EXAMPLE 4-1 Cash-Flow Diagramming

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 EXAMPLE 4-2 Developing a Net Cash-Flow Table

continued on next slide

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3
 EXAMPLE 4-3 Future Equivalent of a Present Sum

F = 8000 x (1.1)^4 = 11712.8

Or F = 8000 (F/P,10%,4) = 8000 x 1.4641 = 11712.8

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 EXAMPLE 4-4 Present Equivalent of a Future Amount
of Money

$10,000

0
6

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 EXAMPLE 4-5 The Inflating Price of Gasoline

Additional question:
Price (2005)=2.31 = F Price (2005)=2.31 = F
Price (1993) = 1.07 = P Price (1993) = 1.07 = P
N = 12 years, N = 12 years,
Annual ? i/year i/year simple interest?

F=P + inP
i= 6.62%/year as shown above
i=(F-P)/ nP = (2.31 – 1.07)/(1.07x12)
=0.096x100% = 9.66% /year
If average monthly rate of increase was requested
n=12x12 = 144 months
i=0.5359% / month

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 EXAMPLE 4-6 When Will Gasoline Cost $5.00 per
Gallon?

Price (2005)=2.31 = P Additional question: If i=6.62%/year

i= 6.62%/year simple interest?
N? price=5=F
F=P + inP
F-P = inP
If compound , see above n=(F-P)/ iP = ( 5–2.31 )/(0.0662x2.31)
n=12 n=17.59 years

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 EXAMPLE 4-7 Future Value of a College Degree

continued on next slide

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 EXAMPLE 4-7 (continued) Future Value of a
College Degree

I am saving at home (i=zero)

F = 23000 x40 = 920,000

I = 3,559,526- 920000 = $2,639,526

I earned this interest

Bank paid this interest
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 EXAMPLE 4-8 Become a Millionaire by Saving $1.00
a Day!

Note: If i was 2% / month

A = $1/day = $365/year We should convert all to month
N = 60 years A = $1/day = $30/month
i= 10% / year N = 60 x 12 = 720 months
F>1 million

Extra: find Total interest that you earn upon investing in the bank:

I = 1,107,706 – 365 x60 = 1,107,706 – 21,900 =1,085,806

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 EXAMPLE 4-9 Present Equivalent of an Annuity
(Uniform Series)

continued on next slide

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 EXAMPLE 4-9 (continued) Present Equivalent of an
Annuity (Uniform Series)

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 EXAMPLE 4-10 How Much Is a Lifetime Oil Change
Offer Worth?

4 Oil changes / year

$30/oil change
N=5 years x4=20quarters
i=2%/quarter
continued on next slide
A=$30/quarter
P=?

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 EXAMPLE 4-10 (continued) How Much Is a Lifetime
Oil Change Offer Worth?

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 EXAMPLE 4-11 Computing Your Monthly Car
Payment

continued on next slide

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 EXAMPLE 4-11 (continued) Computing Your
Monthly Car Payment

Total paid=436.5x36 = 15,714

I = 15714-15000 = $714

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 EXAMPLE 4-12 Prepaying a Loan—Finding N

P = 100,000
Loan P = 100,000
i=8%/year
A1 = 8880/year
A2=10,000/year
i=8%/year
n1=30 years
F=P(1+i)^n wrong
If A2=10,000/year
P=A(P/A,i,n)
N2?
100000=10000 (P/A,8%,n?)
(P/A,8%,n?) =10
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 EXAMPLE 4-12 (continued) Prepaying a Loan—
Finding N

Actual payment over 21 years

A=100,000 (A/P,8%,21) If n= 20 years
=100,000 x0.0998 = $9,980/year A=100,000 (A/P,8%,20)
=100,000 x0.1019 = $10,190/year

Which is more than 10,000/year

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 EXAMPLE 4-12 (continued) Prepaying a Loan—
Finding N

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 EXAMPLE 4-13 Finding the Interest Rate to Meet an
Investment Goal

F=60000
F=60000
N=8 years
N=8 years
A=6000 /year
A=6000 /year
i?
F = A (F/A,i,n)
60000 = 6000 (F/A,i?,8)
At home ‫( الحصاله‬piggy bank) = 6000x8 =48000
(F/A,i?,8) = 10

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 EXAMPLE 4-13 (continued) Finding the Interest
Rate to Meet an Investment Goal

i F/A
Slope= (10.2598-9.8975)/(7-6)
6 9.8975 =(10-9.8975)/(i-6)
i?? 10
?? Or 1/Slope= (7-6) /(10.2598-9.8975)
7 10.2598 =(i-6) /(10-9.8975)

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 EXAMPLE 4-13 (continued) Finding the Interest
Rate to Meet an Investment Goal

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 EXAMPLE 4-14 Present Equivalent of a Deferred
Annuity

