CONTENTS

• Single payment series compound amount

• Single payment series present worth

• Practice Problems

1
Types of interest factor

• Compound amount factor

• Annuity factor

2
Types of Compound Interest Formulas

1. Single payment compound amount:

• Here the objective is to find the single future sum (F) of initial
payment P after n period at interest rate i % compounded every
period.

3
Types of interest factor
• Q1. A person deposits a sum of Rs.50000 at an interest rate
of 18 % compounded annually for a period of 10 years. Find
maturity value after 10 years.

4
Types of interest factor
Q2. How much money will be accumulated in 25 years if Rs. 800
is deposited one year from now, Rs. 2400 six years from now, and
Rs. 3300, 8 years from now all at an interest rate of 18 % p.a.?

5
Types of Compound Interest Formulas

2. Single Payment Present Worth Amount:

• Here the objective is to find the present worth amount (P) of a single
future sum (F) which will be received after n periods at an interest
rate of i% compounded at the end of every interest period.

6
Types of interest factor
Q1. A person wishes to have a sum of Rs. 500000 to
purchase a car 10 years from now. If he plans to deposit
a lump sum amount which will fetch an interest at the
rate of 6% p.a., Determine the sum.

7
Types of interest factor
Q2. What is the present worth of Rs.7000 now, Rs.
15000 four years from now and. Rs. 9000 six years
from now at an interest rate of 8% p.a.?

8
 Practice Problems

1. IDBI came out with an issue of deep discount bonds in the year 2000. The bonds
were offered at a deep discounted rate of Rs. 12750. The maturity period of the
bonds was 30 years with a maturity value of Rs. 500000. Determine the rate of return
on the investment.
Sol: 13 %.

2. A company is planning to make two equal deposits such that 10 years from now
the company will have $49000 to replace a small machine. If the first deposit is made
one year from now and the second nine years from now, how much must be
deposited each time if the interest rate is 15%p.a.
Sol: $10497

9
 CONTENTS

• Equal Payment Series (Derivation)

• Equal Payment Series Compound Amount

• Equal Payment Series Sinking Fund

• Practice Problems

10
 Types of Compound Interest Formulas

3. Equal Payment Series Compound Amount:

• Here the objective is to find the future worth of n equal payments
which are made at the end of every interest period till the end of nth
interest period at an interest rate of i % compounded at the end of
each interest period.

14
 Types of Compound Interest Formulas
Q1. A man deposits $500 in a credit union at the end of each year for 5 years. The
credit union pays 5% interest compounded annually. At the end of 5 years,
immediately after the fifth deposit, how much does the man have in his account?

15
 Types of Compound Interest Formulas
Q2. Formasa Plastics has major fabrication plants in Texas and Hong Kong. The
president wants to know the equivalent future worth of a $1000 capital investment
each year for 8 years, starting 1 year from now. Formasa capital earns at a rate of 14%
per year.

16
Types of Compound Interest Formulas

4. Equal Payment Series Sinking Fund:

• Here the objective is to find the equal amount (A) that should be
deposited at the end of every interest period for n period to realize a
future sum (F) at the end of nth period at an interest rate of i %.

17
 Types of Compound Interest Formulas
Q1. How much money must Carol deposit every year starting 1 year from now at
5.5% per year in order to accumulate $6000 seven years from now?

18
 Types of Compound Interest Formulas

Q2. Jim Hayes read that out west, a parcel of land could be purchased for $1000 cash.
Jim decided to save a uniform amount at the end of each month so that he would have
the required $1000 at the end of one year. The local credit union pays 0.5% interest per
month. How much would Jim have to deposit each month?

19
 Practice Problems
1. A company deposits $2000 in a bank at the end of every year for 10 years. The
company makes no deposits during the subsequent 5 years. If the bank pays 8%
interest, how much would be in the account at end of 15 years?
Sol: $42560

2. A student wants to have $30000 at graduation 4 years from now to buy a new car.
His grandfather gave him $10000 as a high school graduation present. How much
must the student save each year if he deposits $10000 today and can earn 12% on
both $10000 and his earnings in a mutual fund as his grandfather recommends?
Sol: $2984

20
Types of Compound Interest Formulas

5. Equal Payment Series Present Worth:

• Objective is to find present the worth of an equal payment made at
end of every interest period for n periods.

21
Types of interest factor

Q1. A company wants to setup a reserve

which will help the company to have an
annual equivalent amount of Rs. 10,00,000 for
the next 20 years towards its employee
welfare measures. The reserve is assumed to
grow at the rate of 15% annually. Find the
single payment that must be made now as the
reserve amount.

