Engineering

Economic
2. Time Value of Money
Economic Equivalence

Economic equivalence is a combination of

interest rate and time value of money to deter-
mine the different amounts of money at
different points in time that are equal in
economic value.
Time Value of Money
Future Value and Present Value

Compounding converts the present value into future value and discounting converts the future value
into present value
Chapter 1 Foundations of Engineering Economy

Terminology and Symbols

1.5 Terminology and Symbols
The equations and procedures of engineering economy utilize the following terms and symbols.
Sample units are indicated.
P = value or amount of money at a time designated as the present or time 0. Also P is
referred to as present worth (PW), present value (PV), net present value (NPV), dis-
counted cash flow (DCF), and capitalized cost (CC); monetary units, such as dollars
F = value or amount of money at some future time. Also F is called future worth (FW)
and future value (FV); dollars
A = series of consecutive, equal, end-of-period amounts of money. Also A is called the
annual worth (AW) and equivalent uniform annual worth (EUAW); dollars per
year, euros per month
n = number of interest periods; years, months, days
i = interest rate per time period; percent per year, percent per month
t = time, stated in periods; years, months, days

The symbols P and F represent one-time occurrences: A occurs with the same value in each inter-
est period for a specified number of periods. It should be clear that a present value P represents a
single sum of money at some time prior to a future value F or prior to the first occurrence of an
equivalent series amount A.
It is important to note that the symbol A always represents a uniform amount (i.e., the same
 www.downloadslide

1.a Single-Amount Factors (F∕P)

40 Chapter 2

F = P(1 + i)n F=?

i = given

The factor (1 + i)n is called

the single-payment 0 1 2 n–2 n–1 n 0
compound amount factor
(SPCAF), but it is usually
referred to as the F∕P
factor P = given P=?
(a)

Figure 2–1
Cash flow diagrams for single-payment factors: (a) find F, given P, and (b) find P

Substituting P(1 + i)2 for F2 and simplifying

F3 =
F/P example…
Sandy, a manufacturing engineer, just received a year-end bonus of
$10,000 that will be invested immediately. With the expectation of
earning at the rate of 8% per year, Sandy hopes to take the entire
amount out in exactly 20 years to pay for a family vacation when the
oldest daughter is due to graduate from college. Find the amount of
funds that will be available in 20 years …

• P = $10,000 F = P(1 + i)n

• F=? = 10,000(1+0.8)20
• i = 8% per = 10,000(1.08)20
year = 10,000(4.6610)
• n = 20 years = $46,610
 F/P example… www.downloadslide.com

Standard notation and tabulated value: Notation for the F∕P factor is (F∕P,i%,n).
Sandy ….
Compound Interest Factor Tables 607
• P = $10,000 F = P(F∕P,8%,20)
8% TABLE 13 Discrete Cash Flow: Compound Interest Factors 8%
• F=? Single Payments Uniform Series Payments Arithmetic Gradients

• i = 8% per year
Compound Present Sinking Compound Capital Present Gradient Gradient
Amount Worth Fund Amount Recovery Worth Present Worth Uniform Series
n F⧸P P⧸F A⧸F F⧸A A⧸P P⧸A P⧸G A⧸G

• n = 20 years 1
2
1.0800
1.1664
0.9259
0.8573
1.00000
0.48077
1.0000
2.0800
1.08000
0.56077
0.9259
1.7833 0.8573 0.4808
3 1.2597 0.7938 0.30803 3.2464 0.38803 2.5771 2.4450 0.9487
4 1.3605 0.7350 0.22192 4.5061 0.30192 3.3121 4.6501 1.4040
5 1.4693 0.6806 0.17046 5.8666 0.25046 3.9927 7.3724 1.8465
6 1.5869 0.6302 0.13632 7.3359 0.21632 4.6229 10.5233 2.2763
7 1.7138 0.5835 0.11207 8.9228 0.19207 5.2064 14.0242 2.6937
8 1.8509 0.5403 0.09401 10.6366 0.17401 5.7466 17.8061 3.0985
9 1.9990 0.5002 0.08008 12.4876 0.16008 6.2469 21.8081 3.4910
10 2.1589 0.4632 0.06903 14.4866 0.14903 6.7101 25.9768 3.8713
11 2.3316 0.4289 0.06008 16.6455 0.14008 7.1390 30.2657 4.2395
12 2.5182 0.3971 0.05270 18.9771 0.13270 7.5361 34.6339 4.5957

