EMGT 6225

Economic Decision Making

Module 2: Analyzing Cash Flows

and Series of Cash Flows

Manish Ranjit, Ph.D.

Northeastern University
 Objectives
• Analyze cash flows with arithmetic gradients and
geometric gradient series, finding present, annual
and future values of these cash flows
• Calculate the interest rate per cash flow period and
apply it to time value of money calculations
• Practice analyzing cash flows - using all types of
transactions so far
• Analyze problems with multiple compounding and
changing interest rates applied

2
Reading Assignments:
Chapter 2.4 to end

3
Lesson 1: Analyzing Cash Flow Series
 Check Your Knowledge
Question 1

Ideally, how frequently should you add money

to a retirement savings account if your goal is
to have about one million dollars in fifty years?

• Once (i.e., one ‘lump sum’ payment)

• Weekly
• Monthly
• Yearly
5
 Question 2
Quinn wants to have one million dollars saved
toward her retirement in fifty years from now and
she is considering two different long-term
savings options. Option 1 accrues interest at the
rate of 2% annually, and Option 2 accrues it at
20% annually. For each option, approximately
how much money would Quinn need to save
annually over the next fifty years to end up as a
millionaire?

6
 Question 2 Contd.
• Option 1 (2% APR) = $1,000/year, Option 2
(20% APR) = $200/year

• Option 1 (2% APR) = $22/year, Option 2

(20% APR) = $11,000/year

• Option 1 (2% APR) = $11,000/year, Option

2 (20% APR) = $22/year

7
 Gradient Series
• In this series, more money is saved each
period instead of "uniform“ savings.
• Very common series and is used in industry all
the time.
• Manufacturing companies budget this way;
they realize that maintenance costs go up
each year as their equipment ages.

8
 Gradient Series Contd.

Formula 1 Formula 2 CF Diagram

At = (t-1)G
t = 1,...,n

Note that the gradient is not measured until

the second period because it is the increase
between the initial deposit and the next
deposit.
9
 Gradients in the 'Real World'
• Maintenance costs associated with the care of
your automobile.
• There is a uniform series of maintenance costs
(for example, changing the oil and replacing
tires), plus
• A gradient series which is equal to the amount
you would need to put away for other types of
repairs that will increase over time as the car
ages.
10
Example: Find PW of a Gradient Series
A couple plan to start saving money by
depositing $500 into their savings account 1
year from now. They estimate that the deposits
will increase by $100 each year for 9 years
thereafter. What would be the present worth of
the investments if the interest rate is 5% per
year?

11
Example Gradient Series Cont.

12
 Example Gradient Series Cont.
P  PU  PG
 500(P/A, 5%, 10)  100(P/G, 5%, 10)
 500(7.7217)  100(31.652)
 $7026.05

13
 Ways to Convert Gradient Series

Converting Gradient Converting Gradient Converting Gradient

Series to Present Worth Series to Future Worth Series to Annual Worth

Not in tables
P = G(P|G i%, n) F = G(F|G i%, n) A = G(A|G i%, n)
14
 Check Your Knowledge
In word problems that have gradient series (G), you
can easily find A or P using factors in your table.
But what can you do in instances where your tables
do not have factors for F given G and you need to
find F?
• Convert it to something that you already
know.
• Nothing. The equation cannot be solved.
• You would need to look it up online or in a
different book

15
 Review: Converting Gradient Series
The most common scenario is to have P given G
(P|G) or A given G (A|G). Some problems will
have F given G (F|G), but if you do not have F|G,
you need to know how to convert it to either an
A or a P.

