ParkEndff.

qxd

5/31/06

TABLE 3.4
Flow Type

3:15 PM

Page 2

Summary of Discrete Compounding Formulas with Discrete Payments

Factor
Notation

Formula

Compound
amount
(F/P, i, N)
Present
worth
(P/F, i, N)
Compound
amount
(F/A, i, N)

P
A
Y
M
E
N
T

Sinking
fund
(A/F, i, N)

A = Fc

Present
worth
(P/A, i, N)

P = Ac

G
R
A
D
I
E
N
T

S
E
R
I
E
S

Cash Flow
Diagram

F = P11 + i2N

S
I
N
G
L
E
E
Q
U
A
L

S
E
R
I
E
S

Excel Command

= FV1i, N, P,, 02
0
N

P = F11 + i2-N

F = Ac

11 + i2N - 1
i

= PV1i, N, F,, 02
d

= PV1i, N, A,, 02
F
0 1 2 3 N1

= PMT1i, N, P, F, 02

i
d
11 + i2N - 1

11 + i2N - 1
i11 + i2N

= PV1i, N, A,, 02

AAA

AAA

AA

AA

1 2 3 N1N

Capital
recovery
(A/P, i, N)

A = Pc

Linear
gradient

i11 + i2N

11 + i2N - 1

Present
worth
(P/G, i, N)

P = Gc

11 + i2N - iN - 1

Conversion factor
(A/G, i, N)

A = Gc

11 + i2N - iN - 1

Geometric
gradient

A1 c

i 11 + i2
2

i[11 + i2N - 1]

= PMT1i, N,, P2

1 23
P

1 - 11 + g2N11 + i2-N

i - g
Present
P = D
N
worth
A1 a
b1if i = g2
1
+ i
1P/A 1, g, i, N2

(N2)G
2G
G

N1N

A1(1g)N1
A3
A2
A1
123
P

ParkEndff.qxd

5/31/06

3:15 PM

Page 3

Summary of Project Analysis Methods

Analysis
Method
Payback period
PP
Discounted
payback period

Description

Single
Project
Evaluation

Revenue
Projects

PP 6 PP

Select the
one with
shortest PP

A variation of payback period when

factors in the time value of money.
Management sets the benchmark PP .

PP1i2 6 PP

Select the
one with
shortest
PP(i)

An equivalent method which

translates a projects cash flows into a
net present value

PW1i2 7 0

Select the
one with the
largest PW

Select the
one with the
least negative
PW

An equivalence method variation of

the PW: a projects cash flows are
translated into a net future value

FW1i2 7 0

Select the
one with the
largest FW

Select the one

with the least
negative FW

An equivalence method variation of

the PW of perpetual or very long-lived
project that generates a constant
annual net cash flow

CE1i2 7 0

Select the
one with
the largest
CE

Select the one

with the least
negative CE

An equivalence method and variation

of the PW: a projects cash flows are
translated into an annual equivalent sum

AE1i2 7 0

Select the
one with
the largest
AE

Select the one

with the least
negative AE

PW(i)
Future worth
FW(i)
Capitalized
equivalent
CE(i)
Annual
equivalence
AE(i)
Internal rate of
return
IRR
Benefitcost
ratio
BC(i)

Service
Projects

A method for determining when in a

projects history it breaks even.
Management sets the benchmark PP.

PP(i)
Present worth

Mutually Exclusive
Projects

A relative percentage method which

measures the yield as a percentage of
investment over the life of a project:
The IRR must exceed the minimum
required rate of return (MARR).

IRR 7 MARR

An equivalence method to evaluate

public projects by finding the ratio of
the equivalent benefit over the
equivalent cost

BC1i2 7 1

Incremental analysis:
If IRR A2-A1 7 MARR, select the
higher cost investment project, A2.
Incremental analysis:
If BC1i2A2-A1 7 1, select the higher cost investment project, A2.

ParkEndff.qxd

5/31/06

3:15 PM

Page 4

Summary of Useful Excels Financial Functions (Part A)

Description

Excel Function

Example

Solution

SinglePayment

Find: F
Given: P

=FV1i%, N, 0, -P2

Find the future worth of

$500 in 5 years at 8%.