F = P(F∕P,8%,20)
13 2.7196 0.3677 0.04652 21.4953 0.12652 7.9038 39.0463 4.9402
14 2.9372 0.3405 0.04130 24.2149 0.12130 8.2442 43.4723 5.2731
15 3.1722 0.3152 0.03683 27.1521 0.11683 8.5595 47.8857 5.5945
16 3.4259 0.2919 0.03298 30.3243 0.11298 8.8514 52.2640 5.9046

= 10,000(4.6610) 17
18
19
3.7000
3.9960
4.3157
0.2703
0.2502
0.2317
0.02963
0.02670
0.02413
33.7502
37.4502
41.4463
0.10963
0.10670
0.10413
9.1216
9.3719
9.6036
56.5883
60.8426
65.0134
6.2037
6.4920
6.7697

= $46,610
20 4.6610 0.2145 0.02185 45.7620 0.10185 9.8181 69.0898 7.0369
21 5.0338 0.1987 0.01983 50.4229 0.09983 10.0168 73.0629 7.2940
22 5.4365 0.1839 0.01803 55.4568 0.09803 10.2007 76.9257 7.5412
23 5.8715 0.1703 0.01642 60.8933 0.09642 10.3711 80.6726 7.7786
24 6.3412 0.1577 0.01498 66.7648 0.09498 10.5288 84.2997 8.0066
25 6.8485 0.1460 0.01368 73.1059 0.09368 10.6748 87.8041 8.2254
26 7.3964 0.1352 0.01251 79.9544 0.09251 10.8100 91.1842 8.4352
27 7.9881 0.1252 0.01145 87.3508 0.09145 10.9352 94.4390 8.6363
28 8.6271 0.1159 0.01049 95.3388 0.09049 11.0511 97.5687 8.8289
29 9.3173 0.1073 0.00962 103.9659 0.08962 11.1584 100.5738 9.0133
30 10.0627 0.0994 0.00883 113.2832 0.08883 11.2578 103.4558 9.1897
31 10.8677 0.0920 0.00811 123.3459 0.08811 11.3498 106.2163 9.3584
32 11.7371 0.0852 0.00745 134.2135 0.08745 11.4350 108.8575 9.5197
33 12.6760 0.0789 0.00685 145.9506 0.08685 11.5139 111.3819 9.6737
34 13.6901 0.0730 0.00630 158.6267 0.08630 11.5869 113.7924 9.8208
35 14.7853 0.0676 0.00580 172.3168 0.08580 11.6546 116.0920 9.9611
40 21.7245 0.0460 0.00386 259.0565 0.08386 11.9246 126.0422 10.5699
 F/P example… rate = Suku bunga tahunan 8%
nper= Periode 20
Sandy …. pmt= Pembayaran setiap perode 0
• P = $10,000 [PV] Nilai saat ini $10.000
[Type] 0 or 1
• F=? -$46.610

• i = 8% per year
• n = 20 years
FV $46.610

= FV(i%,n,,P)
n years. To find F, given P,

F = P(1 + i)n [2.2]

