Relationships & Equavalance

CHAPTER 3
MONEY-TIME
RELATIONSHIPS
AND EQUIVALENCE
MONEY
Medium of Exchange -Means of payment for goods or services;
What sellers accept and buyers pay ;
Store of Value -A way to transport buying power from one time
period to another;
Unit of Account -A precise measurement of value or worth;
Allows for tabulating debits and credits;
CAPITAL
Wealth in the form of money or
property that can be used to
produce more wealth.
KINDS OF CAPITAL
Equity capital is that owned by individuals who
have invested their money or property in a
business project or venture in the hope of
receiving a profit.
Debt capital, often called borrowed capital, is
obtained from lenders (e.g., through the sale
of bonds) for investment.
Financing
Definition
Instrument Description
Debt
financing
Borrow
money
Bond Promise to
pay
principle &
interest;
Equity
financing
Sell partial Stock Exchange

ownership of
shares of
company;
stock for
ownership of
company;
Financing
Definition
Debt
financing
Borrow
money
Bond Promise to
pay
principle &
interest;
Equity
financing

ownership of
shares of
company;
stock for
ownership of
company;
Financing
Definition
Debt
financing
Borrow
money
Bond Promise to
pay
principle &
interest;
Equity
financing

Exchange
ownership of
sharesfor
of
money
company;
stock for
shares
of
ownership
of
stock
as
company;
proof of
partial
ownership
INTEREST
The fee that a borrower pays to a
lender for the use of his or her
money.
INTEREST RATE
The percentage of money being
borrowed that is paid to the lender
on some time basis.
HOW INTEREST RATE IS

DETERMINED
Interest
Rate
Quantity of Money

DETERMINED
Interest
Rate
Money Demand
Quantity of Money

DETERMINED
Interest
Rate
Money Supply
MS1
Money Demand
Quantity of Money

DETERMINED
Interest
Rate
Money Supply
MS1
ie
Money Demand
Quantity of Money

DETERMINED
Interest
Rate
Money Supply
MS1 MS2
ie
i2
Money Demand
Quantity of Money

DETERMINED
Interest
Rate
Money Supply
MS3 MS1 MS2
i3
ie
i2
Money Demand
Quantity of Money
SIMPLE INTEREST
The total interest earned or charged is linearly
proportional to the initial amount of the loan
(principal), the interest rate and the number of
interest periods for which the principal is
committed.
When applied, total interest I may be found
by I = ( P ) ( N ) ( i ), where
P
P == principal
principal amount
amount lent
lent or
or borrowed
borrowed
N
N == number
number of
of interest
interest periods
periods (( e.g.,
e.g., years
years ))
ii == interest
interest rate
rate per
per interest
interest period
period
COMPOUND INTEREST
Whenever the interest charge for any interest
period is based on the remaining principal
amount plus any accumulated interest charges
up to the beginning of that period.
Period
Period Amount
Amount Owed
Owed Interest
Interest Amount
Amount Amount
Amount Owed
Owed
Beginning
Beginning of
of for
for Period
Period at
at end
end of
of
period
(( @
period
@ 10%
10% )) period
period
11
$1,000
$100
$1,100
$1,000
$100
$1,100
22
$1,100
$110
$1,210
$1,100
$110
$1,210
33
$1,210
$121
$1,331
$1,210
$121
$1,331
ECONOMIC EQUIVALENCE
Established when we are indifferent between a
future payment, or a series of future payments,
and a present sum of money .
Considers the comparison of alternative
options, or proposals, by reducing them to an
equivalent basis, depending on:
interest
interest rate;
rate;
amounts
amounts of
of money
money involved;
involved;
timing
timing of
of the
the affected
affected monetary
monetary receipts
receipts and/or
and/or
expenditures;
expenditures;
manner
manner in
in which
which the
the interest
interest ,, or
or profit
profit on
on invested
invested
capital
capital is
is paid
paid and
and the
the initial
initial capital
capital is
is recovered.
recovered.
ECONOMIC EQUIVALENCE FOR FOUR

REPAYMENT PLANS OF AN $8,000 LOAN
Plan
Plan #1:
#1: $2,000
$2,000 of
of loan
loan principal
principal plus
plus 10%
10% of
of BOY
BOY
principal
principal paid
paid at
at the
the end
end of
of year;
year; interest
interest paid
paid at
at the
the
end
end of
of each
each year
year is
is reduced
reduced by
by $200
$200 (i.e.,
(i.e., 10%
10% of
of
remaining
remaining principal)
principal)
Year
Year Amount
Amount Owed
Owed Interest
Interest Accrued
Accrued Total
Total Principal
Principal Total
Total end
end
at
for
Money
at beginning
beginning
for Year
Year
Money Payment
Payment of
of Year
Year
of
owed
Payment
of Year
Year
owed at
at
Payment (( BOY
BOY ))
end
Year
end of
of
Year
11
$8,000
$800
$8,800
$8,000
$800
$8,800 $2,000
$2,000 $2,800
$2,800
22
$6,000
$600
$6,600
$6,000
$600
$6,600 $2,000
$2,000 $2,600
$2,600
33
$4,000
$400
$4,400
$4,000
$400
$4,400 $2,000
$2,000 $2,400
$2,400
44
$2,000
$200
$2,200
$2,000
$200
$2,200 $2,000
$2,000 $2,200
$2,200
Total
Total interest
interest paid
paid ($2,000)
($2,000) is
is 10%
10% of
of total
total dollar-years
dollar-years ($20,000)
($20,000)

Plan
Plan #2:
#2: $0
$0 of
of loan
loan principal
principal paid
paid until
until end
end of
of fourth
fourth
year;
year; $800
$800 interest
interest paid
paid at
at the
the end
end of
of each
each year
year
Year
Year Amount
Amount Owed
Owed Interest
Interest Accrued
Accrued Total
Total Principal
Principal Total
Total end
end
at
for
Money
at beginning
beginning
for Year
Year
Money Payment
Payment of
of Year
Year
of
owed
Payment
of Year
Year
owed at
at
Payment (( BOY
BOY ))
end
Year
end of
of
Year
11
$8,000
$800
$8,800
$800
$8,000
$800
$8,800 $0
$0
$800
22
$8,000
$800
$8,800
$8,000
$800
$8,800 $0
$0 $800
$800
33
$8,000
$800
$8,800
$800
$8,000
$800
$8,800 $0
$0
$800
44
$8,000
$800
$8,800
$8,000
$800
$8,800 $8,000
$8,000 $8,800
$8,800
Total
Total interest
interest paid
paid ($3,200)
($3,200) is
is 10%
10% of
of total
total dollar-years
($32,000)

