper that guaranteed you would be paid $400 at the
end of three years and $600 at the end of five years.
How much would you be willing to pay for this piece
of paper if you wanted your money to produce a 12%
interest?
5
Answer
F
n=3
= $400; F
n=5
=$600, i =12%, P?
P = (1+i)
-3
+ (1+i)
-5


Problem-Single Payment
If you were to deposit $2000 in a bank that pays 5% nominal interest, compounded
continuously, how much would be in account a the end of two years?



t6
F = P e
r n

R = n o m i n a l i n t e r e s t r a t e = 0 , 0 5
N = n u m b e r o f y e a r s = 2
F = 2 . 0 0 0 e
( 0 , 0 5 x 2
) = 2 0 0 0 ( 1 , 1 0 5 2 )

Problem-Single Payment
A Bank offers to sell saving certificates that will pay the purchaser $5000 at the end of
ten years but will pay nothing to the purchaser in the meantime. If interest is
computed at 6%, compounded continuously, at what price is the bank selling the
certificate?

7
P = F e
- r n

P = 5 0 0 0 e
- ( 0 , 0 6 x 1 0 )
= 5 0 0 0 ( 0 , 5 4 8 8 ) = $ 2 7 4 4
Uniform Series
Uniform series compound amount factor :
(F/A,i,n) = [(1+i)
n
1]/i, i > 0

Uniform series sinking fund:
(A/F,i,n) = i/[(1+i)
n
1]

Uniform series capital recovery :
(A/P,i,n) = [i (1 + i)
n
]/[(1+i)
n
1]

Uniform series present worth:
(P/A,i,n) = [(1+i)
n
1]/[i (1 + i)
n
]


8
Given F, Find A
Given A, Find F
Given A, Find P
Given P, Find A
Uniform Series Problem
If you will receive $20 in the end year two, $30 in the end of year three, and $20 in
the end of year 4, compute the cash flow value in year 0 (annual interest = 15%)

9
A n s w e r
A l t e r n a t i v e 1
P = F
n = 2
( P / F , i , 2 ) + F
n = 3
( P / F , I i , 3 ) + F
n = 4
( P / F , i , 4 )
A l t e r n a t i v e 2
F i r s t - F i n d t o t a l F f o r t h e c a s h f l o w a n d t h e n F i n d P
P = T o t a l F ( P / F , i , 4 )
= [ P
n = 2
( F / P , I , 2 ) + P
n = 3
( F / P , I , 3 ) , P
n = 4
] ( P / F , i , 4 )
A l t e r n a t i v e 3
F i n d A , a n d t h e n F i n d P
P = [ A
n = 2 , 3 , 4
( P / A , i , 3 ) + F
n = 2
( P / F , i , 2 ) ] ( P / F , i , 1 )

P = [ 2 0 ( P / A , 1 5 % , 3 ) + 1 0 ( P / F , 1 5 % , 2 ) ] ( P / F , 1 5 % , 1 )
Uniform Series Problem
If company agrees to pay a machine for $12,000 in five equal annual payment, what
would be the payment each year? (i=4%)
If immediately after the second payment, the terms of the agreement are changed to
allow the balance due to be paid in a single payment the next year, what is the final
single payment?
10
A n s w e r
A = P ( A / P , 5 , 4 % )
A n s w e r
F i n a l p a y m e n t = A + A ( P / A , 4 % , 2 )
Problem Uniform Series
A man deposited $500 per year into a credit union that paid 5% interest, compounded
annually. At the end of five years, he had $2763 in the credit union. How much would
he have if they paid 5% interest compounded continuously?

11
F=A(F/A,r,n)

84 . 2769 $
1
1
500
1
1
05 , 0
) 5 ( 05 , 0
=
|
|
.
|

\
|

=
|
|
.
|

\
|

=
e
e
e
e
A F
r
rn
Problem - Gradient
Find the present worth value of the cash flow on the tables below :
Table 1


Table 2



Table 3
12
year 1 2 3 4 5 6
Value 500 480 460 440 420 400
year 1-4 5 6 7 8 9
Value 500 1000 900 800 750 700
year 1 2 3 4 5 6
Value 500 470 440 390 360 330
Problem Nominal & Effective Interest
A department store charges 1 % interest per month, compounded continuously, on
its customers charge accounts. What the nominal interest rate? What is the effective
interest rate?

13
Answer :
Nominal = 1 % x 12 month = 21%
Effective = (1+i)
m
1 = (1+0.0175)
12
-1 = 0.2314 = 23,14%,
If someone borrow $2000 and repay $51 for the next fifty months, beginning thirty
days after receiving the money- compute the nominal annual interest for this loan.
What is the effective interest rate?

