This action might not be possible to undo. Are you sure you want to continue?

0

Time Value of Money

2.1 Compound Interest

**Selection and replacement studies must take interest or the cost of money into
**

account.

Notation

**A = amount n periods hence
**

P = present value of an amount A payable n periods hence

r = rate of interest

For compound interest, when compounding takes place once per period,

A = P(1 + r)n

P = A(1 +r)-n

Suppose interest is compounded m times per period. From (2.1),

A = P(1 + r/m)mn

(2.1)

(2.2)

**As m → ∞ , the expression multiplying P approaches ern, where e = 2.71828.. This is
**

the method of continuous compounding which is generally used at present; it will be

used

throughout this chapter. [If the periodic method is preferred, ern in the following

formulas need only be replaced by (1 + r)n]. Equations (2.1) and (2.2) thus become

A = Pern

(2.3)

P = Ae-rn =A/ern

(2.4)

**We call ern the compound amount factor; e-rn is the present worth factor for a single
**

payment or receipt.

EXAMPLE 2.1. What is the amount of $1000 compounded continuously at 6% p.a. for

20 years?

x = r n = (0.06)(20) = 1.2; from Appendix A, e1.2 = 3.3201; from (2.3),

A = 1000(3.3201) = $3320.10

EXAMPLE 2.2. What amount must now be invested at 6.5% to yield $1200 16 years

from now?

x = (0.065)(16) = 1.04; from Appendix A, el.04 = 2.8292; from (2.4),

P = 1200/2.8296 = $424.15

From (2. The present worth of this element.2. The present worth of the entire flow is obtained by integration as n n − rn a 1− e r a P = ae − rt dt = − e − rt = r 0 0 ∫ = an 1 − e − rn = anf u rn (2.e. P = 350(15)(0.5.46372) = $2434. x =1. assuming a cost of money of 12%. will produce a flow of a per period for n periods. which is tabulated as a function of x= rn in Appendix A.0496. x for fu = 0. From Appendix A. from (2.8 = 6.6.8. Here. e1. x = rn = 15(0. Then.4.53 In the above solution the maintenance charge is considered to be paid out continuously over the year.46372. when invested at time 0 at an interest rate r.12) = 1. and for x = 1. there is a uniform flow of costs or revenues at a constant rate of a per period.8. Appendix A gives fu = 0.000/20000 = 0.6).5) that 6.5) The term fu. is a δt e-rt. = (1-e-rn ) / rn. As in Example 2. obtained from (2. fu = It also follows. instead of a single amount.5 In Appendix A. thus rn = 10 r = 1.5 is 1.3.6). To find P. consider the small time interval from t to t + δ t during which an amount a δt will flow (i. The present worth of such a flow is the amount P which.3. using (2.5) and obtain fu = P/an = 10. EXAMPLE 2.4). At what continuously compounded interest rate would this investment have to be made? Here we reverse (2.8. either be received or paid). is called the present worth factor for uniform flow.6) EXAMPLE 2.5).000 is to be invested for 10 years in hope of realizing an annual income of $2000. An amount of $10.6 or r = 16 percent EXAMPLE 2. fu may be computed by writing fu = e rn − 1 rne rn (2.46372 (1. Find the present value of an annual maintenance charge of $350 for 15 years.2 UNIFORM FLOW It often happens that.8)(6. Find fu for 15 years and an interest rate of 12%.0496) .0496 − 1 = 0. from (2.

87 = = 1.39760.7.4 and from Appendix A.53815) Again. the total amount paid over the life of the loan for each dollar of loan. the equivalent annual cost of owning the machine is a= 40000 = $7432. the uniform periodic amount is obtained. the ratios of the present values and of the annual costs for purchase and rental are equal.289 It is more advantageous to rent the machine.25.7) i.17 = 0 .87 10(0. We may use (2.000? Either way.53815) = $32. From (2.39760) The total paid in interest is 1 35000 − 1 = 53028. Should a machine be rented for $500 a month or purchased for $40.7). P = 6000(10)(0. From Appendix A.14)(10) = 1. What is the monthly payment for a 25-year. using (2.a= P 1 n fu (2.e. given the initial investment P and the term n. Note that 40000 7432.5) or (2. First.43 300( 0.5) to get the present value of the rental: x (0. Then.75 % for 25(12) = 300 months. i. Therefore the total interest is ( 1/fu) . and money is worth 14%.1 for each dollar. 39760 $53028. From (2. 9% mortgage for $35.53815. its useful life is 10 years.239 32289 6000 i. with a = $6000/yr. fu = 0.000? How much total interest is paid? Assume a monthly interest rate of 1/12 * (9%) = 0.7) a= 35000 = $293.6. it is more advantageous to rent. .e.17 EXAMPLE 2. x = 0.7).0075(300) = 2. The quantity 1/fu is the capital recovery factor. EXAMPLE 2. fu = 0.e.

