UNIT III

INTEREST
FORMULAS

3.1 Simple and compound interest :

The rental rate for a sum of money is usually
expressed as the percent of the sum that is to be
paid for its use for a period one year
Interest rates are also quoted for periods other
than one year ,known as interest periods.
This section compares simple and compound
interest approaches for determining the effect of
the time value of money.
3.1.1 Simple interest: Under simple interest ,the
interest owed upon repayment of a loan is
proportional to the length of time the principal
sum has been borrowed
The interest earned may be found in the
following manner.

Let I represent the interest earned , P the

principal amount , n the interest period and i

the interest rate. Then I= Pni
Suppose that $ 1000 is borrowed at a simple
interest rate of 12% per annum. At the end of
one year ,the interest owed would be
I= $1000(1)(0.12)=$120
The principal plus interest would be $1120
and would be due at the end of the year.
3.1.2 Compound interest :
When a loan is made for several interest
periods ,interest is calculated and payable at
the end of each interest period.

There are a number of loan repayment plans

These range from paying the interest when it

is due to accumulating the interest until the

loan is due.
For example ,the payments on a 4 year loan
of $1000 at 16% interest per annum , payable
when due ,would be calculated as shown in
Table 3.1
If the borrower does not pay the interest
earned at the end of each period and is
charged interest on the total amount owed
( principal plus interest ) the interest is said
to be compounded.
The interest owed in the previous year
becomes part of the total amount owed for
this year.

Year

Amount
Interest to
owed at
be paid at
beginning of end of year
year

Amount
owed at end
of year

Amount to
be paid by
borrower at
end of year

$1,000.00

$160.00

$1,160.00

$160.00

$1,000.00

$160.00

$1,160.00

$160.00

$1,000.00

$160.00

$1,160.00

$160.00

$1,000.00
$160.00
TABLE 3.1 CALCULATION OF COMPOUND
INTEREST IS Amount
PAID ANNUALLY
Year
Interest to
owed at
be added to
beginning of loan at end
year
of year (B)
(A)

$1,160.00
$1,160.00
INTEREST WHEN
Amount
Amount paid
owed at end by borrower
of year
at end of
(A+B)
year

$1,000.00

$1000X0.16
=160

$1000(1.16)
=
$1,160.00

$00.00

$1,160.00

$1160.00X0. $1000(1.16)
16
2=
=185.60
1,345.60

00.00

3
$1,345.60
$1,345.60X0 $1000
00.00
Table 3.2 CALCULATION OF COMPOUND INTEREST WHEN INTEREST IS PERMITTED TO COMPOUND

This years interest charge includes interest that

has been earned on previous charges.

For example, a loan of $1000 at 16% interest
compounded annually for 4 year period will
produce the result shown in Table 3.2
Although the financial arrangements shown in
Tables 3.1 and 3.2 require that the interest be
calculated on the unpaid balance ,the two cases
produce different results because of the way
payments are made.
In the first case, payment of interest at the time it
is due avoids the payment of interest on interest.
The reverse is true in the second payment
scheme.
Thus , the effect of compound interest depends
upon the payment amounts and when they are
made.

3.2 DESCRIBING CASH FLOWS OVER TIME:

In most engineering economy studies ,only
small elements of an enterprise are considered.
For example, studies are often made to evaluate
the consequences of the purchase of a single
equipment item in a complex of many facilities.
In such cases it would be desirable to isolate
the individual item from the whole by some
means analogous to the free-body diagram in
mechanics.
Thus it would be necessary to itemize all
receipts and all disbursements that would arise
from the acquisition and operation of the
equipment being considered.

The cash flow is the actual inflow (receipts)

and outflow (disbursements) at different

points in time that occur over the life of an
investment.
To aid in identifying and recording the
economic effects of investment alternatives, a
graphical description of each alternative s
cash transactions may be used.
This graphical description, referred to as such
a flow diagram, will provide the information
necessary for analyzing an investment
proposal.