=FV18%, 5, 0, -5002
= $734.66

Cash
Flows

Find: P
Given: F

=PV1i%, N, 0, F2

Find the present worth of

$1,300 due in 10 years at
a 16% interest rate.

=PV116%, 10, 0, 13002

=1$294.692

Find: F
Given: A

=FV1i%, N, A2

Find the future worth of

a payment series of $200
per year for 12 years at 6%.

=FV16%, 12, -2002

= $3,373.99

Find: P
Given: A

=PV1i%, N, A2

Find the present worth of

a payment series of $900
per year for 5 years at 8%
interest rate.

=PV18%, 5, 9002
=1$3,593,442

What equal-annual-payment
series is required to repay
$25,000 in 5 years at 9%
interest rate?

=PMT19%, 5, -250002
= $6,427.31

What is the required annual

savings to accumulate
$50,000 in 3 years at 7%
interest rate?

=PMT17%, 3, 0, 500002
=1$15,552.582

EqualPaymentSeries

Find: A
Given: P

Find: A
Given: F

Measures
of
Investment
Worth

=PMT1i%, N, -P2

=PMT1i%, N, 0, F2

Find: NPW
Given: Cash
flow series

=NPV1i%, series2

Find: IRR
Given: Cash
flow series

=IRR1values, guess2

Find: AW
Given: Cash
flow series

=PMT 1i%, N,
-NPW2

Consider a project with the

following cash flow series
at 12% 1n = 0, - $200;
n = 1, $150, n = 2, $300,
n = 3, 2502?

A
Period

2
3
4
5

0
1
2
3

B
Cash
Flow
-200
150
300
250

= NPV112%, B3:B52 + B2
= $351.03

=IRR1B2:B5, 10%2
=89%

=PMT112%, 3,
-351.032
= $146.15

ParkEndff.qxd

5/31/06

3:15 PM

Page 5

Summary of Useful Excels Financial Functions (Part B)

Description

Excel Function

=PMT1i%, N, P2
Loan
payment size

Loan
Analysis
Functions

Suppose you borrow

$10,000 at 9% interest
to be paid in 48 equal
monthly payments. Find
the loan payment size.

Solution
=PMT19%/12, 48, 100002
=1$248.452

Interest
payment

=IMPT1i%, n, N, P2

Find the portion of

interest payment for
the 10th payment.

=IPMT19%/12, 10, 48, 100002

=1$62.912

Principal
payment

=PPMT1i%, n, N, P2

Find the portion of

principal payment
for the 10th payment.

=PPMT19%/12, 10, 48, 100002

=1$185.942

Cumulative
interest
payment

=CUMIMPT1i%, N,
P, start_period,
end_period)

Find the total interest

payment over 48
months.

= CUMIMPT19%/12,
48, 10000, 1, 482
= $1,944.82

Interest rate

Depreciation
functions

Example

=RATE1N, A, P, F2

What nominal interest

rate is being paid on
the following financing
arrangement? Loan
amount:$10,000, loan
period: 60 months, and
monthly payment:
$207.58.

=RATE160, 207.58, -100002

= 0.7499%
APR = 0.7499% * 12 = 9%

Find the number of

months required to pay
=NPER112%/12, 200, -100002
off a loan of $10,000
=69.66 months
with 12% APR where
you can afford a monthly
payment of $200.

Number of
payments

=NPER1i%, A, P, F2

Straight-line

=SLN1cost, salvage,
life2

Cost = $100,000,
S = $20,000,
life = 5 years

=SLN1100000, 20000, 52
= $16,000

Declining
balance

=DB1cost, salvage,
life, period, month2

Find the depreciation

amount in period 3.

=DB1100000, 20000, 5, 3, 122

= $14,455

Double
declining
balance

=DDB1cost, salvage,
life, period, factor2

Find the depreciation

amount in period 3
with = 150%,

=DDB1100000, 20000, 5, 3, 1.52

= $14,700

Declining
balance with
switching to
straight-line

=VDB1cost, salvage,
life, strat_period,
end_period, factor2

Find the depreciation

amount in period 3
with = 150%, with
switching allowed.

=VDB1100000, 20000, 5, 3, 4, 1.52

= $10,290