2306 AFE – Excel Exam Lecture – Financial Mathematics
Mortgage repayment
FV = PV(1+I)^N
•You can use the Present Value of the loan to calculate what the loan will cost you in
the future, that is what the “Future Value” of the loan will be
•You can use the annuity formula to calculate Future Value. FV= P[(1+I)^N=-1]
•P – in the above formula, will calculate your monthly payment
Introduction to coast benefit analysis : unequal returns on Assets
It is claimed that an asset will yield a flow of annual returns : namely
YR 1 $500
Yr 2 $750
Yr 3 $1000
Yr 4 $750
Yr 5 $500 over its life of 5 years
a) What is the (present ) value of the asset if the annual interest rate is 8% and interest is
compounded annually?
b) If the asset yields these returns and also a scrap value of $200 what is its (present
value)?
The present value of this asset is the total of the present values of each of the annual
returns
Since FV = P (1+R)^N, IF WE LET Pn denote the present value of the nth Payment then
Pn=FV/(1+R)^N and PV= p1 +p2+p3+p4+p5
P1 = 500/(1.08) =$462.96
P2 = 750/(1.08)^2=$643.00
P3 =1000/(1.08)^3=$793.83
P4 = 750/(1.08)^4 =$551.27
P5 = 500/(1.08)^5 = $340.29
PV = $462.96 + $643.00 +$793.83+$551.27+ $340.29 = $2791.35
Cost Benefit Analysis
In order to determine whether an investment project is justified, businesses often undertake
a cost benefit analysis. They can either
a) Compare the present value of the expected returns with the cost of the investment (NPV
method) or
b) Compare the percentage returns on the investment with the market rate of interest
