Professional Documents
Culture Documents
MONEY-TIME
RELATIONSHIPS
AND EQUIVALENCE
WHAT IS MONEY?
Medium
Medium ofof Exchange
Exchange
Means
Means of
of payment
payment for
for goods
goods or
or services
services
What
What sellers
sellers accept
accept and
and buyers
buyers pay
pay
Store
Store of
of Value
Value
AA way
way to
to transport
transport buying
buying power
power from
from one
one time
time
period
period to
to another
another
Unit
Unit of
of Account
Account
A
A precise
precise measurement
measurement of of value
value or
or worth
worth
Allows
Allows for
for tabulating
tabulating debits
debits and
and credits
credits
WHAT IS CAPITAL?
Debt
Debt capital
capital often
often called
called borrowed
borrowed capital,
capital, is
is
obtained
obtained from
from lenders
lenders for
for investment
investment (bank
(bank loans,
loans,
overdrafts,
overdrafts, etc)
etc)
What is Bond?
A bond is a written and signed promise
to pay a certain sum of money on a
certain date, or on fulfillment of a
specified condition.
A
A share
share is
is aa unit
unit of
of ownership
ownership that that
represents
represents an an equal
equal proportion
proportion of of a
companys
companys capital.
capital. ItIt entitles
entitles its
its holder
holder (ie.
(ie.
the
the shareholder)
shareholder) to to an
an equal
equal claim
claim onon the
the
company's
company's profits
profits and
and an an equal
equal obligation
obligation for
for
the
the companys
companys debts and losses losses
Financing Definition Instrument Description
In
In engineering
engineering economics,
economics, we
we areare usually
usually not
not too
too
concerned
concerned about
about the
the timing
timing of
of aa project's
project's cash
cash flow.
flow.
Instead,
Instead, we
we are
are concerned
concerned about
about the
the profitability
profitability of
of that
that
project
project
This
This means
means we
we need
need to
to compare
compare projects
projects involving
involving
receipts
receipts and
and disbursements
disbursements occurring
occurring at
at different
different times,
times,
with
with the
the goal
goal of
of identifying
identifying an
an alternative
alternative having
having the
the
largest
largest eventual
eventual profitability
profitability
ECONOMIC EQUIVALENCE
Equivalence
Equivalence is is established
established when
when we we are
are indifferent
indifferent
about
about making
making aa future
future payment,
payment, or or aa series
series of of future
future
payments,
payments, and and aa present
present sum
sum of of money
money
Equivalence
Equivalence is is needed
needed to to compare
compare alternative
alternative options
options
or
or proposals,
proposals, byby reducing
reducing them
them to to an
an equivalent
equivalent
basis,
basis, depending
depending on: 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 onon invested
invested
capital
capital is
is paid
paid and
and the
the initial
initial capital
capital isis recovered
recovered
ECONOMIC EQUIVALENCE FOR FOUR
REPAYMENT PLANS OF AN $8,000 LOAN
Plan
Plan #1:
#1: $2,000
$2,000 ofof loan
loan principal
principal plus
plus 10%
10% atat BOY
BOY
paid
paid at
at end
end of
of year.
year. Notice
Notice -- interest
interest paid
paid at
at the
the end
end
of
of each
each year
year is
is reduced
reduced byby $200
$200 (i.e.,
(i.e., 10%
10% ofof
remaining
remaining principal)
principal)
Year
Year Amount
Amount Owed
Owed Interest
Interest Accrued
Accrued Total
Total Principal
Principal Total
Total end
end
at
at beginning
beginning for
for Year
Year Money
Money Payment
Payment of of Year
Year
of
of Year
Year owed
owed at
at Payment
Payment (( BOYBOY ))
end
end of
of Year
Year
11 $8,000
$8,000 $800
$800 $8,800
$8,800 $2,000
$2,000 $2,800
$2,800
22 $6,000
$6,000 $600
$600 $6,600
$6,600 $2,000
$2,000 $2,600
$2,600
33 $4,000
$4,000 $400
$400 $4,400
$4,400 $2,000
$2,000 $2,400
$2,400
44 $2,000
$2,000 $200$200 $2,200
$2,200 $2,000
$2,000 $2,200
$2,200
ECONOMIC
ECONOMIC EQUIVALENCE
EQUIVALENCE FOR
FOR FOUR
FOUR REPAYMENT
REPAYMENT
PLANS
PLANS OF
OF AN
AN $8,000
$8,000 LOAN,
LOAN, 10%
10% interest
interest rate
rate
Plan
Plan #2:
#2: $0
$0 of
of loan
loan principal
principal paid
paid at
at 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
at beginning
beginning for
for Year
Year Money
Money Payment
Payment of of Year
Year
of
of Year
Year owed
owed at
at Payment
Payment (( BOYBOY ))
end
end of
of Year
Year
11 $8,000
$8,000 $800
$800 $8,800
$8,800 $0$0 $800
$800
22 $8,000
$8,000 $800
$800 $8,800
$8,800 $0$0 $800
$800
33 $8,000
$8,000 $800
$800 $8,800
$8,800 $0$0 $800
$800
44 $8,000
$8,000 $800
$800 $8,800
$8,800 $8,000
$8,000 $8,800
$8,800
ECONOMIC
ECONOMIC EQUIVALENCE
EQUIVALENCE FOR
FOR FOUR
FOUR REPAYMENT
REPAYMENT
PLANS
PLANS OF
OF AN
AN $8,000
$8,000 LOAN,
LOAN, 10%
10% interest
interest rate
rate
Plan
Plan #3:
#3: Pay
Pay interest
interest at
at end
end of
of each
each year,
year, plus
plus some
some premium.