16
 Converting Gradient Series
P=G gradient series, present worth
factor
= G(P|G i%,n)

A=G gradient-to-uniform series

conversion factor
= G(A|G i%,n)

F=G gradient series, future worth

factor
= G(F|G i%,n)

17
 Example
If you borrow $10,000 at 8% compound annual interest and
repay the loan with 5 annual payments, what will be the
size of the 3rd payment if each payment is $100 greater
than the previous payment?
$10,000(A|P 8%,5) = A + $100(A|G 8%,5)
A = $10,000(0.25046) - $100(1.84647) = $2,319.95
Third payment = $2,319.95 + 2($100) = $2,519.95
PW of a Negative (Decreasing) Gradient
Example:

19
Example Negative Gradient Cont.

A=1000

20
 Example Negative Gradient Cont.
P = A (P/A, i, n) – G (P/G, i, n)
= 1000 (P/A, 2%, 5) – 100 (P/G, 2%, 5)
= 1000 (4.713) – 100 (9.240)
= $3789.00

21
 Geometric Series
• We are not putting the same amount of
money in each year as we saw in the gradient
series.
• The amount goes up by a percentage of the
previous amount.
• It is based on the same principle as a raise in
your salary. If you get a 5% raise this year,
then when you get a 5% raise next year, it is
based on that increased salary from the
previous year.
22
 Geometric Series Contd.

Formula 1 Formula 2 CF Diagram

At = A t-1(1+j) t = 2,...,n At = A1(1+j)t-1 t = 1,...,n

23
 Geometric Series
• Not as common as the gradient series
• Once you have the cash flow, the problem is easy
to solve.
• The gradient and geometric series are more
complicated than the uniform series, but are used
in many investment and saving plans.
• Note: when i = j, the denominator of these
formulas calculates to 0. Since it is mathematically
impossible to divide by 0, there are special cases
for this particular instance in the table.
24
 Converting Geometric Series to
Present Worth

P = nA1/(1+i) i=j

P = A1/(P|A1 i%, j%, n)

25
Converting Geometric Series to Future
Worth

F = nA1/(1+i) i=j

F = A1/(F|A1 i%, j%, n)

26
 Geometric Series Contd.
• Example 2.30
A company is considering purchasing a new machine tool. In
addition to the initial purchase and installation costs,
management is concerned about the machine’s maintenance
costs, which are expected to be $1000 at the end of the first year
of the machine’s life and increase 8%/year thereafter. The
machine tool’s expected life is 15 years. Company management
would like to know the present worth equivalent for expected
costs. If the firm’s time value of money is 10%/year compounded
annually, what is the present worth equivalent?

27
 Example 2.30
A firm is considering purchasing a new machine. It will have
maintenance costs that increase 8% per year. An initial
maintenance cost of $1,000 is expected. Using a 10%
interest rate, what present worth cost is equivalent to the
cash flows for maintenance of the machine over its 15-year
expected life?
A1 = $1,000, i = 10%, j = 8%, n = 15, P = ?
P = $1,000(P|A110%,8%,15) = $1,000(12.03040) = $12,030.40
Time Value of Money Factors
P =1000*NPV(10%,1,1.08,1.08^2,1.08^3,1.08^4,1.08^5,
i

j
10.00%
4% 5%
10.00%
Geometric Series - Present Worth
6% 10% 15%
To Find P To Find P To Find P To Find P To Find P

1.08^6,1.08^7,1.08^8,1.08^9,1.08^10,1.08^11,1.08^12,
n Given A1 Given A1 Given A1 Given A 1 Given A1
(P|A1,i%,j%,n) (P|A1,i%,j%,n) (P|A1,i%,j%,n) (P|A1,i%,j%,n) (P|A1,i%,j%,n)
1 0.90909 0.90909 0.90909 0.90909 0.90909
2 1.76860 1.77686 1.78512 1.81818 1.85950
3 2.58122 2.60518 2.62930 2.72727 2.85312

