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Factors:
How Time and
Interest Affect Money

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Overview
1. F/P and P/F Factors
2. P/A and A/P Factors
3. F/A and A/F Factors
4. Interpolate Factor Values
5. P/G and A/G Factors
6. Geometric Gradient
7. Calculate i
8. Calculate “n”

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F/P and P/F Factors

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Basic Derivations of F/P factor

F/P Factor (To find F given P)

Fn
To Find F given P

………….
n

Compound forward in time

P0

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Derivation by Recursion: F/P factor

F1 = P(1+i)
F2 = F1(1+i) = P(1+i)(1+i)
= P(1+i)2
F3 =F2(1+i) =P(1+i)2 (1+i)
= P(1+i)3
In general:
Fn = P(1+i)n
Fn = P(F/P,i%,n)

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Section 2.1 Present Worth Factor from F/P

Since Fn = P(1+i)n
We solve for P in terms of FN
P = F{ 1/ (1+i)n} = F(1+i)-n
Thus:
P = F(P/F,i%,n)
where: (P/F,i%,n) = (1+i)-n
Thus, the two factors are:
1. F = P(1+i)n finds the future worth of P;
2. P = F(1+i)-n finds the present worth from F
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P/F factor – discounting back in time

Discounting back from the future

Fn

………….
n
P/F factor brings a single
future sum back to a specific
P
point in time

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Example - F/P Analysis

Example: P= $1,000;n=3;i=10%
What is the future value, F?
F = ??

0 1 2 3
P=$1,000
i=10%/year

F3 = $1,000[F/P,10%,3] = $1,000[1.10]3
= $1,000[1.3310] = $1,331.00

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Example – P/F Analysis

Assume F = $100,000, 9 years from now
What is the present worth of this amount
now if i =15%?
F9 = $100,000

i = 15%/yr

0 1 2 3 ………… 8 9

P= ??

P0 = $100,000(P/F, 15%,9) = $100,000(1/(1.15)9)

= $100,000(0.2843) = $28,430 at time t = 0
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P/A and A/P Factors

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Uniform Series Present Worth and Capital

Recovery Factors

Annuity Cash Flow

P = ??

…………..
1 2 3 .. .. n-1 n
0

$A per period
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Uniform Series Present Worth and Capital

Recovery Factors

Desire an expression for the

present worth – P of a stream of
equal, end of period cash flows - A
P = ??

0 1 2 3 n-1 n

A = given

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Uniform Series Present Worth and Capital

Recovery Factors

Write a Present worth expression

 1 1 1 1  [1]
P  A   ..  n 1
 n 
 (1  i) (1  i) (1  i) (1  i) 
1 2

Term inside the brackets is a geometric progression

Multiply This equation by 1/(1+i) to yield a second equation

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Uniform Series Present Worth and Capital

Recovery Factors

The second equation

[2]

To isolate an expression for P in terms of A, subtract

Eq. [1] from Eq. [2]
Note that numerous terms will drop out

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Uniform Series Present Worth and Capital

Recovery Factors
Setting up the subtraction

P  1 1 1 1 1 
 A   ... n 1  [2]
(1  i )  (1  i ) 2
(1  i ) 3
(1  i ) 4
(1  i ) n
(1  i ) 

 1 1 1 1 
- P  A
 (1  i )1

(1  i ) 2
 .. 
(1  i ) n 1

(1  i ) n 

[1]

i  1 1 
= P  A n 1
  [3]
1 i  (1  i ) (1  i ) 
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Uniform Series Present Worth and Capital

Recovery Factors

Simplifying Eq. [3] further

i  1 1 
P  A n 1
 
1 i  (1  i ) (1  i ) 

A 1   (1  i ) n  1 
P  n 1
 1 P  A n 
for i  0
i  (1  i)   i (1  i ) 

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Uniform Series Present Worth and Capital

Recovery Factors

This expression will convert an annuity

cash flow to an equivalent present
worth amount one period to the left of
the first annuity cash flow.
 (1  i)n  1 
P  A n 
for i  0
 i(1  i) 