A cash flow diagram represents receipts

received during a period of time by an

upward arrow ( an increase in cash) located
at the period s end.
The arrows height may be proportional to the
magnitude of the receipts during that period.
Similarly , disbursements during a period are
represented by a downward arrow ( a
decrease in cash)
These arrows are then placed on a time scale
that spans all time periods covered by the
proposed investment.

$1000

Figure 3.1 Cash flow

diagram

$1160

$160 $160$160

$160 $160$160

Lend
Borrower
As an example
,consider the cash er
flow diagram in
Figure 3.1,which pertain to the simple loan
transaction described in Table 3.1.
In this example the borrower receives $1000 ,and
this amount appears as a positive cash flow on the
borrowers cash flow diagram.
Each year the borrower pays $160 in interest ;
these amounts plus repayment of the $1000
borrowed ,appear as negative cash flows.
Also shown in Figure 3.1 is the lenders cash flow
$1160 $1000

Since there are two parties to every

transaction, it is important to note that the

cash flow diagram directions in cash flow
diagram depend upon the point of view taken.
When an investment alternative has both
receipts and disbursements occurring
simultaneously, a net cash flow may be
calculated.
Net cash flow is the arithmetic sum of the
receipts (+) and the disbursements (-) that
occur at the same point in time.
The utilization of net cash flow implies that
the net dollars received or disbursed have the
same effect on an investment decision as an
investments total receipts and
disbursements considered separately.

To facilitate describing investment cash flows

,the following notation will be adopted.

Let Ft= net cash flow at time t
where Ft <0 represents a net cash
disbursement;
Ft>0 represents a net cash receipt
In engineering economy studies, disbursements
made to implement an alternative are considered
to take place at the beginning of the period
embraced by the alternative.
Receipts and disbursements occurring during the
life of the alternative are usually assumed to
occur at the end of the year or interest period in
which they occur.
This year end convention is adopted for
describing cash flows over time and for
developing applicable cash flow diagram

3.3 INTEREST FORMULAS (DISCRETE

COMPOUNDING, DISCRETE PAYMENTS):
The interest formulas derived in this section
apply to the common situation of annual
compounding interest and annual payments
The following symbols will be used .
Let i=annual interest rate
n=the number of annual interest periods
P= a present principal amount;
A= a single payment ,in a series of n equal
payments ,made at the end of each annual
interest period
F= a future amount ,n annual interest
periods hence.

Four important points apply in the derivation

and use of interest factors for annual

payments
1.The end of one year is the beginning of the
next year
2. P is at the beginning of a year regarded as
being the present
3.F is at the end of the n th year from a time
regarded as being the present.
4.An A occurs at the end of each year of the
period under consideration
When P and A are involved, the first A of the
series occurs one year after P.
When F and A are involved ,the last A of the
series occurs simultaneously with F.

3.3.1 Single payment compound amount factor ,

(F/P,i,n)
If an amount P is invested now and earns at the
rate i per year ,how much principal and interest
are accumulated after n years? The cash flow
diagram for this situation is shown in Figure 3.2
Since this transaction does not provide any
payments until the investment is terminated
,interest is compounded as shown in Table 3.2
There the interest earned is added to the principal
at the end of each annual interest period.
By substituting general terms in place of
numerical values in Table 3.2 ,the results shown in
Table 3.3 are obtained.

The resulting factor , (1+i)

,is known as the
single payment compound amount factor and
designated
(F/P , i , n)

n-1 n

Figure 3.2 Single present

amount and single future
amount

This factor may be used to find the

future amount ,F, of a present
principal amount ,P.
The relationship is F= P (1+i)n or

Year Amount at Interest Compound amount at

beginning earned end of year
of year
during
year
1

Pi

P +Pi
P(1+i)1

P(1+i)

