You are on page 1of 12  Concepts from the
example problems

 Problem 1  Problem 2  Problem 3  Problem 4  Problem 5  Problem 6  Problem 7  Problem 8  Example 1

get a 12% interest rate compounded annually?

DIAGRAM: \$2 000
0
1
2
3
n=4
P?

P = F 4(P/F,i,n) = 2 000(P|F,12%,4) = 2 000(0.6355) = \$1 271   • Different Ways
of Looking at P/F

If you could get 13% on your money, would you rather have the \$1271 today, or \$2000 in 4 years ?  Example 2

tuition expenses? i is the effective interest rate for each period

0 n
 (
1  g
) 
 1 
(
1 
i )
when
i
g
i
g
A g , ,
,
i n
)
 
n
when
i
g
(
1 
i ) P ?
1
2
3
n
(
P
/
A 1
g = %
P = A 1 (P/A,g,i,n)

Note: cash flow starts with A 1at Time 1, increases by constant g% per period  Example 2

years of tuition expenses?  Example 2 - Concept

begins at \$10,000 increasing by 8% per year. This problem assumes tuition is due at the end of the year.  Complex Cash Flows

(This is like building with LEGOs!)  Problem 3

What is the present equivalent maintenance cost if the interest rate is 12% per year compounded annually?  Problem 3 – Alt Soln 1

= \$700(4.9676) + \$100(14.4715) + \$100(0.8929) = \$5014 P A? 3 4

n=8 P G ?

P F? 0

n=1 1
2
3
4
\$100
\$200
\$300

\$700 P ?
1
2
3
4
n=8
0
\$700
\$100
\$100
\$200
\$300
\$700

\$100

NOTE: CAN BREAK INTO 3 CASH FLOWS:  Problem 3 – Alt Soln 2

= \$800(4.9676) + \$100(11.6443)(0.8929) = \$5014 P A? 3 4

n=8 0
P G ? 0 P PG ? 0
1
2
3
1
\$100
\$200
P G ? P ?
1
2
3
4
n=8
0
\$800
\$100
\$200
\$600

\$600  Problem 4

DIAGRAM: 17
18

4 0