1.08^13,1.08^14) = $12,030.40
4
5
6
3.34951
4.07590
4.76267
3.39586
4.15059
4.87102
3.44278
4.22668
4.98207
3.63636
4.54545
5.45455
3.89190
4.97789
6.11325
7 5.41198 5.55870 5.71000 6.36364 7.30022
8 6.02587 6.21512 6.41145 7.27273 8.54113
9 6.60628 6.84171 7.08740 8.18182 9.83846
10 7.15503 7.43981 7.73877 9.09091 11.19475
11 7.67385 8.01073 8.36645 10.00000 12.61270
12 8.16436 8.55570 8.97130 10.90909 14.09509
13 8.62813 9.07589 9.55417 11.81818 15.64487
14 9.06659 9.57244 10.11583 12.72727 17.26509
15 9.48114 10.04642 10.65708 13.63636 18.95896
Example 2.30
 Geometric Series Contd.
• Example 2.32
An investment of $100,000 is made in a limited partnership in a
natural-gas drilling project. The first year of the investment
produced net revenue of $25,000. Over a 20-year period, the net
revenue received from the investment decreased by 10 percent
each year. Based on a TVOM of 12 percent, what is the present
worth for the investment?

30
 Geometric Series Contd.
• Example 2.32
An investment of $100,000 is made in a limited partnership in a
natural-gas drilling project. The first year of the investment
produced net revenue of $25,000. Over a 20-year period, the net
revenue received from the investment decreased by 10 percent
each year. Based on a TVOM of 12 percent, what is the present
worth for the investment?
A1 = $25,000, i = 12%, j = -10%, n = 20, P = ?
P = -$100,000 + $25,000(P|A1 12%,-10%,20)
P = -$100,000 + $25,000(4.48817) = 12,204.15

P = -$100,000 + $25,000[1 – (0.90)20(1.12)-20]/(0.12 + 0.10)

31
P = $12,204.15
Example 2.32
 Geometric Series Contd.
• Example 2.31
Mattie Bookhout receives an annual bonus and deposits it in a
saving account that pays 8 percent compounded annually. The
amount increases by increases by 10 percent each year, her
initial deposit is $500. Determine how much will be in the fund
immediately after her tenth deposit?

F = $500 (F/A1 8%, 10%, 10) = $500 (21.74087) = $10,870.44

33
Example 2.31
 Example
Suppose you invest $100,000 and receive $25,000 one year after
making the investment. Further, suppose each year you receive 10%
more than the previous year. If your time value of money equals 10%,
how long will it take for you to fully recover your investment?
P = $100,000, A1 = $25,000, i = 10%, j = 10%, n = ?

$100,000 = $25,000(P|A1 10%,10%,n)

(P|A1 10%,10%,n) = $100,000/$25,000 = 4.0
From p. 853, 4 < n < 5
Interpolating, n = 4 + (4.00000 – 3.63636)/(4.54545 – 3.63636) = 4.4
Since i = j = 10%, P = n A1/(1 + i), or $100,000 = $25,000n/1.10.
Therefore, n = $100,000(1.10)/$25,000 = 4.4 years
 Revised Example
Suppose you invest $100,000 and receive $25,000 one year
after making the investment. Further, suppose each year
you receive 10% less than the previous year. If your time
value of money equals 10%, how long will it take for you to
fully recover your investment?
P = $100,000, A1 = $25,000, i = 10%, j = -10%, n = ?
$100,000 = $25,000(P|A1 10%,-10%,n)
  1  0.10  n 
1    
1  (0.81818) n 

$100,000 = $25,000  0.10  (0.10 ) 
1 0.10
= $25,000  
 0.20 
 
 
(0.81818)n = 1 – 0.20($100,000)/$25,000 = 0.20
n = log(0.20)/log(0.81818) = log(0.20)/log(0.9/1.1) = 8.02 years
 Example
If you borrow $10,000 at 8% compound annual interest and
repay the loan with 5 annual payments, what will be the
size of the 3rd payment if each payment is 10% greater than
the previous payment?
$10,000 = A1(P|A1 8%,10%,5)
A1 = $10,000(0.08 – 0.10)/[1 – (1.1/1.08)5] = $2,081.47
A3 = A1(1.10)2 = $2,081.47(1.10)2 = $2,518.58
Lesson 2: Multiple Compounding
Periods in a Year
 Introduction
• Thus far, when referring to an interest rate, we said
that it was x% compounded annually or x% annual
compound interest.