P(1+i)i

P(1+i)+P(1+i) i
=P(1+i)2

P(1+i)2

P(1+i)2.i P(1+i)2+P(1+i)2.i

=P(1+i)3

P(1+i)3.2
n-1DERIVATION
P(1+i)n- P(1+i)
n-1+PPAYMENT
(1+i)nTABLE
OF SINGLE
1.i AMOUNT
COMPOUND
FACTOR
1.i=P(1+i)
=F

The designer used to identify the single

payment compound -amount factor is (F/P, i,

n)
It appears over the parentheses where the
value of the factor is to be entered.
The first element in the designator ,F/P
,represents a ratio that identifies what the
factor must be multiplied by P in order to
find F.
Thus , a P value must be multiplied by an F/P
designated factor to find the F value that is
equivalent
F= P( F/P).
The i represents the interest rate per period
and the n the number of periods between
the occurrence of P and F.

Problem: If $1000 is invested at

16% interest compounded

annually at the beginning of year
one , the compound amount at the
end of the fourth year will be
F=$1000(1+0.16)4=$1000(1.811)
=$1,811 or by the use of the factor
designation and its associated
tabular value,
(F/P,16,4)
F=$1000( 1.811)=$1,811

3.3.2 Single payment present worth factor

(P/F,i,n)
The singlepayment compound amount
relationship
i.e F=P(1+i)

P=F{1/(1+i)

may be solved for P as follows :

n}

The resulting factor ,1/(1+i)n is known as the

singlepayment present worth factor and is

designated (P/F , i, n)
This factor may be used to find the present
worth ,P ,of a future amount ,F.

Problem : How much must be invested now at 16%

compounded annually so that $ 1811 can be

received 4 years hence?
This calculation is
P=1811 {1/(1+0.16)4}=1811(0.5523)=$1000 or by
using the factor designation and interest tables
P/F,16,4
P= $1811(0.5523)= $1000
3.3.3 Equal PaymentSeries Compound Amount
Factor
(F/A,i,n) :
In some engineering economy studies , it is
necessary to find the single future value that would
accumulate from a series of equal payments
occurring at the end of succeeding interest periods.
Such a series of cash flows is presented in Figure
3.3

 The sum of the compound amounts of the several

payments may be calculated by use of the singlepayment compound amount factor.

For example the calculation of the compound
amount of a series of five $100 payments made at
the end of each year at 12% interest compounded
annually is shown in Table 3.4
It is apparent that the tabular method is
cumbersome for calculating the compound amount
for an extensive series.
Therefore it is desirable to derive a compact solution
for this type of situation.
If A represents a series of n equal payments , such
as the $ 100 series in Table 3.4,then
F= A(1)+A(1+i) +..+ A( 1+i)

n-2 +A (1+i) n-1

The total future amount ,F, is equal to

the sum of individual future amounts

calculated for each payment , A.

F
0

1
n-1
A

Figure 3.3 Equal annual series and

single future amount
End of
year

Year end payment

times compound
amount factor

Compound
amount at end
of 5 years

$100 (1.12)0

$100

$100(1.12)1

$112.00

$100 (1.12)2

$125.44

S100 (1.12)3

$140.49

Total compound
amount

TABLE 3.4 THE COMPOUND AMOUNT OF A SERIES OF YEAR

Multiplying this equation by (1+i) results in

F(1+i) = A(1+i)+A(1+i)2+.+A(1+i)

n-

1+A(1+i)n
Subtracting the first equation from the
second gives
F(1+i)

A(1+i)+A(1+i)2+.

+A(1+i)n-1+A(1+i)n
F(1+i)-F= - A + A (1+i)n
-F=-A-A(1+i)-A(1+i)2+.-A(1+i)nSolving
for F gives
1
F={-A+A(1+i)n}/i=A{-1+(1+i)n}/i(3.4)

The resulting factor {(1+i)n-1}/ i is called

equal payment series- compound- amount-

This factor may be used to find the compound

amount ,F, of an equal payment series ,A.

