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C K Biswas

Dept of ME

content

Simple interest

compound interest

future value

Present value

Annuity

Simple Interest

The interest is

computed once

during the life of

the loan, using

the formula.

P= principle

amount

n= time for

repayment

i= annual rate of

interest

borrower

Compound Interest

interest is

The

added to the

principal and that

amount becomes

the principal for the

next calculation of

interest.

F = future amount

m = no. of period

per year

borrower

Key Terms

Principle/ present value, P: the initial amount

of money at time = 0

Future value/ maturity value/ compound

amount, F: the accumulated principal and

interest after one or more interest periods.

Interest period, n: No. of years for money is

lend

Annual interest rate, i: the rate interest for one

year

Periods per year, m: No. of time the interest is

calculated on the compound amount and added to

it in a year.

Example:

Calculate

the maturity amount to paid to the lender

with 10% annual interest rate and the interest

calculated quarterly per year.

Soln:

= Rs 1,639

Annuity

It is a series of equal payments at equal

payment series.

Payment is made at the end of period.

Deposit is made at the start of the period.

Compound interest is earned on the

accumulated payments.

Since each equal payment is earning unequal

amount of compound interest, need formulas/

tables to calculate it.

e.g: Equal monthly installment (EMI)

A m/c is bought

with Rs 20,000/- by

taking loan from

bank. The annual

rate of interest is

12% compounded

annually and

repayment period

is 5 years.

Calculate to

amount to be paid

after each year.

20,000

12%

=5

=?

If a man wants to

pay Rs 5,548/annually to his son

for 5 years, then

how much money

should he keep in

bank. The annual

rate of interest is

12% compounded

annually.

=5,548

=5

12%

The fund for

purchasing the

present m/c has to

be set aside for

future buying after

10 years. If the

estimated price is

Rs 10,000/- and

annual rate of

interest 10%, then

how much money

should be

deposited in bank

each year?

10,000

10%

=10

=?

A

An equal amount

of Rs 627/- will be

set aside annually

for purchasing a

m/c after 10 years.

If the annual rate

of interest 10%,

then how much

money will be

accumulated in

bank?

=10

10%

?

F

Factor

(F/P,i,n)

(P/F,i,n)

(P/F,i,n)

Name

Single payment

compound amount

factor

Single

Single payment

payment

present

present worth

worth factor

factor

Formula

Purpose

Moves a single payment to n periods

later in time

Moves

Moves aa single

single payment

payment to

to nn periods

periods

earlier

earlier in

in time

time

(A/F,i,n)

(A/F,i,n)

Sinking

Sinking Fund

Fund factor

factor

Takes

Takes aa single

single payment

payment and

and spreads

spreads

into

into aa uniform

uniform series

series over

over nn earlier

earlier

periods.

periods. The

The last

last payment

payment in

in the

the

series

occurs

at

the

same

time

series occurs at the same time as

as F.

F.

(F/A,i,n)

(F/A,i,n)

Uniform

Uniform Series

Series

Compound

Compound Amount

Amount

factor

factor

Takes

Takes aa uniform

uniform series

series and

and moves

moves it

it

to

to aa single

single value

value at

at the

the time

time of

of the

the last

last

payment

payment in

in the

the series.

series.

(A/P,i,n)

Capital Recovery

Factor

into a uniform series over n later

periods. The first payment in the

series occurs one period later than P.

(P/A,i,n)

(P/A,i,n)

Uniform

Uniform Series

Series

Present

Present Worth

Worth Factor

Factor

Takes

Takes aa uniform

uniform series

series and

and moves

moves it

it

to

to aa single

single payment

payment one

one period

period earlier

earlier

than

than the

the first

first payment

payment of

of the

the series.

series.

example

A machine will cost

Rs20,000 when purchased

and it will generate

revenues of Rs5000 per

year for 5 years. The

salvage value is Rs1000.

Assume rate of interest as

6%, what is the present

worth of the m/c?

Soln: example

from table

Present worth,

P =-20,000

+5,000(P/A,6%,5)

+1,000(P/F,6%,5)

= -20,000

+5,000(4.212)

+1,000(0.7473)

=Rs1,807.30

k

n

a

h

T

u

o

y

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