Engineering Economic Analysis

Single Payment Compound Interest Formulas 77

Receipts (+)

Fo;:; 800

r

..

Disbursements(...c.) n=4

p=? i= 0.05

EtOhl thGcornpoundinterest tables, ~ ~

10;'" - .. J

P f(P I }!i',i,n) ...$800(t'IF, 5%,4)

IiO'
II"

(P I F,5%, 4) 0.8227

~ P'~"$800(0.8227)~ $658.1'6 ~

Here the problem has an exact answer. In many situations, however, the answer is rounded

off, recognizing that it can be only as acc,urate as the input information on which it is

based.

Suppose the bank changed their interest policy in Example 3-5 to "6% interest, compounded

quarterly." For this situation, how much money would be in the account at the end of 3 years,

assuming a $500 depositnow?

First, we must be certain to understand the meaningo( 6%interest, compoUnded quarterly.''I'h~t;e

are two elements:

6% [pterest: Unless otherwise described,itis customary-to as~umc;that the sta.tc;dP1teresti~

.for a one-year period.ljthe stated interest is for othetthgn a one-yeatperiod, the fimg

frame must be clgarly statgd.

Compounded quarterlY:Tl1isil1dicat~~ th~reare fgl1rint~rest periods pet y-ear; that is, an

"' rillt~restperiodis.31TIonths IOllg.

il

We kno~ that the 6% interest is an annual rate because ifit were for a different period, it would

have be9P stated. Since we are dealing with four interest periods per 'year, if foijows that the '"

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