Applications of future and present values

 Relating Present and Future Equivalent

Values of Single Cash Flows

 Relating a Uniform Series (Annuity) to Its

Present and Future Equivalent Values
TERMINOLOGY AND SYMBOLS
 i = effective interest rate per interest period; % per year

 N = number of compounding (interest) periods; years, months

 P = present sum of money; equivalent value of one or more cash flows at a

reference point in time; the present; $ (a.k.a. present worth)

 F = future sum of money; equivalent value of one or more cash flows at a

reference point in time; the future; $ (a.k.a. future worth)

 A = end-of-period cash flows in a uniform series continuing for a certain number

of periods, starting at the end of the first period and continuing through the last;
currency per period, $ per year (a.k.a. annual worth)
SINGLE-PAYMENT FACTORS
SINGLE-PAYMENT FACTORS (CONT.)

Functional
symbol

1. The quantity (1 + i)-N is called the single payment present

worth factor.
2. The term on is read “P given F at i% interest per period for N interest
periods.”
SINGLE-PAYMENT FACTORS (CONT.)

Description: Formula:

Finding the interest rate, i given P, F

and N

Finding N given P,F, and i

SINGLE-PAYMENT FACTORS (CONT.)
Example 4.9:
 If RM100 is placed in an account that earns 8% interest per year, what will its worth in 8
years?

 P = RM100, i = 8%, N = 8, F = ?
F = P (1 + i)N
= 100 (1 + 0.08)8
= 100 (1.08)8
= 100 (1.8509)
= RM185.09

 F = P (F/P, i%, N)
= 100 (F/P, 8%, 8)
= 100 (1.8509)
= RM185.09
SINGLE-PAYMENT FACTORS (CONT.)
Example 4.10:

 What is the present worth of RM30,000 in year 8 at an interest rate of 10%

per year?

 F = RM30,000, N = 8, i = 10%, P = ?
P = F (1 + i)-N
= 30,000 (1 + 0.10)-8
= 30,000 (1.10)-8
= 30,000 (0.4665)
= RM13,995

 P = F (P/F, i%, N)
= 30,000 (P/F, 8%, 10)
= 30, 000 (0.4665)
= RM13,995
SINGLE-PAYMENT FACTORS (CONT.)
Example 4.11:

 If an engineer invested RM15,000 on 1.1.1991 into a retirement account that earned 6%

per year interest, how much money will be in the account on 1.1.2016?

 P = RM15,000, i = 6%, N = 25, F = ?

F = P (1 + i)N
= 15,000 (1 + 0.06)25
= 15,000 (1.06)25
= 15,000 (4.2919)
= RM64,378.50

 F = P (F/P, i%, N)
= 15,000 (F/P, 6%, 25)
= 15,000 (4.2919)
= RM64,378.50
Example 4.12:

The average price of gasoline in 2005 was RM2.31 per

gallon. In 1993, the average price was RM1.07. what was the
average annual rate of increase in the price of gasoline over
this 12-year period?

P = RM1.07, F = RM2.31, N = 12, i = ?

 F/P
N
i = - 1
12
= √ (2.31/1.07) - 1
= 0.0662 or 6.62% per year
Example 4.12 (cont.):

The average price of gasoline in 2005 was RM2.31 per gallon. We

computed the average annual rate of increase in the price of gasoline to be
6.62%. If we assume that the price of gasoline will continue to inflate at
this rate, how long will it be before we are paying RM5.00 per gallon?

P = RM2.31, F = RM5.00, N = ? i = 6.62%

N = log (F/P)
log (1 + i)

= log (5.00/2.31)
log (1 + 0.0662)

= 12.05 years ~ 12 years