## Sunday, May 17, 2009

### 3A MAT Ex. 8B Annuities and Amortisation

Ok.. AP's and GP's are now a thing of the past (what?? huh?? when did that happen - in 8A of course!).. we're now onto applications of growth and decay.. nope.. (we did that in 8A too.. huh?? what??)..

MAT 8B We're now onto Annuities and Amortisation - growth and decay with payments.

The calculator handles this under the Financial, Sequences or Spreadsheet.

Starting with Financial:
Once in Financial, select Compound interest.

n - represents the number of installment periods
I% - is the interest p.a.
PV - is the present value (the initial investment)
PMT - is the payment per period
FV - is the future value (the investment at period N)
P/Y - is the number of installment periods per year (how often a payment is made)
C/Y - is the number of times interest is compounded

Let's look at a simple problem say 8B q.3 in 3A MAT. Kelvin invests \$620,000 into an account giving 5.8% pa. interest compounded annually from which her withdraws \$50,000 at the end of every year.

a) How much is left after 10 withdrawals (N=10, FV=?).
N=10
I%=5.8
PV=-620000
PMT=50000
P/Y=1
C/Y=1

Leave the cursor on FV and press solve (at the bottom left hand corner of the window)
FV=436670

b) For how many years will Kelvin be able to withdraw 50000 per year

Find when the account is exhausted of funds (eg. N=? when FV=0)
I%=5.8
PV=-620000
I%=5.8
PMT=50000
FV=0
P/Y=1
C/Y=1

Leave the cursor on N and press solve (at the bottom left hand corner of the window)

N=22.52 therefore for 22 years.

If anyone can explain why PV is negative I would be very appreciative. I know from last year's course that it is but have no idea why.

Now Sequence:
This could also have been done through the Sequence tool using recursion
a) Tn+1=Tn*1.058-50000; T0=620000. Find T10
b) Tn+1=Tn*1.058-50000; T0=620000. Find n Where Tn=0

I'll leave the spreadsheet method for another day.

Here is a link to other CAS calculator posts.