1 + i)n is called the single-payment compoundwww.downloadslide.com

amount factor (SPCAF), but it is usu-
to as the F∕P factor. This is the conversion factor that, when multiplied by P, yields
mount F of an initial amount P after n years at interest rate i. The cash flow diagram
gure 2–1a. 1.b Single-Amount Factors (P∕F ) …
he situation to determine the P value for a stated amount F that occurs n periods
40 Chapter 2 Factors: How Time and Interest Affect Money
. Simply solve Equation [2.2] for P.
1
[ (1 + i) ]
P = F ————n = F(1 + i)
−n
F=?
[2.3]
F = given

i = given i = given
−n
ion (1 + i) is known as the single-payment present worth factor (SPPWF), or the
This expression determines the present worth P of a given future amount F after
0 1
terest rate i. The
Thecash flow2 diagram
expression
n–2 n–1
(1 +is i)shown
−n n
is in Figure 2–1b.0 1 2 n–2 n–1 n

the two factors derived

known ashere
theare for single payments; that is, they are used to find the
single-
ture amount when only one payment or receipt is involved.
payment present worth
P = given P=?
factor (SPPWF),
(a) or the P∕F
notation has been adopted for all factors. The notation includes two cash flow (b)sym-
erest rate, factor
and
Figure 2–1the number of periods. It is always in the general form (X∕Y,i,n). The
esents Cash
what flowisdiagrams
sought, for while the letter
single-payment factors:Y(a)represents what
find F, given P, and (b)isfind
given. For
P, given F. example, F∕P
F when given P. The i is the interest rate in percent, and n represents the number of
Substituting P(1 + i)2 for F2 and simplifying, we get
lved.
F3 = P(1 + i)3
s notation, (F∕P,6%,20) represents the factor that is used to calculate the future
From the preceding values, it is evident by mathematical induction that the formula can be gen-
ccumulated in 20 periods if the interest rate is 6% per period. The P is given. The
eralized for n years. To find F, given P,
ation, simpler to use than formulas and factor names, will be used hereafter.
1 summarizes the standard notation and equations for the F∕P F = and
P(1 +P∕F
i)n factors. This [2.2]
P∕F example …….
You pretend as a Person, that have a wish to take the entire amount
after (10+n) years, when you plan to retire. Find out the single amount
that you should invest now to get an amount about $30.000 in the
future if we assume the interest rate is 5% per year….

Do it by your self with

a. Manual coun5ng use the formula from previous slide
b. Table Compound Interest
c. Spreadshet, use func5on = PV(i%,n,,F)
2.
Uniform Series
Present Worth
Factor and The P⁄A and A⁄P factors are derived with
Capital the present worth P and the first uniform
annual amount A one year (period) apart.
Recovery That is, the present worth P must always
be located one period prior to the first
Factor (P/A and A.
A/P)
 The term in brackets in Equation [2.8] is the conversion factor referred to as the uniform series
present worth factor (USPWF). It is the P∕A factor used to calculate the equivalent P value in
year 0 for a uniform end-of-period series of A values beginning at the end of period 1 and extend-
ing for n periods. The cash flow diagram is shown in Figure 2–4a.

2.a Uniform series present worth (P/A)

P=? It is the P∕A
P=factor
given used to
i = given calculate the equivalent P i = given
0 1 2 n–2 n–1 n value in year0 0 for a1 uniform
2 n–2 n
end-of-period series of A
values beginning at the end
of period 1 and extending for
A = given n periods A=?
(a) (b)
Figure 2–4
Cash flow diagrams used to determine (a) P, given a uniform series A, and (b) A, given a present worth P.

2_038-071.indd 43
 A
[ 1
= —— ————n − 1
−i (1 + i) ]
[(1 + i) − 1
P = A ——————
i(1 + i)n
n

] i≠0

Uniform series The term in brackets in Equation is the

conversion factor referred to as the
present worth uniform series present worth factor
Equation
(P/A) [2.8] is the conversion factor ref
(USPWF)

SPWF). It is the P∕A factor used to calcu

-of-period series of A values beginning at t
 Recovery Factor (P∕A and A∕P)
The equivalent present worth P of a uniform series A of end-of-period cash flows (investments
is shown in Figure 2–4a. An expression for the present worth can be determined by considerin
each A value as a future worth F, calculating its present worth with the P∕F factor, Equation [2.3]
and summing the results.