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 P0=2000 (P/A,12%,21) wrong

P17 = 2000(P/A,12%,21-17=4)
P0=P17 x (P/F,12%,17) = 884

I = 2000*4 – 884 = 7,116

Or P0 = 2000 (F/A,12%,4)(P/F,12%,21)

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 EXAMPLE 4-15 Deferred Future Value of an Annuity

F40 =5000 (P/A,8%,5)x(F/P,8%,40)

Or
F40 = 5000 (F/A,8%,5) (F/P,8%,35)

continued on next slide

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 EXAMPLE 4-15 (continued) Deferred Future Value
of an Annuity

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 EXAMPLE 4-16 Calculating Equivalent P, F, and A
Values

continued on next slide

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Present equivalent = P at time zero
Future equivalent F at n: here it F8
Annual equivalent : uniform series from 1 to n
Here from 1 to 8

P0= 100 (P/F,20%,1) +200 (P/F,20%,2) + 500 (P/F,20%,3)

+400 (P/A,20%,5)(P/F,20%,3) = 1203.8

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 EXAMPLE 4-16 (continued) Calculating Equivalent
P, F, and A Values

continued on next slide

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 EXAMPLE 4-16 (continued) Calculating Equivalent
P, F, and A Values

continued on next slide

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 EXAMPLE 4-16 (continued) Calculating Equivalent
P, F, and A Values

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If we did not calculate P0 and want to calculate F8 directly:

F8 = 100(F/P,20%,7) + 200 (F/P,20%,6) + 500 (F/P,20%,5) + 400 (F/A,20%, 5)

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 EXAMPLE 4-17 How Much is that Last Payment?
(Example 4-12 Revisited)

continued on next slide

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 EXAMPLE 4-17 (continued) How Much is that Last
Payment? (Example 4-12 Revisited)

This cash flow is at equivalency: Revenues are equivalent to cost

If we choose any point in time and convert all cash to it we can say : Revenues
equal to cost

If we choose t=0
100,000 = 10000 (P/A,8%,20) + F? (P/F, 8%, 21)

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This cash flow is at equivalency: Revenues are equivalent to cost

If we choose any point in time and convert all cash to it we can say : Revenues equal to
cost

If we choose t=0
100,000 = 10000 (P/A,8%,20) + F? (P/F, 8%, 21)

F = 9154

Present equivalent
P0 = 10000 (P/A,8%,20) + 9,154 (P/F, 8%, 21) - 100,000 = zero

F equivalent = P0 (F/P) = zero

A equivalent = P0 ( A/P) = Zero

If a cash flow is at equivalency ------Peq, Feq, Aeq = zero

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 EXAMPLE 4-18 The Present Equivalent of BP’s
Payment Schedule

Total interest = 20 - 16.53 = $3.47 billions

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 EXAMPLE 4-19 Determining an Unknown Annuity
Amount

At t = 1
1000 ( P/A,12%,2)(P/F,12%,8)=A?(P/A,12%,4)
We can choose any point:

At t= 9 ----------------1000(P/A,12%,2)= A?(P/A,12%,4)(F/P,12%,8)
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 EXAMPLE 4-19 (continued) Determining an
Unknown Annuity Amount

continued on next slide

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 EXAMPLE 4-19 (continued) Determining an
Unknown Annuity Amount

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 EXAMPLE 4-20 Using the Gradient Conversion
Factors to Find P and A

Peq
Peq Aeq
Aeq Feq
i=15%/year i=15%/year
G = 1000/year G = 1000/year
P = 1000 (P/G,15%,4) P = 1000 (P/G,15,4)
Aeq = 1000 (A/G,15%,4) Feq = P0(F/P,15%,4)

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 EXAMPLE 4-20 (continued) Using the Gradient
Conversion Factors to Find P and A

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 EXAMPLE 4-21 Present Equivalent of an Increasing
Arithmetic Gradient Series

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Peq= Peq 1 + Peq2
5000 (P/A,15%,4) + 1000 (P/G,15%,4)

Aeq = Peq (A/P,15%,4)

or
Aeq = Aeq 1 + Aeq 2
= 5000 + 1000 (A/G,15%,4)

Feq = Peq (F/P, 15%,4)

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 EXAMPLE 4-21 (continued) Present Equivalent of
an Increasing Arithmetic Gradient Series

continued on next slide

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 EXAMPLE 4-21 (continued) Present Equivalent of
an Increasing Arithmetic Gradient Series

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 EXAMPLE 4-22 Present Equivalent of a Decreasing
Arithmetic Gradient Series

continued on next slide

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Peq = Peq 1 - Peq2
=8000 (P/A,15%,4) - 1000 (P/G,15%,4)

Aeq = Peq (A/P,15%,4)

or
Aeq = Aeq1 – Aeq 2
=8000 – 1000 (A/G,15%,4)