• While it is true that practically all engineering

economic analyses incorporate annual compounding,
in personal financing, compounding typically occurs
more frequently than once a year.

39
 Introduction
• For example, credit cards charge interest of say 1.5%
on the unpaid balance of the account each month.
As a result, if you owe $1000 and do not pay it by the
monthly payment deadline, your balance owed
increases to $1015. If you do not make any
payments, the interest owed next month will be 1.5%
of $1015.
• In this case of 1.5% per month, an alternate way of
expressing the interest rate is 18% per annum
compounded monthly, or 18% per year per month.
When expressed in this form, 18% is known as the
40
nominal annual interest rate (r).
 Introduction
• In the examples presented thus far, cash flows
occurred on an annual basis and money was
compounded annually. When cash flow frequency
and compounding frequency are not the same, one
of two approaches must be employed: the period
interest rate approach or the effective interest rate
approach.

• When the interest period and the compounding period are the same (monthly),
the factors in Appendix A can be applied directly. Note, however, the number of
interest periods (n) must be adjusted to match the new frequency.
41
 Effective Interest Rate
Effective interest rate per year, ieff or ia, is the
annual interest rate taking into account the effect
of any compounding during the year.

Where:
r = nominal annual interest rate
m = number of compounding periods per year
ieff = EFFECT(r, m) - annual effective interest rate
42
 Effective Interest Rate
• If the interest rate is 12% per year compounded
quarterly, then r = 12%, and there are four interest
periods per year. Thus, the period interest rate is 3%
per quarter. Hence, $1 invested for 1 year at 3% per
quarter has a FW of F = 1(F/P 3%,4) = 1(1.12551) =
1.12551
• To obtain the same value in 1 year require an annual
compound interest rate of 12.551%. This value is
called the effective annual interest rate and is given
by (1.03)4 – 1 = 0.12251 = 12.551%
43
 Example 2.35
• Two thousand dollars is invested in an account that
pays 12 percent per year compounded monthly.
What is the account balance after 3 years?
• Here, r =12%, m = 12, period interest rate =r/m =
1%/month
• F = 2000 (F/P i%, n) = 2000 (F/P 1%, 36)
2000 (1.43077) = 2861.54
• ieff = (1+0.01)12 – 1 = 12.6825%
• F = 2000 (F/P i%, n) = 2000 (F/P 12.6825%, 3) =
2000 (1.43077) = 2861.54
44
 Example 2.35
• Two thousand dollars is invested in an account that
pays 12 percent per year compounded semiannually.
What is the account balance after 3 years?
• Here, r =12%, m = 2, period interest rate =r/m =
6%/month
• F = 2000 (F/P i%, n) = 2000 (F/P 6%, 6)
2000 (1.41852) = 2837.04
• ieff = (1+0.06)2 – 1 = 12.36%
• F = 2000 (F/P i%, n) = 2000 (F/P 12.36%, 3) =
2000 (1.41852) = 2837.04
45
 Example 2.37
What happens to the interest rate when we
change the compounding rate for an
investment?

46
Rate r m r/m ieff Formula ieff

12% per annum

12% 1 12% (F|P 12%,1) -1 12%
compounded annually

12% per annum

compounded 12% 2 6% (F|P 6%, 2) -1 12.36%
semiannually
12% per annum
compounded 12% 4 3% (F|P 3%, 4) -1 12.55%
quarterly

12% per annum

12% 12 1% (F|P 1%, 12) -1 12.68%
compounded monthly

12% per annum

12% 52 (1+.12/52)52 -1 12.73%
compounded weekly
12% per annum
12% 365 (1+ .12/365)365-1 12.75%
compounded daily
12% per annum
12% 8760 (1+.12/8760)8760-1 12.75%
compounded hourly 47
 Example 2.38
• Wenfeng Li borrowed $1000 and paid off the
loan with interest after 4.5 years. The amount
paid was $1500. What was the effective
annual interest rate for the transaction?
(Letting the interest period be 6 months).

