Finding P when Given A

P = A [ (1+i)n -1/ i(1+i)n ] Example: If a certain machine undergoes a major overhaul now, its output can be increased by

20% - which translate into additional cash flow of $20,000 at the at the end of each year for five years. If i= 15% per year, how much can we afford to invest to overhaul this machine?

Solution
A= $20,000

N=5 years

i = 15 % P = A [ (1+i)n -1/ i(1+i)n ] P = $20,000(3.3522)

P = $67,044

Example

Example: Suppose your father has

$1000000 that he wishes to distribute to his heirs at the rate of $100,000 per year. If the 1,000,000 are deposited in a bank account that earns 6% interest per year , how many years it will it take to completely deplete the account.

Solution

P = A [ (1+i)n -1/ i(1+i)n ] 0.6 (1.06)n = (1.06)n 1 1/0.4 = (1.06)n 0.916 = n * 0.0583

10= (1.06)n -1/ 0.06 (1.06)n 1 = (1.06)n 0.6 (1.06)n 2.5 = (1.06)n N = 0.916/0.0583

10* 0.06 (1.06)n = (1.06)n 1 1 = (1.06)n [1-0.6] ln 2.5 = n * ln (1.06) N= 15.7 years

Finding F when Given A

Example:
Suppose you make 15 equal annual deposits of $1000 each into a bank account paying 5% interest per year. The first deposit will be made one year from today. How much money can be withdrawn from this bank account immediately after the 15 th deposit? Solution: A= $1000 N= 15 years I = 5% F = A [ (1+i)n -1/ i ] F = $1,000 (21.5786) = $ 21,578.60

Example: If you are 20 years of age and save $1.00 each day for the rest of your life , you
can become a millionaire. Lets assume you live to age 80, and annual interest rate is 10% (i= 10%).Calculate the future compound amount. Solution: F = A [ (1+i)n -1/ i ] A = $ 365 per year N = 60 I = 10% F = $365( 3034.81) F = $1,107706

Finding A when given F

A = F [ i/ (1+i)n 1] Example: An engineering student is planning to have personal saving totaling

$1,000,000 when he retires at age of 65.He is now 20 years old. If the annual interest rate will average 7% over the next 45 years on his savings account , what equal end of year amount must he save to accomplish his goal. Solution: F = $1,000,000 N = 45 (65-20) i= 7% A = F [ i/ (1+I )n -1] A = $3500

Example
Example: Mrs. Maryam plans on retiring on her 60th birthday. She wants to put the

same amount of funds aside each year for the next twenty years -- starting next year -- so that she will be able to withdraw $50,000 per year for twenty years once she retires, with the first withdrawal on her 61st birthday. Maryam is 20 years old today. How much must she set aside each year for her retirement if she can earn 10% on her funds?
PV60 = $50,000 (PV annuity factor for N=20, i=10%) PV60 = $50,000 (8.5136) P= A [(1+i)n -1] / i(1+i)n PV60 = $425,678.19 Because she will stop making payments on her 40th birthday (first is on her 21st birthday, last is on her 40th birthday), we must calculate the balance in the account on her 40th birthday: PV40 = PV60 / (1 + 0.10)20 = $63,274.35 Then, we need to calculate the deposits necessary to reach the goal: FV40 = PV40 = $63,274.35 N = 20 i = 10% FV = A (FV annuity factor for N=20, i=10%) $63,274.35 = CF (FV annuity factor for N=20, i=10%) F= A[ (1+i)n -1/ i] $63,274.35 = CF (57.2750) A =payment = $1,104.75 per year