Lecture No5

L5: Interest Formulas – Equal
Payment Series
ECON 320 Engineering Economics

Mahmut Ali GOKCE
Industrial Systems Engineering
Computer Sciences
www.izmirekonomi.edu.tr
Equal Payment Series
F
0 1 2 N
A A A
P
0 1 2 N
0 N
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
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
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
Validation
$5,000(1  0.06)  $6,312.38

4 F =?
$5,000(1  0.06)3  $5,955.08 i = 6%
$5,000(1  0.06)  $5,618.00

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
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
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
 Annuity Due
F5  $5,000( F / A,6%,5)(1.06)
 $29,876.59
 Excel Solution
Beginning period
=FV(6%,5,5000,0,1)
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
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
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
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’
Two-Step Procedure
P '  $21, 061.82( F / P, 6%,1)

 $22,325.53
A  $22,325.53( A / P, 6%,5)
 $5,300
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
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=?
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
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
F44  $2,000( F / A,8%,34)

?
 $317,233 Option 2: Deferred Savings Plan
0 11 12
44
$2,000
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
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)
Using Excel’s Goal Seek Function
Result
$396,644
Option 1: Early Savings Plan
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

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L5: Interest Formulas – Equal

ECON 320 Engineering Economics

$5,000(1  0.06)  $6,312.38

$5,000(1  0.06)3  $5,955.08 i = 6%

$5,000(1  0.06)  $5,618.00

$5,000(1  0.06)1  $5,300.00

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

Example 2.12: Paying Off Education Loan

P '  $21, 061.82( F / P, 6%,1)

Example 2.14:Powerball Lottery

Option 1: Early Savings Plan

Option 2: Deferred Savings Plan

F44  $28,973( F / P,8%,34) 44

F44  $2,000( F / A,8%,34)

 $317,233 Option 2: Deferred Savings Plan

Option 1: Early Savings Plan

Option 2: Deferred Savings Plan

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