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Reviewer/Interest Factor…
Cash flow diagram:
A cash flow is the difference between total cash receipts (inflows)
and total cash disbursements (outflows) expenditures for a given
period of time.
A cash flow diagram is used to visualized a cash flow;
individual cash flows are presented as vertical arrows along a
horizontal time sale
Positive cash flows (net inflows) are represented by “upward-
pointing ” arrows and negative “cash flows” (net outflows) by
“downward-pointing” arrows. The length of an arrow is proportional
to the magnitude of the corresponding cash flow. Each cash flow is
assumed to occur at the respective time period. The cash flow
diagram is dependent on the point on view (e.g. lender vs. borrower
viewpoint).
-P100,000
Reviewer/Interest Formulas
1. A uniform payment series is one that consists of Reviewer/Interest Formulas
equal payments
a) starting now up to year n
b) starting one year from now up to year n A
c) starting one year from now increasing by a
uniform amount up to year n
d) none of the above 1 2 3 4 5 6 7 n-1 n
Answer: b
P
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Reviewer/Interest Formulas
The original amount of the loan is:
a) P72,000 c) P108,692
b) P90,000.00 d) P97,200
Reviewer/Interest Formulas
Given: 3 different plans to pay a loan as shown in the table. 5. The value of the interest factor needed to find the
Find: P equivalent at time 0 of P155,000 occurring 7 years from
now when interest rate is 9% per year compounded yearly
Solution: Since interest rate is not given, it is best to look at is
interest earned and total amount owed at the end of year 1. a) 1.8280 c) 0.0129
For all plans, total amount owed at year 1, F1 = P97,200. b) 0.5470 d) none of the above
Interest earned for year 1, I1 = P7,200.
Therefore, P = F1 – I1 = P97,200 – P7,200 = P90,000 b
Reviewer/Interest Formulas
Given: F7 = P155,000
n = 7 yrs Reviewer/Interest Formulas
i = 9%/yr
Find: Value of interest facto to find P given F 6. The value of the interest factor needed to find a
Solution: series of equal revenues that must be received every
Cash flow diagram is as follows:
year for 12 years to realize a return of 25% from an
initial investment of P25M is
F = P155,000
a) 0.2685 c) 0.0687
(P/F) b) 0.0185 d) none of the
above
i=9%/yr n=7yrs
P?
(P/F,i,n) = (1+i)-n = (1 + 0.09)-7 = 0.5470 b
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Reviewer/Interest Formulas
Solution 1: Step-wise approach
Answer: c
End of P I P+I Amt Paid Remaining End of P I P+I Amt Paid Remaining
year amount after year amount after
year n year n
1 10,000 600 10,600 600 10,000 1 10,000 600 10,600 4,600 6,000
2 10,000 600 10,600 600 10,000 2 6,000 360 6,360 3,600 2,760
3 10,000 600 10,600 10,600 0 3 2,760 165.6 2925.6 3,600 Overpaid
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End of P I P+I Amt Paid Remaining End of P I P+I Amt Paid Remaining
year amount after year amount after
year n year n
1 10,000 600 10,600 0 10,600 1 10,000 600 10,600 3,741 6859
2 10,600 636 11,236 0 11,236 2 6,859 411.54 7270.54 3,741 3529.54
3 11,236 674 11,910 11,910 0 3 3,529.54 211.77 3741 3,741 0
P2,000 P2,000
P2,500 P2,500 A=?
P3,000 P3,000
P3,500 P3,500
Reviewer/Interest Formulas
Reviewer/Interest Formulas 2nd Approach; Solve for P, then find A using the capital
recovery factor interest formula.
1st approach: First find P, then solve for A algebraically.
P 2,000 (1.1) 2,500 (1.1) 3,000 (1.1) 3500 (1.1)
1 2 3 4 A P ( A / P, i , n)
i 1 i
n
P 8,528.6
A 8528.6
P A (1.1) A (1.1) A (1.1) A (1.1)
(1 i ) 1
1 2 3 4
n
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1 4
A 2,000 500 [ ]
0.1 (1 0.1) 1 4
A P 2,691
i 1 i [1 (1 i ) ] i
n
i (1 i )
n
n
?
i
1 i 1 1 (1 i )
(1 i ) (1 i ) 1 i
n n n n
?
i 1 i [
n
]
i i (1 i ) n
i i ((1 i ) 1) i i (1 i ) i
?
