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MS-291: Engineering Economy

(3 Credit Hours)

Pervious Lecture!!!

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Single payment Factors

F=?

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

P is given

P/F Factor
P =?

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

n and i is given

F = given

Uniform Series Factors

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)

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Athematic Gradient
FG = ?

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

1 (1 + ) 1

Athematic Gradient

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

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

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Geometric Gradient
Fg = ?
Pg = ?

for g i:
=

1+
1 1+

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

for g = i:
=

1+

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

Chapter 3
Combining Factors
and Spreadsheet
Functions

Engineering Economy

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This Chapter Objectives

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

Example
P=?

P3 = ?

10

11

12

13

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.

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Shifted Uniform Series

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.
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.
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

P3 = ?

PA is always one year ahead

of first A
4

10

11

12

13

Year

A = $50
F=?
FA is in same year as last A
0

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

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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
A = $500
P0 = $5000

3. Determine n for each

series by renumbering the
cash flow diagram.

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

5. Set up
and solve
the
equations.

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

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%
i = 10%
0

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

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Class Practice 5 Minutes Time

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

PA = ?
0

Actual year
Series year

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

Shifted Series and Random

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

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

10

A = $5000

Solution:

$2000

PT = ?
0

i = 10%
1

Actual year

8
6

10

Series year

A = $5000
$2000

Find the cash flows both positive and negatives

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

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

Example:
PA = ?

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

Move PA back to year 0 using P/F: P0 = 26,675(P/F,10%,2) = 26,675(0.8264) = $22,044
Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933

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

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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

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

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Shifted Gradient Series

We already learnt how to get P (Present
value) or A ( Annuity or a Uniform series)
from a Gradient Series
We will now discuss how to calculate P or
A from Shifted Gradient Series a
gradient series not starting from year 1.

P from Shifted Gradient Series

P from Normal Arithmetic Gradient Series

Shifted Arithmetic gradient Series

PT = ?

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

PG = ?

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)

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What will be the procedure for calculating P from

Shifted Geometric Gradient Series?
Lets discuss it directly from a Numerical Example

Example:
Shifted Geometric Gradient
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

5 6 7 8
0

$7000

i =15% per year

1 2 3

9 10 11 12 13
4

5 6

7 8

$7840

$35000

$17331
12% increase
per year

Year
Geometric
Gradient n

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P from Shifted Gradient Series

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

.
.

(0.5718)

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.
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
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.

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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
The present worth (P) of an arithmetic gradient will always be
located two periods before the gradient starts.
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.
F from gradient series can also be find by first calculating P
and then using F/P factor

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

60

Actual years

10

Gradient years

60
65
70

G=5

Solution:

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

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

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

PT = P0 + PA = $396.70

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Class Question.. 5 minutes

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

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

Using Single Amount factors (Correct

but not Standard methods)
Method 3

Method 4

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THANK YOU