Plan
Plan #3:
#3: $2,524
$2,524 paid
paid at
at the
the end
end of
of each
each year;
year; interest
interest
paid
paid at
at the
the end
end of
of each
each year
year is
is 10%
10% of
of amount
amount owed
owed
at
at the
the beginning
beginning of
of the
the year.
year.
Year
Year Amount
Amount Owed
Owed Interest
Interest Accrued
Accrued Total
Total Principal
Principal Total
Total end
end
at
for
Money
at beginning
beginning
for Year
Year
Money Payment
Payment of
of Year
Year
of
owed
Payment
of Year
Year
owed at
at
Payment (( BOY
BOY ))
end
Year
end of
of
Year
11
$8,000
$800
$8,800
$8,000
$800
$8,800 $1,724
$1,724 $2,524
$2,524
22
$6,276
$628
$6,904
$6,276
$628
$6,904 $1,896
$1,896 $2,524
$2,524
33
$4,380
$438
$4,818
$4,380
$438
$4,818 $2,086
$2,086 $2,524
$2,524
44
$2,294
$230
$2,524
$2,294
$230
$2,524 $2,294
$2,294 $2,524
$2,524
Total
Total interest
interest paid
paid ($2,096)
($2,096) is
is 10%
10% of
of total
total dollar-years
($20,950)

Plan
Plan #4:
#4: No
No interest
interest and
and no
no principal
principal paid
paid for
for first
first
three
three years.
years. At
At the
the end
end of
of the
the fourth
fourth year,
year, the
the original
original
principal
principal plus
plus accumulated
accumulated (compounded)
(compounded) interest
interest is
is
paid.
paid.
Year
Year Amount
Amount Owed
Owed Interest
Interest Accrued
Accrued Total
Total Principal
Principal Total
Total end
end
at
for
Money
at beginning
beginning
for Year
Year
Money Payment
Payment of
of Year
Year
of
owed
Payment
of Year
Year
owed at
at
Payment (( BOY
BOY ))
end
Year
end of
of
Year
11
$8,000
$800
$8,800
$8,000
$800
$8,800 $0
$0 $0
$0
22
$8,800
$880
$9,680
$8,800
$880
$9,680 $0
$0 $0
$0
33
$9,680
$968
$10,648
$9,680
$968
$10,648 $0
$0 $0
$0
44
$10,648
$1,065
$11,713
$10,648
$1,065
$11,713 $8,000
$8,000 $11,713
$11,713
Total
Total interest
interest paid
paid ($3,713)
($3,713) is
is 10%
10% of
of total
total dollar-years
($37,128)
CASH FLOW DIAGRAMS / TABLE

NOTATION
ii == effective
effective interest
interest rate
rate per
per interest
interest period
period
N
N == number
number of
of compounding
compounding periods
periods (e.g.,
(e.g., years)
years)
P
P == present
present sum
sum of
of money;
money; the
the equivalent
equivalent value
value of
of one
one
or
or more
more cash
cash flows
flows at
at the
the present
present time
time reference
reference point
point
F
F == future
future sum
sum of
of money;
money; the
the equivalent
equivalent value
value of
of one
one or
or
more
more cash
cash flows
flows at
at aa future
future time
time reference
reference point
point
A
A == end-of-period
end-of-period cash
cash flows
flows (or
(or equivalent
equivalent end-ofend-ofperiod
period values
values )) in
in aa uniform
uniform series
series continuing
continuing for
for aa
specified
specified number
number of
of periods,
periods, starting
starting at
at the
the end
end of
of the
the
first
first period
period and
and continuing
continuing through
through the
the last
last period
period
G
G == uniform
uniform gradient
gradient amounts
amounts --- used
used ifif cash
cash flows
flows
increase
increase by
by aa constant
constant amount
amount in
in each
each period
period
CASH FLOW DIAGRAM NOTATION

1
5=N
Time scale with progression of time moving from left to

right; the numbers represent time periods (e.g., years,
months, quarters, etc...) and may be presented within a
time interval or at the end of a time interval.

1
P =$8,000
5=N

Present expense (cash outflow) of $8,000 for lender.

A = $2,524 3
1
P =$8,000
5=N

Annual income (cash inflow) of $2,524 for lender.

A = $2,524 3
1
P =$8,000
4
4
5=N
i = 10% per year

Interest rate of loan.

A = $2,524 3
5
1
P =$8,000
4
4
5=N
i = 10% per year

Interest rate of loan.
Dashed-arrow line indicates

amount to be determined.
INTEREST FORMULAS FOR ALL OCCASIONS

relating
relating present
present and
and future
future values
values of
of single
single cash
cash
flows;
flows;
relating
relating aa uniform
uniform series
series (annuity)
(annuity) to
to present
present and
and
future
future equivalent
equivalent values;
values;
for
for discrete
discrete compounding
compounding and
and discrete
discrete cash
cash flows;
flows;
for
for deferred
deferred annuities
annuities (uniform
(uniform series);
series);
equivalence
equivalence calculations
calculations involving
involving multiple
multiple interest;
interest;
relating
relating aa uniform
uniform gradient
gradient of
of cash
cash flows
flows to
to annual
annual
and
and present
present equivalents;
equivalents;
relating
relating aa geometric
geometric sequence
sequence of
of cash
cash flows
flows to
to
present
present and
and annual
annual equivalents;
equivalents;
INTEREST FORMULAS FOR ALL OCCASIONS
relating nominal and effective interest rates;

relating to compounding more frequently than
once a year;
relating to cash flows occurring less often than
compounding periods;
for continuous compounding and discrete cash
flows;
for continuous compounding and continuous
cash flows;
RELATING PRESENT AND FUTURE

EQUIVALENT VALUES OF SINGLE CASH
FLOWS
Finding F when given P:

Finding future value when given present value
F = P ( 1+i ) NN
(1+i)
(1+i)NN single
single payment
payment compound
compound amount
amount factor
factor
functionally
functionally expressed
expressed as
as F
F == (( F
F // P,
P, i%,N
i%,N ))
predetermined
predetermined values
values of
of this
this are
are presented
presented in
in
column
column 22 of
of Appendix
Appendix C
C of
of text.
text.
P
N=
0
F=?
RELATING PRESENT AND FUTURE

