Interest Formulas for

Single Cash Flows

Lecture No.6
Chapter 3
Contemporary Engineering Economics
Copyright 2006
Contemporary Engineering
Economics, 4th edition, 2007

Types of Common Cash Flows in

Engineering Economics

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Equivalence Relationship
Between P and F

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Single Cash Flow FormulaCompound-Amount Factor

Single payment
compound amount
factor (growth factor)
Given: i 12%
N 8 years
P $5, 000

F P(1 i )
F P( F / P, i, N )
N

0
N

Find: F
F $5, 000(1 0.12)8
$5, 000( F / P,12%,8)
$12, 380

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Engineering Economics,

Practice Problem

If you had $2,000 now and invested it at

10%, how much would it be worth in 8
years?
F=?
i = 10%
0
8
$2,000
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Engineering Economics,

Solution
Given:
P $2, 000
i 10%
N 8 years
Find: F
F $2, 000(1 0.10)8
$2, 000( F / P,10%, 8)
$4, 287.18
EXCEL command:
=FV(10%,8,0,2000,0)
=$4,287.20
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Engineering Economics,

Single Cash Flow Formula

Present-Worth Factor

Single payment
present worth factor
(discount factor)
Given:
i 12%

P F(1 i) N
P F ( P / F , i, N )
0

N 5 years

F $1,000

Find:

P $1,000(1 0.12 )

$1,000( P / F,12%,5)
$567.40
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Practice Problem

You want to set aside a lump sum amount

today in a savings account that earns 7%
annual interest to meet a future expense in
the amount of $10,000 to be incurred in 6
years. How much do you need to deposit
today?

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Solution
$10,000

0
6

P $10, 000(1 0.07) 6

$10, 000( P / F , 7%, 6)
$6, 663
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Solving for i

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Solution
EXCEL Solution using RATE Function

$20 $10(1 i )5
2 (1 i )
i 14.87%
5

=RATE(5,0,-10,20)=14.87%

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Rule of 72 Number of Years

Required to Double Your
Investment

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Solution Analytical
Approach
2P

F 2 P P (1 0.20) N
2 1.2

0
N=?
P

log 2 N log1.2
log 2
N
log1.2
3.80 years

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Solution - Rule of 72

Approximating
how long it will
take for a sum of
money to double

72
N
interest rate (%)
72

20
3.6 years

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Number of Years Required to Double

an Initial Investment at Various
Interest Rates

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Uneven Payment Series

$25,000

$5,000

$3,000
0
1

How much do you need

to deposit today (P) to
withdraw $25,000 at n
=1, $3,000 at n = 2, and
$5,000 at n =4, if your
account earns 10%
annual interest?

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$25,000

Uneven
Payment Series

$5,000

$3,000
0
1

P
$25,000

$5,000

$3,000
0
1

0
1

P2

$22, 727

P4

P1
P1 $25, 000( P / F ,10%,1)

P2 $3, 000( P / F ,10%, 2)

$2, 479

P P1 P2 P4 $28, 622

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P4 $5, 000( P / F ,10%, 4)

$3, 415

Check
0

Beginning
Balance

28,622

6,484.20

4,132.62

4,545.88

Interest
Earned
(10%)

2,862

648.42

413.26

454.59

Payment

+28,622

-25,000

-3,000

-5,000

Ending
Balance

$28,622

6,484.20

4,132.62

4,545.88

0.47

Rounding error
It should be 0.
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Engineering Economics,