Professional Documents
Culture Documents
Announcements
2/5/2016
Previous Lecture
Simple and Compound Interest
SPCAF
SPPWF
Today Lecture
- USPWF
- Capital Recovery Factor
Compounding and
Discounting
When we convert a P value into a F using some
rate we call this process . COMPOUNDING
and the rate use is called Interest rate
When we convert F into P using some rate we
call the process Discounting and the rate we
use is called Discount rate
Compounding increase your amount (as its
compounded).discounting decrease your amount
as its (discounted)
2/5/2016
Example
Find the present value of $10,000 to be
received 10 years from now at a discount rate
of 10%
F = $10,000
i or r = 10%
n = 10
P = F (1+i)-n
=> P = 10,000 (1+0.1)-10
= 10,000 x 0.385
= $3850
Class Practice:
Allowed time 5 minutes
Sandy, a manufacturing engineer, just received a yearend 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?
2/5/2016
A Standard Notation
This notations includes two cash flows symbols, interest rate and
number of periods
Equation with
factor formula
Name
Single-payment compound
amount
Single-payment present
worth
F = P(1+i)n
P = F(1+i)-n
Notation
(F/P, i, n)
Standard Notation
Equation
Find/
Given
F = P(F/P, i, n)
F/P
(P/F, i, n) P = F(P/F, i, n)
P/F
F = 100,000 (5.054)
F= 505400
2/5/2016
F = P(1+i)n
2/5/2016
n1
t=0
A = given
A
1
+
(1 + )
= [
1
(1 + )
(
+ .+
1
(1 + )
. +
(
1
(1 + )
] . (1)
Multiply Eq(1) by (P/F, i, n) factor and subtract the equation(1) from Eq (2)
+ .+
+ .+
] ..(2)
= [
(1 + )
(
+
(
= [
= [
= [
=
+ .+
1
1+
+ .+
1]
1
]
(1 + )
] ..(2)
] . (1)
= [
1]
)
1]
(1 + ) 1
(1 + )
2/5/2016
n1
t=0
t = given
Mathematically:
(1 + ) 1
(1 + )
(1 + ) 1
(1 + )
(1 + )
(1 + ) 1
P = given
t = given
1
A=?
n-1
t=0
(1 + ) 1
(1 + )
(1 + )
(1 + ) 1
Notation
(P/A, i, n)
(A/P, i, n)
Standard Notation
Equation
P = A(P/A, i, n)
A = P(A/P, i, n)
2/5/2016
Solution:
A = 5000
A = $5000
i = 10%
n=5
P = A(P/A, i, n)
0
i =10%
P=?
P = 5000(P/A,10%,5)
= 5000(3.7908)
= $18,954
2/5/2016
formula
f2
Example
Linear
assumption
unknown
( )
8 % ... 2.1589
8.3% (x).. unknown
9 % ... 2.3674
f1
=
X1
Required
X
i or n axis
X2
= 2.1589 +
( )
(2.3674 2.1589)
= 2.2215
2/5/2016
n-1
A = given
(1 + ) 1
2/5/2016
t = given
n-1
n
A=?
Sinking Fund Factor can be obtained from USCA and given as:
(1 + ) 1
(1 + ) 1
The term in the brackets is Sinking Fund Factor and is used to determines
the uniform annual series A that is equivalent to a given future amount F
Practice
An industrial engineer made a modification to a chip manufacturing process that
will save her company $10,000 per year. At an interest rate of 8% per year, how
much will the savings amount to in 7 years?
Solution:
A = $10,000
F=?
i = 8%
A =10,000
i =8%
n =7
F = A(F/A, i, n)
F = 10,000(F/A,8%,7)
= 10,000(8.9228)
= $89,228
2/5/2016
Class Practice:
4 Minutes
Question No. A
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.
Class Practice
Question No. A
i= 14%
n = 8 years
A= 10,000
F=?
i = 14%
1 2
A = $10,000
F = A(F/A, i, n)
F = 1000( F/A, 14%,8)
= 1000(13.2328)
$13,232.80
2/5/2016
Class Practice:
4 Minutes
Question No. B
A company that makes selfclinching fasteners expects
to purchase new
production-line equipment
in 3 years. If the new units
will cost $350,000, how
much should the company
set aside each year, if the
account earns 10% per
year?
