Single Payment

Simplest case which involves the equivalence of a single present

amount and its future worth


Formula deals with only two amounts:
+ P present amount
+ F future worth
( )
1
N
F P i = +
Single Payment Cash Flow
Uniform Series
Transactions are arranged as a series of equal cash flows at regular
intervals
Also known as an equal-payment series
Describes the cash flows of common installment loan contract which
arranges for the repayment of a loan in equal periodic installments
Formula deals with the equivalence relations to P, F, and A (constant
amount of the cash flows in the series)

Uniform Series
Compound Amount Factor Find F, Given A, i, N
+ Used when we are interested to compute for the future amount
(F) of a fund to which we contribute (A) amount each period and
earn interest (i) per period
+ Notation: A = F (A/F, i, N)






( )
1 1
N
i
F A
i
(
+
= (
(

Uniform-series compound amount factor
Uniform Series
Sinking-fund Factor Find A, Given F, i, N
+ It is an interest bearing account where a fixed asset is deposited
each interest period
+ Purpose: Replace fixed assets
+ Notation: F = A (F/A, i, N)

Sinking fund factor
( )
1 1
N
i
A F
i
(
= (
+
(

(?) (?) (?) (?)
(?)
()
Uniform Series
Capital Recovery Factor (Annuity Factor) Find A, Given P, i, N
+ Notation: A = P (A/P, i, N)
( )
( )
1
1 1
N
N
i i
A P
i
(
+
= (
+
(

(?) (?)
(?) (?) (?)
()
Capital Recovery Factor
Uniform Series
Present Worth Factor Find P, Given A, i, N
+ Notation: P = A (P/A, i, N)
+ This answers the question, What would you have to invest now
in order to withdraw A amounts at the end of N periods?
( )
( )
1 1
1
N
N
i
P A
i i
(
+
= (
+
(

Equal-payment-series present worth factor
() ()
() () ()
(?)
1. What is the future worth of an equal payment series of $1,000
each for 5 years if the interest rate is 9% compounded
continuously? Illustrate the transaction.

($ 1000) ($ 1000) ($ 1000) ($ 1000) ($ 1000)
(?)
i = 9% comp. cont.
Given:
( )
1 1
N
i
F A
i
(
+
= (
(

0.09
1
1
0.0942
r
c
c
c
i e
i e
i
=
=
=
( )
5
1.0942 1
1,000
0.0942
$6,034.63
F
F
(

= (
(

=
Soln:
2. If you desire to withdraw the following amounts over the next 5
years from a savings account that earn a 6% interest
compounded annually, how much do you need to deposit now?

1 2
3 4
5
$ 2,000
$ 3,000
$ 5,000
$ 3,000
P (?)
Given:
( )
( )
( )
( )
( )
2 3 4
2
3
4
5
5
2
2
3
3
4
4
5
5
$1,779.99
$2,518.86
$
1
2000 1.06
3000 1.06
5000 1.06
3000 1.
3,960.47
$2,241.77
06
$1,779.99 $2,518.86 $3,960.47 $2,2
$10,501
41.77
.09
N
P F i
P
P
P
P
P P P P P
P
P
P
P
P
P

= +
= + + +
=
=
=
=
= +
=
+ +
=
=
=
=
Soln:
3. A house and lot can be acquired a down payment of 500,000.00
PhP and a yearly payment of 100,000.00 PhP at the end of each
year for a period of 10 years, starting at the end of 5 years from
the date of purchase. If money is worth 14% compounded
annually, what is the cash price of the property?

Given:
DP = PhP 500,000
A = PhP 100,000 starting after 5 years
i = 14% per year

Reqd: P

( )
( )
( )
( )
( )
2
1
10
1 10
1
2 1
4
2
2
808,835.92
500,000
1 1
1
1.14 1
100000
0.14 1.14
521,611.56
(1 )
521,611.56 1.14
308,835.92
N
N
N
P P
i
P A
i i
P
P
P P i
P
P
P

= +
(
+
= (
+
(

(

= (
(
=

=
= +
=
=
A A A A A A A A A A
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
500,000
I I I I I I I I I I
P
1
P
2
Soln:
Linear and Geometric Gradient Series
Linear Gradient Series
Cash flow which increase or decrease by a fixed amount
In addition to P, F, and A, the formulas used in this problems involve
the constant amount, G (amount change per period), of the change in
each cash flow.
Linear Gradient Series
Present Worth Factor Linear Gradient: Find P, Given A, G, N, i
Notation: P = G (P/G, i, N)

( )
( )
2
1 1
1
N
N
i iN
P G
i i
(
+
= (
+
(

Gradient-series present worth factor
Linear Gradient Series
Linear Gradient: Find P, Given, A
1
, G, i, N
Example 1
A textile mill has just purchased a lift truck that has a useful life of 5 years.
The engineer estimates that the maintenance costs for the truck during the
first year will be $1,000. Maintenance costs are expected to increase as the
truck ages at a rate of $250 per year over the remaining life. Assume that the
maintenance costs occur at the end of each year. The firm wants to set up a
maintenance account that earns 12% interest. All future maintenance
expenses will be paid out of this account. How much does the firm have to
deposit in this account now?