premium.
A
A total
total of
of $2,524
$2,524 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
at beginning
beginning for
for Year
Year Money
Money Payment
Payment of of Year
Year
of
of Year
Year owed
owed at
at Payment
Payment (( BOYBOY ))
end
end of
of Year
Year
11 $8,000
$8,000 $800
$800 $8,800
$8,800 $1,724
$1,724 $2,524
$2,524
22 $6,276
$6,276 $628
$628 $6,904
$6,904 $1,896
$1,896 $2,524
$2,524
33 $4,380
$4,380 $438
$438 $4,818
$4,818 $2,086
$2,086 $2,524
$2,524
44 $2,294
$2,294 $230
$230 $2,524
$2,524 $2,294
$2,294 $2,524
$2,524
ECONOMIC
ECONOMIC EQUIVALENCE
EQUIVALENCE FOR
FOR FOUR
FOUR REPAYMENT
REPAYMENT
PLANS
PLANS OF
OF AN
AN $8,000
$8,000 LOAN,
LOAN, 10%
10% interest
interest rate
rate
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
at beginning
beginning for
for Year
Year Money
Money Payment
Payment of of Year
Year
of
of Year
Year owed
owed at
at Payment
Payment (( BOYBOY ))
end
end of
of Year
Year
11 $8,000
$8,000 $800
$800 $8,800
$8,800 $0 $0 $0$0
22 $8,800
$8,800 $880
$880 $9,680
$9,680 $0 $0 $0$0
33 $9,680
$9,680 $968
$968 $10,648
$10,648 $0$0 $0$0
44 $10,648
$10,648 $1,065
$1,065 $11,713
$11,713 $8,000
$8,000 $11,713
$11,713
What is Cash Flow?
Cash flowisthemovement of money intoorout
ofabusiness,project,orfinancialproduct
Itisusuallymeasuredduringaspecified,limited
period of time
Measurementofcashflowcanbeusedfor
calculatingotherparametersthatgiveinformation
aboutacompany'svalueandsituation.
What is Cash Flow?
In
In an
an ideal
ideal business
business cycle,
cycle, there
there will
will be
be more
more cash
cash
flowing
flowing in
in than
than flowing
flowing out.
out.
In
In reality,
reality, however,
however, most
most businesses
businesses have
have to
to produce
produce
or
or deliver
deliver goods/services
goods/services toto their
their customers
customers while
while also
also
paying
paying their
their staff
staff and
and suppliers
suppliers before
before they
they get
get paid
paid
themselves
themselves
This
This lag
lag in
in payments-in
payments-in andand payments-out
payments-out is is aa major
major
challenge
challenge forfor businesses.
businesses. How
How well
well itit is
is managed
managed isis
critical
critical to
to the
the business'
business' immediate
immediate financial
financial health
health and
and
long
long term
term sustainability.
sustainability.
Cash Inflows
Cash inflows are any receipts of cash to a
business and can include:
1
1 2 3 4 5=N
1
1 2 3 4 5=N
P =$8,000 2
(1)
(1) Alternative
Alternative A:
A: rebuild
rebuild the
the existing
existing HAVC
HAVC
system
system
(2)
(2) Alternative
Alternative B:B: Install
Install aa new
new HAVC
HAVC system
system that
that
utilizes
utilizes existing
existing ductwork
ductwork
Which
Which alternative
alternative would
would you
you choose?
choose? Why?
