3/17/2015

MS-291: Engineering Economy

Pervious Lecture!!!

(3 Credit Hours)

Uniform Series Factors

Single payment Factors

F=?

F/P Factor
F= P(F/P, i%, n)
n and i is given

P/A Factor
P = A(P/A, i%, n)

A/P Factor
A = P(A/P, i%, n)

F/A Factor
F = A(F/A, i%, n)

A/F Factor
A = F(A/F, i%, n)

P is given

P/F Factor
P =?

P= F(P/F, i%, n)

n and i is given

F = given

Athematic Gradient

Athematic Gradient
FG = ?

A = PT(A/P, i%, n)
or

F = PT(F/P, i%, n)
or
PA = A(P/A, i%, n)
PG = G(P/G, i%, n)

AT =
1 (1 + ) 1

PA = A(P/A, i%, n)
PG = G(P/G, i%, n)

AA

AG

AA = A (Annual Worth) &

AG = G(A/G, i, n)

(1 + ) 1

3/17/2015

Geometric Gradient

Chapter 3
Combining Factors
and Spreadsheet
Functions

Fg = ?
Pg = ?

Engineering Economy

for g i:
=

1+
1 1+

F = Pg(F/P, i%, n)
Similarly

for g = i:
=

1+

A = Pg(A/P, i%, n)

This Chapter Objectives

Example
P=?

P3 = ?

10

11

12

13

1. Shifted uniform series

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

Year

A = $50

How can we get Present worth of this series ?

Use the P/F factor to find the present worth of each disbursement at year 0 and add
them.
Use the F/P factor to find the future worth of each disbursement in year 13, add
them, and then find the present worth of the total, using P/F= F( P/F, i ,13).
Use the F/A factor to find the future amount F/A =A( F/A, i ,10), and then compute
the present worth, using P/F=F(P/F, i ,13).
Use the P/A factor to compute the present worth P3 =A( P/A , i ,10) (which will be
located in year 3, not year 0), and then find the present worth in year 0 by using the
(P/F , i ,3) factor.

Shifted Uniform Series

P3 = ?

Typically the last method is used for calculating the present worth
of a uniform series that does not begin at the end of period 1.

PA is always one year ahead

of first A
4

Note that a P value is always located 1 year or period prior to the

beginning of the first series amount. Why? Because the P/A factor
was derived with P in time period 0 and A beginning at the end of
period 1.

10

11

12

13

Year

A = $50
F=?
FA is in same year as last A

The most common mistake made in working problems of this type

is improper placement of P .
Remember:
When using P/A or A/P factor, PA is always one year ahead of first A
When using F/A or A/F factor, FA is in same year as last A
The number of periods n in the P/A or F/A factor is equal to the number of uniform
series values

A = $50
The number of periods n in the P/A or
F/A factor is equal to the number of
uniform series values

10

11

12

13

Year

3/17/2015

Steps for applying factors to

Shifted Cash Flows
1. Draw a diagram of the positive and negative cash flows.
2. Locate the present worth or future worth of each series on
the cash flow diagram.
3. Determine n for each series by renumbering the cash flow
diagram.
4. Draw another cash flow diagram representing the desired
equivalent cash flow. (Optional)
5. Set up and solve the equations.

Example
The offshore design group at Bechtel just purchased
upgraded CAD software for $5000 now and annual
payments of $500 per year for 6 years starting 3 years
from now for annual upgrades. What is the present
worth in year 0 of the payments if the interest rate is
8% per year?
Solution 1. Draw a diagram of the positive and negative cash flows.
PT = ?
2. Locate the present
worth or future worth of
each series on the cash
PA = ?
PA = ?
i= 8% per year
flow diagram.
6
7 8 Year
4 5
3
0 1
2
2 3
n
0 1
4
6
5
3. Determine n for each
series by renumbering the
cash flow diagram.

