Review

Time Value of Money

Interest
Simple Interest
Compound Interest
Nominal Interest
Effective Interest
Continuous Compounding
Equivalence
 Single Cash Flow

involves the equivalence of a single present amount

and its future worth

deals with only two amounts: a single present amount

P, and its future worth F
 SINGLE-AMOUNT FACTORS (F/P AND P/F)

January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
 SINGLE-AMOUNT FACTORS (F/P AND P/F)

EXAMPLE:
Sandy, a manufacturing engineer, just received a year-end bonus of $10,000 that
will be invested immediately. With the expectation of earning at the rate of 8%
per year, Sandy hopes to take the entire amount out in exactly 20 years to pay
for a family vacation when the oldest daughter is due to graduate from college.
Find the amount of funds that will be available in 20 years
F/P factor

F = P (10,000, 8%, 20)

Ans: $ 46, 610
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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
Interest Formulas - Equal Payment
Series, Unequal payment series
Uniform Series present worth, Capital Recovery,
Compound amount, Sinking Fund
Irregular payment series
 Equal Payment Series

also known as the uniform series

includes transactions arranged as a series of equal cash
flows at regular intervals
deals with the equivalence calculations of P, F, and A
(constant amount of cash flow in the series)
 UNIFORM SERIES COMPOUND AMOUNT FACTOR
AND SINKING FUND FACTOR (A/F AND F/A)

January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
 Compound Amount Factor

factor notation: F=A(F/A,i,n)

Given:
Constant contribution for each period, A
Interest per period, i
Contributions made at the end of each period, n
Finding the accumulated amount, F
 Example - Compound Amount Factor

Suppose you make an annual contribution of $3,000 to

your saving account at the end of each year for 10 years. If
your saving account earns 7% interest annually, how much
can be withdrawn at the end of 10 years?
F/A factor

F = A (3000, 7%, 10)

Ans: $ 41,449.34
 Sinking Fund Factor

factor notation: A=F(A/F,i,n)

Find A, given F, i, n
 Example - Sinking Fund Factor
To help you reach a goal of $5,000 5 years from now, your father offers to give
you $500 now. You plan to get a part-time job and make five additional deposits
at the end of each year. (The first deposit is made at the end of the first year.)
If all your money is deposited in a bank that pays 7% interest, how large must
your annual deposit be?
Solution : Use future as perspective
Subtract future worth of 500 to the 5000 goal
Get the annuity of the subtracted value

Answer : $747.51 annually for 5 years

 SINKING FUND FACTOR AND UNIFORM SERIES
COMPOUND AMOUNT FACTOR (A/F AND F/A)
EXAMPLE:
The president of Ford Motor Company wants
to know the equivalent future worth of a $1
million capital investment each year for 8
years, starting 1 year from now. Ford capital
earns at a rate of 14% per year.

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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
 UNIFORM SERIES PRESENT WORTH FACTOR AND
CAPITAL RECOVERY FACTOR (P/A AND A/P)

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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
 Present Worth Factor

factor notation: P=A(P/A,i,n)

Find P, given A, i, n
 Example -Present Worth Factor

Mrs. Setchfield gave up $32,639 a year for 9 years to receive

a lump sum of $140,000. If she could invest her money at
8% interest, did she make the right decision? What should
have been the fair amount to give up her nine future
receipts?
The annual is better than
the lump sum amount
 Capital Recovery Factor

factor notation: A=P(A/P,i,n)

Find A, given P, i, n
 Example - Capital Recovery Factor

BioGen Company, a small biotechnology firm has

borrowed $250,000 to purchase laboratory equipment for
gene splicing. The loan carries an interest rate of 8% per
year and is to be repaid in equal installments over the next
6 years. Compute the amount of this annual installment.

Answer : $54,078.85
 UNIFORM SERIES PRESENT WORTH FACTOR AND
CAPITAL RECOVERY FACTOR (P/A AND A/P)

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?

Answer : $2,763.93
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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
Uneven Payment Series
 Irregular Series

does not exhibit a regular overall pattern

one or more of the patterns identified may
appear over segments of time in the total
length of the series
Find the present worth of each individual
payment and sum the results.
 PRESENT VALUES OF AN UNEVEN SERIES
BY DECOMPOSITION INTO SINGLE
PAYMENTS

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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
PRESENT VALUES OF AN UNEVEN
SERIES BY DECOMPOSITION INTO
SINGLE PAYMENTS

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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
PRESENT VALUES OF AN UNEVEN
SERIES BY DECOMPOSITION INTO
SINGLE PAYMENTS

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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
 Focusing your life solely on making a buck shows
poverty of ambition. It asks too little of yourself. And it
will leave you unfulfilled.
-Barack Obama
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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
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January 8, 2014 Metallurgical Engineering 15: Equal Payment Series & Uneven Payment Series
 Some Practice Problems
(Try this and compare with your classmates)
1. What is the future worth of an equal payment series of $1,000 each for 5 years if
the interest rate is 9% compounded continuously? Illustrate the transaction.
2. If you desire to withdraw the following amounts over the next 5 years from a
savings account that earn a 6% interest compounded annually, how much do you
need to deposit now?
3. A house and lot can be acquired a down payment of 500,000.00 PhP and a yearly
payment of 100,000.00 PhP at the end of each year for a period of 10 years, starting
at the end of 5 years from the date of purchase. If money is worth 14%
compounded annually, what is the cash price of the property?
 Announcements
Probset will be uploaded today, February 22
Next Meeting
Deadline of Probset
Bring answer sheet for exam (bluebook)
First Long Exam March 8, 2016
4:00 PM 7:00 PM