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Interest Formulas

for Single Cash


Flows
Module 6
Chapter 3
Contemporary Engineering Economics
Copyright 2010

Contemporary Engineering Economics, 5th edition, 2010

Types of Common
Cash Flows in
Engineering
Economics

Single cash flow


Equal (uniform)

payment series at
regular intervals
Linear gradient
series
Geometric
gradient series
Irregular
(random) payment
series
Contemporary Engineering Economics, 5th edition, 2010

Equivalence
Relationship
Between P and
F
Compounding

Process Finding an
equivalent future
value of current
cash payment

Discounting

Process Finding an
equivalent present
value of a future
cash payment
Contemporary Engineering Economics, 5th edition, 2010

Example 3.7
Single
Amounts: Find
F, Given i, N,
and P
Single Cash Flow Formula

Given: P =

$2,000, i = 10%, N
= 8 years
Find: F

Compound Amount
Factor

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

0
Excel Solution:

N
P

Contemporary Engineering Economics, 5th edition, 2010

A Typical
Compound
Interest Table
say 12%
To find the compound
interest factor when
the interest rate is
12% and the number
interest periods is 10,
we could evaluate the
following equation
using the interest
table.

Contemporary Engineering Economics, 5th edition, 2010

Example 3.8
Single
Amounts: Find
P, Given i, N,
and F
Single Cash Flow Formula

Given: F =

$1,000, i = 12%, N
= 5 years
Find: P

Present Worth Amount


Factor
F
N

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

0
Excel Solution:

N
P

Contemporary Engineering Economics, 5th edition, 2010

Example 3.9
Single
Amounts: Find
i, Given P, F,
and N
Solving for i

Given: F = $20, P =

$10, N = 5 years
Find: i

Excel Solution:

Contemporary Engineering Economics, 5th edition, 2010

Example 3.10
Single
Amounts: Find
N, Given P, F,
and i
Solving for N
Given: P = $6,000,

F = $12,000, and i =
20%
Find: N

Excel Solution:

Contemporary Engineering Economics, 5th edition, 2010

Rule of
72
Number of Years Required to

Double an Initial Investment at


Various Interest Rates

Approximatin

g how long it
will take for a
sum of money
to double
Contemporary Engineering Economics, 5th edition, 2010

Example 3.11
Uneven
Payment
Series

How much do

you need to
deposit today (P)
to withdraw
$25,000
at n =1,
$25,000
$3,000 at n = 2,
$3,000 $5,000
and
$5,000
at n
0
=4, if
1 your
2
3
4
account earns
10% annual
P
interest?
Contemporary Engineering Economics, 5th edition, 2010

Check to see if $28,622 is


indeed sufficient
0

Beginni
ng
Balance

28,622

6,484.2
0

4,132.6
2

4,545.8
8

Interest
Earned
(10%)

2,862

648.42

413.26

454.59

Paymen
t

+28,62
2

-25,000

-3,000

-5,000

Ending
Balance

$28,622

6,484.2
0

4,132.6
2

4,545.8
8

0.47

Rounding error
It should be 0.
Contemporary Engineering Economics, 5th edition, 2010

Example 3.12
Future Value of an
Uneven Series
with Varying
Interest Rates

Given: Deposit series


as given over 5 years

Find: Balance at the

end of year 5
Contemporary Engineering Economics, 5th edition, 2010

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