Chapter 3 Combining Factors and Spreadsheet Functions

Lecture slides to accompany

Engineering Economy
7th edition

Leland Blank Anthony Tarquin

!-1

2012 by McGraw-Hill, New York, N.Y All Rights Reserve

LEA !"!# $%TC$&ES

1. Shifted uniform series 2. Shifted series and single cash flows 3. Shifted gradients

!-2

2012 by McGraw-Hill, New York, N.Y All Rights Reserve

Shi'ted %ni'orm Series

A shi'ted uni'orm series starts at a time other than period 1 "he cash #low iagra$ below is a% e&a$'le o# a shi#te series
(eries starts i% 'erio 2, %ot 'erio 1

)A * +

Shi'ted series usually require the use o' multiple factors

Remember: (hen using )*A or A*) 'actor+ )A is al,ays one year ahead o' 'irst A (hen using F*A or A*F 'actor+ FA is in same year as last A
!-!
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample %sing )*A Factor. Shi'ted %ni'orm Series

The present ,orth o' the cash 'lo, sho,n belo, at i / 123 is. 4a5 067+328 4b5 069+7:6 4c5 038+8:6 4d5 037+92; -0 * + -1 * +
0 1 2 !

i / 123
, . /

Act5al year
.

(eries year

Solution0

A / 012+222 112 3se -4A #actor with % * . 1#or . arrows2 to get -1 in year 1 122 3se -4) #actor with % * 1 to $ove -1 back #or -0 in year 2

)2 / )14)*F+123+15 / A4)*A+123+754)*F+123+15 / 12+22243<792;542<92915 / 2012 by McGraw-Hill, New York, N.Y All Rights Reserve 038+8:6 !-, Ans,er is 4c5

E-ample %sing F*A Factor. Shi'ted %ni'orm Series

=o, much money ,ould be a>ailable in year 12 i' 0;222 is deposited each year in years 3 through 12 at an interest rate o' 123 per year?

Cash flow diagram is:

i / 123
0 1 2 ! , . / 6 7 8

FA / ?
6 7
10

Act5al year (eries year

A / 0;222

Solution0 Re-%5$ber iagra$ to eter$i%e % * 7 1%5$ber o# arrows2 )A * 70001)4A,109,72 * 7000111.,!.82 * 091+8;7

!-.
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

Shi'ted Series and andom Single Amounts

)or cash #lows that i%cl5 e uniform series and randomly placed single amounts0

Uniform series procedures are applied to the series amounts Single amount formulas are applied to the one-time cash flows

The resulting >alues are then combined per the problem statement

"he #ollowi%g sli es ill5strate the 'roce 5re

!-/
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample. Series and andom Single Amounts

)i% the 'rese%t worth i% year 0 #or the cash #lows show% 5si%g a% i%terest rate o# 109 'er year.
)T / ?
0 10 1 2 ! , .

i / 123
/ 6 7 8

A / 07222

06222

)T / ?
0 10 1 2
0 1

i / 123
!
2

,
!

.
,

/
.

7
/ 6

8
7

Act5al year (eries year

A / 07222

06222

Solution. )irst, re-%5$ber cash #low iagra$ to get % #or 5%i#or$ series0 % * 7

!-6

2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample. Series and andom Single Amounts

)A

)T / ?
0 10 1 2
0 1

i / 123
!
2

,
!

.
,

/
.

6
/

8
6 7

Act5al year (eries year

A / 07222

06222

3se -4A to get -A i% year 20 -A * .0001-4A,109,72 * .0001..!!,82 * :2/,/6. Move -A back to year 0 5si%g -4)0 -0 * 2/,/6.1-4),109,22 * 2/,/6.10.72/,2 * :22,0,,
Move :2000 si%gle a$o5%t back to year 00 -2000 * 20001-4),109,72 * 200010.,//.2 * :8!!

Now, a

-0 a% -2000 to get -"0 -" * 22,0,, ; 8!! * :22,866

1-7

2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample (orked a @i''erent (ay

4%sing F*A instead o' )*A 'or uni'orm series5

"he sa$e re-%5$bere )T / ?

0 10 1
0

iagra$ #ro$ the 'revio5s sli e is 5se

i / 123

FA / ?
6
. /

2
1

!
2

,
!

.
,

7
6

8
7

A / 07222

06222

Solution.

3se )4A to get )A i% act5al year 100 )A * .0001)4A,109,72 * .000111.,!.82 * :.6,170 Move )A back to year 0 5si%g -4)0 -0 * .6,1701-4),109,102 * .6,17010.!7..2 * :22,0,! Move :2000 si%gle a$o5%t back to year 00 -2000 * 20001-4),109,72 * 200010.,//.2 * :8!! Same as be'ore Now, a two - val5es to get -"0 -" * 22,0,! ; 8!! * :22,86/

As show%, there are 5s5ally $5lti'le ways to work e<5ivale%cy 'roble$s

!-8
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample. Series and

andom Amounts

Con>ert the cash 'lo,s sho,n belo, 4black arro,s5 into an equi>alent annual ,orth A in years 1 through ; 4red arro,s5 at i / 123 per year<
A/?
0 1 2 !
0

,
1

.
2

/
!

6
,

7
.

i / 123

A / 03222

01222

Approaches.