For example ,the future amount of a $100
payment deposited at the end of the next 5
years and earning 12% per annum will be
F=$100{(1+0.12)5
-1}/0.12=$100( 6.353)=$635 which agrees
with the result found in Table 3.4
Using the factor designation and the interest
tables
F/A,12,5
gives F=$100(6.353)=$635

3.3.4 Equal paymentseries sinking fund factor

( A/F, i, n )
The equal-payment series compound amount
relationship of equation (3.4) may be solved
for A as follows :
A= F{i/[(1+i)

n)-1]}(3.5)
n-

The resulting factor i/[(1+i)

1], is known as
the equal payment-series sinking fund factor
and is designated
(A/F , i , n)
This factor may be used to find the required
end of year payments , A, to accumulate a
future amount , F, as shown in Figure 3.3

 If for example , it is desired to accumulate $635 by

making a series of five equal annual payments at 12%

interest compounded annually , the required amount of
each payment will be

A= $635 {0.12/[(1+0.12)

5-1]}= $635 ( 0.1574)=$100

A/F,12,5
or A=$63(0.1574)=$100
3.3.5 Equal-Payment Series Capital-Recovery Factor,
(A/P,i,n)
A deposit of amount P is made now at an annual
interest rate i.
The depositor wishes to withdraw the principal plus
earned interest , in a series of equal year-end amounts
over the next n years.
When the last withdrawal is made , there should be no
funds left on deposit
The cash flow diagram for this situation is illustrated in
Figure 3.4

A
A
0

1
n-1

A
A

Figure 3.4 . Equal annual series and single

amount
Itpresent
has been
shown previously that F is
related to A by the equal-payment-series
sinking-fund factor and that F and P are
linked by the single-payment compound
amount factor
The substitution of P(1+i)n for F in

The resulting factor , i(1+i)

n/[(1+i)n-1], is

known as the equal payment capital

recovery factor and is designated
(A/P , i ,
n)
This factor may be used to find the end of
period payments , A, that will be provided by a
present amount ,P.
For example,$1000 invested at 15% interest
compounded annually will provide for eight
equal year end payments of
A=$1000 {0.15 (1+0.15)8/(1+0.15)8-1}
A/P,15,8
=$1000(0.2229)=$223 or A= $1000 ( 0.2229 )
=$223

As each annual withdrawal is made ,

the amount remaining on deposit is

smaller than the amount remaining
after the previous withdrawal.
Because the interest earned is based
on the amount on deposit , the
interest earned each year also
diminishes
The equal payment series capital
recovery factor accounts for these
year-by-year changes in what happens
to be a complicated relationship
between interest earned and amount
withdrawn.

3.3.6 Equal-payment series present worth

Factor ,(P/A,i,n)
To find what single amount must be deposited
now so that equal end of period payments
can be made, P must be found in terms of A
The equal payment-series capital-recovery
factor [Equation (3.6)] may be solved for P as
follows

n-1]/i(1+i)n}(3.7)
The resulting factor ,{ (1+i)n-1}/i(1+i)n, is
P= A{ [(1+i)

known as the equal payment series present

worth factor and is designated
( P/A , i, n)

This factor may be used to find the present

worth ,P, of a series of equal periodic

payments, A, as depicted in Figure 3.4
For example ,the present worth of series of
eight equal annual payments of $223 at an
interest rate of 15% compounded annually
will be
P= $223 { (1+ 0.15)

8-1)/0.15 (1+0.15 )8}

=$223 (4.4873)=$1000
or
P/A,15,8
P=$223 (4.4873)=$1,000

3.3.7 Uniform Gradient Series Factor,(A/G,i,n):

In some cases , periodic payments do not
occur in an equal series.
They may increase or decrease by a constant
amount.
In general ,a uniformly increasing series of
payments for n interest periods may be
expressed as G,2G, (n-1)G , as shown in Fig
3.5,where G denotes the annual change in the
magnitude of the payments.
One way of evaluating such a series is to
apply the interest formulas developed
previously to each payment in the series.

