How Time and Interest

Affects Money
 Single Payment Factor (P/F and
F/P)
 To determine the amount of money F accumulated after n years (or
periods) from a single present worth P, with interest compounded
one time per year (or periods).
 If an amount P is invested at time t=0, the amount F1 accumulated 1
year hence at an interest rate of i percent per year will be
F1 = P + P i
= P( 1 + i )
where the interest rate is expressed in decimal form.

 For n number of years

F = P ( 1 + i )n

 Reordering the formulae gives the value of P

 1 
P = F n
 (1 + i ) 
 F/P and P/F Factors
 Standard notation for this factor
 (F/P,6%,20)
 (P/F,6%,20)
 The first statement presents,
 Find F, when P is given
 6% is the interest rate
 20 is the number of periods
 Use of Tables for Interest
rates i
 To simplify routine engineering
economy calculations, tables of factor
values have been prepared for interest
rates from 0.25 to 50% and time period
from 1 to large n values.
 For a given factor, interest rate, and
time, the correct factor value is found
at the intersection of the factor name
and n.
 Example 2.1
 John has accumulated $12,000 that he will invest now. He wants to
calculate the equivalent value after 24 years, when he plans to use
all the resulting money as the down payment on an island vacation
home. Assume a rate of return of 8% per year for each of the 24
years.
Find the amount he can pay down by using
 Standard notation
 Factor formulae
 Computer
Solution:
F = P ( F/P, i, n )
F = P ( 1 + i )n
FV(8%,24,,12000)
 Example 2.2
 PTCL has completed a study indicating that $50,000, this year, resulted
from improved integrated circuit fabrication technology based on rapidly
changing designs
(a) If PTCL considers these types of savings worth 20% per year, find the
equivalent value of this result after 5 years.
(b) If the $50,000 maintenance savings occurs now, find its equivalent value
3 years earlier with interest at 20% per year.

Solution
(a) P=$50,000 F=? i=20% per year n=5 years
F = P ( F/P ,i, n )

(b) P=? F=$50,000 i=20% per year, n=3 years

P = F ( P/F ,i, n )
Example 2.3
 Uniform Series Present Worth
Factor and Capital Recovery
Factor (P/A and A/P)
 (1 + i ) − 1
n
P = A n 
 i (1 + i ) 
The term in bracket is called the
uniform-series present worth present worth factor (USPWF)

 i (1 + i ) n 
A = P n 
 (1 + i ) − 1
The term in bracket is called the
Capital recovery factor (CRF)
 Uniform Series Present
Worth Factor and Capital
Recovery Factor (P/A and
A/P)
 Example 2.4
 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=600(P/A,16%,9)

For solution by computers use

PV(16%,9,600)