Lecture9 - ES301 Engineering Economics
Lecture9 - ES301 Engineering Economics
Lecture9 - ES301 Engineering Economics
Methods
Lecture 9
1+𝑖 𝑛−1
𝐹𝑉 = 𝑃𝑀𝑇 → 𝑓𝑢𝑡𝑢𝑟𝑒 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑 𝑎𝑚𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑜𝑟 FV of annuity at the end of nth period
𝑖
−𝑛
1− 1+𝑖
𝑃𝑉 = 𝑃𝑀𝑇 → 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑 𝑎𝑚𝑜𝑢𝑛𝑡 𝑓𝑎𝑐𝑡𝑜𝑟 𝑜𝑟 PV of annuity
𝑖
Where:
PMT= payments or amortization or annuity payment deposited or received at the end of each period
n= number of periods for which annuity will last
i = interest rate per period
Examples
1 How much money will you accumulate by the end of year 10 if you deposit $3,000
each for the next ten years in a savings account that earns 5% per year?
Given:
n=10 years
i = 5% = 0.05
PMT =$3,000
Required:
FV=?
Solution:
1+𝑖 𝑛−1
𝐹𝑉 = 𝑃𝑀𝑇
𝑖
1 + 0.05 10 − 1
𝐹𝑉 = 3000
0.05
𝐹𝑉 = $37,733.70
The Future Value of an Ordinary Annuity
• Using an Excel Spreadsheet
• FV of Annuity
– = FV(rate, nper,pmt, pv)
– =FV(.05,10,-3000,0)
– = $37,733.68
Solving for PMT in an Ordinary Annuity
• Instead of figuring out how much money
you will accumulate (i.e. FV), you may like
to know how much you need to save each
period (i.e. PMT) in order to accumulate a
certain amount at the end of n years.
• In this case, we know the values of n, i,
and FVn in the equation and we need to
determine the value of PMT.
Solving for PMT in an Ordinary Annuity
2. Suppose you would like to have $25,000
saved 6 years from now to pay towards
your down payment on a new house. If you
are going to make equal annual end-of-year
payments to an investment account that
pays 7 percent, how big do these annual
payments need to be?
Solving for PMT in an Ordinary Annuity
(cont.)
1+𝑖 𝑛−1
𝐹𝑉 = 𝑃𝑀𝑇
𝑖