Linear Gradient Series
Equal-Payment-Series Factor: Find A, Given A
1
, G, i, N
Notation: A = G (A/G, i, N)
( )
( )
1 1
1 1
N
N
i iN
A G
i i

+

=
`
(
+


)
Gradient-to-equal payment series conversion factor
Linear Gradient Series
Linear Gradient: Find A, Given, A
1
, G, i, N
Example 2
John and Barbara have just opened two savings accounts at their credit union.
The accounts earn 10% annual interest. John wants to deposit $1,000 in his
account at the end of the first year and increase this amount by $300 for each
of the following 5 years. Barbara wants to deposit an equal amount each year
for the next 6 years. What should be the size of Barbaras annual deposit so
that the two accounts would have equal balances at the end of 6 years?

Linear Gradient Series
Future Worth Factor Find F, Given A, G, i, N
Notation: F = G (F/G, i, N)
( )
1 1
N
i
G
F N
i i
(
+
= (
(

Linear Gradient Series
Declining Linear Gradient: Find F, Given A
1
, G, i, N
Example 3
Suppose that you make a series of annual deposits into a bank account that
pays 10% interest. The initial deposit at the end of the first year is $1,200. The
deposit amounts decline by $200 in each of the next 4 years. How much
would you have immediately after the fifth deposit?

Geometric Gradient Series
Usually applied to construction costs
Involves cash flows that increase or decrease over time by a constant
percentage, g = the percent change in payment per period
Growth by geometric gradient is sometimes called compound growth
Geometric series can illustrate changes in price due to inflation
Geometric Gradient Series
Present Worth Factor Find P, Given A
1
, g, i, N
Notation: P = A1 (P/A
1
, g, i, N)
( ) ( )
1
1
1 1 1
, if
, if
1
N N
g i
P A N i g
i g
NA
P i g
i

(
+ +
= (

(

= =
+
Geometric-gradient-series present worth factor
Geometric Gradient Series
Geometric Gradient: Find P, Given A
1
, g, i, N
Example 4
A municipal power plant is expected to generate a net revenue of $500,000 at
the end of its first year, and this annual amount will increase by 8% per year
for the next 5 years. To finance a new construction project, the municipal
government wants to issue a tax exempt bond that pays 6% annual interest.
The amount of bond financing will deposit on the equivalent present worth of
the expected future earnings from the power plant, which will be used to pay
off the bonds. What would be the maximum amount of bond financing that
could be secured?

Note: A bond is a long-term promissory note issued by a business or
governmental unit.
Geometric Gradient Series
Future Worth Factor Find F, Given A
1
, g, N, i
Notation: F = A
1
(F/A
1
, g, i, N)

( ) ( )
( )
1
1
1
1 1
, if
1 , if
N N
N
i g
F A i g
i g
F NA i i g

(
+ +
= (

(

= + =
Geometric Gradient Series
Geometric Gradient: Find F, Given A
1
, g, i, N
Example 5
Jimmy Carpenter is opening a retirement account at a bank. His goal is to
accumulate $1,000,000 in the account by the time he retires from work in 20
years time. A local bank is willing to open a retirement account that pays 8%
interest, compounded annually throughout the 20 years. Jimmy expects his
annual income will increase at a 6% annual rate during his working career. He
wishes to start with deposit at year 1 (A
1
) and increase the deposit at a rate of
6% each year thereafter. What should be the size of his first deposit? The first
deposit will occur at the end of year 1, and subsequent deposits will be made
at the end of each year. The last deposit will be made at the end of year 20.

Irregular Series
Exhibits no regular overall pattern
One or more of the patterns discussed may over portions of the
irregular series
Example 6: Cash flows with sub-patterns
The two cash flows shown below are equivalent at an interest rate of
12% compounded annually. Determine the unknown value X.
1. Single Payment
Deals with two amounts, P and F
2. Uniform Series
Cash flows at regular intervals
3. Linear Gradient Series
Cash flows in a series that increase or decrease by a fixed amount
4. Geometric Gradient Series
Cash flow in a series that increase or decrease by some fixed rate
5. Irregular Series
Cash flow that does not exhibit regular pattern
1. The cash flow transactions shown
below are said to be equivalent at
10% interest compounded annually.
Find the unknown X value that
satisfies the equivalence.








2. Consider the cash flow shown
below. What value of C makes the
inflow series equivalent to the
outflow series at an interest rate of
12%