• 1500 = 1000(F/P i%, 4.5) -> ln1.5 = 4.5 ln (1+i)

-> i = 9.4287%

48
 Example 2.38
• Wenfeng Li borrowed $1000 and paid off the
loan with interest after 4.5 years. The amount
paid was $1500. What was the effective
annual interest rate for the transaction?
(Letting the interest period be 6 months).

• 1500 = 1000(F/P i%, 9) -> ln1.5 = 9 ln (1+i) -> i

= 4.60819
• ieff = (1+0.0460819)2 - 1=0.094287 = 9.4287%
49
 Example 2.36
• Rebecca Carlson purchases a car for $25,000 and
finances her purchase by borrowing the money at 8%
per year compounded monthly; she pays off the loan
with equal monthly payments for 5 years. What will
be the size of her monthly loan payment?
• r = 8%, m = 12, period interest rate = 8/12
=0.66667%per month
• A = 25000 (A/P 0.66667%,60) = 25000 (0.02028) =
507

50
 Example 2.39
• Greg Wilhelm borrowed $100,000 to purchase
a house. He agreed to repay the loan with
equal monthly payments over a 30-year
period at a nominal annual interest rate of 6%.
His monthly payment on the 30-year loan is?

• A = 100,000 (A/P 0.5%, 360) =

100,000(0.0059955) = $599.55

51
 When Compounding and Cash Flow
Frequencies Differ
• Previous examples – frequency of
compounding coincided with the frequency of
cash flows – monthly compounding and
monthly cash flows. What if they are not the
same?

52
 Mismatched CFs and Compounding
Frequencies
Two Cases:
1. CF more often or compounding less often than CF
(monthly cash flow and quarterly compounding)

2. CF less often or compounding is more frequent than CF

(quarterly cash flow and monthly compounding)

53
 Mismatched CFs and Compounding
Frequencies
1. CF more often or compounding less often than CF
(monthly cash flow and quarterly compounding)

Ann deposits $1000 at the end of each month into her bank savings
account. The bank paid 6% nominal interest, compounded and paid
quarterly. No interest was paid on money not in the account for the
full 3-month period (i.e. It is assumed that money deposited during a
compounding period earns no interest). How much was in Ann’s
account at the end of 3 years.

54
 Mismatched CFs and Compounding
Frequencies
2. CF less often or compounding is more frequent than CF
(quarterly cash flow and monthly compounding)

55
 Mismatched CFs and Compounding
Frequencies
2. CF less often or compounding is more frequent than CF
(quarterly cash flow and monthly compounding)

56
 Mismatched CFs and Compounding
Frequencies
2. CF less often or compounding is more frequent than CF
(quarterly cash flow and monthly compounding)

Solution 1: Compute an equivalent A for each 3-month time period.

A = P(A/P, i , n) = 5000(A/P, 2% ,20) = 5000(0.0612) = $306

57
 Mismatched CFs and Compounding
Frequencies
2. CF less often or compounding is more frequent than CF
(quarterly cash flow and monthly compounding)

Solution 1: Compute an equivalent A for each 3-month time period.

