INTRODUCTION TO FINANCE

THE INVESTMENT DECISION 2

Oct 2019
Economic Assessment
Present Worth Method
– For compound interest
F=P(1+i)n

Therefore P = F/(1+i)n
If an investors bank statement shows a credit of £12462
as a result of an investment made 5years previously at
4.5% interest, what was the original investment?
P = 12462/(1+0.045)5 = £10000
Economic Assessment
Economic Assessment
Uniform Series
1) Compound Amount of a Regular Series
F= A x ((1+i)n-1))/i
• What sum would accumulate after 5 years if £1000
was invested at end of each year given interest rate
of 5%

F= 1000 x ((1+0.05)5-1))/0.05 = £5526

Economic Assessment
Economic Assessment
Uniform Series
2. Sinking Fund
A= F x (i/(1+i)n-1)
• A uniform annual investment is to be made into a
sinking fund with a view to providing capital at end
of 5 years. An interest rate of 5% is available. What s
the annual investment to provide for £5526?

A= 5526 x (0.05/(1+0.05)5-1)=
5526 x 0.1810= 1000
Economic Assessment
Economic Assessment
Uniform Series
3) Present Worth
P= A x ((1+i)n-1))/i(1+i)n

• What sum should be deposited in bank in order to

provide five equal annual withdrawals of £1000, the
first of which will be made one year after deposit.
Interest rate is 5%
P= 1000 x ((1+0.05)5-1))/0.05(1+0.05)5

= 1000 x 4.329=£4329
Economic Assessment
Economic Assessment
Uniform Series
4) Capital Recovery
A= P x i(1+i)n/ ((1+i)n-1

• A fund is set up with an initial investment of £5000 to provide a

uniform year end payment each year for 5 years. How much will
be the payment amount to if the investment is made at interest
of 5% and the fund is to be completely exhausted at end of year
5

A= P x i(1+i)n/ ((1+i)n-1
A= 5000 x 0.2373 = £1187
Economic Assessment
Summary
Compound Amount
F=P(1+i)n
Present Worth
P = F/(1+i)n
Uniform Series
Compound Amount of a Regular Series
F= A x ((1+i)n-1))/I
Sinking Fund
A= F x (i/(1+i)n-1)
Present Worth
P= A x ((1+i)n-1))/i(1+i)n
Capital Recovery
A= P x i(1+i)n/ ((1+i)n-1
END !!!