G
0
n-1

1
n

(n-1 )G

(n2)G

2G

Figure 3.5 A uniformly increasing

gradient
series
$5000
$4400 $3800

1
5

2
6

$320
$2600
0
$2000

End of year
Figure 3.6 A uniformly decreasing
gradient series

This method will yield good results but will be

time consuming
Another approach is to reduce the uniformly
increasing or decreasing series of payments
to an equal payment series , A, shown in
Column 4 of Table 3.5. Let
G=annual change or gradient;
n= the number of years;
A=the equal annual payment.
The gradient sereis,G,2G,,(n-1)G can be
expressed as sum of identical components of
size G as presented in Column 3 of Table 3.5.

(1) End of year

(2) Gradient
series

(3)Set of series
equivalent to
Gradient series

(4)Annual
series

2G

G+G

3G

G+G+G

...

n-1

(n-2}G

G+G+G+.+G

(n-1)G

G+G+G+.
+G+G

TABLE 3.5 GRADIENT SERIES AND AN EQUIVALENT SET

OF SERIES

To find the future amount, F, at time n that

will result from the gradient series displayed

in Column 3,take each column of G values in
Column 3 and find its future amount . Add
these future amounts for all the columns of G
in column 3.
The total future amount can be represented
as follows:
F=(G/i){(1+i)

n-1)/i}-{n.G/i}. (3.8)

From Equation (3.5)find A that equals F for

the gradient series in Table 3.5:

The resulting factor A=G[(1/i)-(n/(1+i) -1)] is

called the uniform-gradient series factor and
is designated (A/G , i, n)

Compounding frequency considerations:

The derivations to this point have involved
interest periods of only one year . In practice,
however, cash flows or loan agreements may
require that interest be paid more frequently,
such as half- year, each quarter ,or each
month.
Such agreements result in interest periods of
one-half year , one quarter year, or onetwelfth year and the compounding of interest
twice, four times, or twelve times a year
respectively .
Interest rates associated with this more
frequent compounding are normally quoted
on an annual basis according to the following
convention.

The nominal rate of interest is expressed on an

annual basis and is determined by multiplying the

actual or effective interest rate per interest
period by the number of compounding periods
per year.
Nominal and effective interest rates:
It is possible to establish a relationship between
the effective interest rate for any time interval
and the nominal interest rate per year . Let
r= nominal interest rate per year*
i=effective interest rate in the time interval.
l= length of the time interval ( in years)
m=reciprocal of the length of the compounding
period ( in years)
*The nominal interest rate is commonly referred to
in financial transactions as the annual percentage
rate , APR

The effective interest rate for any time interval

is given by i={1+(r/m)}

l.m. -1

..(3.14)

If the interest is compounded only once in the

time interval , then l.m=1 and

i=r/m.(3.15)
To find the applicable effective interest rate for
any time interval , the following relationship
may be used.

i={1+(r/m)}

c-1, c >1

.(3.16)

where c is the number of compounding

periods in the time interval (c=l . m).
When c=1,Equation (3.16) reduces to
Equation (3.15) and either may be used to find
the effective rate per compounding period.

For example ,if the nominal interest rate is 9%

compounded monthly , the effective rate per

month is i=0.09/12=0.0075 or 0.75% If c=1,the
effective rate is found from Equation (3.16) for
any time interval.
1.Nominal rate of 12% compounded monthly
with time interval of one year (c=12)
i={1+(0.12/12)}12 -1=0.1268 or 12.68% per
year.
When using the interest formulas for the
discrete payments/discrete compounding
situation ,it is important to recognize that
interest formulas require i, the effective
interest rate , and n , the number of periods
involved , and these two must always be time
compatible.

 Example: If $2000 is to be borrowed at present and

repaid 3 years later , the single payment ,F, shown in

Figure 3.10 can be correctly computed for a variety of
assumptions . For an interest rate of 6% compounded
monthly ,the following three calculations provide the
same result. Assume the periods are as follows:

F/P,6.167,3
Years i=6.167% per year , n=3 years , F=$2000(1.967)
Quarters i=1.507% per year , n=12 quarters ,
F=$2000(1.967)
Months i=6%/12=0.5%per month , n=36 months,
F=$2000(1.967)
Note that for each example , i and n are stated in
terms of the same time period.
As long as the cash flow is correctly represented by
the interest formula , this consistency between i and
n will always provide identical solutions.