Why?
Alternative
Alternative A
A rebuild
rebuild existing
existing HAVC
HAVC system
system
Equipment,
Equipment, labor,
labor, materials
materials -- RM18,000
RM18,000
Annual
Annual electricity
electricity cost
cost RM32,000
RM32,000
Annual
Annual maintenance
maintenance RM2,400
RM2,400
Alternative
Alternative B B Install
Install new
new HAVC
HAVC system
system
Equipment,
Equipment, labor,
labor, materials
materials RM60,000
RM60,000
Annual
Annual electricity
electricity cost
cost RM9,000
RM9,000
Annual
Annual maintenance
maintenance RM16,000
RM16,000
Replacement
Replacement of of major
major component
component atat the
the end
end
of
of 44 years
years RM9,400
RM9,400
You
You have
have been
been told
told that
that at
at the
the end
end of
of 88 years,
years, the
the estimated
estimated
market
market value
value of
of Alternative
Alternative AA is
is RM2,000
RM2,000 and
and for
for Alternative
Alternative B,
B, the
the
value
value is
is RM8,000.
RM8,000. Which
Which alternative
alternative would
would you
you choose?
choose? Why?
Why?
End of year Alternative A (RM) Alternative B (RM)
0 (now) 18,000 60,000
1 34,400 25,000
2 34,400 25,000
3 34,400 25,000
4 34,400 34,400
5 34,400 25,000
6 34,400 25,000
7 34,400 25,000
8 34,400 2,000 = 25,000 8,000 =
32,400 17,000
TOTAL 291,200 261,400
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
FF == 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
RELATING PRESENT AND FUTURE
EQUIVALENT VALUES OF SINGLE CASH
FLOWS
(a) Find F (future value) when given P
(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 asas F
F == P
P (F
(F // P,
P, i%,
i%, N
N ))
predetermined
predetermined values
values of
of this
this can
can be
be found
found inin
standard
standard interest
interest factor
factor tables
tables
P
N=
0
F=?
RELATING PRESENT AND FUTURE
EQUIVALENT VALUES OF SINGLE CASH
FLOWS
(b) Find P when given F:
P = F [1 / (1 + i ) ] NN
(1+i) -N single payment present worth factor
(1+i)-N single payment present worth factor
functionally
functionally expressed
expressed asas PP == F
F (( P
P // F,
F, i%,
i%, N
N ))
predetermined
predetermined values
values of
of this
this can
can bebe found
found inin
standard
standard interest
interest factor
factor tables
tables
F
0 N=
P=?
Example (a) find F, given P
(single cash flow)
Your
Your company
company borrows
borrows RM1000
RM1000 for
for 88 years.
years. How
How
much
much mustmust itit repay
repay in
in aa lump
lump sum
sum at
at the
the end
end of
of the
the
88thth year?
year? (use
(use interest
interest rate
rate 10%
10% per
per year)
year)
The
The question
question above
above can
can be
be written
written this
this way:
way: What
What
is
is the
the future
future equivalence
equivalence at
at the
the end
end of
of 88 years
years of
of
RM1000
RM1000 at at the
the beginning
beginning of
of the
the 88 years?
years?
Example (a) find F, given P
(single cash flow)
Your
Your company
company borrows
borrows RM1000
RM1000 for
for 88 years.
years. How
How
much
much mustmust itit repay
repay in
in aa lump
lump sum
sum at
at the
the end
end of
of the
the
88thth year?
year? (use
(use interest
interest rate
rate 10%
10% per
per year)
year)
The
The question
question above
above can
can be
be written
written this
this way:
way: What
What
is
is the
the future
future equivalence
equivalence at
at the
the end
end of
of 88 years
years of
of
RM1000
RM1000 at at the
the beginning
beginning of
of the
the 88 years?
years?
F
F == PP (F
(F // P,
P, i%,
i%, N
N ))
== RM1000
RM1000 (2.1436)
(2.1436)
== RM
RM 2,143.60
2,143.60
Example (b) find P, given F
(single cash flow)
Your
Your company
company would
would like
like to
to have
have RM2,143.60
RM2,143.60 eight
eight
years
years from
from now.
now. What
What amount
amount should
should be
be deposited
deposited
now
now to
to get
get that
that amount
amount inin 88 years
years time?
time? (10%
(10%
annual
annual interest
interest rate)
rate)
What
What is
is the
the present
present equivalence
equivalence ofof RM2,143.60
RM2,143.60
that
that will
will be
be received
received 88 years
years from
from now?
now?