P/A example … 1
P = A ————
(1 + i)1 [ ] [ ] [
1
+ A ————
(1 + i)2
+ A ————1
(1 + i)3
+...
]
How much money should you
+ A ————
be willing(1 to
1
[
+ i)pay now
n−1 ] [ ]
+ A ————
(1 +
1
for
i)n a guaranteed
$600 per year for The
3 years starZng
terms in next
brackets are year,
the P∕F at aforrate
factors yearsof1 through
returnn,of 10% perFactor out A.
respectively.
year 1
[ 1 1
P = A ————1 + ————2 + ————3 + . . . + ————
(1 + i) (1 + i) (1 + i)
1 + ————n1
(1 + i)n−1 (1 + i) ] [2.6
A = $ 600 To simplify Equation [2.6] and obtain the P∕A factor, multiply the n-term geometric progressio
i = 10% / year in brackets by the (P∕F,i%,1) factor, which is 1∕(1 + i). This results in Equation [2.7]. Now sub
tract the two equations, [2.6] from [2.7], and simplify to obtain the expression for P whe
n=3 i ≠ 0 (Equation [2.8]).
P = ….? P = A ————
———
1+i 2[
1 + ————
1 + ————
3
1 + . . . + ————
(1 + i)4
(1 + i)
n
1
1 + ————
n+1
(1 + i) (1 + i) (1 + i) ] [2.7

1 P = A ————
———
1+i 2 [
1 + ————
1 + . . . + ————
3
(1 + i)
1
(1 + i)
1
n + ————n+1 (1 + i) (1 + i) ]
− P = A ————
[
1 + ————
(1 + i)1
1 + . . . + ————
(1 + i)2
1
(1 + i)n−1
1
+ ————
(1 + i)n ]
−i P = A ————
———
1+i
1
[
n+1
1
− ————1
(1 + i) (1 + i) ]
A ————
P = —— 1 −1
[
−i (1 + i)n ]
 A = $ 600
www.downloadslide.com P = A(P∕A,10%,3)
i = 10% / year
P/A example … n=3
= 600 (2.4869)
P = ….? = ……….?
Compound Interest Factor Tables 609

10% TABLE 15 Discrete Cash Flow: Compound Interest Factors 10%

Single Payments Uniform Series Payments Arithmetic Gradients
Compound Present Sinking Compound Capital Present Gradient Gradient
Amount Worth Fund Amount Recovery Worth Present Worth Uniform Series
n F⧸P P⧸F A⧸F F⧸A A⧸P P⧸A P⧸G A⧸G
1 1.1000 0.9091 1.00000 1.0000 1.10000 0.9091
2 1.2100 0.8264 0.47619 2.1000 0.57619 1.7355 0.8264 0.4762
3 1.3310 0.7513 0.30211 3.3100 0.40211 2.4869 2.3291 0.9366
4 1.4641 0.6830 0.21547 4.6410 0.31547 3.1699 4.3781 1.3812
5 1.6105 0.6209 0.16380 6.1051 0.26380 3.7908 6.8618 1.8101
6 1.7716 0.5645 0.12961 7.7156 0.22961 4.3553 9.6842 2.2236
7 1.9487 0.5132 0.10541 9.4872 0.20541 4.8684 12.7631 2.6216
8 2.1436 0.4665 0.08744 11.4359 0.18744 5.3349 16.0287 3.0045
9 2.3579 0.4241 0.07364 13.5795 0.17364 5.7590 19.4215 3.3724
10 2.5937 0.3855 0.06275 15.9374 0.16275 6.1446 22.8913 3.7255
11 2.8531 0.3505 0.05396 18.5312 0.15396 6.4951 26.3963 4.0641
12 3.1384 0.3186 0.04676 21.3843 0.14676 6.8137 29.9012 4.3884
13 3.4523 0.2897 0.04078 24.5227 0.14078 7.1034 33.3772 4.6988
14 3.7975 0.2633 0.03575 27.9750 0.13575 7.3667 36.8005 4.9955
 in Equation [2.8] is the conversion factor referred to as the uniform series
(USPWF). It is the P∕A factor used to calculate the equivalent P value in
end-of-period series of A values beginning at the end of period 1 and extend-
e cash flow diagram is shown in Figure 2–4a.
2.b Capital
Recovery Factor
(A/P)
P = given
i = given A∕P factor. It calculates the i = given
equivalent uniform annual
2 n –worth
2 A nover n a given
– 1 n years for 0 1 2 n–2 n–1 n
P in year 0, when the interest
rate is i

