Compound Interest Formulas 1.

Your project has an estimated cost for land reclamation to be realized at the end of 20 years from today for $70,000,000. If current long term bond interest rates are 7.0% compounded annually, what would you need to invest in zero coupon (or deep discount) bonds today to cover the estimated cost after 20 years? In other words, calculate the present value P at time zero of $70,000,000 20 years from today for an interest rate of 7.0% compounded annually. What uniform series of payments at the end of periods 1 through 20 would also cover the year 20 cost? Use the same annual interest rate of 7.0%. (Answers: P = $18.1 million; A = $1.7 million) 2. An investor has a series of three $15,000 payments expected to be realized at the end of each of evaluation years three, four and five. Calculate the present value P at time zero, and the corresponding future value F at the end of year 7. This analysis assumes that no payments are realized in periods zero, one, two, six or seven. Assume a nominal interest rate of 15.0% compounded annually. (Answers: P = $25,894; F = $68,881) 3. Suppose you have a newborn child and want to begin covering the estimated cost of tuition and expenses for four years of college beginning 18 years from now. Your estimated cost is $30,000 per year beginning at the end of year 18 and running through the end of year 21 (4 years). Assume a nominal investment interest rate of 10.0% compounded annually. A) What is the value of the payments at the beginning of year 18 (end of year 17)? (Answer: P = $95,097) B) How much would you have to invest today (time zero) to cover the estimated cost of four years of college? (Answer: P = $18,810) C) What uniform series of deposits at the end of each of years 1 through 17 would be required to cover the tuition costs in years 18 through 21? (Answer: A = $2,345) 4. What future amount of money will be accumulated 10 years from now by investing $1,000 now plus $2,000 5 years from now at 6% interest compounded semi-annually? (Answer: F = $4,494) 5. What equivalent annual end-of-year payments for the next 6 years are equivalent to paying $5,000 now and $10,000 6 years from now if interest is 6% compounded annually? (Answer: $2,450) 6. What amount of money must be deposited in a savings account at the end of each quarter for the next 5 years to accumulate $10,000 in 5 years if interest is 6% compounded quarterly? (Answer: $432.46)

7. A company can lease an asset for the next four years by making lease payments that are equivalent to annual payments of $3,000 at year 0, $6,000 at year 1, $7,000 at year 2, $7,000 at year 3 and $4,000 at year 4. Use a 12% minimum discount rate determining the year 0 present worth lease payments, year 4 future worth lease payments and year 1 through 4 equivalent annual lease payments. (Answer: P = $21,462; F = $33,770; A = $7,066) 8. A payment of $2,000 will be realized today with additional payments of $1,000 at the end of each of the next 5 years. Assume a nominal interest rate of 20% is appropriate and calculate the following: A) Determine the future value of all the payments at the end of five years from now. (Answer: F = $12,419) B) What is the future value 5 years from now of the $2,000 plus $1,000 annual payments if the 20% nominal interest rate is compounded semi-annually? (Answer: $12,777) C) What semi-annual payments are equivalent to the $1,000 payments each year if the 20% interest is compound semi-annually? (Answer: $476.19) 9. What nominal annual interest rate is equivalent to an effective annual interest rate equal to 20% if interest is compounded quarterly? (Answer: r = 18.65%) 10. Calculate the present worth cost of service for the following cash flows. The minimum rate of return is a nominal 12.0% compounded monthly. BTCF Years Months A) -8,000 0 0 -2,000 1 12 -3,000 2 24 -2,500 3 36

Use monthly compounding periods. (Answer: - $13,885)

B) Use annual compounding periods and the appropriate effective annual interest rate that is equivalent to 12.0% compounded monthly. (Answer: $13,885) 11. An investor expects to realize 18 monthly payments of $100 starting at the end of month 31 and running through month 48. For a discrete nominal annual interest rate of 15%, calculate the present worth of these payments for the following cases: A) Use monthly discrete periods and assume the 15% rate is compounded monthly. (Answer: P = $1,104)

B) Use annual periods and assume the 15% annual discrete rate is compounded annually. Put the payments into the analysis at the closest year to which they are incurred. Compare this result with the result obtained by handling the time value of money using the effective annual interest rate of 16.07% that is equivalent to the annual rate of 15% compounded monthly. (Answer: P = $1,098) C) Work case B for continuous compounding of interest by using the annual continuous interest rate equivalent to 16.07% discrete. (Answer: P = $1,098) D) Use annual periods assuming continuous flow of payments during year 3 and 4 with continuous interest (as in case C). (Answer: P = $1,184) 12. Determine the sum of money that must be invested today at 9% interest compounded annually to give an investor annuity (annual income) payments of $5,000 per year for 10 years starting 5 years from now. (Answer: P = $22,731) 13. If you borrow $15,000 at an Annual Percentage Rate of 11.5% compounded monthly, calculate the equal end of month mortgage payments that will pay off this loan over four years. (Answer: A = $391.33) 14. Assume a 10 megawatt power plant is operating at full capacity 6,000 hours per year producing electric power that is sold for $0.04 per kilowatt-hour (kwh). Calculate the time zero present value of revenues to be generated over years one through ten assuming a 10% nominal interest rate for: A) Discrete end-of-year revenues with discrete annual compounding of interest. (Answer: P = $14,747) B) Discrete beginning-of-year revenue with discrete annual compounding of interest. (Answer: P = $16,222) C) Discrete mid-year revenue with discrete annual compounding of interest. (Answer: P = $15,467) D) Revenues flowing uniformly during each year are treated as discrete revenues at the closest annual period to which they are incurred. In other words, revenues incurred within plus or minus 6 months of an annual period are treated as discrete sums at that period. With this approach, put month 1-6 revenue at time 0, month 7-18 revenue at year 1, month 19-30 revenue at year 2, and month 31-36 revenue at year 3. (Answer: P = $15,484)