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Chapter 3.3 - Cashflow and Continuous Compounding Sample Problems

The document discusses examples of calculating present value, future value, and equivalent annual worth for cash flows that occur at regular time intervals using compound interest formulas. It provides step-by-step workings for problems involving constant cash flows, increasing cash flows, decreasing cash flows, and geometric sequences of cash flows at interest rates of 8-25% compounded annually. Formulas for the arithmetic gradient and single cash flow concepts are presented.

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Arin Park
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1K views

Chapter 3.3 - Cashflow and Continuous Compounding Sample Problems

The document discusses examples of calculating present value, future value, and equivalent annual worth for cash flows that occur at regular time intervals using compound interest formulas. It provides step-by-step workings for problems involving constant cash flows, increasing cash flows, decreasing cash flows, and geometric sequences of cash flows at interest rates of 8-25% compounded annually. Formulas for the arithmetic gradient and single cash flow concepts are presented.

Uploaded by

Arin Park
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Cash Flow

Julius D. Obnamia, CIE, AAE, CLSSGBt


Sample Problem 1
 Suppose that one has cash flows as follows:

End-of-Year 1 2 3 4
Cash Outflows 5,000 6,000 7,000 8,000
(in pesos)

 Assume that one wishes to calculate their present


equivalent at 15% rate of interest compounded annually,
what is its present worth?
Using the Arithmetic Gradient Concept

𝑃 = 𝑃𝐴 + 𝑃𝐺

𝑃 = 𝐴 𝑃Τ𝐴 , 𝑖%, 𝑛 + G 𝑃Τ𝐺 , 𝑖%, 𝑛

1+𝑖 𝑛−1 𝐺 1+𝑖 𝑛−1 𝑛


𝑃=𝐴 + −
𝑖 1+𝑖 𝑛 𝑖 𝑖 1+𝑖 𝑛 1+𝑖 𝑛

1 + 0.15 4 − 1 1,000 1 + 0.15 4 − 1 4


𝑃 = 5,000 + −
0.15 1 + 0.15 4 0.15 0.15 1 + 0.15 4 1 + 0.15 4

𝑷 = 𝟏𝟖, 𝟎𝟔𝟏. 𝟑𝟑
Using the Single Cash Flow Concept

𝑃 = 𝐹 𝑃Τ𝐹 , 𝑖%, 𝑛
−𝑛
𝑃 =𝐹 1+𝑖
−1 −2 −3 −4
𝑃 = 5,000 1 + 0.15 + 6,000 1 + 0.15 + 7,000 1 + 0.15 + 8,000 1 + 0.15

𝑷 = 𝟏𝟖, 𝟎𝟔𝟏. 𝟑𝟑
Sample Problem 2
 Calculate the future equivalent at the end of 1999, at 8%
per year, of the following series of cash flows.

End-of-Year 1996 1997 1998 1999


Cash flows (in 10,000 8,000 6,000 4,000
pesos)
Using the Arithmetic Gradient Concept

𝐹 = 𝐹𝐴 − 𝐹𝐺

𝐹 = 𝐴 𝐹 Τ𝐴 , 𝑖%, 𝑛 − G 𝐹 Τ𝐺 , 𝑖%, 𝑛

1+𝑖 𝑛−1 𝐺 1+𝑖 𝑛−1


𝐹=𝐴 − −𝑛
𝑖 𝑖 𝑖

1 + 0.08 4 − 1 2,000 1 + 0.08 4 − 1


𝐹 = 10,000 − −4
0.08 0.08 0.08

𝑭 = 𝟑𝟐, 𝟒𝟎𝟖. 𝟑𝟐
Using the Single Cash Flow Concept

𝐹 = 𝑃 𝐹 Τ𝑃 , 𝑖%, 𝑛
𝑛
𝐹 =𝑃 1+𝑖
3 2 1 0
𝐹 = 10,000 1 + 0.08 + 8,000 1 + 0.08 + 6,000 1 + 0.08 + 4,000 1 + 0.08

𝑭 = 𝟑𝟐, 𝟒𝟎𝟖. 𝟑𝟐
Sample Problem 3
 Suppose an engineer receives an initial annual salary of
Php24,000 increasing at the rate of Php1,200 a year. If
money is worth 12% annually, determine its equivalent
annual salary for a period of 10 years.
𝐴 = 𝐴 + 𝐴𝐺