A = given A=?
(a) (b)

o determine (a) P, given a uniform series A, and (b) A, given a present worth P.
the present worth P is known and the equivalent uniform serie
2–4b). The first A value occurs at the end of period 1, that is, on
Capital Recovery Factor
Equation [2.8] for A to obtain
(A/P)
ØThe present worth P is

[ ]
known and the equivalent
i(1 + i)
A = P ——————
n
uniform series amount A is
[2.9]
sought
(1 + i) − 1
n
ØThe term in brackets is called
the capital recovery factor
d the
capital recovery factor (CRF), or A∕P
(CRF), factor.
or A∕P factor It calculates th

l worth A over n years for a given P in year 0, when the intere

are derived with the present worth P and the first uniform annual
d) apart. That is, the present worth P must always be located one
A/P example

Suppose you finance a $10, 000 car over 5 years at an interest

rate of 12% per year or 1% per month. How much is your
yearly or monthly car payment?
Solution yearly payment : Solution monthly payment :
A = $10, 000 (A | P, 12%,5) A = $10, 000 (A | P, 1%,60)
= $10,000 (0.27741) = $10,000 (0.0224)
= $2774,1/year = $222,4/month

Find the Solution by using Function : A/P = PMT(i%,n,P)

Spreadsheet…
The uniform series A
3.
begins at the end of year Sinking Fund
(period) 1 and conZnues
through the year of the
Factor and
given F. The last A value Uniform Series
and F occur at the same Compound
Zme
Amount Factor
(A/F and F/A)
The simplest way to derive the A∕F factor is to substitutei(1 into
(F∕A,i,n) = [(1 + i) ] n
—————— [
(1 + i)n − 1
+ i) facto
n =
(1
—— ]
from Equation [2.3] is substituted into
For solution Equation
by spreadsheet, the [2.9], thecalculates
FV function followingF for a

][ ]
The format is

[
n
1 i(1 + i)
A = F ———— n —————
= FV(i%,n,A,P)
n
3.a Sinking Fund Factor (A/F) (1 + i) (1 + i) −1
The P may be omitted when no separate present worth value is given.

[ ]
the A value for n years, given F in year n and possibly a separate P v
A=F i
—————
The expression in brackets is n
the A∕F or sinking fund factor. (1 + =i)PMT(i%,n,P,F)
−1
It determines the uniform If P is omitted, the comma must be entered so the function knows
annual series A
The expression inthat is
brackets
equivalent to a given future
in Equation [2.12] is the A∕F or sinking
F = given
the uniform
amount F annual series A that i is equivalent to a given future amo
= given
ically in Figure 2–6a,0 where1 A is 2a uniform
n–2 nannual
–1 investment.
n 0 1 2

The uniform series A begins at the end of year (period) 1 and conti
the given F. The last A value andA F
= ?occur at the same time.
(a)
Figure 2–6
Cash flow diagrams to (a) find A, given F, and (b) find F, given A.
Equation [2.12] can be rearranged to find F for a stated A series i
ure 2–6b).
 18 5.5599 0.1799 0.02193 45.5992 0.12193 8.2014 49.6395 6.0526
19 6.1159 0.1635 0.01955 www.downloadslide.com
51.1591 0.11955 8.3649 52.5827 6.2861
20 6.7275 0.1486 0.01746 57.2750 0.11746 8.5136 55.4069 6.5081
21 7.4002 0.1351 0.01562 64.0025 0.11562 8.6487 58.1095 6.7189
22 8.1403 0.1228 0.01401 71.4027 0.11401 8.7715 60.6893 6.9189
23 8.9543 0.1117 0.01257 79.5430 0.11257 8.8832 63.1462 7.1085
24 9.8497 0.1015 0.01130 88.4973 0.11130 8.9847 65.4813 7.2881
25 10.8347 0.0923 0.01017 98.3471 0.11017
Compound9.0770 67.6964
Interest Factor Tables 7.4580 609
26 11.9182 0.0839 0.00916 109.1818 0.10916 9.1609 69.7940 7.6186