EQUIVALENT VALUES OF SINGLE CASH
FLOWS
Finding P when given F:
Finding present value when given future value
P = F [1 / (1 + i ) ] NN
-N single payment present worth factor
(1+i)
(1+i)-N
single payment present worth factor
functionally
expressed as
as P
P == F
F (( P
P // F,
F, i%,
i%, N
N ))
predetermined
values of
of this
this are
are presented
presented in
in
column
column 33 of
of Appendix
Appendix C
C of
of text;
text;
N=
P=?
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding F
F given
given A:
A:
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding F
F given
given A:
A:
Finding
Finding future
future equivalent
equivalent income
income (inflow)
(inflow) value
value given
given
aa series
series of
of uniform
uniform equal
equal Payments
Payments
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding F
F given
given A:
A:
Finding
Finding future
future equivalent
equivalent income
income (inflow)
(inflow) value
value given
given
aa series
(( 11 ++
series of
of uniform
uniform equal
equal Payments
Payments
ii )) NN -- 11
F
F == A
A
ii
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding F
F given
given A:
A:
Finding
Finding future
future equivalent
equivalent income
income (inflow)
(inflow) value
value given
given
aa series
(( 11 ++
series of
of uniform
uniform equal
equal Payments
Payments
ii )) NN -- 11
F
F == A
A
ii
uniform
uniform series
series compound
compound amount
amount factor
factor in
in [[ ]]
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding F
F given
given A:
A:
Finding
Finding future
future equivalent
equivalent income
income (inflow)
(inflow) value
value given
given
aa series
(( 11 ++
series of
of uniform
uniform equal
equal Payments
Payments
ii )) NN -- 11
F
F == A
A
ii
uniform
uniform series
series compound
compound amount
amount factor
factor in
in [[ ]]
functionally
expressed as
as FF == A
A (( F
F // A,i%,N
A,i%,N ))
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding F
F given
given A:
A:
Finding
Finding future
future equivalent
equivalent income
income (inflow)
(inflow) value
value given
given
aa series
(( 11 ++
series of
of uniform
uniform equal
equal Payments
Payments
ii )) NN -- 11
F
F == A
A
ii
uniform
uniform series
series compound
compound amount
amount factor
factor in
in [[ ]]
functionally
expressed as
as FF == A
A (( F
F // A,i%,N
A,i%,N ))
predetermined
values are
are in
in column
column 44 of
of Appendix
Appendix
C
C of
of text
text
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding F
F given
given A:
A:
Finding
Finding future
future equivalent
equivalent income
income (inflow)
(inflow) value
value given
given
aa series
series of
of uniform
uniform equal
equal Payments
Payments
(( 11 ++ ii )) NN -- 11
F
F == A
A
ii
uniform
uniform series
series compound
compound amount
amount factor
factor in
in [[ ]]
functionally
expressed as
as F
F == A
A (( F
F // A,i%,N
A,i%,N ))
predetermined
values are
are in
in column
column 44 of
of Appendix
Appendix
C
C of
of text
text
F=?
1 2 3 4 5 6 7 8
A=
( F / A,i%,N ) = (P / A,i,N ) ( F / P,i,N )

N
( F / A,i%,N ) = F / P,i,N-k )
k=1
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding P
P given
given A:
A:
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding P
P given
given A:
A:
Finding
Finding present
present equivalent
equivalent value
value given
given aa series
series of
of
uniform
uniform equal
equal receipts
receipts
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding P
P given
given A:
A:
Finding
Finding present
present equivalent
equivalent value
value given
given aa series
series of
of
uniform
uniform equal
equal receipts
receipts
(( 11 ++ ii )) NN -- 11
P
P == A
A
ii (( 11 ++ ii )) NN
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding P
P given
given A:
A:
Finding
Finding present
present equivalent
equivalent value
value given
given aa series
series of
of
uniform
uniform equal
equal receipts
receipts
(( 11 ++ ii )) NN -- 11
P
P == A
A
ii (( 11 ++ ii )) NN
uniform
uniform series
series present
present worth
worth factor
factor in
in [[ ]]
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding P
P given
given A:
A:
Finding
Finding present
present equivalent
equivalent value
value given
given aa series
series of
of
uniform
uniform equal
equal receipts
receipts
(( 11 ++ ii )) NN -- 11
P
P == A
A
ii (( 11 ++ ii )) NN
uniform
uniform series
series present
present worth
worth factor
factor in
in [[ ]]
functionally
expressed as
as P
P == A
A (( P
P // A,i%,N
A,i%,N ))
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding P
P given
given A:
A:
Finding
Finding present
present equivalent
equivalent value
value given
given aa series
series of
of
uniform
uniform equal
equal receipts
receipts
(( 11 ++ ii )) NN -- 11
P
P == A
A
ii (( 11 ++ ii )) NN
uniform
uniform series
series present
present worth
worth factor
factor in
in [[ ]]
functionally
expressed as
as P
P == A
A (( P
P // A,i%,N
A,i%,N ))
predetermined
values are
are in
in column
column 55 of
of Appendix
Appendix
C
C of
of text
text
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding P
P given
given A:
A:
Finding
Finding present
present equivalent
equivalent value
value given
given aa series
series of
of
uniform
uniform equal
equal receipts
receipts
(( 11 ++ ii )) NN -- 11
P
P == A
A
ii (( 11 ++ ii )) NN
uniform
uniform series
series present
present worth
worth factor
factor in
in [[ ]]
functionally
expressed as
as P
P == A
A (( P
P // A,i%,N
A,i%,N ))
predetermined
values are
are in
in column
column 55 of
of Appendix
Appendix
C
C of
of text
text
A= 1 2 3 4 5 6 7 8
P=?
( P / A,i%,N ) = P / F,i,k )
N
k=1
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given F:
F:
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given F:
F:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent future
future value
value
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given F:
F:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent future
future value
value
ii
A
A == F
F
(( 11 ++ ii )) NN -1
-1
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given F:
F:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent future
future value
value
ii
A
A == F
F
(( 11 ++ ii )) NN -1
-1
sinking
sinking fund
fund factor
factor in
in [[ ]]
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given F:
F:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent future
future value
value
ii
A
A == F
F
(( 11 ++ ii )) NN -1
-1
sinking
sinking fund
fund factor
factor in
in [[ ]]
functionally
expressed as
as A
A == F
F (( A
A // F,i%,N
F,i%,N ))
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given F:
F:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent future
future value
value
ii
A
A == F
F
(( 11 ++ ii )) NN -1
-1
sinking
sinking fund
fund factor
factor in
in [[ ]]
functionally
expressed as
as A
A == F
F (( A
A // F,i%,N
F,i%,N ))
predetermined
values are
are in
in column
column 66 of
of Appendix
Appendix
C
C of
of text
text
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given F:
F:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent future
future value
value
ii
A
A == F
F
(( 11 ++ ii )) NN -1
-1
sinking
sinking fund
fund factor
factor in
in [[ ]]
functionally
expressed as
as A
A == F
F (( A
A // F,i%,N
F,i%,N ))
predetermined
values are
are in
in column
column 66 of
of Appendix
Appendix
C
F=
C of
of text
text
1 2 3 4 5 6 7 8
A =?
( A / F,i%,N ) = 1 / ( F / A,i%,N )
( A / F,i%,N ) = ( A / P,i%,N ) - i
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given P:
P:
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given P:
P:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent present
present value
value
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given P:
P:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent present
present value
value
ii (( 1+i
1+i ))NN
A
A == P
P
(( 11 ++ ii )) NN -1
-1
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given P:
P:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent present
present value
value
ii (( 1+i
1+i ))NN
A
A == P
P
(( 11 ++ ii )) NN -1
-1
capital
capital recovery
recovery factor
factor in
in [[ ]]
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given P:
P:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent present
present value
value
ii (( 1+i
1+i ))NN
A
A == P
P
(( 11 ++ ii )) NN -1
-1
capital
capital recovery
recovery factor
factor in
in [[ ]]
functionally
expressed as
as A
A == P
P (( A
A // P,i%,N
P,i%,N ))
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given P:
P:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent present
present value
value
ii (( 1+i
1+i ))NN
A
A == P
P
(( 11 ++ ii )) NN -1
-1
capital
capital recovery
recovery factor
factor in
in [[ ]]
functionally
expressed as
as A
A == P
P (( A
A // P,i%,N
P,i%,N ))
predetermined
values are
are in
in column
column 77 of
of Appendix
Appendix
C
C of
of text
text
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT AND
AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
Finding
Finding A
A given
given P:
P:
Finding
Finding amount
amount A
A of
of aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent present
present value
value
ii (( 1+i
1+i ))NN
A
A == P
P
(( 11 ++ ii )) NN -1
-1
capital
capital recovery
recovery factor
factor in
in [[ ]]
functionally
expressed as
as A
A == P
P (( A
A // P,i%,N
P,i%,N ))
predetermined
values are
are in
in column
column 77 of
of Appendix
Appendix
C
P=
C of
of text
text
1 2 3 4 5 6 7 8
A =?
( A / P,i%,N ) = 1 / ( P / A,i%,N )
RELATING
RELATING A
A UNIFORM
UNIFORM SERIES
SERIES (DEFERRED
(DEFERRED
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT // FUTURE
FUTURE
EQUIVALENT
EQUIVALENT VALUES
VALUES
If an annuity is deferred j periods, where j < N

