Uniform-Series (Annuity) to its Present and Future

Equivalent Value
Finding P When Given A:
The equivalent present worth P of a uniform series A of end-of-period
cash flows can be determined by considering each A value as a future
worth F and calculating its present worth.
A = An end-of-period cash receipt or disbursement in a uniform series,
continuing for n periods, the entire series equivalent to P or F at
interest rate i .

Dr. Dhaheer Abd Al- Samad

 ...(10)

..(11)

Now subtract the two equations, Eq. (10) from Eq. (11):

....(12)
Dr. Dhaheer Abd Al-Samad
 is the uniform series present worth factor, P/A factor used to
calculate the equivalent present worth P in year 0 for a uniform end-of-
period series of A values beginning at the end of period 1 and extending
for n periods.

Finding A When Given P:

 To reverse the situation, the present worth P is known and the
equivalent uniform series amount A is sought. The first A value occurs
at the end of period 1, that is, one period after P occurs. Solve Eq. (12)
for A to obtain:

....(13)

Dr. Dhaheer Abd Al- Samad

 is the capital recovery factor or A/P factor. It calculates the
equivalent uniform annual worth A over n years starting from the end
of year 1 for a given P in year 0.

 CAUTION!
These formulas are derived with the present worth P and the first
uniform annual amount A one period apart. Therefore, the present
worth P must always be located one period prior to the first A.
The factors and their use to find P and A are summarized as follows:

Dr. Dhaheer Abd Al-Samad

Example:
How much money should you be willing to pay now for a guaranteed
$ 600 per year for 9 years starting next year, at a rate of return of 16 %
per year?
Solution:
The present worth is:

= 600 * (4.6065)
= $2763.90

Dr. Dhaheer Abd Al-Samad

Example:
Consider a situation in which you borrow $5000. You will repay the loan
in five equal end of the year payments. The first payment is due one year
after you receive the loan. Interest on the loan is 8%. What is the size of
each of the five payments?
Solution:
The annual loan payment is:

P = $ 5,000
i = 8%
= 5,000 * (0.2505)
= $1252
Or
A=?
From Tables:
A = 5,000 ( A / P, 8 %, 5) = 5,000 * (0.2505) = $ 1252
Dr. Dhaheer Abd Al-Samad
Finding A When Given F:
The uniform series formulas that relate A and F follow, are derived as
follow:
We already know that:

....(14)

Finding F When Given A:

Equation (14) can be rearranged to find F
for uniform A series in periods through n:
....(15) Cash flow diagrams to (a) find A, given F ,
and (b) find F, given A .

Dr. Dhaheer Abd Al-Samad

 From Eq. (14), is the sinking fund factor or A/F factor, used
to determine the uniform annual series A that is equivalent to a given
future worth F.

 CAUTION!
The uniform series A begins at the end of year (period) and continues
through the year of the given F. The last A value and F occur at the
same time.
The factors and their use to find F and A are summarized as follows:

Dr. Dhaheer Abd Al-Samad

Example:
A man deposits $500 in a bank at the end of each year for 5 years. The
bank pays 5% interest, compounded annually. At the end of 5 years,
immediately after the fifth deposit, how much does the man have in his
account?
Solution:
The F value at the end of 5 years is:
F=?
i=5%

= 500 * (5.526) = $ 2763

Or
A = $ 500
From Tables:
F = 500 ( F / A, 5 %,5) = 500 * (5.526) = $ 2763
Dr. Dhaheer Abd Al-Samad
Calculations For Cash Flows That Are Shifted
- When a uniform series begins at a time other than at the end of period1,
it is called a shifted series.

- In this case several methods can be used to find the equivalent present
worth P.
- For example, P of the uniform series shown in the figure could be
determined by any of the following methods:
(1) Use P/F factor to find the present worth of each disbursement at
year 0 and add them.
(2) Use the F/P factor to find the future worth of each disbursement in
year 13, add them, and then find the present worth of the total using
P = F(P/F,i,13). Dr. Dhaheer Abd Al-Samad
(3) Use the F/A factor to find the future amount F = A(F/A,i,10), as
shown in the figure, and then compute the present worth in year 0
by using P = F(P/F,i,13).

(4) Use P/A factor to find the present worth P3, as shown in the figure
(which will be located in year 3 not year 0), and then find the
present worth in year 0 by using P= F(P/F,i,3).

Dr. Dhaheer Abd Al-Samad

 Quiz

Using a 15% interest rate, compute the value of F in the following cash
flow:
End of Year Cash Flow
1 +100
2 +100
3 +100
4 0
5 +200
6 +200
7 +200
8 +200
9 0
10 -F

Dr. Dhaheer Abd Al-Samad

 Quiz

Using a 12 % interest rate, compute the value of P in the following cash

flow:
End of Year Cash Flow
0 -P
1 0
2 +100
3 +100
4 +100
5 0
6 +200
7 +200
8 +200
9 +200

Dr. Dhaheer Abd Al-Samad