A/F Example … 27
10%
28
13.1100
14.4210
0.0763
TABLE
0.069315
0.00826
Discrete
121.0999
0.00745 Cash134.2099
Flow: Compound
0.10826 9.2372
Interest Factors
0.10745 9.3066
71.7773
73.6495
7.7704
7.913710%
29 15.8631 0.0630 0.00673 148.6309 0.10673 9.3696 75.4146 8.0489
30 Single
17.4494 Payments
0.0573 0.00608 Uniform
164.4940 Series Payments
0.10608 9.4269 Arithmetic
77.0766 Gradients
8.1762

You would need to 31 Compound

32
19.1943
21.1138
0.0521
Present
0.0474
0.00550 Compound
Sinking
0.00497
181.9434
201.1378
0.10550
Capital
0.10497
9.4790
Present
9.5264
78.6395
Gradient
80.1078
8.2962
Gradient
8.4091Series
Amount Worth Fund Amount Recovery Worth Present Worth Uniform
deposit into an account 33n 23.2252
F⧸P 0.0431
P⧸F 0.00450
A⧸F 222.2515
F⧸A 0.10450
A⧸P 9.5694
P⧸A 81.4856
P⧸G 8.5152
A⧸G
paying 10% per year in 34
1
35
25.5477
1.1000
28.1024
0.0391
0.9091
0.0356
0.00407
1.00000
0.00369
245.4767
1.0000
271.0244
0.10407
1.10000
0.10369
9.6086
0.9091
9.6442
82.7773
83.9872
8.6149
8.7086
order to have $1,000,000 2
40
3
1.2100
45.2593
1.3310
0.8264
0.0221
0.7513
0.47619
0.00226
0.30211
2.1000
442.5926
3.3100
0.57619
0.10226
0.40211
1.7355
9.7791
2.4869
0.8264
88.9525
2.3291
0.4762
9.0962
0.9366
at 40 years from now. 45
4
50
72.8905
1.4641
117.3909
0.0137
0.6830
0.0085
0.00139
0.21547
0.00086
718.9048
4.6410
1163.91
0.10139
0.31547
0.10086
9.8628
3.1699
9.9148
92.4544
4.3781
94.8889
9.3740
1.3812
9.5704
Instead of the single 5
55
1.6105
189.0591
0.6209
0.0053
0.16380
0.00053
6.1051
1880.59
0.26380
0.10053
3.7908
9.9471
6.8618
96.5619
1.8101
9.7075
606 1.7716 0.5645 0.12961 7.7156 0.22961 4.3553 9.6842 2.2236
deposit, what uniform 657
304.4816
1.9487
490.3707
0.0033
0.5132
0.0020
0.00033
0.10541
0.00020
3034.82
9.4872
4893.71
0.10033
0.20541
0.10020
9.9672
4.8684
9.9796
97.7010
12.7631
98.4705
9.8023
2.6216
9.8672
annual deposit for 40 708 2.1436 0.4665
Solution: (In $1000 units)
789.7470 0.0013 0.08744
0.00013 11.4359
7887.47 0.18744
0.10013 5.3349
9.9873 16.0287
98.9870 3.0045
9.9113
759 2.3579 0.4241 0.07364 13.5795 0.17364 5.7590 19.4215 3.3724
years would also make 80
1271.90
A = F (A/F,i,n)
10 2.5937
2048.40
0.0008
0.3855
0.0005
0.00008
0.06275
0.00005
12,709
15.9374
20,474
0.10008
0.16275
0.10005
9.9921
6.1446
9.9951
99.3317
22.8913
99.5606
9.9410
3.7255
9.9609
you a millionaire? 11
12
2.8531
3.1384
0.3505
A = $1, 000 (A/F, 10%, 40)
85 3298.97 0.0003
0.3186
0.05396
0.00003
0.04676
18.5312
32,980
21.3843
0.15396
0.10003
0.14676
6.4951
9.9970
6.8137
26.3963
99.7120
29.9012
4.0641
9.9742
4.3884
90 5313.02 0.0002 0.00002 53,120 0.10002 9.9981 99.8118 9.9831
A = $ …?
13
95 3.4523
8556.68 0.2897
0.0001 0.04078
0.00001 24.5227
85,557 0.14078
0.10001 7.1034
9.9988 33.3772
99.8773 4.6988
9.9889
14
96 3.7975
9412.34 0.2633
0.0001 0.03575
0.00001 27.9750
94,113 0.13575
0.10001 7.3667
9.9989 36.8005
99.8874 4.9955
9.9898
15
98 4.1772
11,389 0.2394
0.0001 0.03147
0.00001 31.7725 0.13147
0.10001 7.6061
9.9991 40.1520
99.9052 5.2789
9.9914
16
100 4.5950
13,781 0.2176
0.0001 0.02782
0.00001 35.9497 0.12782
0.10001 7.8237
9.9993 43.4164
99.9202 5.5493
9.9927
17 5.0545 0.1978 0.02466 40.5447 0.12466 8.0216 46.5819 5.8071
18 5.5599 0.1799 0.02193 45.5992 0.12193 8.2014 49.6395 6.0526
19 6.1159 0.1635 0.01955 51.1591 0.11955 8.3649 52.5827 6.2861
20 6.7275 0.1486 0.01746 57.2750 0.11746 8.5136 55.4069 6.5081
21 7.4002 0.1351 0.01562 64.0025 0.11562 8.6487 58.1095 6.7189
where A is ai(1
uniform
+ i) annual investment.
V function calculates F for a stated A series over n years.
begins at the end of year (period) 1 and continues through the year of
t A value and F occur at the same time.
= FV(i%,n,A,P) [2.14]