n n
1 (1 i )
(1 i ) 1 (1 i ) 1
n n n
1
1 i 1 (1 i ) 1 i 1
n n n
?
i 1 i i (1 i ) i (1 i )
n n
i (1 i ) (1 i ) (1 i )
n
n
i
n n
1 i 1 1 i 1
n n
i 1 i i (1 i )
n
n
n=n1+n2
P n1 n2
0 1 2 3 4 5 6 7 n-1 n
A ( F / A, i, n) A (1 i) ( nn )
A (1 i) ( n ( n 1 ))
A (1 i) n ( n 2 )
....A (1 i) ( n 1 )
P F ( P / F , i , n) F ( P / F , i , n ) ( P / F , i , n )
2 2 1
A ( F / A, i, n) A (1 i) (1 i) (1 i) ... (1 i)
?
0 1 2 n 1
Since F F , then, ?
2
A ( F / A, i, n) A [1 ( F / P, i,1) ( F / P, i,2) ...(F / P, i, n 1)]
(P/F,i, n) ( P / F , i, n ) ( P / F , i, n )
2 1
( F / A, i, n) 1 ( F / P, i,1) ( F / P, i,2) ...(F / P, i, n 1)
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Reviewer/Effective vs. Nominal rates/Frequent Compounding Reviewer/Effective vs. Nominal rates/Frequent Compounding
Interest rate statement Interpretation Comment
Table 3. Specific examples of interest statements and interpretations.
i = 12% per year i = effective 12% per year When no compounding period
compounded yearly is given, interest rate is an Interest statement Type of Compounding period
i = 1% per month i = effective 1% per month effective rate, with interest
compounded monthly compounding period assumed
i = 3½% per quarter i = effective 3½% per quarter to be equal to stated time
compounded quarterly period. 15% per year compounded monthly Nominal Monthly
15% per year Effective Yearly
i = 8% per year, i = nominal 8% per year When compounding period is Effective 15% per year compounded Effective Monthly
compounded monthly compounded monthly given without stating whether monthly
i = 4% per quarter the interest rate is nominal or 20% per year compounded Nominal Quarterly
compounded monthly i = nominal 4% per quarter effective, it is assumed to be quarterly Nominal Weekly
i = 14% per year compounded compounded monthly nominal. Compounding period Nominal 2% per month
semiannually is as stated. compounded weekly Effective Monthly
i = nominal 14% per year 2% per month Effective Monthly
compounded semiannually 2% per month compounded monthly Effective Quarterly
Effective 6% per quarter Effective Daily
i = effective 10% per year i = effective 10% per year If interest rate is stated as an Effective 2% per month Nominal Continuously
compounded monthly compounded monthly effective rate, then it is an compounded daily Nominal Continuously
i = effective 6% per quarter i = effective 6% per quarter effective rate. If compounding 1% per week compounded
compounded quarterly period is not given, continuously
i = effective 1% per month i = effective 1% per month compounding period is 0.1% per day compounded
compounded daily compounded daily assumed to coincide with stated continuously
time period.
d)
0.185
2
i 1 1 19.36%
2
a
Answer : b
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Answer: d
1 i ' 1 1 i (1.188)
n ( 1 / 12 )
7,875 500 m
1 i ' 1 7,875
n
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7,875 500
i '(1 i ' )
n
if a person made a monthly deposit of P2000 every
month up to the 3rd year when the account pays
1 i ' 1 7,875
n
0.144594 (1 0.144594) 500
18
Answer: b
FA m
where n no. of months
m
i
(1 .01) 1
36
F P2,000 P86,154
0.01
Answer : d
Given: P 3 (1 1 )
nq
q
3 (1 .02)
nq
F = 3P
To solve for n , take the natural log of both sides
i=8%/yr compounded quarterly = 2%/q q
n ln(1.02) ln 3
q
1.0986123
n
q
55.48q
Find: n such that F=3P at 2%/q 0.0198026
55.48 q 13.87 yrs 14 yrs
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i (1 .02) 1 8.2432% / yr
4 18. If you invest P1,500,000 now in a house and lot,
how much must you rent your property per month
a
F 3P P ( F / P, i , n ) a
for 20 years if you want an annual return of 20% on
3 (1 1 )
n your investment?