$200
0

Years
2
Quart
ers
Month
s

1
4

F
8
12

12

24

36

Figure 3.10 Borrowing cash

flow

Continuous compounding : As a limit , interest

may be considered to be compounded as

infinite number of times per year-that is
,continuously.
Under these conditions ,the effective annual
interest for continuous compounding is
derived from Equation (3.14) with l=1 as
ia= lim

{1+(r/m)}

{1+r/m}

- 1

But since {1+(r/m)}

and
lim

m= [ {1+r/m}m/r]r

m/r=e=2.7182

Then ia= lim [{1+(r/m)

m/r}]r-1=er-1

Therefore ,when interest is compounded

continuously,
ia=effective annual interest rate = er-1
Comparing interest rates:
The effective interest rates corresponding to
a nominal annual interest rate of 18%
compounded annually ,semiannually ,
quarterly , monthly , weekly ,daily and
continuously are shown in Table3.7

TABLE 3.7
EFFECTIVE ANNUAL INTEREST RATES FOR VARIOUS
COMPOUNDING PERIODS AT A NOMINAL RATE OF
Compounding
Number of
Effective
Effective annual
18%
frequency

periods per
year

interest rate
per period

interest rate

Annually
Semiannu
ally
Quarterly
Monthly
Weekly
Daily
Continuou
sly

1
2

18.0000% 18.0000%
9.0000%
18.8100

4
12
52
365

4.5000
1.5000
0.3642
0.0493
0.0000

19.2517
19.5618
19.6843
19.7217
19.7217

Since the effective interest rate represents

actual interest earned ,this rate should be

used to compare the benefits of various
nominal rates of interest.
For example ,one might be confronted with
the problem of determining whether it is
more desirable to receive 16% compounded
annually or 15% compounded monthly.
The effective rate of interest per year for16%
compounded annually is ,of course,16%,while
for 15% compounded monthly the effective
annual interest rate is
ia= (1+{0.15/12})

12-1=16.08%.Thus ,15%

compounded monthly yields an actual rate of

interest that is higher than 16% compounded
annually.

3.6 INTEREST FORMULAS(CONTINUOUS

COMPOUNDING,DISCRETE PAYMENTS):In
certain economic valuations , it is reasonable
to assume that continuous compounding
interest more nearly represents the situation
than does discrete compounding.
Also , the assumption of continuous
compounding may be more convenient from a
computational standpoint in some
applications.
Therefore this section presents interest
formulas that may be used in those cases
where discrete payments and continuouscompounding interest seem appropriate.
The following symbols will be used.

Let r= the nominal annual interest rate

n = the number of annual periods;
P= a present principal sum;
A= a single payment ,in a series of n equal

payments , made at the end of each annual

period
F= a future sum , n annual periods hence
3.6.1 Single payment Compound Amount
Factor:
The single payment compound amount factor
may be expressed as a function of the number
of compounding periods as follows:
For annual compounding F=P(1+r)

For semiannual compounding ;F=P(1+

{r/2})2n

For monthly compounding ; F=P(1+

{r/12})

12n

In general , if there are m compounding

periods per year ,

F= P{1+(r/m)}

mn

When interest is assumed to compound

continuously , the interest earned is

instantaneously added to the principal at the
end of each infinitesimal interest period.
For continuous compounding , the number of
compounding periods per year is considered to
be infinite. Therefore,
F=P[lim (1+{r/m})

mn]

By rearranging terms F=P{lim[(1+r/m)m/r]rn}

m
But lim (1+r/m)

m/r=e=2.7182

Therefore , F=P.ern
The resulting factor ,e rn ,is the single

payment compound amount factor for

continuous compounding interest and is
F/P,r,n
designated [
]
Note that any continuous-compounding ,
discrete payment factor may be derived from
its discrete compounding ,discrete-payment
counterpart by substituting the effective
continuous interest rate for i .