P / A i %, n factor
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Capital Recovery Factor (A/P, i%, n)

The present worth point of an annuity cash flow is always one period
to the left of the first A amount

Given the P/A factor

 (1  i)n  1 
P  A n 
for i  0 Solve for A in terms of P
 i(1  i) 
Yielding….

 i(1  i)  n
A P  (A/P,i%,n) factor
 (1  i)  1
n

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F/A and A/F Factors

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F/A and A/F Derivations

Annuity Cash Flow $F

Find $A given the Future amount - $F

…………..
N

$A per period
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Sinking Fund and Series Compound

Amount Factors (A/F and F/A)

Take advantage of what we already have

Recall:
 1 
PF n 
 (1  i )  Substitute “P” and
simplify!
Also:
 i (1  i ) n 
A P 
 (1  i )  1 
n

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A/F Factor

By substitution we see:

 1   i (1  i ) n 
AF n  
 (1  i )  (1  i ) n
 1 
Simplifying we have:

 i 
A F 
 (1  i )  1 
n

Which is the (A/F,i%,n) factor

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F/A factor from the A/F Factor

Given

 i 
A F 
 (1  i )  1 
n

Solve for F in terms of A

 (1  i)n  1
F=A  
 i 
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F/A and A/F Derivations

Annuity Cash Flow $F

Find $F given the $A amounts

0
…………..
N

$A per period
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Example

Formosa Plastics has major fabrication

plants in Texas and Hong Kong
It is desired to know the future worth of
$1,000,000 invested at the end of each
year for 8 years, starting one year from
now
The interest rate is assumed to be 14%
per year

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Example

• A = $1,000,000/yr; n = 8 yrs, i = 14%/yr

• F8 = ?

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Section Example

Solution:
The cash flow diagram shows the annual
payments starting at the end of year 1 and
ending in the year the future worth is desired.
Cash flows are indicated in $1000 units. The F
value in 8 years is

F = l000(F/A,14%,8) = 1000( 13.23218)

= $13,232.80 = 13.232 million 8 years
from now

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Example

How much money must Carol deposit every

year starting, 1 year from now at 5.5% per
year in order to accumulate $6000 seven
years from now?

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Example

Solution
The cash How diagram from Carol's
perspective fits the A/F factor.
A = $6000 (A/F,5.5%,7) = 6000(0.12096)
= $725.76 per year
The A/F factor Value 0f 0.12096 was
computed using the A/F factor formula

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Interpolation in Interest Tables

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Interpolation of Factors
• Typical Format for Tabulated Interest Tables

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Interpolation (Estimation Process)

• At times, a set of interest tables may not have

the exact interest factor needed for an analysis
• One may be forced to interpolate between two
tabulated values
• Linear Interpolation is not exact because:
 The functional relationships of the interest
factors are non-linear functions
 Hence from 2-5% error may be present with
interpolation

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Example

• Assume you need the value of the A/P factor for i = 7.3%
and n = 10 years
• 7.3% is most likely not a tabulated value in most interest
tables
• So, one must work with i = 7% and i = 8% for n fixed at 10

• Proceed as follows:

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i = 7.3% using the A/P factor

• For 7% we would observe:
COMPOUND PRESENT SINKING COMPOUND CAPITAL
N AMT. FACTOR WORTH FUND AMOUNT RECOVERY
F/P P/F A/F F/A A/P
10 1.9672 0.5083 0.0724 13.8164 0.14238

(A/P,7%,10) = 0.14238

• For i = 8% we observe:
COMPOUND PRESENT SINKING COMPOUND CAPITAL
N AMT. FACTOR WORTH FUND AMOUNT RECOVERY
F/P P/F A/F F/A A/P
10 2.1589 0.4632 0.0690 14.4866 0.14903

(A/P,8%,10) = 0.14903
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Estimating for i = 7.3%

• Form the following relationships

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