And finding P given A for an ordinary annuity is
expressed by:
P = A ( P / A, i
%,N )
This is expressed for a deferred annuity by:
A ( P / A, i%,N - j ) at end of period j
This is expressed for a deferred annuity by:
A ( P / A, i%,N - j ) ( P / F, i%, j )
as
of time 0 (time present)
EQUIVALENCE CALCULATIONS INVOLVING

MULTIPLE INTEREST
All
All compounding
compounding of
of interest
interest takes
takes place
place once
once per
per time
time
period
period (e.g.,
(e.g., aa year),
year), and
and to
to this
this point
point cash
cash flows
flows also
also
occur
occur once
once per
per time
time period.
period.
Consider
Consider an
an example
example where
where aa series
series of
of cash
cash outflows
outflows
occur
occur over
over aa number
number of
of years.
years.
Consider
Consider that
that the
the value
value of
of the
the outflows
outflows is
is unique
unique for
for
each
each of
of aa number
number (i.e.,
(i.e., first
first three)
three) years.
years.
Consider
Consider that
that the
the value
value of
of outflows
outflows is
is the
the same
same for
for
the
the last
last four
four years.
years.
Find
Find a)
a) the
the present
present equivalent
equivalent expenditure;
expenditure; b)
b) the
the
future
future equivalent
equivalent expenditure;
expenditure; and
and c)
c) the
the annual
annual
equivalent
equivalent expenditure
expenditure
PRESENT
PRESENT EQUIVALENT
EQUIVALENT EXPENDITURE
EXPENDITURE
Use
Use P
P00 == F(
F( P
P // F,
F, i%,
i%, N
N )) for
for each
each of
of the
the unique
unique years:
years:
--- FF is
is aa series
series of
of unique
unique outflow
outflow for
for year
year 11 through
through year
year 3;
3;
--- ii is
is common
common for
for each
each calculation;
calculation;
--- N
N is
is the
the year
year in
in which
which the
the outflow
outflow occurred;
occurred;
--- Multiply
Multiply the
the outflow
outflow times
times the
the associated
associated table
table value;
value;
--- Add
Add the
the three
three products
products together;
together;
Use
Use A
A (( P
P // A,i%,N
A,i%,N -- jj )) (( P
P // F,
F, i%,
i%, jj )) --- deferred
deferred annuity
annuity --- for
for
the
the remaining
remaining (common
(common outflow)
outflow) years:
years:
--- A
A is
is common
common for
for years
years 44 through
through 7;
7;
--- ii remains
remains the
the same;
same;
--- N
N is
is the
the final
final year;
year;
--- jj is
is the
the last
last year
year aa unique
unique outflow
outflow occurred;
occurred;
--- multiply
multiply the
the common
common outflow
outflow value
value times
times table
table values;
values;
--- add
add this
this to
to the
the previous
previous total
total for
for the
the present
present equivalent
equivalent
expenditure.
expenditure.
RELATING A UNIFORM GRADIENT OF CASH

FLOWS TO FUTURE EQUIVALENTS
Find
Find F
F when
when given
given G:
G:

Find
Find F
F when
when given
given G:
G:
Find
Find the
the future
future equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount

Find
Find F
F when
when given
given G:
G:
Find
Find the
the future
future equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
N-1 -1
N-2 -1
(1+i)
(1+i)
(1+i)N-1
-1 (1+i)
(1+i)N-2
-1
(1+i) 11 -1
-1
F
++
++ ...
F == G
G
... ++

Find
Find F
F when
when given
given G:
G:
Find
Find the
the future
future equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
N-1 -1
N-2 -1
(1+i)
(1+i)
(1+i)N-1
-1 (1+i)
(1+i)N-2
-1
(1+i) 11 -1
-1
F
++
++ ...
F == G
G
... ++
Functionally
Functionally represented
represented as
as (G/
(G/ i)i) (F/A,i%,N)
(F/A,i%,N) -- (NG/
(NG/ i)i)

Find
Find F
F when
when given
given G:
G:
Find
Find the
the future
future equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
N-1 -1
N-2 -1
(1+i)
(1+i)
(1+i)N-1
-1 (1+i)
(1+i)N-2
-1
(1+i) 11 -1
-1
F
++
++ ...
F == G
G
... ++
Functionally
represented as
as (G/
(G/ i)i) (F/A,i%,N)
(F/A,i%,N) -- (NG/
(NG/ i)i)
Usually
Usually more
more practical
practical to
to deal
deal with
with annual
annual and
and
present
present equivalents,
equivalents, rather
rather than
than future
future equivalent
equivalent
values
values
Cash Flow Diagram for a Uniform Gradient

Increasing by G Dollars per period
i = effective interest rate
per period
(N-1)G
(N-2)G
(N-3)G
3G
2G
G
1
End of Period
N-2 N-1 N

FLOWS TO ANNUAL AND PRESENT
EQUIVALENTS
Find
Find A
A when
when given
given G:
G:

EQUIVALENTS
Find
Find A
A when
when given
given G:
G:
Find
Find the
the annual
annual equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount

EQUIVALENTS
Find
Find A
A when
when given
given G:
G:
Find
Find the
the annual
annual equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
11
N
N
A
A == G
G -ii (1
(1 ++ ii )) NN -- 11

EQUIVALENTS
Find
Find A
A when
when given
given G:
G:
Find
Find the
the annual
annual equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
11
N
N
A
A == G
G -ii (1
(1 ++ ii )) NN -- 11
Functionally
represented as
as A
A == G
G (( A
A // G,
G, i%,N
i%,N ))

EQUIVALENTS
Find
Find A
A when
when given
given G:
G:
Find
Find the
the annual
annual equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
11
N
N
A
A == G
G -ii (1
(1 ++ ii )) NN -- 11
Functionally
represented as
as A
A == G
G (( A
A // G,
G, i%,N
i%,N ))
The
The value
value shown
shown in
in [[ ]] is
is the
the gradient
gradient to
to uniform
uniform series
series
conversion
conversion factor
factor and
and is
is presented
presented in
in column
column 99 of
of
Appendix
Appendix C
C (represented
(represented in
in the
the above
above parenthetical
parenthetical
expression).
expression).

EQUIVALENTS
Find
Find P
P when
when given
given G:
G:

EQUIVALENTS
Find
Find P
P when
when given
given G:
G:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount

EQUIVALENTS
Find
Find P
P when
when given
given G:
G:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
11 (1
N
(1 ++ ii )) NN-1
-1
N
P
-P == G
G
ii ii (1
(1
(1 ++ ii )) NN
(1 ++ ii )) NN

EQUIVALENTS
Find
Find P
P when
when given
given G:
G:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
11 (1
N
(1 ++ ii )) NN-1
-1
N
P
-P == G
G
ii ii (1
(1
(1 ++ ii )) NN
(1 ++ ii )) NN
Functionally
represented as
as P
P == G
G (( P
P // G,
G, i%,N
i%,N ))

EQUIVALENTS
Find
Find P
P when
when given
given G:
G:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
uniform
uniform gradient
gradient amount
amount
11 (1
N
(1 ++ ii )) NN-1
-1
N
P
-P == G
G
ii ii (1
(1
(1 ++ ii )) NN
(1 ++ ii )) NN
Functionally
represented as
as P
P == G
G (( P
P // G,
G, i%,N
i%,N ))
The
The value
value shown
shown in{
in{ }} is
is the
the gradient
gradient to
to present
present
equivalent
equivalent conversion
conversion factor
factor and
and is
is presented
presented in
in
column
column 88 of
of Appendix
Appendix C
C (represented
(represented in
in the
the above
above
parenthetical
parenthetical expression).
expression).
RELATING
RELATING GE0METRIC
GE0METRIC SEQUENCE
SEQUENCE OF
OF CASH
CASH
FLOWS
FLOWS TO
TO PRESENT
PRESENT AND
AND ANNUAL
ANNUAL EQUIVALENTS
EQUIVALENTS
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing at
at an
an average
average
rate
rate of
of ff each
each period;
period;
RELATING
RELATING GE0METRIC
GE0METRIC SEQUENCE
SEQUENCE OF
OF CASH
CASH
FLOWS
FLOWS TO
TO PRESENT
PRESENT AND
AND ANNUAL
ANNUAL EQUIVALENTS
EQUIVALENTS
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing at
at an
an average
average
rate
rate of
of ff each
each period;
period;
Resultant
Resultant end-of-period
end-of-period cash-flow
cash-flow pattern
pattern is
is referred
referred
to
to as
as aa geometric
geometric gradient
gradient series;
series;
RELATING
RELATING GE0METRIC
GE0METRIC SEQUENCE
SEQUENCE OF
OF CASH
CASH
FLOWS
FLOWS TO
TO PRESENT
PRESENT AND
AND ANNUAL
ANNUAL EQUIVALENTS
EQUIVALENTS
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing at
at an
an average
average
rate
rate of
of ff each
each period;
period;
Resultant
cash-flow pattern
pattern is
is referred
referred
to
to as
as aa geometric
geometric gradient
gradient series;
series;
A
A11 is
is cash
cash flow
flow at
at end
end of
of period
period 11
RELATING
RELATING GE0METRIC
GE0METRIC SEQUENCE
SEQUENCE OF
OF CASH
CASH
FLOWS
FLOWS TO
TO PRESENT
PRESENT AND
AND ANNUAL
ANNUAL EQUIVALENTS
EQUIVALENTS
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing at
at an
an average
average
rate
rate of
of ff each
each period;
period;
Resultant
cash-flow pattern
pattern is
is referred
referred
to
to as
as aa geometric
geometric gradient
gradient series;
series;
A
A11 is
is cash
cash flow
flow at
at end
end of
of period
period 11
A
) ( 1 +f ),2 < k < N
A kk == (A
(A k-1
k-1) ( 1 +f ),2 < k < N
RELATING
RELATING GE0METRIC
GE0METRIC SEQUENCE
SEQUENCE OF
OF CASH
CASH
FLOWS
FLOWS TO
TO PRESENT
PRESENT AND
AND ANNUAL
ANNUAL EQUIVALENTS
EQUIVALENTS
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing at
at an
an average
average
rate
rate of
of ff each
each period;
period;
Resultant
cash-flow pattern
pattern is
is referred
referred
to
to as
as aa geometric
geometric gradient
gradient series;
series;
A
A11 is
is cash
cash flow
flow at
at end
end of
of period
period 11
A
) ( 1 +f ),2 < k < N
A kk == (A
(A k-1
k-1) ( 1 +f ),2 < k < N
N-1
A
ANN == A
A11 (( 11 ++ ff )) N-1
RELATING
RELATING GE0METRIC
GE0METRIC SEQUENCE
SEQUENCE OF
OF CASH
CASH
FLOWS
FLOWS TO
TO PRESENT
PRESENT AND
AND ANNUAL
ANNUAL EQUIVALENTS
EQUIVALENTS
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing at
at an
an average
average
rate
rate of
of ff each
each period;
period;
Resultant
cash-flow pattern
pattern is
is referred
referred
to
to as
as aa geometric
geometric gradient
gradient series;
series;
A
A11 is
is cash
cash flow
flow at
at end
end of
of period
period 11
A
) ( 1 +f ),2 < k < N
A kk == (A
(A k-1
k-1) ( 1 +f ),2 < k < N
N-1
A
ANN == A
A11 (( 11 ++ ff )) N-1
ff == (A
) / A k-1
(A kk -- A
A k-1
k-1 ) / A k-1
RELATING
RELATING GE0METRIC
GE0METRIC SEQUENCE
SEQUENCE OF
OF CASH
CASH
FLOWS
FLOWS TO
TO PRESENT
PRESENT AND
AND ANNUAL
ANNUAL EQUIVALENTS
EQUIVALENTS
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing at
at an
an average
average
rate
rate of
of ff each
each period;
period;
Resultant
cash-flow pattern
pattern is
is referred
referred
to
to as
as aa geometric
geometric gradient
gradient series;
series;
A
A11 is
is cash
cash flow
flow at
at end
end of
of period
period 11
A
) ( 1 +f ),2 < k < N
A kk == (A
(A k-1
k-1) ( 1 +f ),2 < k < N
N-1
A
ANN == A
A11 (( 11 ++ ff )) N-1
ff == (A
) / A k-1
(A kk -- A
A k-1
k-1 ) / A k-1
ff may
may be
be either
either positive
positive or
or negative
negative
AN =A1(1+f )N - 1
A3 =A1(1+f )2
A2 =A1(1+f )
A1
2
3
4
End of Period
Cash-flow diagram for a Geometric Sequence of

