LECTURE 3:

SOLVING MONEY TIME VALUE PROBLEMS

USING FACTORS AND SPREADSHEET
&
WORTH MEASUREMENT
 LEARNING OUTCOME
Solve Time Value of Money using factors and spreadsheet for;
• Single Cashflow (Payment)
• F/P – compound amount
• P/F – present worth
• Multiple Cashflow (Payment) – uniform series
• A/P – capital recovery
• P/A – present worth

• Multiple Cashflow (Payment) – uniform series

• F/A – compound amount
• A/F – sinking fund
 A

FV (F)
RM X RM X RM X RM X RM X

0 1 2 3 4 5
i, r
PV (P)
Given P, Find F; (F/P) – compound amount
Given F, Find P; (P/F) – present worth
Given A, Find P; (P/A) – present worth
Given P, Find A; (A/P) – capital recovery
Given A, Find F; (F/A) – compound amount
Given F, Find A; (A/F) – sinking fund
 1.1 F/P and P/F factors
Notation Find / Given Factor Excel Function
(F/P, r, t) F/P 𝐹 = 𝑃(1 + 𝑟)𝑡 = FV(r%,t,A,P)
(P/F, r, t) P/F 𝑃 =𝐹 1+𝑟 −𝑡
= PV(r%,t,A,F)

Example 1 – Mr Y just received a year-end bonus of RM10,000 that will be

invested immediately in a bank. The bank pays an interest of 8% compounded
annually. Mr Y hopes to take the entire amount out in exactly 20 years to pay
for family vacation. Find the amount of funds that will be available in 20 years
using a) factor formula; b) spreadsheet function.

Answer – RM 46,610
Example 2 – A cement company in Langkawi will require an investment of RM200
million for plant expansion. Delay beyond the anticipated implementation year of
2012 will require additional money. Assuming the cost of money is 10% per year,
anually compounded interest. Determine the following for the BOD by using both
factor formula and spreadsheet function.
a) The equavalent investment needed if the plant is built in 2015
b) The equivalent investment needed had the plant been constructed in the
2008.

Answer
a) RM 266.2 million
b) RM 136.6 million
1-5
 1.2 P/A and A/P factors
Notation Find / Given Factor Excel Function
(P/A, r, t) P/A (1 + 𝑟)𝑡 −1 = PV(r%,t,A)
P=𝐴
𝑟(1 + 𝑟)𝑡
(A/P, r, t) A/P 𝑟(1 + 𝑟)𝑡 = PMT(r%,t,P)
A=𝑃
(1 + 𝑟)𝑡 −1

Example 3 – How much money should you deposit in the bank now for a
guaranteed RM600 per year for 9 consecutive years starting next year if the rate
of return is 16% per year. Calculate using a) factor formula; b) spreadsheet
function ; c) Present Annuity formula
Answer –
RM 2763.7
Example 4 – The Cement Langkawi plant may generate a revenue base of RM50 million
per year. The company president may have reason to be quite pleased with this projection
for the reason that over the 5-year planning horizon, the expected revenue would total
RM250 million, which is RM50 million more than the total investment. With money worth
10% per year, address the following question from the president;
a) Will the initial investment be recovered over the 5-year horizon with the time value of
money considered.
b) If not, what is the minimum annual revenue base required for the recovery plus the
10% return of money?

Calculate using a) factor formula; b) spreadsheet function ; c) Present Annuity formula

Answer –
a) RM 189.54 million b) RM52.76 million annually
 1.3 F/A and A/F factors
Notation Find / Given Factor Excel Function
(F/A, r, t) F/A (1 + 𝑟)𝑡 −1 = FV(r%,t,A)
𝐹=𝐴
𝑟
(A/F, r, t) A/F A=𝐹
𝑟
= PMT(r%,t,F)
(1 + 𝑟)𝑡 −1

Example 5 –The president of Proton wants to know the equivalent future worth of a
RM1 million capital investment each year for 8 years, starting one year from now.
Proton capital earns at a rate of 14% per year.

Calculate using a) factor formula; b) spreadsheet function ; c) Present Annuity formula

Answer –
a) RM 13.23 million
1-8
Problem 1 –How much can UniMAP afford to spend now on an energy management
system if the software will save UniMAP RM21,3000 per year for the next 5 years.
Assume the interest rate is 10% per year compounded annually.