P
P == F
F (( P
P // F,
F, i%,
i%, N
N )) (try
(try it!)
it!)
NOTATION
A
A == end-of-period
end-of-period cash
cash flows
flows (or(or equivalent
equivalent
end-of-period
end-of-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
Ordinary
Ordinary annuity
annuity the
the first
first cash
cash flow
flow is
is made
made
at
at the
the end
end of
of the
the first
first period
period
Deferred
Deferred annuity
annuity the
the cash
cash flow
flow begins
begins at
at
some
some later
later date
date
RELATING
RELATING A A UNIFORM
UNIFORM SERIES
SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO TO PRESENT
PRESENT AND AND FUTURE
FUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
(1)
(1) Find
Find 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
FF == A
A
ii
uniform
uniform series
series compound
compound amount
amount factor
factor inin [[ ]]
functionally
functionally expressedexpressed as as FF == A
A (( F
F // A,
A, i%,
i%, N
N ))
predetermined
predetermined values values are
are given
given inin standard
standard interest
interest
factor
factor tables
tables
F=?
1 2 3 4 5 6 7 8
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
(2)
(2) Find
Find P P given
given A A
Finding
Finding present
present equivalent
equivalent value
value given
given aa series
series ofof
uniform
uniform equalequal receipts
receipts
(( 11 ++ ii )) NN -- 11
P
P == AA
ii (( 11 ++ ii )) NN
uniform
uniform seriesseries present
present worth
worth factor
factor in
in [[ ]]
functionally
functionally expressed
expressed as as PP == A
A (( P
P // A,
A, i%,
i%, N
N ))
predetermined
predetermined values values given
given inin standard
standard interest
interest
factor
factor tables
tablesA = 1 2 3 4 5 6 7 8
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
(3) Find A given
(3) Find A 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 valuevalue
ii
AA == FF
(( 11 ++ ii )) NN -1
-1
sinking
sinking fund
fund factor
factor in in [[ ]]
functionally
functionally expressed
expressed as as A
A == F
F (( A
A // F,
F, i%,
i%, N
N ))
predetermined
predetermined values values are are given
given inin standard
standard interest
interest
factor
factor tables
tables F=
1 2 3 4 5 6 7 8
A =?
RELATING
RELATING A A UNIFORM
UNIFORM SERIES SERIES (ORDINARY
(ORDINARY
ANNUITY)
ANNUITY) TO TO PRESENT
PRESENT AND AND FUTUREFUTURE EQUIVALENT
EQUIVALENT
VALUES
VALUES
(4)
(4) Find
Find AA given
given P P
Finding
Finding amount
amount A A ofof aa uniform
uniform series
series when
when given
given the
the
equivalent
equivalent present
present value value
ii (( 1+i
1+i ))NN
AA == PP
(( 11 ++ ii )) NN -1
-1
capital
capital recovery
recovery factor factor in
in [[ ]]
functionally
functionally expressed
expressed as as A A == PP (( A
A // P,
P, i%,
i%, NN ))
predetermined
predetermined values values are
are in in standard
standard interest
interest
factor
factor tables
tables P=
1 2 3 4 5 6 7 8
A =?
Example (1) find F, given A
(uniform series, ordinary annuity)
IfIf 88 annual
annual deposits
deposits of
of RM187.45
RM187.45 eacheach are
are placed
placed
in
in an an account,
account, how
how much
much money
money will
will be
be
accumulated
accumulated immediately
immediately after
after the
the last
last deposit?
deposit?
(use10%
(use10% annual
annual interest
interest rate)
rate)
What
What amount,
amount, atat the
the end
end of
of the
the 88thth year,
year, is
is
equivalent
equivalent to
to 88 end-of-the-year
end-of-the-year payments
payments of of
RM187.45
RM187.45 each?
each?
F
F == A
A (( F
F // A,
A, i%,
i%, N
N )) (try
(try it!)
it!)
Example (2) find P, given A
(uniform series, ordinary annuity)
How much should be deposited in a fund now
so that at the end of every year, for 8 years, a
sum of RM187.45 can be withdrawn?
