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# L5: Interest Formulas – Equal

Payment Series

## ECON 320 Engineering Economics

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 FA
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)1  \$5,300.00

\$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

## \$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)

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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=?

## Example 2.12: Paying Off Education 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

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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

## P '  \$21, 061.82( F / P, 6%,1)

 \$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 )

## Example 2.14:Powerball Lottery

 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
?

## Option 1: Early Savings Plan

0 1 2 3 4 5 6 7 8 9 10

44

\$2,000 ?

## Option 2: Deferred Savings Plan

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

## F44  \$28,973( F / P,8%,34) 44

 \$396,645 \$2,000

Age 31 65

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Option 2: Deferred Savings Plan

?

##  \$317,233 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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\$396,644

## Option 1: Early Savings Plan

0 1 2 3 4 5 6 7 8 9 10

44

\$2,000
\$317,253

## Option 2: Deferred Savings Plan

0 1 2 3 4 5 6 7 8 9 10 11 12
44

\$2,000

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