A = $500
P0 = $5000

Class Practice 5 Minutes Time

Calculate the present worth of the cash flow shown below at i = 10%
i = 10%
0

P' = $500( P /A ,8%,6)

P = P' ( P /F ,8%, 2)
P = $500( P /A ,8%,6) ( P /F ,8%, 2)

5. Set up
and solve
the
equations.

PT = P0 +PA
=5000 + 500( P /A ,8%,6)( P / F ,8%,2)
=5000 +500(4.6229)(0.8573)
$6981.60

Class Practice 5 Minutes Time

Calculate the present worth of the cash flow shown below at i = 10%
PT = ?

Actual year

A = $10,000

10%

Single Payments

Uniform Series Factors

Compoun
d Amount
(F/P)

Present
Worth
(P/F)

Sinking
Fund
(A/F)

Compound Capital
Amount
Recovery
(F/A)
(A/P)

Present
Worth
(P/A)

1.1000

0.9091

1.00000 1.0000

1.10000

0.9091

1.6105

0.6209

0.16380 6.1051

0.26380

3.7908

Shifted Series and Random

Single Amounts
For cash flows that include uniform series and randomly placed
single amounts:

i = 10%

PA = ?

Actual year
Series year

Uniform series procedures are applied to the series amounts

Single amount formulas are applied to the one-time cash flows

A = $10,000
Solution
(1) Use P/A factor with n = 5 (for 5 arrows) to get PA in year 1

---- A(P/A,10%, 5)

(2) Use P/F factor with n = 1 to move PA back for PT in year 0

---- (P/F,10%, 1)

PT = A(P/A,10%, 5) (P/F,10%,1)
= 10,000(3.7908)(0.9091)
$34462

The resulting values are then combined per the problem statement

3/17/2015

Example

Example:

Find the present worth in year 0 for the cash flows shown using an interest
rate of 10% per year.
i = 10%
0

PA = ?
7

10

A = $5000

Solution:

$2000

PT = ?

i = 10%

Actual year

8
6

9
7

10
8

Series year

A = $5000

Move PA back to year 0 using P/F: P0 = 26,675(P/F,10%,2) = 26,675(0.8264) = $22,044

$2000

Use P/A to get PA in year 2: PA = 5000(P/A,10%,8) = 5000(5.3349) = $26,675

Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933

Find the cash flows both positive and negatives

Locate the present worth/ future worth
Determine the n by re-numbering the cash flows series

Now, add P0 and P2000 to get PT: PT = 22,044 + 933 = $22,977

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

The resulting values are then combined per the problem statement

Class Practice: 8 Minutes

An engineering company lease the mineral rights to a mining
company on its land. The engineering company makes a
proposal to the mining company that it pay $20,000 per year for
20 years beginning 1 year from now, plus $10,000 six years from
now and $15,000 sixteen years from now. If the mining company
wants to pay off its lease immediately, how much should it pay
now if the investment is to make 16% per year?
Single Payments

16%

Uniform Series Factors

Compound
Amount (F/P)

Present Worth
(P/F)

Capital
Recovery (A/P)

Present Worth
(P/A)

2.4364

0.4104

0.27139

3.6847

2.8262

0.3538

0.24761

4.0386

16

10.7480

0.0930

0.17641

5.6685

17

12.4677

0.0802

0.17395

5.7487

20

19.4608

0.0514

0.16867

5.9228

Shifted Gradient Series

Solution
P=?

$15,000

$10,000

A =$20,000

16

17

18

19

20

P = 20,000(P/A ,16%,20)+
10,000( P /F ,16%,6) +
15,000(P/F,16%,16)

P = $20,000(5.9288)+ $ 10,000( 0.4104) + $ 15,000(0.0930)

= $124,075

P from Shifted Gradient Series

P from Normal Arithmetic Gradient Series

Shifted Arithmetic gradient Series

PT = ?

We already learnt how to get P (Present

value) or A ( Annuity or a Uniform series)
from a Gradient Series

PA = A(P/A, i%, n)
PG = G(P/G, i%, n)
PA = ?

PG = ?

We will now discuss how to calculate P or

A from Shifted Gradient Series a
gradient series not starting from year 1.

