Interest Formulas - Equal Payment Series: Lecture No.5

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Interest Formulas Equal

Payment Series
Lecture No.5

Equal Payment Series


F

0
A

P
0

Equal Payment Series Compound Amount


Factor
F

F
0

N
0

2
N

Compound Amount Factor


F

A(1+i)N-2
A

A
A(1+i)N-1

F A(1 i)

N 1

A(1 i)

N 2

L A

Equal Payment Series Compound Amount Factor (Future Value of


an annuity)

F
0

3
N

(1 i ) N 1
FA
i
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

F =?

$5,000(1 0.06)3 $5,955.08


$5,000(1 0.06) $5,618.00

i = 6%

$5,000(1 0.06)1 $5,300.00


$5,000(1 0.06) $5,000.00
$28.185.46
0

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

Finding an Annuity Value


F
0

3
N

A=?

i
A F
N
(1 i) 1
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

$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

i
L
O
A FM
P
i

(
1
)
1
N Q
N

3
N

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
i = 7%
N = 8 years

$100,000

Current age: 10 years old

Find:
0
1

=PMT(i,N,pv,fv,type)
=PMT(7%,8,0,100000,0)
=$9,746.78

A=?

i = 8%

Capital Recovery Factor


P

i(1 i)
A P
N
(1 i) 1
P( A / P, i, N )
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

Grace period

P = $21,061.82(F/P, 6%, 1)

i = 6%
0

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

(1 i ) N 1
P A
i (1 i ) N
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

Find: P
=PV(8%,25,7.92,0)
= $84.54M

A = $7.92 million

0
1

25

i = 8%

P=?

Example 2.15 Early Savings Plan 8% interest


?

Option 1: Early Savings Plan


0

10
44

$2,000

Option 2: Deferred Savings Plan


0

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)


$396,645

44

$2,000

Age

31

65

Option 2: Deferred Savings Plan

F44 $2,000(F/ A,8%,34)

$317,233

Option 2: Deferred Savings Plan

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

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
40
41
42
43
44
45
46
47

Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
37
38
39
40
41
42
43
44

Option 1

Option 2

$
$
$
$
$
$
$
$
$
$

(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)

Interest rate

$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$

(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)
(2,000)

0.08

FV of Option 1

$ 396,645.95

FV of Option 2

$ 317,253.34

Target cell

$ 79,392.61

Using Excels Goal Seek Function

Result

$396,644

Option 1: Early Savings Plan


0

10
44

$2,000
$317,253

Option 2: Deferred Savings Plan


0

10 11 12
44

$2,000

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