𝐴 = 𝐴 + 𝐺 𝐴Τ𝐺 , 𝑖%, 𝑛

1 𝑛
𝐴=𝐴+𝐺 −
𝑖 1+𝑖 𝑛−1

1 10
𝐴 = 24,000 + 1,200 − 10
0.12 1 + 0.12 −1

𝐴 = 28,301.58
Sample Problem 4

 Annual maintenance costs for a machine are Php1,500


next year and are estimated to increase by 10% each year
starting one year from now. What is the present worth of
the maintenance costs for six years if (a.) i = 8%, (b.) i =
10%, and (c.) i = 12%?
𝑎. ) @ 𝑖 = 8%; 𝑓 = 10% 𝑐. ) @ 𝑖 = 12%; 𝑓 = 10%
1+𝑖 1 + 0.08 1+𝑖 1 + 0.12
𝑖𝑐𝑟 = −1= − 1 = −0.0182 𝑖𝑐𝑟 = −1= − 1 = 0.0182
1+𝑓 1 + 0.10 1+𝑓 1 + 0.10
𝐴 𝐴
𝑃= 𝑃Τ𝐴 , 𝑖𝑐𝑟 %, 𝑛 𝑃= 𝑃Τ𝐴 , 𝑖𝑐𝑟 %, 𝑛
1+𝑓 1+𝑓

𝐴 1+𝑖 𝑛−1 𝐴 1+𝑖 𝑛−1


𝑃= 𝑃=
1+𝑓 𝑖 1+𝑖 𝑛 1+𝑓 𝑖 1+𝑖 𝑛

1,500 1 + −0.0182 6 − 1 1,500 1 + 0.0182 6 − 1


𝑃= 6 𝑃=
1 + 0.10 −0.0182 1 + −0.0182 1 + 0.10 0.0182 1 + 0.0182 6

𝑃 = 8,728.80 𝑃 = 7,685.40

𝑏. ) @ 𝑖 = 10%; 𝑓 = 10%

𝑖𝑐𝑟 = 0 𝑛𝐴 6(1,500)
𝑃= = = 𝑃 = 8,181.82
1 + 𝑓 1 + 0.10
Sample Problem 5
 Consider the following EOY geometric sequence of cash
flows and determine the P, A, and F equivalent values.
The rate of increase is 20% per year after the first year,
and the interest rate is 25% per year.
Finding the value of P Finding the value of A

1+𝑖 1 + 0.25 𝐴 = 𝑃 𝐴Τ𝑃 , 𝑖%, 𝑛


𝑖𝑐𝑟 = −1= − 1 = 0.0417
1+𝑓 1 + 0.20
𝑖 1+𝑖 𝑛
𝐴=𝑃
1+𝑖 𝑛−1
𝐴
𝑃= 𝑃Τ𝐴 , 𝑖𝑐𝑟 %, 𝑛 0.25 1 + 0.25 4
1+𝑓 𝐴 = 3,013.07
1 + 0.25 4 − 1
𝐴 1+𝑖 𝑛−1
𝑃=
1+𝑓 𝑖 1+𝑖 𝑛 𝐴 = 1,275.86

1,000 1 + 0.0417 4 − 1
𝑃=
1 + 0.20 0.0417 1 + 0.0417 4 Finding the value of F

𝑃 = 3,013.07 𝐹 = 𝑃 𝐹 Τ𝑃 , 𝑖%, 𝑛
𝑛
𝐹 =𝑃 1+𝑖
4
𝐹 = 3,013.07 1 + 0.25

𝐹 = 7,356.13
Sample Problem 6

 Suppose that the geometric gradient in Example 5 begins


with Php1,000 at EOY one and decreases by 20% per year
after the first year. Determine P, A, and F under this
condition.
Finding the value of P Finding the value of A

1+𝑖 1 + 0.25 𝐴 = 𝑃 𝐴Τ𝑃 , 𝑖%, 𝑛


𝑖𝑐𝑟 = −1= − 1 = 0. 5625
1−𝑓 1 − 0.20
𝑖 1+𝑖 𝑛
𝐴=𝑃
1+𝑖 𝑛−1
𝐴
𝑃= 𝑃Τ𝐴 , 𝑖𝑐𝑟 %, 𝑛 0.25 1 + 0.25 4
1−𝑓 𝐴 = 1,849.40
1 + 0.25 4 − 1
𝐴 1+𝑖 𝑛−1
𝑃=
1−𝑓 𝑖 1+𝑖 𝑛 𝐴 = 783.11

1,000 1 + 0.5625 4 − 1
𝑃=
1 − 0.20 0.5625 1 + 0.5625 4 Finding the value of F

𝑃 = 1,849.40 𝐹 = 𝑃 𝐹 Τ𝑃 , 𝑖%, 𝑛
𝑛
𝐹 =𝑃 1+𝑖
4
𝐹 = 1,849.40 1 + 0.25

𝐹 = 4,515.13

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