1< Con>ert all cash 'lo,s into ) in year 2 a% 5se A4- with % * 7 6< Find F in year ; a% 5se A4) with % * 7
(olve #or )0 F / 32224F*A+123+75 A 12224F*)+123+15 / 32224:<12715 A 122241<12225 / 019+817 )i% A0 A / 19+8174A*F+123+;5 / 19+81742<2;7885 / 01:9;
!-10
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

Solution.

Shi'ted Arithmetic #radients

Shi'ted gradient begins at a time other than bet,een periods 1 and 6

)resent ,orth )# is located 6 periods be'ore gradient starts

&ust use multiple 'actors to 'ind )T in actual year 2

To 'ind equi>alent A series+ 'ind )T at actual time 2 and apply 4A*)+i+n5

!-11

2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample. Shi'ted Arithmetic #radient

=%g. Ali Ah$a e&'ects the cost o# a tractor 'art to i%crease by :. 'er year begi%%i%g , years #ro$ %ow. ># the cost i% years 1-! is :/0, eter$i%e the present worth in year 0 o# the cost thro5gh year 10 at a% i%terest rate o# 129 'er year. )T / ?
i / 163
0 1 2 ! , . 10

Act5al years Gra ie%t years

0
/0 /0

1
:2

2
/.

60 8.

#/7

Solution.

First 'ind )6 'or # / 07 and base amount 40:25 in actual year 6

-2 * /01-4A,129,72 ; .1-4G,129,72 * :!60.,1 !e-t+ mo>e )6 back to year 2

-0 * -21-4),129,22 * :28..28
-A * /01-4A,129,22 * :101.,1

!e-t+ 'ind )A 'or the 0:2 amounts o' years 1 and 6 Finally+ add )2 and )A to get )T in year 2
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

)T / )2 A )A / 039:<72

!-12

Shi'ted #eometric #radients

Shi'ted gradient begins at a time other than bet,een periods 1 and 6

Equation yields )g 'or all cash 'lo,s 4base amount A1 is included5

Equation 4i G g5.

)g / A 1B1 C D41Ag5*41Ai5En*4iCg5F

For negati>e gradient+ change signs on both g >alues

There are no tables 'or geometric gradient 'actors
!-1!
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample. Shi'ted #eometric #radient

Nabl5s Natio%al (teel sig%e a .-year co%tract to '5rchase water treat$e%t che$icals #ro$ a local istrib5tor #or :6000 'er year. ?he% the co%tract e% s, the cost o# the che$icals is e&'ecte to i%crease by 129 'er year #or the %e&t 7 years. ># a% i%itial i%vest$e%t i% storage ta%ks is :!.,000, eter$i%e the e<5ivale%t 'rese%t worth i% year 0 o# all o# the cash #lows at i * 1.9 'er year.

!-1,

2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample. Shi'ted #eometric #radient

Gra ie%t starts betwee% act5al years . a% /@ these are gra ie%t years 1 a% 2. -g is locate i% gra ie%t year 0, which is act5al year ,

-g * 6000A1-B11;0.122411;0.1.2C8410.1.-0.122D * :,8,,01 Move -g a% other cash #lows to year 0 to calc5late - " )T / 37+222 A 72224)*A+173+85 A 89+8214)*F+173+85 / 0;3+636
1-1.
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

!egati>e Shi'ted #radients

For negati>e arithmetic gradients+ change sign on # term 'rom A to C Ge%eral e<5atio% #or eter$i%i%g -0 ) / present ,orth o' base amount C )#
Changed 'rom A to C

For negati>e geometric gradients+ change signs on both g >alues

Changed 'rom A to C

)g / A1B1CD41Cg5*41Ai5En*4iAg5F
Changed 'rom C to A

All other procedures are the same as 'or positi>e gradients

!-1/
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

E-ample. !egati>e Shi'ted Arithmetic #radient

For the cash 'lo,s sho,n+ 'ind the 'uture ,orth in year 7 at i / 123 per year
)# / ?
0
0

i * 109
1
1

F/?
. /
. .00

2
2

!
!

6
/ ,.0

Actual years #radient years

600

/.0

/00

..0

Solution.

# / 0C72 Gra ie%t G #irst occ5rs betwee% act5al years 2 a% !@ these are gra ie%t years 1 a% 2 -G is locate i% gra ie%t year 0 1act5al year 12@ base a$o5%t o# :600 is i% gra ie%t years 1-/

)# / 7224)*A+123+:5 H 724)*#+123+:5 / 72248<37735 H 7249<:;865 / 067:7 F / )#4F*)+123+:5 / 67:741<771:5 / 08788

!-16
2012 by McGraw-Hill, New York, N.Y All Rights Reserve

Summary o' "mportant )oints

) 'or shi'ted uni'orm series is one period ahead o' 'irst AI n is equal to number o' A >alues F 'or shi'ted uni'orm series is in same period as last AI n is equal to number o' A >alues For gradients+ first change equal to # or g occurs bet,een gradient years 1 and 6 For negati>e arithmetic gradients+ change sign on # 'rom A to C For negati>e geometric gradients+ change sign on g 'rom A to C
!-17
2012 by McGraw-Hill, New York, N.Y All Rights Reserve