ne be
present
3.b Uniform Series Compound Amount Factor
rearranged to find
worth value F forThe
is given. a stated A seriesdetermines
PMT function in periods 1 through n (Fig-
(F/A)
r n and possibly a separate P value in year 0. The format is The term in brackets is

[ ]
called the uniform series
= PMT(i%,n,P,F) (1 + i) − 1
n [2.15] compound amount
F = A —————— [2.13] or F∕A
factor (USCAF),
i factor. When multiplied
ntered so the function knows the last entry is an F value.
by the given uniform
called the uniform series compound amount factor (USCAF), or F∕A
annual factor. A, it
amount
= given F=?
e given uniform annual amount A, it
i = given yields the future worthyields
of the
theuniform
future worth
of the uniform series. It
remember0 that the1future amount
2
F n
occurs
– 2
in
n
the
– 1
same period
n is as theimportant
last A. to
n
follows the same form as that of other factors. They are (F∕A,i,n) that
remember and the
ummarizes the notations and equations. They are also included future onamount F occurs
the first
in the same period as
the last A
est, the uniform series factors can be symbolically determined by using an
A = given
m. For example, F∕A = (F∕P)(P∕A),(b)
where cancellation of the P is correct.

[ ]
ulas, we have
n n
F, given A. (1 + i) − 1 (1 + i) −1
(F∕A,i,n) = [(1 + i)n] —————— = ——————
i(1 + i)n i
F/A example …
The president of Ford Motor Company wants to know the equivalent
future worth of a $1 million capital investment each year for 8 years,
starting 1 year from now. Ford capital earns at a rate of 14% per year
The annual investments starting at the end of year 1 and
A = $1 million ending in the year the future worth is desired
n = 8 years, In $1000 units, the F value in year 8 is found by using the
F∕A factor.
I = 14% per year
F = …? F = 1000(F∕A,14%,8)
= 1000(13.2328)
= $13,232.80
4. Factor Values for
Untabulated i or n Values
Often it is necessary to know the correct numerical value of a
factor with an i or n value that is not listed in the compound
interest tables in the rear of the book.
Given specific values of i and n, there are several ways to obtain
any factor value :
• Use the formula listed in this chapter or the
front cover of the book.
• Use an Excel function with the corresponding
P, F, or A value set to 1.
• Use linear interpolation in the interest tables.
4.a Use the formula … F = P(1 + i)n
If Laurel made a 50,000 = 30,000 (1+i)5
$30,000 investment
in a friend’s business 5 = 3 (1+i)5
and received $50,000
five years later, (1+i)5 = 5/3
determine the rate of
return 1+i = (5/3)1/5

