NE 364

Engineering Economy
Lecture 4 A
Money-Time Relationships
and Equivalence
(Part 2: Uniform Series)

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 Revision

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 Uniform Series

Necessary Conditions:
• P occurs one Interest Period before the first A (uniform amount)
• F occurs at the same time as the last A, and N periods after P,
• A occurs at the end of periods 1 through N, inclusive
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 Uniform Series Function and Proof

Proof:
F=
A(F/P,i%,N−1)+A(F/P,i%,N−2)+…+A(F/P,i%,1)+A(F/P,i%,0)

= A((1+i)N-1+ (1+i)N-2+(1+i)N-3 + ….+ (1+i)1 + (1+i)0)

This is a geometric series of a form

Where b=(1+i)-1 , a1= (1+i)N-1, and aN=(1+i)0

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 Example 1
How much will you have in 40 years if you
save $3,000 each year and your account
earns 8% interest each year?

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 Interest Tables

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 Example 2
A recent government study reported that a college degree
is worth an extra $23,000 per year in income (A)
compared to what a high-school graduate makes. If the
interest rate (i) is 6% per year and you work for 40 years
(N), what is the future compound amount (F) of this extra
income?

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 Finding A when given F

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 Example 3
How much would you need to set aside each
year for 25 years, at 10% interest, to have
accumulated $1,000,000 at the end of the 25
years?

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 Finding P when given A

From : and

It results:

Dividing both sides by (1+i)N , hence:

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 Example 4
How much is needed today to provide an
annual amount of $50,000 each year for 20
years, at 9% interest each year?

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 Example 5
If a certain machine undergoes maintenance now, its
output can be increased by 20% - which translates into
additional cash flow of $20,000 at the end of each year for
five years. If i=15% per year, how much can we afford to
invest to maintain this machine?

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 Finding A when given P

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 Example 6
If you had $500,000 today in an account
earning 10% each year, how much could you
withdraw each year for 25 years?

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 Example 7
You borrow $15,000 from your credit union to purchase a
used car. The interest rate on your loan is 0.25% per
month and you will make a total of 36 monthly payments.
What is your monthly payment?

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 What if i is unknown?

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 Example 5 (Finding i)
After years of being poor, debt-encumbered college
student, you decide that you want to pay for your dream
car in cash. Not having enough money now, you decide to
specifically put money away each year in a "dream car"
fund.
The car you want to buy will cost $60,000 in eight years.
You are going to put aside $6,000 each year (for eight
years) to save for this.
At what interest rate must you invest your money to
achieve your goal of having enough to purchase the car
after eight years?

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 Solution
 The car you want to buy will cost $60,000 in eight years
means F8=$60,000.

 You are going to put aside $6,000 each year (for eight
years) means A=$6,000 for 8 years.

 So,
F8= A * (F/A, i%, 8)

$60,000=$6,000 * (F/A, i%, 8)

10= (F/A, i%, 8)

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 Solution cont.
 So we are looking for a factor (F/A, i%, 8) which is
equal to 10.

 We know that we have to look in the F/A column and in

the 8th row, but we don’t know which interest rate
(which interest table).

 We have searched all the tables that we have at the

F/A column and 8th row and found two close values in
the 6% and 7% tables.

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 Solution cont.
 The interest rate we are searching for is between 6%
and 7%.

 The equation for F/A factor is a non-linear but we can

approximate it to a linear equation

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 Solution cont. (interpolation)
The dashed curve is what we are linearly
approximating. The answer, i', can be
determined by using the similar triangles
dashed in the figure.

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 Solution cont.

 So if you can find an investment account that will earn

at least 6.28% interest per year, you'll have the $60,000
you need to buy your dream car in eight years.

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 What if N is unknown?

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 Example 7
Joe borrowed $100,000 from a local bank, which charges
him an interest rate of 7% per year. If Joe pays the bank
$8,000 per year, how many years will it take to pay off the
loan?

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 Solution
 Joe borrowed $100,000 from a local bank means
P0=$100,000
 If Joe pays the bank $8,000 per year means
A=$8,000 for N years but N is unknown.
 So,
P0 = A * (P/A, 7%, N)
$100,000=$8,000 * (P/A, 7%, N)
12.5 = (P/A, 7%, N)

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 Solution cont.
 The factor at 30 years = 12.4090 not 12.5
 The factor at 35 years = 12. 9477 not 12.5
 This means that if Joe paid for 30 years $8,000, this will
not cover his $100,000 loan. And if he paid for 35 years
$8,000 it will be more than his loan.
 So, let’s assume he will pay for 31 years and calculate
the amount of the loan he will cover.
 The row 31 is not calculated in the 7% table and
therefore we will use the equation of the P/A factor.

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 Solution cont.
 P0new= $8,000 * (P/A, 7%, 31)
= $8,000 * ((1.07)31 – 1 ) / (0.07 * (1.07)31)
= $100,254.51
 This is more than he owes the bank. This means that
his last payment on the 31st year should not be $8,000
but less. How much less?
 We should calculate how much the extra $254.51 are
worth in the 31st year and subtract it from the $8,000
payment

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 Solution cont.
 F31 = $254.51 * (F/P, 7%, 31)
= $254.51 * (1.07)31

= $2,073

 So, the last payment on the 31st year should not be

$8,000 but should be

$8,000 – $2,073 = $5,927 only

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 There are specific spreadsheet
functions to find N and i.
 The Excel function used to solve for i is
 RATE(nper, pmt, pv, fv), which returns a fixed interest rate for
an annuity of pmt that lasts for nper periods to either its present
value (pv) or future value (fv).
 The Excel function used to solve for N is
 NPER(rate, pmt, pv), which will compute the number of
payments of magnitude pmt required to pay off a present
amount (pv) at a fixed interest rate (rate).

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 EXCEL
Solving for N Solving for i

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 Thank You

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