COMBINING FACTORS

M. IVAN FARHAN
DIAN RATRI CAHYANI
JOSHUA LOKATILI
CALCULATIONS FOR SHIFTED UNIFORM SERIES

 When a uniform series begins at a time other than at the end of period 1, it is called a shifted series.
 The present worth is always located one period prior to the first uniform series amount when using the P/A
factor.
 The future worth is always located in the same period as the last uniform series amount when using the F/A
factor.
 Several methods can be used to solve shifted uniform series. it is generally more convenient to use the uniform
series factors than the single-amount factors. Specific steps should be followed to avoid errors:
UNIFORM SERIES AND RANDOMLY PLACED SINGLE
AMOUNTS
 When a cash flow includes both a uniform series and randomly placed single amounts, the procedures of Section
3.1 are applied to the uniform series and the single-amount formulas are applied to the one-time cash flows.
 For spreadsheet solutions, it’s necessary to enter the net cash flows before using the NPV and other functions.
EXAMPLE

An engineering company in Wyoming that owns 50 hectares of valuable land has decided to lease the mineral
rights to a mining company.
The primary objective is to obtain long-term income to finance ongoing projects 6 and 16 years from the
present time. 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?
SOLUTION

 Find the present worth of the 20-year uniform series and add it to the present worth of the two one-
time amounts to determine PT.
PT = 20,000( P/A ,16%,20) + 10,000(P/F ,16%,6) + 15,000(P/F ,16%,16)
= $ 124,075
 Note that the $20,000 uniform series starts at the end of year 1, so the P/A factor determines the
present worth at year 0
 The cash flow diagram from the owner’s perspective :
 When you calculate the A value for a cash fl ow series that includes randomly placed single amounts and uniform
series, first convert everything to a present worth or a future worth. Then you obtain the A value by
multiplying P or F by the appropriate A/P or A/F factor.
EXAMPLE

 A design-build-operate engineering company in Texas that owns a sizable amount of land plans to lease the
drilling rights (oil and gas only) to a mining and exploration company. The contract calls for the mining
company to pay $20,000 per year for 20 years beginning 3 years from now (i.e., beginning at the end of year
3 and continuing through year 22) plus $10,000 six years from now and $15,000 sixteen years from now.
Utilize engineering economy relations by hand and by spreadsheet to determine the five equivalent values
listed below at 16% per year. Find:
1. Total present worth PT in year 0
2. Future worth F in year 22
3. Annual series over all 22 years
4. Annual series over the first 10 years
5. Annual series over the last 12 years
SOLUTION
 Solution by spreadsheet
 Cash flow diagrams (top) from:
(a) years 1 to 10
(b) years 11 to 20
 Spreadsheet (bottom) using cell
reference format
CALCULATIONS FOR SHIFTED GRADIENTS
 ARITHMETHIC GRADIENT
REVIEW SHIFTED

• An arithmetic gradient series is a cash flow • Shifted gradient begins at a time other than
series that either increases or decreases by a between periods 1 and 2
constant amount each period. The amount of
change is called the gradient. • Present worth PG is located 2 periods before
gradient starts
• The “G” amount is the constant arithmetic
change from one time period to the next. • Must use multiple factors to find PT in actual year
0
• The “G” amount may be positive or negative.
• To find equivalent A series, find PT at actual year
• The present worth point is always one time 0 and apply (A/P,i,n)
period to the left of the first cash flow (Base
amount) in the series or two periods to the left
of the first gradient cash (G) flow
(Conventional Gradient).
 Factor Formula and Excel Function

PT = PA ± PG AT = AA ± AG

= NPV(i%, second_cell:last_cell) first_cell for PG

= PMT(i%, n, cell_with_PG) for AG
 The present worth (year 0) of the cash flow shown in the diagram above at an interest rate of 12%
EXAMPLE
per year is :

Solution:
In using the P/G factor, the ‘P’ will be located in year 3 (i.e. year 0 of the gradient years) and,
therefore, will have to be moved back 3 years using the P/F factor. Also, note that n is equal to 4
for the P/G factor:
P3= $100 (P/A, 12%, 4) + $20 (P/G, 12%, 4)
= $100 (3.0373) + $20 (4.1273)
= $386.28

P0 = P3 (P/F, 12%, 3)
= $386.28 (0.7118)
= $274.95
 GEOMETRIC GRADIENT

REVIEW SHIFTED

• A geometric gradient series is a cash flow • Shifted gradient begins at a time other than
series that either increases or decreases by a between periods 1 and 2
constant percentage each period. The
uniform change is called the rate of change. • The present worth of a geometric gradient series
will always be located two periods before the
gradient stars, and the initial amount is included in
the resulting present worth.
• g, constant rate of change, in
decimal form, by which cash flow
values increase or decrease from one
period to the next.

• The gradient g can be positive or

negative .

• A1 initial cash flow in year 1 of the

geometric series

• Pg present worth of the entire

geometric gradient series, including
the initial amount A1
  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.

Solution:
Gradient starts between actual years 5 and 6; these are gradient years 1 and 2.
Pg is located in gradient year 0, which is actual year 4
EXAMPLE
Pg = 7000{1-[(1+0.12)/(1+0.15)]9/(0.15-0.12)} = $49,401
Move Pg and other cash flows to year 0 to calculate PT
PT = 35,000 + 7000(P/A,15%,4) + 49,401(P/F,15%,4) = $83,232
 NEGATIVE SHIFTED GRADIENT

ARITHMETHIC GEOMETRIC

• For negative arithmetic gradients, • For negative geometric gradients,

change sign on G term from + to - change signs on both g values

• PT = PA – Pg • Pg = A1{1-[(1-g)/(1+i)]n/(i+g)}