Class Practice
Question No. B
i= 10%
n = 3 years
A= ?
F = 350, 000
F = 350,000
i = 10%
1
A=?
A = 350,000 (A/F, i, n)
A = 350,000(A/F,10%,3)
= 350,000(0.30211)
= $105,739
2/5/2016
Class Assignment
Allowed time 5 minutes
Take a paper sheet
Write down your name and Registration number on
top of the paper sheet
Those who talk will get Zero
When I announce time overstop writing
2/5/2016
Class Practice A:
Allowed Time 7
A chemical product company is considering investment in
cost saving equipment. If the new equipment will cost
$220,000 to purchase and install, how much must the
company save each year for 3 years in order to justify the
investment, if the interest rate is 10% per year?
Class Practice:
Allowed Time 7
A chemical product company is considering investment in
cost saving equipment. If the new equipment will cost
$220,000 to purchase and install, how much must the
company save each year for 3 years in order to justify the
investment, if the interest rate is 10% per year?
The cash flow diagram is as follows:
A=?
Solution:
P = 220,000
I = 10%
n=3
Which factor should be used ?
P = $220,000
i =10%
A = P(A/P, i, n)
A = 220,000(A/P,10%,3)
= 220,000(0.40211)
= $88,464
2/5/2016
Practice B: 5 minutes
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?
Example 2.3
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?
Solution:
P=?
i = 16%
n=9
Which factor should be used ?
P = A(P/A, i, n)
A = $600
t=0
P=?
2/5/2016
Example
n-1
Base amount
$2500
$2700
$2900
$2500+(n-2)200
$2500+(n-1)200
2/5/2016
$175
$125
$100
$150
$500
G = $25
Base = $100
$1000
G = -$500
Base = $2000
Gradient
series
could be
both: cash
inflow (as
given
here) or
Outflows
2/5/2016
PT =
PA
PG
Important!!!
PG series start
with year 2
A+(n-1) G
A+3G
(n-1)G
3G
A+2G
A+G
=
0
+
0
PT =
2G
PA
PG
2/5/2016
PA
PG
i i (1 i ) n
(
1
i)n
PG
Or
G (1 i ) n in 1
i
i 2 (1 i ) n
$100
$50
$25
=>
0
0
G = $25
PA
$P = $100(P/A,i,4) + $25(P/G,i,4)
Base = $100
PT =
$75
PG
PG
G (1 i )n 1
n
i i (1 i )n
(1 i )n
Where PA = Present worth uniform series (P/A, i,n) and PG = present worth of the gradient series (P/G,i, n)
2/5/2016
G = $1100,
Base = $6000
G = $1100
Base = $6000
$10400
$9300
$8200
$1100
1 2
=>
$7100
$6000
0
$4400
$3300
$2200
$6000
PT =
PA
P = A(P/A, i, n)
P = 6000(P/A, 8%, 5)
P=
6000(3.9927)
P = 32066
+
PG
G(P/G, i, n)
+
+ 1100(P/G, 8%, 5)
+ 1100(7.3724)
4 5
2/5/2016
Athematic Gradient
Sinking
Fund
(A/F)
Compound
Amount
(F/A)
Capital
Recovery
(A/P)
Present Gradient
Worth
Present Worth
(P/A)
(P/G)
Gradient
Uniform
Series (A/G)
0.09069
11.0266
0.14069
7.1078
26.1268
3.6758
10
0.07950
12.5779.
0.12950
7.7217
31.6520
4.0991
Solution
Base = 500,000
PT =
PA +
PG
Gradient = 100,000
PT = 500(P/A,5%,10) + 100(P/G,5%,10)
= 500(7.7217)
+ 100(31.6520)
Taking units in 1000
=$7026.05 or .. ($7,026,050)
P=?
Base = 500
0 1
2
3
4
5
6
7
8
9 10
Gradient =100
i= 5%
$500
$600
n=1+9 = 10
$700
$800
$900
$1000
$1100
$1200
$1300
$1400
2/5/2016
Thank You