Cash Flows
RELATING A GEOMETRIC SEQUENCE OF

CASH FLOWS TO ANNUAL AND PRESENT
EQUIVALENTS
Find
Find P
P when
when given
given A:
A:

EQUIVALENTS
Find
Find P
P when
when given
given A:
A:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
annual
annual equivalent
equivalent value
value (( ii == ff ))

EQUIVALENTS
Find
Find P
P when
when given
given A:
A:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
annual
annual equivalent
equivalent value
A
A11
P
P ==
(( P
P // A,
A,
(( 11 ++ ff ))
11 ++ ii
-1,
-1, N
N ))
11 ++ ff

EQUIVALENTS
Find
Find P
P when
when given
given A:
A:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
annual
annual equivalent
equivalent value
N (1+f)N
A
A11[1
[1 (1+i)
(1+i)N
(1+f)N]]
P
P ==
11 -- ff
which
which may
may also
also be
be written
written as
as
A
A11[1
[1 -- (P/F,i%,N)
(P/F,i%,N) (F/P,f%,N)]
(F/P,f%,N)]
P
P ==
ii -- ff

EQUIVALENTS
Note
Note that
that the
the foregoing
foregoing is
is mathematically
mathematically equivalent
equivalent
to
to the
the following
following (i(i == ff ):
):
A
A11
P
P ==
(( P
P // A
A
11 ++ ff
11 ++ ii
-1,
-1, N
N ))
11 ++ ff
``

EQUIVALENTS
The
The foregoing
foregoing may
may be
be functionally
functionally represented
represented as
as
== P
P (A
(A // P,
P, i%,N
i%,N ))
The
The year
year zero
zero base
base of
of annuity,
annuity, increasing
increasing at
at
constant
constant rate
rate ff %
% is
is A
A00 == P
P (( A
A // P,
P, ff %,
%, N
N ))
The
The future
future equivalent
equivalent of
of this
this geometric
geometric gradient
gradient is
is
F
F == P
P (( F
F // P,
P, i%,
i%, N
N ))
A
A

EQUIVALENTS
Find
Find P
P when
when given
given A:
A:

EQUIVALENTS
Find
Find P
P when
when given
given A:
A:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
annual
annual equivalent
equivalent value
P
P == A
A11N
N (1+i)
(1+i)-1-1 which
which may
may be
be written
written as
as

EQUIVALENTS
Find
Find P
P when
when given
given A:
A:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
annual
annual equivalent
equivalent value
P
P == A
A11N
N (P/F,i%,1)
(P/F,i%,1)
Functionally
represented as
as A
A == P
P (A
(A // P,
P, i%,N
i%,N ))

EQUIVALENTS
Find
Find P
P when
when given
given A:
A:
Find
Find the
the present
present equivalent
equivalent value
value when
when given
given the
the
annual
annual equivalent
equivalent value
P
P == A
A11N
N (i+i)-1
(i+i)-1 which
which may
may be
be written
written as
as
P
P == A
A11N
N (P/F,i%,1)
(P/F,i%,1)
Functionally
represented as
as A
A == P
P (A
(A // P,
P, i%,N
i%,N ))
The
The year
year zero
zero base
base of
of annuity,
annuity, increasing
increasing at
at
constant
constant rate
rate ff %
% is
is A
A00 == P
P (( A
A // P,
P, ff %,
%, N
N ))
The
The future
future equivalent
equivalent of
of this
this geometric
geometric gradient
gradient is
is
F
F == P
P (( F
F // P,
P, i%,
i%, N
N ))
INTEREST RATES THAT

VARY WITH TIME
Find P given F and interest rates that vary over
N
INTEREST RATES THAT

VARY WITH TIME
N
Find the present equivalent value given a
future value and a varying interest rate over the
period of the loan
INTEREST RATES THAT

VARY WITH TIME
N
Find the present equivalent value given a
future value and a varying interest rate over the
period of the loan
FNN
P=
----------------NN (1 + ikk)
k+1
NOMINAL AND EFFECTIVE INTEREST RATES

Nominal Interest Rate - r - For rates
compounded more frequently than one year,
the stated annual interest rate.
Effective Interest Rate - i - For rates
compounded more frequently than one year,
the actual amount of interest paid.
i = ( 1 + r / M )MM - 1 = ( F / P, r / M, M ) -1
M
M -- the
the number
number of
of compounding
compounding periods
periods per
per year
year
Annual Percentage Rate - APR - percentage

rate per period times number of periods.
APR
APR == rr xx M
M
COMPOUNDING MORE OFTEN THAN ONCE A

YEAR
Single
Single Amounts
Amounts
Given
Given nominal
nominal interest
interest rate
rate and
and total
total number
number of
of
compounding
compounding periods,
periods, P,
P, F
F or
or A
A can
can be
be determined
determined by
by
F
F == P
P (( F
F // P,
P, i%,
i%, N
N ))
i%
i% == (( 11 ++ rr // M
M )) MM -- 11
Uniform
Uniform and
and // or
or Gradient
Gradient Series
Series
Given
Given nominal
nominal interest
interest rate,
rate, total
total number
number of
of
compounding
compounding periods,
periods, and
and existence
existence of
of aa cash
cash flow
flow
at
at the
the end
end of
of each
each period,
period, P,
P, F
F or
or A
A may
may be
be
determined
determined by
by the
the formulas
formulas and
and tables
tables for
for uniform
uniform
annual
annual series
series and
and uniform
uniform gradient
gradient series.
series.
CASH FLOWS LESS OFTEN THAN