Answer:RM80,744

1-9
 The formula that given in Test & Final Exam

(F/P) 𝐹 = 𝑃(1 + 𝑟)𝑡 𝐹 = 𝑃(1 + 𝑖)𝑁

−𝑁
(P/F) 𝑃 =𝐹 1+𝑟 −𝑡 𝑃 =𝐹 1+𝑖

(1 + 𝑟)𝑡 −1
(P/A) P=𝐴
𝑟(1 + 𝑟)𝑡

𝑟(1 + 𝑟)𝑡
(A/P) A=𝑃
(1 + 𝑟)𝑡 −1

(1 + 𝑟)𝑡 −1
(F/A) 𝐹=𝐴
𝑟

𝑟
(A/F) A=𝐹
(1 + 𝑟)𝑡 −1
Worth (Value) Measurement

• Present Worth
• Annual Worth
• Future Worth
• Rate of Return
• Benefit / Cost Ratio, etc.
EXAMPLE 6
Mr X purchased a machine that costed him RM500,000 for his
manufacturing business. It is anticipated that the machine will generate
an annual income of RM750,000 for 8 consecutive years, starting one
year after he procured the machine. He plans to sell the machine after 8
years of usage with the expected selling price (salvage value) of
RM300,000. The interest rate is 8% compounded annually.

Calculate;
a) The equivalent present value (worth)
b) The equivalent future value (worth)
c) The equivalent annual value (worth)
 750,000
300,000

1 2 3 4 5 6 7 8
i = r = 10%=0.1

500,000 (1 + 𝑟)𝑡 −1
(P/A) P = 𝐴
𝑟(1 + 𝑟)𝑡
a) PV = -500,000 + 750,000(P/A, 0.1,8) + 300,000 (P/F, 0.1,8)
1 + 0.1 8 − 1 𝑟(1 + 𝑟)𝑡
= −500,000 + 750,000( + 300,000 1 + 0.1 −8 (A/P) A = 𝑃 (1 + 𝑟)𝑡 −1
0.1 1 + 0.1 8
1.1436 (1 + 𝑟)𝑡 −1
= −500,000 + 750,000( ) + 300,000(0.4665) (F/A) 𝐹 = 𝐴
0.2144 𝑟
= −500,000 + 4,000,466 + 139,950 𝑟
(A/F) A = 𝐹
(1 + 𝑟)𝑡 −1
= 3,640,416
 750,000
300,000

1 2 3 4 5 6 7 8
i = r = 10%=0.1
(1 + 𝑟)𝑡 −1
500,000 (P/A) P = 𝐴
𝑟(1 + 𝑟)𝑡

b) FV = -500,000 (F/P,0.1,8) + 750,000 (F/A, 0.1,8) + 300,000 𝑟(1 + 𝑟)𝑡

(A/P) A = 𝑃 (1 + 𝑟)𝑡 −1
8
1 + 0.1 8 − 1
= −500,000 1.1 + 750,000( ) + 300,000
0.1 (1 + 𝑟)𝑡 −1
(F/A) 𝐹 = 𝐴
= −500,000(2.1436) + 750,000(11.4358) + 300,000 𝑟
𝑟
= −1,071,800 + 8,576,850 + 300,000 (A/F) A = 𝐹
(1 + 𝑟)𝑡 −1

= 7,805,050
 750,000
300,000

1 2 3 4 5 6 7 8
i = r = 10%=0.1
(1 + 𝑟)𝑡 −1
500,000 (P/A) P = 𝐴
𝑟(1 + 𝑟)𝑡

c) AV = -500,000 (A/P,0.1,8) + 750,000 + 300,000 (A/F,0.1,8) 𝑟(1 + 𝑟)𝑡

(A/P) A = 𝑃 (1 + 𝑟)𝑡 −1
0.1 1.1 8 0.1
= −500,000 + 750,000 + 300,000 ( )
1.1 8 − 1 1.1 8 − 1 (1 + 𝑟)𝑡 −1
(F/A) 𝐹 = 𝐴
0.2144 0.1 𝑟
= −500,000 + 750,000 + 300,000 ( ) 𝑟
1.1436 1.1436
(A/F) A = 𝐹
(1 + 𝑟)𝑡 −1
= −500,000 (0.1875) + 750,000 + 300,000 (0.0874)

= −93750 + 750,000 + 26220 = 682,470

$32.15

1-16
$2,889,710
1-17
 $59,686

$82,821

1-18
$108.70

1-19
$12,328
1-20
 $1,257,949

$105,739

1-21