35823 .67074 .28430 .35605 .66218 .31409 .38743 .33058 .55739 .50255 .3 3.0 .34755 .31943 .88905 .91074 .4 2.71599 .5 .27360 .28065 .82037 .3 .68834 .3 2.26040 .35070 .26554 .70044 .41647 .25543 .0 .0 .94233 .76918 .55520 .35714 2.50632 .65102 .78694 .24206 .5 .52991 .31853 .48608 .47556 .34445 .61655 .50068 1.63212 .43233 .37648 .84375 .60400 .8 2.4 .81656 .83585 .52386 .30469 .31497 .34548 .36717 .27568 .64282 .28138 .51207 .56403 .46874 .9 1.24150 .74525 .76570 .25241 .64554 .09 0 .26230 .75198 .36154 .24485 .80156 .5 1.32585 .33839 32868 .7 2.39119 .44603 .51988 .27223 .57537 .77269 .48430 .38868 .30386 .34241 .95632 .46207 .26294 .48787 .25004 .49148 .29735 .80901 .56181 .92861 .30805 .05 .38128 .35932 .28283 .87220 .25604 .38250 .24829 .51595 .50443 .93773 .60898 1.38372 .36603 .0 .39246 .42646 .83194 .47729 .82420 .41369 .26751 .62949 .32963 .72235 .89764 .46372 .4 3.62168 .71916 .39890 .26884 .29576 .24656 .40957 .87637 .53195 .73204 .03 .64012 .28210 .24714 .42501 .26359 .32679 .8 .59423 .32773 .72879 .06 .43532 .70351 .29419 .31234 .2 3.57308 .96105 .34140 .24429 .2 .63744 .37887 .38007 .70971 .79056 .40552 .79787 .45716 .1 2.24887 .00 .90198 .31321 .60648 .30057 .26489 .47043 .24771 .43085 .36946 .27291 .6 .48253 .56627 .6 2.27498 .66787 .42938 .46043 .35282 .61149 .28879 .29185 .24542 .75880 .97541 .34859 .69739 .29815 .33740 .51014 .39502 .8 3.99007 .34343 .2 1.71284 .70660 .26424 .30720 .37294 .95163 .30636 .37767 .43834 .75538 .24317 .50823 .61401 .07 .65378 .25665 .33939 .28803 .36831 .1 3.48077 .26685 .47213 .24041 .56853 .52788 .6 1.37061 .5 .69134 .37411 .8 1.30139 .59182 .54657 .42071 .43682 .43986 .24373 .30890 3.3 1.25301 .9 3.47384 .73861 .26166 .57768 .34651 .93316 .33154 .98026 .55302 .33445 .25727 .40021 .1 1.91517 .89333 .74192 .26103 .34964 .44760 .44139 .41929 2.7 3.25421 .7 .28955 .33250 .46539 .29895 .33641 .88057 .38495 .42791 .98515 .90635 .35176 .27019 .4 1.58000 .45075 .67363 .40153 .35389 .74861 .81277 .41788 .49512 .29341 .53400 .58943 .28357 .42357 .9 2.27993 .77622 .47903 .44293 .1 .32492 .24095 .39760 .28578 .52587 .54023 .33542 .80527 .36265 .44917 .77977 .25914 .58705 .31763 .82806 .02 .65657 .37177 .25181 .49329 .39631 .7 1.25361 .24599 .37529 .32215 .68240 .27709 .76224 .52187 .32033 .53815 .27429 .41508 .57080 .32400 .94696 .68536 .64827 .85175 .78334 .60154 .45879 .04 .28504 .36490 .25122 .85985 .65937 .31585 .40686 .58234 .25063 .42213 .36377 .38993 .79420 .28653 .58469 .39373 .29108 .40821 .31674 .33347 .27850 .69435 .83979 .45234 .73531 .24261 .86394 .91962 .54871 .27638 .51401 .36043 . f u = 1 − e−x x x .59909 .29655 .29263 .35497 .30303 .2 2.9 4.34039 .44448 .29976 .40285 .53607 .45394 .86806 .49696 .01 .24945 .72556 .27086 3.26818 .25851 .55959 .25482 .31061 .97059 .55086 .63477 .32124 .41094 .25789 .46706 .30975 .84773 .43382 .28728 .27922 .99502 .6 3.29032 .26951 .67654 .92410 .61911 .32307 .30552 .08 .85578 .38618 .27154 .51791 .29497 .48967 .62687 .30221 .49881 .27779 .96580 .66502 .40418 .0000 0 .59665 .25976 .62427 .31147 .45555 .54445 .26619 .41231 .Appendix A Values of the Present Worth Factor for Uniform Flow.67946 .54233 .88480 .

- FNCE101-wk02
- Chapter 1- Time Value of Money
- Accounts and Finance for Bankers
- Time Value of Money Compounding Less Than 1 Year
- unit10
- Time Value of Money
- Time Value of Time Value of Money
- Time Value of Money
- BusMathsJan2013_L6
- Time Value of Money
- Banking
- 29338_Financial Mathematics Tutorial
- Financial Valuationasas
- Lecture02_Time Value of Money(2)
- Brooks PP Ch 4 RTP
- time value of money
- Time Value
- Lecture No2
- Financial Mgt Chapter#3 Time Value of Money
- 28
- Math In FM
- Time Value of Money
- Main
- chap03
- CH2
- Se-307-Chapter 2 Time Value of Money
- Theory of Interest
- K&P Inc. Discounted Cash Flow Analysis
- 361-CH2a
- Financial Mathematics
- Time Value of Money

Are you sure?

This action might not be possible to undo. Are you sure you want to continue?

We've moved you to where you read on your other device.

Get the full title to continue

Get the full title to continue reading from where you left off, or restart the preview.

scribd