What
What uniform
uniform annual
annual amount
amount should
should be
be deposited
deposited
every
every year
year so
so that
that RM2143.60
RM2143.60 can can be
be accumulated
accumulated
at
at the
the time
time of
of the
the 88thth annual
annual deposit?
deposit?
What
What uniform
uniform payment,
payment, made
made at
at the
the end
end of
of every
every
year,
year, isis equivalent
equivalent to
to RM2143.60
RM2143.60 at
at the
the end
end of
of the
the
88thth year?
year?
A
A == F
F (( A
A // F,
F, i%,
i%, N
N )) (try
(try it!)
it!)
Example (4) find A, given P
(uniform series, ordinary annuity)
What
What is
is the
the size
size of
of 88 equal
equal annual
annual payments
payments to
to repay
repay aa loan
loan
of
of RM1000?
RM1000? TheThe first
first payment
payment is
is due
due one
one year
year after
after
receiving
receiving the
the loan.
loan. (Interest
(Interest 10%
10% per
per year)
year)
What
What isis the
the amount
amount of of the
the uniform
uniform payment
payment that
that must
must be
be
made,
made, such
such that
that at
at the
the end
end of
of 88 successive
successive years,
years, the
the
payment
payment would
would bebe equivalent
equivalent toto RM1000
RM1000 at
at the
the beginning
beginning
of
of the
the first
first year?
year?
A
A == P
P (( A
A // P,
P, i%,
i%, N
N )) (try
(try it!)
it!)
RELATING
RELATING UNIFORM
UNIFORM SERIES
SERIES (DEFERRED
(DEFERRED
ANNUITY)
ANNUITY) TO
TO PRESENT
PRESENT // FUTURE
FUTURE
EQUIVALENT
EQUIVALENT VALUES
VALUES
Annuity is deferred for j periods, where j < N
Find P given A
For ordinary annuity: P = A ( P / A, i%, N )
For deferred annuity:
P= A ( P / A, i%, N - j ) at end of period j
P= A ( P / A, i%, N - j ) ( P / F, i%, j )
at time 0 (time present)
Example deferred annuity
A mother, on the day her daughter is born,
wants to put aside a lump sum of money in an
account bearing a 12%/year interest. The
mother wishes that her daughter withdraws
RM2000 on her 18thth, 19thth, 20thth, and 21stst
birthday. How much should the lump sum be?
P = A ( P / A, i%, N - j ) ( P / F, i%, j )
(j = 17, N = 21)
F
F == P
P (F
(F // P,
P, i%,
i%, NN ))
P
P == F
F (( P
P // F,
F, i%,
i%, N
N ))
F
F == A
A (( F
F // A,
A, i%,
i%, N
N ))
P
P == A
A (( P
P // A,
A, i%,
i%, N
N ))
A
A == F
F (( A
A // F,
F, i%,
i%, NN ))
A
A == P
P (( A
A // P,
P, i%,
i%, N
N ))
P=
P= AA (( P
P // A,
A, i%,
i%, NN -- jj )) at
at end
end of of period
period jj
P=
P= AA (( P
P // A,
A, i%,
i%, NN -- jj )) (( P
P // F,
F, i%,
i%, jj )) at
at time
time 00
EQUIVALENCE CALCULATIONS INVOLVING
MULTIPLE PARAMETERS
So
So far,
far, we
we have
have seen
seen that
that all
all compounding
compounding 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 perper time
time period.
period.
However,
However, therethere are
are cases
cases where
where aa series
series ofof cash
cash
outflows
outflows occur
occur over
over aa number
number of of years,
years, and
and that
that the
the
value
value of of the
the outflows
outflows is is unique
unique for
for each
each ofof the
the years
years
(for
(for example,
example, the the first
first three
three years).
years). ItIt could
could be
be that
that
the
the value
value ofof outflows
outflows is is the
the same
same for for the
the last
last four
four
years.
years.