3.6.2 Single payment present worth factor :

The single payment compound amount

relationship in Equation (3.18) may be solved

for P as follows:
P=F{1/er.n}.
The resulting factor ,e-r.n, is the singlepayment present-worth factor for continuous
compounding interest and is designated
P/F ,r , n

[
]
3.6.3 Equal- Payment Series Present Worth
factor: By considering each payment in a
series individually ,the total present worth of
the series is a sum of the individual present
worth amounts as follows:

-r)+A(e-r2)+..+A(e-r.n)
=A . e-r{1+e-r+e-r2+..+e-r(n-1)}

P= A(e

n-1
which is A.e-r times the geometric series

{1/er}j.

j=0

-r {1-er.n}/{1-e-r}
=A [(1-e-r.n)/(er-1)] ..(3.20)

Therefore ,P=A. e

The resulting factor,(er-1)/(1-e-r.n) is the equal-

payment-series present worth factor for

continuous-compounding interest and is
designated
P/A , r, n
[
]

3.6.4 Equal Payment Series Capital Recovery

Factor:
The equal payment series present worth
relationship may be solved for A follows.
A=P[(e

r-1)/(1- e-r.n)](3.21)
r

The resulting factor ,( e -1)/(1-e

-rn) is the

equal payment series capital recovery factor

for continuous-compounding interest and is
designated
A,P,r,n
[
]
3.6.5 Equal payment series sinking fund factor:
The substitution of F.e

-r.n for P in the equal-

payment series capital recovery relationship

results in

A=F. e

-r.n[(er-1)/(1-e-rn)]=F{(er-1)/(ern-

1)}
The resulting factor ,(er-1)/(ern-1),is the
equal-payment series sinking fund factor for
continuous-compounding interest and is
designated
A/F,r,n
[
]
3.6.6 Equal Payment Series Compound
Amount factor:
The equal-payment series sinking fund
relationship may be solved for F as follows:
F=A[(ern-1)/(er-1)

The resulting factor ,( ern-1)/(er-1) ,is the

equal-payment series compound-amount

factor-for continuous -compounding interest
and is designated
F/A , r, n
[
]
3.6.7 Uniform Gradient Series Factor:
The equivalent annual payment ,A,
corresponding to a linear gradient G, number
of years , n, and interest rate ,r ,may be found
in a similar manner as for annual
compounding,
It can be shown that
A= G[{1/(er-1)}- {n/(ern-1)}]

The resulting factor [{1/(er-1)}- {n/(ern-1)}]

is called the uniform-gradient -series factor

for continuous compounding interest and is
designated
A/G , r , n
[
]
3.7Summary of interest formulas and
designations:
Pay
men
t

Factor

Singl Compou
e
nd
pay
amount
men
t

Fin
d

Giv
en

Discrete
payments
Under discrete
compounding

Discrete payments
Under continuous
compounding

F/P,i,n

F/P,r,n

F=P(1+i)n=P(
)

F=P.er.n

=P[

Equal
payment
series

Equal
Payment
series

Compoun F
d -Amount

Sinking
fund

Equal
Payment
series

Present
worth

Equal
payment
series

Capital
recovery

A
F/A,i,n
F=A[{(1+i)n1}/i]=A(

F A=F[i/{(1+i)n-1}]
A/F,i,n
F=(
)

P=A[{ (1+i)

n-

1}/i(1+i)n]
P/A,i,n
=A(
)
P

A=P[{i(1+i)
{(1+i)

n}/

n-1}]

A/P,i,n
=P(
)
Gradient
series

Uniform
Gradient

G A=G[(1/i)-n/{(1+i)n1}]

F=P.e[(ern-1)/
(er-1)=
F/A,r,n
A[
]
A=F[(er-1)/
(ern-1)
A/F,r,n
=F[

P=A[(1-e-m)/
(er-1)]
P/A,r,n
=A[
]
A=P[(er-1)/(1-e-

m)]
A/P,r,n
=P[
]
A=G[(1/(er-1)-n/