COMPOUNDING PERIODS
Find A, given i, k and X, where:
ii is
is the
the effective
effective interest
interest rate
rate per
per interest
interest period
period
kk is
is the
the period
period at
at the
the end
end of
of which
which cash
cash flow
flow occurs
occurs
X
X is
is the
the uniform
uniform cash
cash flow
flow amount
amount
Use: A = X (A / F,i%, k )
Find A, given i, k and X, where:
ii is
is the
the effective
effective interest
interest rate
rate per
per interest
interest period
period
kk is
is the
the period
period at
at the
the beginning
beginning of
of which
which cash
cash flow
flow
occurs
occurs
X
X is
is the
the uniform
uniform cash
cash flow
flow amount
amount
Use: A = X ( A / P, i%, k )
CONTINUOUS
CONTINUOUS COMPOUNDING
COMPOUNDING AND
AND DISCRETE
DISCRETE
CASH
CASH FLOWS
FLOWS
CONTINUOUS
COMPOUNDING AND
AND DISCRETE
DISCRETE
CASH
CASH FLOWS
FLOWS
Continuous
Continuous compounding
compounding assumes
assumes cash
cash flows
flows occur
occur
at
at discrete
discrete intervals,
intervals, but
but compounding
compounding is
is continuous
continuous
throughout
throughout the
the interval.
interval.
CONTINUOUS
COMPOUNDING AND
AND DISCRETE
DISCRETE
CASH
CASH FLOWS
FLOWS
Continuous
compounding assumes
assumes cash
cash flows
flows occur
occur
at
at discrete
discrete intervals,
intervals, but
but compounding
compounding is
is continuous
continuous
throughout
throughout the
the interval.
interval.
Given
Given nominal
nominal per
per year
year interest
interest rate
rate --- r,r, compounding
compounding
per
one
per year
year --- M
M
one unit
unit of
of principal
principal == [[ 11 ++
(r
(r // M
M )) ]] MM
CONTINUOUS
COMPOUNDING AND
AND DISCRETE
DISCRETE
CASH
CASH FLOWS
FLOWS
Continuous
compounding assumes
assumes cash
cash flows
flows occur
occur
at
at discrete
discrete intervals,
intervals, but
but compounding
compounding is
is continuous
continuous
throughout
throughout the
the interval.
interval.
Given
Given nominal
nominal per
per year
year interest
interest rate
compounding
per
one
per year
year --- M
M
one unit
unit of
of principal
(r
(r // M
M )) ]] MM
Given
Given M
M // rr == p,
p, [[ 11 ++ (r
(r // M
M )) ]] MM == [1
[1 ++ (1/p)
(1/p) ]] rprp
CONTINUOUS
COMPOUNDING AND
AND DISCRETE
DISCRETE
CASH
CASH FLOWS
FLOWS
Continuous
compounding assumes
assumes cash
cash flows
flows occur
occur
at
at discrete
discrete intervals,
intervals, but
but compounding
compounding is
is continuous
continuous
throughout
throughout the
the interval.
interval.
Given
Given nominal
nominal per
per year
year interest
interest rate
compounding
per
one
per year
year --- M
M
one unit
unit of
of principal
(r
(r // M
M )) ]] MM
Given
Given M
M // rr == p,
p, [[ 11 ++ (r
(r // M
M )) ]] MM == [1
[1 ++ (1/p)
(1/p) ]] rprp
Given
Given lim
lim [[ 11 ++ (1
(1 // p)
p) ]] pp == ee11 == 2.71828
2.71828
p
CONTINUOUS
COMPOUNDING AND
AND DISCRETE
DISCRETE
CASH
CASH FLOWS
FLOWS
Continuous
compounding assumes
assumes cash
cash flows
flows occur
occur
at
at discrete
discrete intervals,
intervals, but
but compounding
compounding is
is continuous
continuous
throughout
throughout the
the interval.
interval.
Given
Given nominal
nominal per
per year
year interest
interest rate
compounding
per
one
per year
year --- M
M
one unit
unit of
of principal
(r
(r // M
M )) ]] MM
Given
Given M
M // rr == p,
p, [[ 11 ++ (r
(r // M
M )) ]] MM == [1
[1 ++ (1/p)
(1/p) ]] rprp
Given
Given lim
lim [[ 11 ++ (1
(1 // p)
p) ]] pp == ee11 == 2.71828
2.71828
p
rN
(( F
N
F // P,
P, r%,
r%,
N )) == ee rN
CONTINUOUS
COMPOUNDING AND
AND DISCRETE
DISCRETE
CASH
CASH FLOWS
FLOWS
Continuous
compounding assumes
assumes cash
cash flows
flows occur
occur
at
at discrete
discrete intervals,
intervals, but
but compounding
compounding is
is continuous
continuous
throughout
throughout the
the interval.
interval.
Given
Given nominal
nominal per
per year
year interest
interest rate
compounding
per
one
per year
year --- M
M
one unit
unit of
of principal
(r
(r // M
M )) ]] MM
Given
Given M
M // rr == p,
p, [[ 11 ++ (r
(r // M
M )) ]] MM == [1
[1 ++ (1/p)
(1/p) ]] rprp
Given
Given lim
lim [[ 11 ++ (1
(1 // p)
p) ]] pp == ee11 == 2.71828
2.71828
p
rN
(( F
N
F // P,
P, r%,
r%,
N )) == ee rN
ii == ee rr -- 11
CONTINUOUS COMPOUNDING AND

DISCRETE CASH FLOWS
Single Cash Flow
Finding F given P
Finding future equivalent value given present
value
rN)
F = P (e rN
Functionally expressed as ( F / P, r%, N )
rN is continuous compounding compound
e rN
amount
Predetermined values are in column 2 of
appendix D of text

DISCRETE CASH FLOWS
Single Cash Flow
Finding P given F
Finding present equivalent value given future
value
-rN)
P = F (e -rN
Functionally expressed as ( P / F, r%, N )
-rN is continuous compounding present
e -rN
equivalent
appendix D of text

DISCRETE CASH FLOWS
Uniform Series
Finding F given A
Finding future equivalent value given a series
of uniform equal receipts
rN- 1)/(e rr- 1)
F = A (e rN
Functionally expressed as ( F / A, r%, N )
rN- 1)/(e rr- 1) is continuous compounding
(e rN
compound amount
appendix D of text

DISCRETE CASH FLOWS
Uniform Series
Finding P given A
Finding present equivalent value given a series
of uniform equal receipts
rN- 1) / (e rN
rN ) (e rr- 1)
P = A (e rN
Functionally expressed as ( P / A, r%, N )
rN- 1) / (e rN
rN ) (e rr- 1) is continuous
(e rN
compounding present equivalent
appendix D of text

DISCRETE CASH FLOWS
Uniform Series
Finding A given F
Finding a uniform series given a future value
rN - 1)
A = F (e rr- 1) / (e rN
Functionally expressed as ( A / F, r%, N )
rN - 1) is continuous compounding
(e rr- 1) / (e rN
sinking fund
appendix D of text

DISCRETE CASH FLOWS
Uniform Series
Finding A given P
Finding a series of uniform equal receipts given
present equivalent value
rN (e rr- 1) / (e rN
rN - 1) ]
A = P [e rN
Functionally expressed as ( A / P, r%, N )
rN (e rr- 1) / (e rN
rN - 1) ] is continuous
[e rN
compounding capital recovery
appendix D of text

