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Interest calculation

C K Biswas
Dept of ME

content
Simple interest
compound interest
future value
Present value
Annuity

Simple Interest
The interest is
computed once
during the life of
the loan, using
the formula.
P= principle
amount
n= time for
repayment

i= annual rate of
interest

Cash flow diagram for


borrower

Compound Interest

interest is
The

added to the
principal and that
amount becomes
the principal for the
next calculation of
interest.
F = future amount
m = no. of period
per year

Cash flow diagram for


borrower

Key Terms
Principle/ present value, P: the initial amount

of money at time = 0
Future value/ maturity value/ compound
amount, F: the accumulated principal and
interest after one or more interest periods.
Interest period, n: No. of years for money is
lend
Annual interest rate, i: the rate interest for one
year
Periods per year, m: No. of time the interest is
calculated on the compound amount and added to
it in a year.

Example:

Calculate
the maturity amount to paid to the lender

if an amount of Rs 1,000 is borrowed for 5 years


with 10% annual interest rate and the interest
calculated quarterly per year.
Soln:

Maturity/ future amount , F = 1,000


= Rs 1,639

Annuity
It is a series of equal payments at equal

interval of time. Also known as uniform


payment series.
Payment is made at the end of period.
Deposit is made at the start of the period.
Compound interest is earned on the
accumulated payments.
Since each equal payment is earning unequal
amount of compound interest, need formulas/
tables to calculate it.
e.g: Equal monthly installment (EMI)

Capital recovery annuity


A m/c is bought
with Rs 20,000/- by
taking loan from
bank. The annual
rate of interest is
12% compounded
annually and
repayment period
is 5 years.
Calculate to
amount to be paid
after each year.

20,000
12%
=5

=?

Present worth annuity


If a man wants to
pay Rs 5,548/annually to his son
for 5 years, then
how much money
should he keep in
bank. The annual
rate of interest is
12% compounded
annually.

=5,548

=5
12%

Sinking fund annuity


The fund for
purchasing the
present m/c has to
be set aside for
future buying after
10 years. If the
estimated price is
Rs 10,000/- and
annual rate of
interest 10%, then
how much money
should be
deposited in bank
each year?

10,000
10%
=10

=?
A

Compound Amount Annuity


An equal amount
of Rs 627/- will be
set aside annually
for purchasing a
m/c after 10 years.
If the annual rate
of interest 10%,
then how much
money will be
accumulated in
bank?

=10
10%

?
F

Factor
(F/P,i,n)
(P/F,i,n)
(P/F,i,n)

Name
Single payment
compound amount
factor
Single
Single payment
payment
present
present worth
worth factor
factor

Formula

Purpose
Moves a single payment to n periods
later in time
Moves
Moves aa single
single payment
payment to
to nn periods
periods
earlier
earlier in
in time
time

(A/F,i,n)
(A/F,i,n)

Sinking
Sinking Fund
Fund factor
factor

Takes
Takes aa single
single payment
payment and
and spreads
spreads
into
into aa uniform
uniform series
series over
over nn earlier
earlier
periods.
periods. The
The last
last payment
payment in
in the
the
series
occurs
at
the
same
time
series occurs at the same time as
as F.
F.

(F/A,i,n)
(F/A,i,n)

Uniform
Uniform Series
Series
Compound
Compound Amount
Amount
factor
factor

Takes
Takes aa uniform
uniform series
series and
and moves
moves it
it
to
to aa single
single value
value at
at the
the time
time of
of the
the last
last
payment
payment in
in the
the series.
series.

(A/P,i,n)

Capital Recovery
Factor

Takes a single payment and spreads it


into a uniform series over n later
periods. The first payment in the
series occurs one period later than P.

(P/A,i,n)
(P/A,i,n)

Uniform
Uniform Series
Series
Present
Present Worth
Worth Factor
Factor

Takes
Takes aa uniform
uniform series
series and
and moves
moves it
it
to
to aa single
single payment
payment one
one period
period earlier
earlier
than
than the
the first
first payment
payment of
of the
the series.
series.

example
A machine will cost
Rs20,000 when purchased
and it will generate
revenues of Rs5000 per
year for 5 years. The
salvage value is Rs1000.
Assume rate of interest as
6%, what is the present
worth of the m/c?

Cash flow diagram

Soln: example

Compound interest factors


from table

Present worth,
P =-20,000
+5,000(P/A,6%,5)
+1,000(P/F,6%,5)

= -20,000
+5,000(4.212)
+1,000(0.7473)
=Rs1,807.30

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