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Payment Series

Mahmut Ali GOKCE

Industrial Systems Engineering

Computer Sciences

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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

0 1 2 N

A A A

0 1 2 N

0 1 2

N

A A A

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Compound Amount Factor

F

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

F A(1 i) A(1 i) A

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Equal Payment Series Compound Amount Factor (Future Value of

an annuity)

F

(1 i ) 1N

0 1 2 3 FA

N

i

A

A( F / A, i , N )

Example 2.9:

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

4 F =?

2

0 1 2 3 4 5

$5,000(1 0.06) $5,000.00

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

0

$28.185.46

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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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Example 2.10 Handling Time Shifts in a Uniform Series

F=?

First deposit occurs at n = 0

i = 6%

0 1 2 3 4 5

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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)

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Sinking Fund Factor

F

L

A FM

i O

P

0 1 2 3

N

N Q

(1 i ) N

1

A F( A / F, i, N )

Example 2.11 – 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

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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

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Capital Recovery Factor

P

i (1 i ) N

A P

1 2 3 (1 i ) 1

N

0 N

P( A / P, i , N )

A=?

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

Find: A

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

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Example 2.14 Deferred Loan Repayment Plan

P =$21,061.82

i = 6%

0 1 2 3 4 5 6

Grace period

A A A A A

P’ = $21,061.82(F/P, 6%, 1)

i = 6%

0 1 2 3 4 5 6

A’ A’ A’ A’ A’

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Two-Step Procedure

$22,325.53

A $22,325.53( A / P, 6%,5)

$5,300

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Present Worth of Annuity Series

P=?

(1 i ) N 1

P A

1 2 3 i (1 i ) N

0 N

A A( P / A , i , N )

Given: A = $7.92M, N = 25 years, and i = 8%

Find: P

Solution: P = $7.92M(P/A,8%,25) = $84.54M

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Excel Solution

Given:

A = $7.92M

i = 8%

N = 25 A = $7.92 million

Find: P

0

=PV(8%,25,7.92,0) 1 2 25

= $84.54M i = 8%

P=?

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Example 2.15 Early Savings Plan – 8% interest

?

0 1 2 3 4 5 6 7 8 9 10

44

$2,000 ?

0 1 2 3 4 5 6 7 8 9 10 11 12

44

$2,000

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Option 1 – Early Savings Plan

?

F10 $2,000( F / A,8%,10)

$28,973 Option 1: Early Savings Plan

0 1 2 3 4 5 6 7 8 9 10

$396,645 $2,000

Age 31 65

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Option 2: Deferred Savings Plan

?

0 11 12

44

$2,000

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At What Interest Rate These Two Options

Would be Equivalent?

Option 1:

F44 $2, 000( F / A, i,10)( F / P, i,34)

Option 2:

F44 $2, 000( F / A.i,34)

Option 1 = Option 2

$2, 000( F / A, i,10)( F / P, i,34) $2, 000( F / A.i,34)

Solve for i

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A B C D E F

1

2 Year Option 1 Option 2

3 0

4 1 $ (2,000)

5 2 $ (2,000) Interest rate 0.08

6 3 $ (2,000)

7 4 $ (2,000) FV of Option 1 $ 396,645.95

8 5 $ (2,000)

9 6 $ (2,000) FV of Option 2 $ 317,253.34

10 7 $ (2,000)

11 8 $ (2,000) Target cell $ 79,392.61

12 9 $ (2,000)

13 10 $ (2,000)

14 11 $ (2,000)

15 12 $ (2,000)

16 13 $ (2,000)

17 14 $ (2,000)

18 15 $ (2,000)

19 16 $ (2,000)

20 17 $ (2,000)

21 18 $ (2,000)

22 19 $ (2,000)

40 37 $ (2,000)

41 38 $ (2,000)

42 39 $ (2,000)

43 40 $ (2,000)

44 41 $ (2,000)

45 42 $ (2,000)

46 43 $ (2,000)

47 44 $ (2,000)

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Using Excel’s Goal Seek Function

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Result

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www.izmirekonomi.edu.tr

$396,644

0 1 2 3 4 5 6 7 8 9 10

44

$2,000

$317,253

0 1 2 3 4 5 6 7 8 9 10 11 12

44

$2,000

www.izmirekonomi.edu.tr

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