W = A(F/A, i , n) = 306(F/A, 2% ,4) = 306(4.122) = $1260

58
 Mismatched CFs and Compounding
Frequencies
2. CF less often or compounding is more frequent than CF
(quarterly cash flow and monthly compounding)

Solution 2: Compute an effective interest rate for the time period

between individuals
i = (1+r/m)m/k – 1
Where:
r = nominal annual interest rate
m = number of compounding periods per year
k = number of cash flows per year
I = interest rate per cash flow period
Note: The formula is derived as: (1+i)k – 1 = (1+r/m)m – 1 59
 Mismatched CFs and Compounding
Frequencies
2. CF less often or compounding is more frequent than CF
(quarterly cash flow and monthly compounding)

Solution 2: Compute an effective interest rate for the time period

between individuals

i = (1+r/m)m/k – 1

iyearly = (1+0.08/4)4/1 – 1 = 0.0824 = 8.24% per year

60
 Mismatched CFs and Compounding
Frequencies
2. CF less often or compounding is more frequent than CF
(quarterly cash flow and monthly compounding)

Solution 2: Compute an effective interest rate for the time period

between individuals

W = P(A/P, i , n) = 5000(A/P, 8.24% ,5) = 306(0.2520) = $1260

61
 Mismatched CFs and Compounding
Frequencies
1. CF more often or compounding less often than CF
(monthly cash flow and quarterly compounding)

Ann deposits $1000 at the end of each month into her bank savings
account. The bank paid 6% nominal interest, compounded quarterly.
It is assumed that money earns interest regardless of when it is
deposited. How much was in Ann’s account at the end of 3 years.

imonthly = ((1+0.06/4)(4/12) ) – 1 = 0.004975 = 0.4975%

F = 1000 (F|A, 0.4975%, 36) = 1000 (39.31846) = 39,318.46

62
 Mismatched CFs and Compounding
Frequencies
Example 2.40
1. CF more often or compounding less often than CF
(monthly cash flow and quarterly compounding)

What size monthly payments should occur when $10,000 is

borrowed at 8% per year compounded quarterly and the load is
repaid with 36 equal monthly payments? It is assumed that the
money earns interest regardless of when it is lend.

ieff = (1+imonthly)12 -1 = (1+iquarterly)4 -1

i = (1+0.08/4)4/12 – 1 = 0.006623 = 0.6623%
A = $10,000 (A/P 0.6623%, 36) =10000 (0.03131)
= $313.1 63
 Question 3
Imagine a scenario where you have to get your
interest rate to match your cash flow. What’s the
best approach in order to accomplish this if the
interest compounding is more frequent than the
cash flow?

• Divide the cash flows.

• Use effective interest rate.

64
 Finding the Effective Interest Rate
You want to buy a car but you do not have any
cash or much credit. So, you go to a shady auto
place and find a car. Deal presented to you is as
follows:
Car Price: $2400
20% Loan Fee: $480
12 payments: $2880/12 = $240 per month
Is this a good deal? Find the monthly and the
effective interest rate. ieff = (1+i)m-1
65
 Finding the Effective Interest Rate
2400 = 240(P/A i, 12)
2400/240 = (P/A i, 12)
(P/A i, 12) = 10
i = 2.93%/month
ieff = (1 + 2.93%)12 - 1
ieff = 41.35%

66
 Question 4
You ask your friend for a $2000 loan. He agrees to loan it to
you at 10% interest ($200) over 10 months ($220 per
month). But is this actually a 10% interest rate? From the
choices below, select the equation that uses equivalence to
solve for the interest rate you would actually pay.

• P = A(P/A 10%,6)(P/F 10%,5)

• P = A(P/A i, 10)
• P = A(P/A 10%, 11)

67
 Question 4
2000 = 220(P/A i, 10)
2000/220 = (P/A i, 10)
(P/A i, 10) = 9.0909
i = 2%/month
ieff = (1 + 2%)12 - 1
ieff = 26.82%

68
To Find Given Factor Symbol Name

-n
P F (1 + i) (P|F i%,n ) Single sum, present worth factor

F P (1 + i)n (F|P i%,n ) Single sum, compound amount factor

(1 + i)n - 1
P A (P|A i%,n ) Uniform series, present worth factor
i(1 + i)n
n
i(1 + i)
A P n
(A|P i%,n ) Uniform series, capital recovery factor
(1 + i) - 1