You
You might
might bebe asked
asked to to 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
Example - problem involving
multiple parameters
Your company needs to make a series of year-
end payments of equipment maintenance over
8 years RM100 on the 1stst year, RM200 on the
2nd
nd year, RM500 on 3rd rd year, RM400 each year
Future
Future equivalent
equivalent expenditure
expenditure
F
F88 == P
Poo (F
(F // P,
P, 20%,
20%, 8)
8) == RM1203.82*4.2998
RM1203.82*4.2998 ==
RM5176.19
RM5176.19
Annual
Annual equivalent
equivalent expenditure
expenditure
A
A == FF (( A
A // F,
F, 20%,
20%, 88 )) == RM5176.19*0.0606
RM5176.19*0.0606 == RM313.7
RM313.7
A
A == PP (( A
A // P,
P, 20%,
20%, 88 )) == RM
RM 1203.82*0.2606
1203.82*0.2606 == RM313.7
RM313.7
Relating Uniform Gradient of Cash Flow
to its Future, Annual and Present
Equivalents
Annual equivalence
A = G ( A / G, 15%, 4 )
= 1000*1.3263 = RM1,326
Projected
Projected cash
cash flow
flow patterns
patterns changing
changing atat an
an average
average
rate
rate of
of ff each
each period;
period;
The
The resultant
resultant end-of-period
end-of-period cash-flow
cash-flow pattern
pattern is
is
referred
referred toto as
as aa geometric
geometric gradient
gradient series
series
Find
Find P,
P, given
given A:
A: P
P == A
A11N
N (P/F,i%,1)
(P/F,i%,1)
Find
Find A,
A, given
given P:
P: A
A == P
P (A
(A // P,
P, i%,
i%, N
N ),), A
A00 == P
P (( A
A // P,
P, ff %,
%, N
N ))
Find
Find F,
F, given
given P:
P: FF == P
P (( FF // P,
P, i%,
i%, N
N ))
VARYING INTEREST RATES
Sometimes, the interest rate on a loan
varies with time. This must be addressed
when calculating the equivalent values of
the loan
F
F == P
P (( FF // P,
P, i%,
i%, N N ))
i%
i% == (( 11 ++ rr // M
M )) MM 11
Uniform
Uniform and
and // or
or Gradient
Gradient Series
Series
Find
Find P,
P, F,
F, A,
A, given
given r,r, M,
M, and
and the
the existence
existence of
of aa cash
cash
flow
flow at
at the
the end
end of
of each
each period
period -- use
use formulas
formulas andand
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
XX isis 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 ofof which
which cash
cash flow
flow
occurs
occurs
XX isis 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
Continuous compounding
compounding assumes assumes cash cash flowsflows 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
per year
year -- -- M
M one
one unitunit ofof principal
principal == [[ 11 ++
(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
(( FF // P,
P, r%,r%, N
N )) == ee rN
rN
ii == ee rr -- 11
CONTINUOUS COMPOUNDING AND
DISCRETE CASH FLOWS
Single Cash Flow
Find F given P
F = P (e rN
rN)
amount
Predetermined values are in standard
tables.
CONTINUOUS COMPOUNDING AND
DISCRETE CASH FLOWS
Single Cash Flow
Find P given F
P = F (e -rN-rN)
equivalent
Predetermined values are given in standard
interest tables
CONTINUOUS COMPOUNDING AND
DISCRETE CASH FLOWS
Uniform Series
Find F given A
F = A (e rNrN- 1)/(e rr- 1)
compound amount
Predetermined values are in standard interest
tables
CONTINUOUS COMPOUNDING AND
DISCRETE CASH FLOWS
Uniform Series
Find P given A
Finding present equivalent value given a series
of uniform equal receipts
P = A (e rNrN- 1) / (e rN
rN ) (e rr- 1)
sinking fund
Predetermined values are in column 6 of
appendix D of text
CONTINUOUS COMPOUNDING AND
DISCRETE CASH FLOWS
Uniform Series
Find A given P
Finding a series of uniform equal receipts given
present equivalent value
A = P [e rN rN (e rr- 1) / (e rN
rN - 1) ]
compound amount
Predetermined values are found in column 6 of
appendix D of text.
CONTINUOUS COMPOUNDING AND
CONTINUOUS CASH FLOWS
Find P given A
Finding the present equivalent given the
continuous funds flow
P = A [ ( erNrN - 1 ) / rerN
rN ]
present equivalent
Predetermined values are found in column 7 of
appendix D of text.
CONTINUOUS COMPOUNDING AND
CONTINUOUS CASH FLOWS
Find A given F
Finding the continuous funds flow given the
future equivalent
A = F [ r / ( erNrN - 1 )]
sinking fund
CONTINUOUS COMPOUNDING AND
CONTINUOUS CASH FLOWS
Find A given P
Finding the continuous funds flow given the
present equivalent
A = F [ rerN rN / ( erN
rN - 1 )]
capital recovery