14
Problem Nominal & Effective Interest
A n n u a l n o m i n a l = ( 5 1 : 2 0 0 0 ) x 1 2 m o n t h = 0 , 3 0 6 3 0 , 6 %
E f f e c t i v e : [ 1 + ( 5 1 : 2 0 0 0 ) ]
1 2
- 1 = 0 , 3 5 6 3 5 , 6 %
Problem Nominal & Effective Interest
If bank A offers 5% interest, compounded annually for deposit, and bank B pays 5%
interest compounded quarterly, and you have $3000 and want to put the in a savings
account and leave the money for two year, compare how much additional interest
would you obtain from bank A and bank B?
15
B a n k A : F = P ( 1 + i )
n
= 3 0 0 0 ( 1 + 5 % )
2

B a n k B : F = P ( 1 + i )
n
= 3 0 0 0 ( 1 + ( 5 % / 3 ) )
6

What are the nominal and the effective interest rate for 6% compounded continuously?

16
Nominal : 6%
Effective : e
r
-1 = e
0.06
-1 = 6.18%
Continuous Compounding
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r = nominal interest rate per year
m = number of compounding sub-periods per year
i = r/m = effective interest rate per compounding sub-period.

Continuous compounding can sometimes be used to simplify computations, and for theoretical purposes. The table above
illustrates that e
r
- 1 is a good approximation of (1 + r/m)
m
for large m. This means there are continuous compounding versions
of the formulas we have seen earlier.
For example,
F = P e
rn
is analogous to F = P (F/P,r,n): (F/P,r,n)
inf
= e
rn

P = F e
-rn
is analogous to P = F (P/F,r,n): (P/F,r,n)
inf
= e
-rn

( ) ( ) | |
/
1 1
1/ 0
lim 1 1 lim 1 1 lim 1 1
lim 1 1 lim 1 1 1
r
m m
m r
r r
m m m r
r r
r
x x
x x
r r r
m m m
x x e


(
(
| | | | | |
(
+ = + = + =
(
| | |
(
\ . \ . \ .
(


( (
= + = + =
( (

i
a
= (1 + i)
m
1 =
= (1 + r/m)
m
1
We will pay little attention to continuous compounding in this course. You are supposed to read the material on
continuous compounding in the book, but it will not be included in the homework or tests.

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Summary Notation
i: effective interest rate per interest period (stated as a decimal)
n: number of interest periods
P: present sum of money
F: future sum of money: an amount, n interest periods from the present, that is equivalent to P
with interest rate i
A: end-of-period cash receipt or disbursement amount in a uniform series, continuing for n
periods, the entire series equivalent to P or F at interest rate i.
G: arithmetic gradient: uniform period-by-period increase or decrease in cash receipts or
disbursements
g: geometric gradient: uniform rate of cash flow increase or decrease from period to period
r: nominal interest rate per interest period (usually one year)
i
a
: effective interest rate per year (annum)
m: number of compounding sub-periods per period
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Summary: Formulas
Single Payment formulas:
Compound amount: F = P (1+i)
n
= P (F/P,i,n)
Present worth: P = F (1+i)
-n
= F (P/F,i,n)
Uniform Series Formulas
Compound Amount: F = A{[(1+i)
n
1]/i} = A (F/A,i,n)
Sinking Fund: A = F {i/[(1+i)
n
1]} = F (A/F,i,n)
Capital Recovery: A = P {[i(1+i)
n
]/[(1+i)
n
1] = P (A/P,i,n)
Present Worth: P = A{[(1+i)
n
1]/[i(1+i)
n
]} = A (P/A,i,n)
Arithmetic Gradient Formulas
Present Worth P = G {[(1+i)
n
i n 1]/[i
2
(1+i)
n
]} = G (P/G,i,n)
Uniform Series A = G {[(1+i)
n
i n 1]/[i (1+i)
n
i]} = G (A/G,i,n)
Geometric Gradient Formulas
If i = g, P = A {[1 (1+g)
n
(1+i)
-n
]/(i-g)} = A (P/A,g,i,n)
If i = g, P = A [n (1+i)
-1
] = A (P/A,g,i,n)
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Summary: Formulas
Nominal interest rate per year, r: the annual interest rate without
considering the effect of any compounding

Effective interest rate per year, i
a
:
i
a
= (1 + r/m)
m
1 = (1+i)
m
1 with i = r/m

Continuous compounding, :
r one-period interest rate, n number of periods
(P/F,r,n)
inf
= e
-rn

(F/P,r,n)
inf
= e
rn