L5: Interest Formulas – Equal Payment Series ECON 320 Engineering Economics Mahmut Ali GOKCE Industrial Systems Engineering Computer Sciences

Equal Payment Series 012 N 0 12N AAA F P 0 N

Equal Payment Series – Compound Amount Factor 012 N 0 12N AAA F 012 N AAA F

Compound Amount Factor 012 N 0 12N AAA F A(1+i) N-1 A(1+i) N-2

Equal Payment Series Compound Amount Factor ( Future Value of an annuity) Example 2.9: Given: A = $5,000, N = 5 years, and i = 6% Find: F Solution: F = $5,000(F/A,6%,5) = $28, N F A

Validation

Finding an Annuity Value Example: Given: F = $5,000, N = 5 years, and i = 7% Find: A Solution: A = $5,000(A/F,7%,5) = $ N F A = ?

Example 2.10 Handling Time Shifts in a Uniform Series F = ? $5,000 $5,000 $5,000 $5,000 $5,000 i = 6% First deposit occurs at n = 0

 Annuity Due  Excel Solution =FV(6%,5,5000,0,1) Beginning period

Sinking Fund Factor 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, N F A

Excel Solution Given:  F = $100,000  i = 7%  N = 8 years Find: =PMT(i,N,pv,fv,type) =PMT(7%,8,0,100000,0) =$9,746.78

Capital Recovery Factor 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, N P A = ? 0

P =$21, A A A A A i = 6% A’ A’ A’ A’ A’ i = 6% P’ = $21,061.82(F/P, 6%, 1) Grace period Example 2.14 Deferred Loan Repayment Plan

Two-Step Procedure

Present Worth of Annuity Series 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 N P = ? A 0

Excel Solution Given:  A = $7.92M  i = 8%  N = 25 Find: P =PV(8%,25,7.92,0) = $84.54M

Option 2: Deferred Savings Plan $2,000 Example 2.15 Early Savings Plan – 8% interest Option 1: Early Savings Plan $2,000 ? ?

Option 1 – Early Savings Plan Option 1: Early Savings Plan $2,000 ? 6531Age

Option 2: Deferred Savings Plan Option 2: Deferred Savings Plan $2,000 ?

At What Interest Rate These Two Options Would be Equivalent?

Using Excel’s Goal Seek Function

Result

Option 1: Early Savings Plan Option 2: Deferred Savings Plan $2,000 $396,644 $317,253