Feq = Peq (F/P,15%,4)

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 EXAMPLE 4-22 (continued) Present Equivalent of a
Decreasing Arithmetic Gradient Series

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 EXAMPLE 4-23 Equivalence Calculations for an
Increasing Geometric Gradient Series

f, or g = 20%
i=25%
A1=1000

P = 1000 ( 1- (1.2^4)x(1.25^-4))/(.25-.2)

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 EXAMPLE 4-23 (continued) Equivalence
Calculations for an Increasing Geometric Gradient
Series

G?
3013(G/P not available
3013 = G?(P/G,25%,4)
3013 = G? x 2.893
G=3013/2.893 = $1,041.5
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 EXAMPLE 4-24 Equivalence Calculations for a
Decreasing Geometric Gradient Series

g,f=(-20%/year)

P0=1000 (1-(0.8^4)(1.25^-4))/(0.45)

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 EXAMPLE 4-25 Using a Spreadsheet to Model
Geometric Gradient Series

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 EXAMPLE 4-26 A Retirement Savings Plan

A1= 4,500 (10% of salary)

i=7%/year
N=40 years
f o r g =4%year
F??
F = 101894 (F/P, 7%,40)

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 EXAMPLE 4-26 (continued) A Retirement Savings
Plan

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 EXAMPLE 4-27 Compounding with Changing Interest
Rates

continued on next slide

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This cash flow is at equivalency (breakeven) Revenues are equivalent to costs

If we choose and point in time and convert all Revenues and costs to it , we can say that
Revenues are equal to costs

P0 =F0= 4000 (1.0406)(1.0342)(1.0523)(1.0603) + 5000(1.0342)(1.0523)(1.0602)

+6000 (1.0523)(1.0603) + 7000(1.0603)

A = P0( A/P, 5%,20)

continued on next slide

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 EXAMPLE 4-27 (continued) Compounding with
Changing Interest Rates

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 EXAMPLE 4-27 (continued) Compounding with
Changing Interest Rates

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 EXAMPLE 4-28 Effective Annual Interest Rate

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 EXAMPLE 4-29 Future Equivalent when Interest Is
Compounded Quarterly

P=100 Im = 1.5%/quarter
r=6%,compounded quarterly N=10x4=40 quarter
N=10 years
F??? F=100 (1.015)^40

Or
m=4
ieff =6.14%/year
im= 6/4=1.5%/quarter N=10years
Ieff = (1+0.015)^4-1=
.0614x100% = 6.14%/year F=100(1.0614)^10
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 EXAMPLE 4-30 Computing a Monthly Auto Payment

P=10,000 Note:
A / month = ???? If the required A was annual
N=5years = 60 months A / year = ????
r=12%, compounded monthly N=5years
m=12 r=12%, compounded monthly
Im= r/m = 1%/month m=12
Ieff = 12.68%/year
A= 10000 (A/P,1%,60) A= 10000 (A/P,12.68%,5) must
use equation
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r=20%, compounded semiannual
M=2
ihalf year = 20/2 = 10%/half year
G =1000/six month
A / six months
N=4x2 = 8 half years

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 EXAMPLE 4-31 (continued) Uniform Gradient
Series and Semiannual Compounding

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P = 15,000
A=477/month
n=36 months

r? imo

P=A(P/A,I,n) or A=P(A/P,I,n)

477=15000 (A/P,i?,36)
(A/P,i?,36) = 477/15000 = 0.0318

im = 0.75%/month

r= imxm=9%, compounded monthly

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 EXAMPLE 4-32 Finding the Interest Rate on a Loan

continued on next slide

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 A=477/month

n=36months

n=20 months
P=15,000

Unpaid loan principal after 20 months = P of the

remaining 16 payment

P20 = 477 (P/A, ¾%,16)

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 EXAMPLE 4-32 (continued) Finding the Interest
Rate on a Loan

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 EXAMPLE 4-33 Continuous Compounding and Single
Amounts

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P=1000
A???/year
N=10 years

A= 1000 x ((e^(.2x10)((e^.2)-1)/ (e^(.2x10)-1)

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 EXAMPLE 4-34 Continuous Compounding and
Annual Payments

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Or you can convert the problem to discrete by
calculating ieff = e^r -1 = e^.2 – 1 = 22.14%

A = 1000 ( 0.2214(1.2214)^10)/(1.2214^10 -1)

= 256.05

 i (1 + i ) n 
A = P  = P ( A P , i %, n)
 (1 + i) − 1 
n

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 EXAMPLE 4-35 Continuous Compounding and
Semiannual Payments

P=12,000
A???/half year
N=8 years *2 = 16 half years

R=7% compounded cont.

R=7/2 = 3.5%, compounded cont.

A= 1000 x ((e^(.035x16)((e^.035)-1)/ (e^(.035x16)-1)

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