CONTINUOUS CASH FLOWS
Continuous
Continuous flow
flow of
of funds
funds suggests
suggests aa series
series of
of cash
cash
flows
flows occurring
occurring at
at infinitesimally
infinitesimally short
short intervals
intervals of
of
time
time

Continuous
Continuous flow
flow of
of funds
funds suggests
suggests aa series
series of
of cash
cash
flows
flows occurring
occurring at
at infinitesimally
short intervals
intervals of
of
time
time
Given:
Given:
aa nominal
nominal interest
interest rate
rate or
or rr
pp is
is payments
payments per
per year
year

Continuous
Continuous flow
flow of
of funds
funds suggests
suggests aa series
series of
of cash
cash
flows
flows occurring
occurring at
at infinitesimally
short intervals
intervals of
of
time
time
Given:
Given:
aa nominal
nominal interest
interest rate
rate or
or rr
pp is
is payments
payments per
per year
year
[[ 11 ++ (r
(r // pp )) ]] pp -- 11
P
P == ----------------------------------------------------------rr [[ 11 ++ (( rr // pp )) ]] pp

Continuous
Continuous flow
flow of
of funds
funds suggests
suggests aa series
series of
of cash
cash
flows
flows occurring
occurring at
at infinitesimally
short intervals
intervals of
of
time
time
Given:
Given:
aa nominal
nominal interest
interest rate
rate or
or rr
pp is
is payments
payments per
per year
year
[[ 11 ++ (r
(r // pp )) ]] pp -- 11
P
P == ----------------------------------------------------------rr [[ 11 ++ (( rr // pp )) ]] pp
Given
Given Lim
Lim [[ 11 ++ (( rr // pp )) ]] pp == ee rr
p --> oo

Continuous
Continuous flow
flow of
of funds
funds suggests
suggests aa series
series of
of cash
cash
flows
flows occurring
occurring at
at infinitesimally
short intervals
intervals of
of
time
time
Given:
Given:
aa nominal
nominal interest
interest rate
rate or
or rr
pp is
is payments
payments per
per year
year
[[ 11 ++ (r
(r // pp )) ]] pp -- 11
P
P == ----------------------------------------------------------rr [[ 11 ++ (( rr // pp )) ]] pp
Given
Given Lim
Lim [[ 11 ++ (( rr // pp )) ]] pp == ee rr
p --> oo
For
one
For one year
year (( P
P // A,
A, r%,
r%, 11 )) == (( ee rr -- 11 )) // re
re rr

Finding F given A

Finding F given A
Finding the future equivalent given the
continuous funds flow

Finding F given A
rN - 1 ) / r ]
F = A [ ( erN

Finding F given A
rN - 1 ) / r ]
F = A [ ( erN

Finding F given A
rN - 1 ) / r ]
F = A [ ( erN
rN - 1 ) / r is continuous compounding
( erN
compound amount

Finding F given A
rN - 1 ) / r ]
F = A [ ( erN
rN - 1 ) / r is continuous compounding
( erN
compound amount
Predetermined values are found in column 6 of
appendix D of text.

Finding P given A

Finding P given A
Finding the present equivalent given the

Finding P given A
rN - 1 ) / rerN
rN ]
P = A [ ( erN

Finding P given A
rN - 1 ) / rerN
rN ]
P = A [ ( erN

Finding P given A
rN - 1 ) / rerN
rN ]
P = A [ ( erN
rN - 1 ) / rerN
rN is continuous compounding
( erN
present equivalent

Finding P given A
rN - 1 ) / rerN
rN ]
P = A [ ( erN
rN - 1 ) / rerN
rN is continuous compounding
( erN
present equivalent
Predetermined values are found in column 7 of
appendix D of text.

Finding A given F

Finding A given F
Finding the continuous funds flow given the
future equivalent

Finding A given F
future equivalent
rN - 1 )]
A = F [ r / ( erN

Finding A given F
future equivalent
rN - 1 )]
A = F [ r / ( erN

Finding A given F
future equivalent
rN - 1 )]
A = F [ r / ( erN
rN - 1 ) is continuous compounding
r / ( erN
sinking fund

Finding A given P

Finding A given P
present equivalent

Finding A given P
present equivalent
rN - 1 )]
A = P [ r / ( erN

Finding A given P
present equivalent
rN - 1 )]
A = P [ r / ( erN

Finding A given P
present equivalent
rN / ( erN
rN - 1 )]
A = F [ rerN
rN / ( erN
rN - 1 ) is continuous compounding
rerN
capital recovery

Relationships &amp; Equavalance

Transféré par

Informations du document

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Relationships &amp; Equavalance

Transféré par

Droits d'auteur :

Formats disponibles

CHAPTER 3

Sell partial Stock Exchange

Sell partial Stock Exchange

Sell partial Stock Exchange

HOW INTEREST RATE IS

HOW INTEREST RATE IS

HOW INTEREST RATE IS

HOW INTEREST RATE IS

HOW INTEREST RATE IS

HOW INTEREST RATE IS

ECONOMIC EQUIVALENCE FOR FOUR

ECONOMIC EQUIVALENCE FOR FOUR

ECONOMIC EQUIVALENCE FOR FOUR

ECONOMIC EQUIVALENCE FOR FOUR

CASH FLOW DIAGRAMS / TABLE

CASH FLOW DIAGRAM NOTATION

Time scale with progression of time moving from left to

CASH FLOW DIAGRAM NOTATION

Time scale with progression of time moving from left to

Present expense (cash outflow) of $8,000 for lender.

CASH FLOW DIAGRAM NOTATION

Time scale with progression of time moving from left to

Present expense (cash outflow) of $8,000 for lender.

Annual income (cash inflow) of $2,524 for lender.

CASH FLOW DIAGRAM NOTATION

i = 10% per year

Time scale with progression of time moving from left to

Present expense (cash outflow) of $8,000 for lender.

Annual income (cash inflow) of $2,524 for lender.

Interest rate of loan.

CASH FLOW DIAGRAM NOTATION

i = 10% per year

Time scale with progression of time moving from left to

Present expense (cash outflow) of $8,000 for lender.

Annual income (cash inflow) of $2,524 for lender.

Interest rate of loan.

Dashed-arrow line indicates

INTEREST FORMULAS FOR ALL OCCASIONS

INTEREST FORMULAS FOR ALL OCCASIONS

relating nominal and effective interest rates;

RELATING PRESENT AND FUTURE

Finding F when given P:

RELATING PRESENT AND FUTURE

( F / A,i%,N ) = (P / A,i,N ) ( F / P,i,N )

If an annuity is deferred j periods, where j < N

EQUIVALENCE CALCULATIONS INVOLVING

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

Cash Flow Diagram for a Uniform Gradient

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

RELATING A UNIFORM GRADIENT OF CASH

Cash-flow diagram for a Geometric Sequence of

RELATING A GEOMETRIC SEQUENCE OF

Relationships & Equavalance

Relationships & Equavalance