a) P18,400 b) P21,450 c) P25,670 d) P30,000
a
3 (1 0.082432)
n
A P ( A / P, i , n)
year
interest rate is 12% compounded quarterly, the single
i (1 i ) n
present amount equivalent to the series of payments
A P1.5M
(1 i ) 1
n
received over the 14-year period is
0.20(1 0.20) 20 a) P10,075 b) P10,114 c) P10,190 d) P11,400
A P1.5M P308,034.8
(1 0.20) 1
20
A P308,034.8
A
m
year
P 25,670 / mo
12 12
i=12% compounded quarterly Since cash flows are semi - annual, we have to first solve for i :
s
i (1 i ) 1
s q
2
0.12
i (1
s
) 1 0.0609 6.09%
2
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(1 i ) 1
n1 s
(1 i ) 1 n2 s
P A A i (1 i ) (1 i )
n1 s
i earned = ?
i (1 i )
1s n1 s 2s n2 s
(1 0.0609) 1 8
(1 0.0609) 1 20
i earned = ?
Answer: c
P=P1,000
P=P1,000
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MARR of 12%: F 0
t 0
t
End of
Year 0 1 2 3 4 5 6 Sequentially solving for the value of ΣFt
Cash At t 1,
Flow -30,000 -19,000 10,000 10,000 10,000 20,000 20,000 1 ?
F P30,00 ( P19,000) 0
0
t
At t 3,
3 ?
At t 4,
4 ?
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IRR is the value of the interest rate, i’, that will make the 10,000 ( P / A, i' ,3) ( P / F , i' ,2) 20,000 ( P / A, i' ,2) ( P / F , i' ,4)
equivalent amount of receipts equal to the equivalent amount P30,000 P19,000 ( P / F , i' ,1)
of disbursements:
n n Sequentially try the interest rate given as choices,
R ( P / F , i'%,k ) E ( P / F , i'%,k )
k 0
k
k 0
k starting with values in the middle of the range.
R ( P / F , i'%, k ) E
k 0
k
k 0
k ( P / F , i'%, k ) Alternatives
Capital Recovery (C.R.) cost defined:
10,000 ( P / A, i' ,3) ( P / F , i' ,2) 20,000 ( P / A, i' ,2) ( P / F , i' ,4)
P30,000 P19,000 ( P / F , i' ,1)
(1 i' )3 1 (1 i' ) 2 1
CR P( A / P, i, n) S ( A / F , i, n)
10,000 3
(1 i' ) 2 20,000 2
(1 i' ) 4
i' (1 i' ) i' (1 i' )
P30,000 P19,000 (1 i' ) 1
Using i’=9.4%, equivalent receipts equal P47,368 and
equal disbursement equal P47,402. The other choices
do not come close, and the difference could be due to
rounding discrepancies. Therefore, IRR = 9.4%
CR P12,518
Answer: b
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Reviewer/Comparison Between
Reviewer/Comparison Between Investment
Alternatives
Investment Alternatives
Two electric motors are being evaluated for an automated
paint booth application. Each motor must have an output of
PW P160T P50T ( P / A,15%,8) P80T ( P / F ,15%,4) P80T ( P / F ,15%,8) 10 horsepower (hp). It is estimated that the booth will be
PW P44,778 operated an average of 8 hours per day for 250 days per
year. MARR is 12% per year before taxes and the machine
must return the capital in 5 years. Motor A costs P68,000
Answer: c and has a guaranteed efficiency of 85% at the indicated
operating load. Motor B costs P56,000 and has a
guaranteed efficiency of 80% at the same operating load.
Electric energy costs P6.80 per kilowatt-hour and 1hp =
0.746 kw. (Recall that efficiency equals output/input).
The annual cost of electric energy in operating motor A is
closest to
a) P119,360 b) P126,820 c) P142,320 d) P163,270
P=P68,000 output
eff
eff = 85% input
output 10hP
output, O = 10 hP Input 11.764706hP
eff 0.85
1 hP = 0.746 kw 0.746kw hrs P6.80
Annual cost of electricit y 11.764706hP 2000
hP yr kw hr
electric energy cost = P6.80/kw-hr Annual cost of electricit y P119,360
Avg no. of hours of operation/year =
= 8 hrs/day × 250 days/yr = 2,000 hrs/year Answer: a
Find: Annual cost of operating Motor A
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Answer: b
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Answer: d
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