Appendix A 247The interpolation proceeds by setting up ratios and solving for the
unknown value, (F|P,13%,7), as follows:
change between rows 2 & 1 of left column
——————————————————— =
change between rows 3 & 1 of left column
change between rows 2 & 1 of right column
———————————————————
change between rows 3 & 1 of right column
0.13 – 0.12 (F|P,13%,7) –2.2107
————— = —————————
0.15 – 0.12 2.6600 – 2,2107
0.01 (F|P,13%,7) – 2.2107
—— = ——————————
0.03 0.4493
0.1498 = (F|P,13%,7) – 2.2107
(F|P,13%,7) = 2.3605
The interpolated value for (F|P,13%,7), 2.3605, differs from the exact
value, 2.3526, by 0.0079. This would imply a $7.90 difference in pres-
ent worth for every thousand dollars of return at t = 7. The relative
importance of this interpolation error can be judged only in the context
of a specific problem.
A.9.3 Non-Annual Interest Compounding
Many practical economic analysis problems involve interest that is
not compounded annually. It is common practice to express a non-annu-
ally compounded interest rate as follows:
12% per year compounded monthly or 12%/yr/mo.When expressed in this form, 12%/yr/mo is known as the nominal
annual interest rate. The techniques covered in this appendix up to this
point can not be used directly to solve an economic analysis problem of
this type because the interest period (per year) and compounding period
(monthly) are not the same. Two approaches can be used to solve prob-