22
Types of interest factor
Q2. Determine the amount P that you should deposit into an account 2 years from
SolvedRs.
now, in order to be able to withdraw Problems
4000/- per year for 5 years starting 3
years from now, at an interest rate of 15% per year ? Also find the investment’s
current value?
P = ? ; i = 15% ; n=5 ; A= 4000 ;
Notation:
P= A(P/A, i, n) = 4000 * (P/A, 15, 5) = 4000 * (3.3522) = Rs 13408.80/-
P1 = P (P/F, 15%, 2) = Rs13408.8 *0.7561 = Rs10138.39

i= 15% n=5 years

400 400 400 400 400

0 0 0 0 0

0 1 2 3 4 5 6 7 8
P
P1

23
Types of Compound Interest Formulas
6. Equal Payment Series Capital Recovery Amount:
• Objective of this mode of investment is to find the annual equivalent
amount (A) which is to be recovered at the end of every interest
period for n interest periods for a loan (P) which is sanctioned now
at an interest rate i% compounded every period.

24
 Types of Compound Interest Formulas
Q1. Rs. 1000/- invested now at 5%Solved
interestProblems
compounded annually, provide for 8 equal
future year end payments. Determine its equal annual amounts.
Data Given
P = 1000; i = 5% ; n=8 ; A= ? P = 1000 i= 5%

Notation A= P(A/P, i, n)
0 1 2 3 4 5 6 7 8
= 1000 (A/P , 5 , 8)
A= ?
= 1000 (0.1547) = Rs. 154.72/-

25
 Practice Problems
1. If $200 is deposited in a savings account at the beginning of each of 15 years and
the account draws interest at 7% per year, how much will be in the account at the
end of 15 years? F15

i= 7%

0 1 2 3 4 14 15

A=$200

26
 Practice Problems
2. Jacki obtained a new credit card from a national bank, MBNA, with a stated rate of
18% per year, compounded monthly. For a $1000 balance at the beginning of the year,
find the effective annual rate and the total amount owed to MBNA after 1 year,
provided no payments are made during the year.

Solution: There are 12 compounding periods per year (n=12)

Effective annual interest rate = (1 + r/n)n – 1

ieff = [(1 + (18%/12) )12 -1 ] * 100
ieff =19.562%

Jacki will pay 19.562%, or $195.62 plus the $1000 balance, for the use of the bank's 27
money during the year.
 Practice Problems

3. A company is planning to invest Rs. 6000 once in 6 months, the

investment is made at the end of every 6th month, for next 5 years.
The company is planning to utilize this amount accumulated at the
end of 5th year for buying an asset. Identify the amount accumulated
at the end of 5th year under following cases:
• If interest is 12% compounded semi-annually.
• If interest is 12% compounded annually.
• If interest is 12% compounded quarterly.

28
 Practice Problems
4. A company wants to have Rs. 100000 available at the end of 5 years so as to replace
a certain machine. Determine the lump sum amount the company should deposit now
if the interest rate in years 1, 2, 3, 4, and 5 are 10%, 11%, 12%, 13%, and 14%
respectively.

29
 Practice Problems
5. An engineering technology group just purchased new CAD software for $5000 now
and annual payments of $500 per year for 6 years starting 3 years from now for
annual upgrades. What is the present worth of the payments if the interest rate is 8%
per year?
8% per year

30
 Practice Problems
6. The following cash flow diagrams are said to be equivalent in terms of economic
desirability at an interest rate of 12% compounded annually. Determine the unknown
value A?

31
 Practice Problems
7. An entrepreneur intending to start a new business knows that the first few years
were most difficult. To lessen the chance of failure a loan plan for startup capital is
proposed in which interest paid during the first two years will be 3% and 6% for the
next two years and 12% for the last two years. How large a loan can be sanctioned if
proposed repayments at the end of years 2, 4 , and 6 are Rs. 20000, Rs. 30000, and Rs.
50000 respectively.

32
 Practice Problems
8. Henry Cisco is planning to make two deposits: $25,000 now and $30,000 at the end
of year 6. He wants to withdraw C for the first six years and (C+ $1,000) each year for
the next six years. Determine the value of C if the deposits earn 10% interest
compounded annually.

33
 Practice Problems
9. Gerri, an engineer at Fujitsu, Inc., has tracked the average inspection cost on a
robotics manufacturing line for 8 years. Cost averages were steady at $100 per
completed unit for the first 4 years but have increased consistently by $50 per unit for
each of the last 4 years. Taking interest rate as 10% calculate its present worth.

34
 Practice Problems
10. Calculate the present worth, future worth, and annual worth for the following
series of incomes and expenses, if the interest rate is 10% per year.

Annual Worth
A = 8000(A/P,10%,10) + 600
= 8000(0.16275) + 600
= $1902
35
Practice Problems

11. Abank gives a loan to a company to purchase an equipment worth $10,00,000 at an interest
rate of 18% compounded annually. This amount should be repaid in 11 years equal
installments. Find the installment amount that company has to pay to the bank ?

• P : 10,00,000, i: 18%, n : 11 years. A : ?

P=10,00000

1 2 3 4 5 6 7 8 9 10 11

A=?

A = P ( A/P, I, N)
= 10,00,000 ( A/P, 18%, 11)
36
= 10,00,000 * 0.2148
= $ 214800 per year