(1 + i)n - 1
F A (F|A i%,n ) Uniform series, compound amount factor
i

i
A F (A|F i%,n ) Uniform series, sinking fund factor
(1 + i )n - 1
-n
[1 - (1 + ni )(1 + i ) ]
P G 2
(P|G i%,n ) Gradient series, present worth factor
i

(1 + i)n - (1 + ni )
A G (A|G i%,n ) Gradient series, uniform series factor
i [(1 + i )n - 1]
n -n
1 - (1 + j ) (1 + i )
P A 1,j for i ≠ j (P|A 1 i%,j%,n ) Geometric series, present worth factor
i-j

(1 + i )n - (1 + j) n
F A 1,j for i ≠ j (F|A 1 i%,j%,n ) Geometric series, future worth factor
i-j 69
 Continuous Compounding
• In businesses and governments, transactions
occur every year, every month, every day, every
hour, every minute, and every second.
• In multi-national corporations, for example,
money is “put to work” immediately. Via
electronic transfers, money is invested around
the world continuously.
• Explicit consideration of “around the clock” and
“around the world” money management
motivates the use of continuous compounding.
70
 Continuous Compounding Contd.
• Not only does compounding of money occur
“continuously,” but also expenditures occur by
the hour, minute, and second. Hence, funds
also flow continuously.
• ieff = er - 1
• F = Pern = P(F|P, r%, n)∞

71
 Continuous Compounding
nm
 
F  P1  i   P1  
We have that
n r
 m
nm
 r
If we consider that F  P lim 1  
m 
 m
lim 1  x 
1
Then x  2.71828  e
x 0

x r
m
; nm  1  x rn 

F  P lim 1  x 
x 0
1
x 
rn
 Pe rn
 Examples
• Example 2.A.1 Summary of continuous
compounding interest factors for discrete flows

• Example 2.A.2 Summary of continuous

compounding interest factors for continuous
flows

• Example 2.A.3 Continuous Compounding with a

Geometric Series
73
 Example 2.A.1
If 2,000 is invested in a fund that pays interest at
a rate of 12% compounded continuously, after 5
years the cumulative amount in the fund will
be?

74
 Example 2.A.1
If 2,000 is invested in a fund that pays interest at
a rate of 12% compounded continuously, after 5
years the cumulative amount in the fund will
be?

F = P (F/P 12%, 5)∞ = 2000 (1.82212) = 3,644.24

75
 Example 2.A.2
$1000 is deposited each year into an account
that pays interest at a rate of 12 percent
compounded continuously. Determine both the
amount in the account immediately after the
tenth deposit and the present worth equivalent
for 10 deposits?

76
 Example 2.A.2
$1000 is deposited each year into an account
that pays interest at a rate of 12 percent
compounded continuously. Determine both the
amount in the account immediately after the
tenth deposit and the present worth equivalent
for 10 deposits?
F = A (F/A 12%, 10)∞ = 1000 (18.19744)
= 18,197.44
P = A (P/A 12%, 10)∞ = 1000 (5.48097)
=5,840.97 77
 Example 2.A.3
An individual receives an annual bonus and
deposits it in a savings account that pays 8%
compounded continuously. The amount
increases each year at a rate of 10%
compounded continuously; the initial deposit is
$500. Determine how much will be in the fund
immediately after the tenth deposit?

78
 Continuous Compounding

Substituting e-rn for (1+i)-n , er -1 for i, and ern for (1+i)n. 79

 Example 2.A.3
An individual receives an annual bonus and deposits it
in a savings account that pays 8% compounded
continuously. The amount increases each year at a rate
of 10% compounded continuously; the initial deposit is
$500. Determine how much will be in the fund
immediately after the tenth deposit?

F = A1 (F/A1 i%, j%, n)∞ = 500 (F/A1 10%, 8%, 10)∞ =

= 500 (22.51619) = 11,258.09

80