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    CB 311-Topic 4

    Uploaded by

    rahma

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    © All Rights Reserved
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    CB 311-Topic 4

    Uploaded by

    rahma
    3 views20 pages

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    © © All Rights Reserved

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    Copyright:

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    3 views20 pages

    CB 311-Topic 4

    Uploaded by

    rahma

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    © All Rights Reserved
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    Computations using Standard

    Notations
    Computations using Standard Notations
    1
    • 𝑃=𝐹 𝑃 = 𝐹 (𝑃Τ𝐹 , 𝑖%, 𝑛)
    1+𝑖 𝑛

    𝑛
    • 𝐹 =𝑃 1+𝑖 𝐹 = 𝑃 (𝐹Τ𝑃 , 𝑖%, 𝑛)

    (1+𝑖)𝑛 −1
    • 𝑃=𝐴 𝑃 = 𝐴(𝑃Τ𝐴 , 𝑖%, 𝑛)
    𝑖(1+𝑖)𝑛
    Computations using Standard Notations
    𝑖(1+𝑖)𝑛
    • 𝐴=𝑃 𝐴 = 𝑃(𝐴Τ𝑃 , 𝑖%, 𝑛)
    (1+𝑖)𝑛 −1

    𝑖
    • 𝐴=𝐹 𝐴 = 𝐹 (𝐴Τ𝐹 , 𝑖%, 𝑛)
    1+𝑖 𝑛 −1

    (1+𝑖)𝑛 −1
    • 𝐹=𝐴 𝐹 = 𝐴 (𝐹Τ𝐴 , 𝑖%, 𝑛)
    𝑖
    Example
    • If a woman deposits $600 now, $300 two
    years from now, and $400 five years from now,
    how much will she have in her account 10
    years from now if the interest rate is 5% per
    year?
    F=?

    0 1 2 3 4 5 6 7 8 9

    10

    $600 $300 $400


    Example F=?

    0 1 2 3 4 5 6 7 8 9

    10

    $600 $300 $400

    F = F1 + F2 + F3

    = $600(F/P, 5%,10) + $300(F/P,5%,8) + $400(F/P,5%,5)


    F = $600*1.6289 +$300*1.4775 + $400*1.2763 =
    $1931.09
    Example
    • How much money would a man have in his
    account after 8 years if he deposited $1,000
    per year for 8 years at 14% per year starting 1
    year from now?
    F=?

    0 1 2 3 4 5 6 7 8 9 10

    $1,000/year (1 + 𝑖)𝑛 −1
    𝐹=𝐴
    𝑖
    $13,232.8
    Example
    • A unit of mechanical equipment has an initial
    cost of 10,000 LE and annual maintenance
    expenditure is expected to be 200 LE for its
    eight years of life. If interest is 6% and the
    equipment has no salvage value, what is its
    equivalent annual cost, excluding labor, fuel,
    etc?
    Nominal & Effective
    Interest Rates
    Nominal & Effective Interest Rates
    • 10% year compounded quarterly or semi
    annual in such case the effective interest rate
    per year will be greater than 10%

    𝑖 𝑚
    • 𝑖𝑒𝑓𝑓 = (1 + ) −1
    𝑚
    Example
    • If a loan of 1,000LE is made a nominal interest
    rate of 10% per year, compounded quarterly,
    what is the effective interest rate?

    0 1 2 3 4

    10.4%
    i=10%
    Example
    • If a woman deposits 1000 LE now, and 3000LE
    4 years from now and 1500 LE 6 years from
    now at an interest rate of 12% compounded
    semiannually, how much money will she have
    in her account 10 years from now?

    11,634.5 LE
    Example
    • If a man deposits $500 every 6 months for 7
    years, how much money will he have in his
    account after he makes his last deposit if the
    interest rate is 20% per year compounded
    quarterly?

    14,244.55 LE
    Method 1 F=?

    0 1 2 3 4 5 ………… 14

    $500/6months (period =6 months)


    i% per year = 20%
    i% per 6 months = 20%/2 = 10% per period → (nominal)
    Compounding quarterly (every 3 months) → twice in the 6 months
    Then i effective = (1+i/m)m -1 = 10.25% (m=2)

    (1 + 𝑖)𝑛 −1
    𝐹=𝐴
    𝑖

    A=500, i = 10.25% and n =14 → F =$14,244.55


    Method 2 F=?

    0 1 2 3 4 5 ………… 28

    $500/6months every 2 periods


    i% per year = 20%
    i% per period= 20%/4 = 5% per period
    Covert money from 500 every 6 months to money every period (3 months)
    0 1 2 0 1 2
    𝑖
    𝐴=𝐹
    1+𝑖 𝑛−1
    $500
    i=5%, n=2
    $243.9 /period
    (1 + 𝑖)𝑛 −1
    𝐹=𝐴
    𝑖

    A=243.9, i = 5% and n =28 → F =$14,244.55


    Method 3 F=?

    0 1 2 3 4 5 ………… 28

    $500/6months every 2 periods


    i% per year = 20%
    i% per period= 20%/4 = 5% per period

    𝐹 =𝑃 1+𝑖 𝑛

    P=$500, i=5%, n = 2, 4, 6, ….26

    F = 500 * (Factor n=2 +Factor n=4 +…+Factor n=26)


    …
    n =26

    F = $500 * (Sum of factors from 2 to 26 @ step =2)


    Economic Comparisons

    Money based – P, A, F, B/C


    Interest - i
    Time - n

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