Shifted gradient begins at a

time other than between periods
1 and 2
Must use multiple factors to find PT
in actual year 0

PG = ?

Present worth PG is located 2

periods before gradient starts
P T =P A +P G
=100(P/A , i ,8) + 50(P/G, i ,5)(P/F, i ,3)

3/17/2015

Example:
Shifted Geometric Gradient

What will be the procedure for calculating P from

Shifted Geometric Gradient Series?

Weirton Steel signed a 5-year contract to purchase water treatment chemicals from a
local distributor for $7000 per year. When the contract ends, the cost of the chemicals is
expected to increase by 12% per year for the next 8 years. If an initial investment in
storage tanks is $35,000, determine the equivalent present worth in year 0 of all of the
cash flows at i = 15% per year.
Pg = ?

PT = ?
0 1

3 4

Lets discuss it directly from a Numerical Example

i =15% per year

5 6 7 8
0

$7000

1 2 3

Year

9 10 11 12 13
4

5 6

7 8

Geometric
Gradient n

$7840

$35000

$17331
12% increase
per year

P from Shifted Gradient Series

A from Shifted Gradient Series

Shifted gradient Series

A (Annuity or Uniform Series)

To calculate A for shifted Gradient Series (Arithmetic or

Geometric), there are several possibilities.

PT = 35,000 + A ( P /A ,15%, 4) + A1 ( P/A ,12%,15%,9) (P/F ,15%,4)

PT = 35,000 + 7000 ( 2.8550) + 7000

$83,232

.
.

The easiest way (and recommended also) is to get the P of

shifted Gradient Series first (procedure just explained in pervious slides) then
use A/P factor to get A for the shifted gradient series

(0.5718)

Important Points for P and A

of Shifted Gradient Series
Must use multiple factors to find P in actual year 0, for shifted
gradient series

A, for above example will be: A = PT (A/PT, i%, n),

where PT refers to the present value of the shifted gradient series that procedure is
already explained on pervious slide.

Example: Shifted Arithmetic

Gradient
John Deere expects the cost of a tractor part to increase by $5 per year beginning 4 years from
now. If the cost in years 1-3 is $60, determine the present worth in year 0 of the cost through year
10 at an interest rate of 12% per year.
P2 = ? i = 12%

PT = ?
0

0
60

The present worth (P) of an arithmetic gradient will always be

located two periods before the gradient starts.

Gradient years

65
70
95

First find P2 for G = $5 and base amount ($60) in actual year 2

P2 = 60(P/A,12%,8) + 5(P/G,12%,8) = $370.41
Next, move P2 back to year 0

P0 = P2(P/F,12%,2) = $295.29

Next, find PA for the $60 amounts of years 1 and 2

F from gradient series can also be find by first calculating P

and then using F/P factor

Actual years

10

60

G=5

Solution:

To find the equivalent A series of a shifted gradient through

all the n periods, first find the present worth of the gradient at
actual time 0, then apply the (A/P, i, n) factor.

60

Finally, add P0 and PA to get PT in year 0

PA = 60(P/A,12%,2) = $101.41

PT = P0 + PA = $396.70

3/17/2015

Using Single Amount factors (Correct

but not Standard methods)

Class Question.. 5 minutes

For the cash flows shown, find the future value in year 7 at i = 10% per year
Method 3

PG

PG = ?
Set up the
equations
only

F=?
i = 10%

1
0

600
700

5
4

550

6
5
500

Actual years

7
6

Gradient years

450

650

Method 4

G = $-50

Solution:

PG is located in gradient year 0 (actual year 1); base amount of $700 is in gradient years 1-6

PG = A(P/A,10%,6) G(P/G,10%,6)
PG = 700(P/A,10%,6) 50(P/G,10%,6) = 700(4.3553) 50(9.6842) = $2565
PG= PG(F/P,10%,1) = 2565(0.9091) = $2331.84

F = PG(F/P,10%,7) = 2331.84(1.9487) = $4544

Method 1

F = PG(F/P,10%,6) = 2565(1.7716) = $4544

Method 2

THANK YOU