i = (5/3)1/5 – 1

i = 1.10756 – 1

i = 0,10756 ~ 10.76%
 too distant from the required value x. Second, find the corresponding tab
(f1 and f2). Third, solve for the unknown, linearly interpolated value f using
where the differences in parentheses are indicated in Figure 2–10 as a throu

www.downloadslide.com

4.b Use an Excel Figure

Use of
function ... Enter requested i and n
factor v
values.
Factor Values for Untabulated i or n Values 49

Factor To Do This Excel Function

P∕F Find P, given F. = −PV(i%,n,,1)
F∕P Find F, given P. = −FV(i%,n,,1)
P∕A Find P, given A. = −PV(i%,n,1)
A∕P Find A, given P. = −PMT(i%,n,1)
F∕A Find F, given A. = −FV(i%,n,1)
A∕F Find A, given F. = −PMT(i%,n,,1)

ows a spreadsheet developed explicitly to determine these factor values. When it is

el, entering any combination of i and n displays the exact value for all six factors. The
5% and n = 25 years are shown here. As we already know, these sameFactor functions
value will Figure
P, A, or F value when actual or estimated cash flow amounts are entered.axis Linear
polation for an untabulated interest rate i or number of years n takes more time value ta
using the formula or spreadsheet function. Also, interpolation introduces some
Table
cy, depending upon the distance between the two boundary values selected f 2 for
mulas themselves are nonlinear functions. Interpolation is included here for indi-
h to utilize it in solving problems. Refer to Figure 2–10 for a graphical descrip-
wing explanation. First, select two tabulated values (x1 and x2) of the parameter Linear
ctor is requested, that is, i or n, ensuring that the two values surround and are not assumption
Unknown
4.c Use linear interpolation …
 0 1 2 3 4 n–1 n Figure 2–11
Time
Cash flow diagra
arithmetic gradie

$2500
$2700
$2900
$3100

5. Arithmetic Gradient Factors $2500

+ (n – 2)200 $2500
+ (n – 1)200

0 1 2 3 4 5 n–1 n Figure 2–12

An arithmetic Time
Conventional arit
gradient series is a gradient series w
the base amount.
cash flow series that
G
either increases or 2G
decreases by a con- 3G
4G
stant amount each
(n – 2)G
period. The amount (n – 1)G
of change is called
the gradient G = constant arithmetic change in cash flows from one time period
each year. If you estimate that total costs will increase by $200 each year, the amount the second
to the next; G may be positive or negative
year is $2700, the third $2900, and so on to year n, when the total cost is 2500 + (n − 1)200. The
cash flow diagram is shown in Figure 2–11. Note that the gradient ($200) is first observed be-
tween year 1 and year 2, and the base amount ($2500 in year 1) is not equal to the gradient.
Define the symbols G for gradient and CFn for cash flow in year n as follows.

G = constant arithmetic change in cash flows from one time period to the next; G may be positive
CF = base amount + (n − 1)G [2.18]
 Arithmetic Gradient Factors www.downloadslide.com

Define the symbols G for gradient and CFn for

cash flow in year
52 n as follows : Chapter 2 Factors: How Time and Interest Affect Money

CFn = base amount + (n − 1)G G = $15,000

CF9 =
$200,000
$185,000
$170,000
$155,000
Example : $140,000
A local university has initiated a $125,000
$110,000
logo-licensing program with the CF1 = $95,000
clothier Holister, Inc. Estimated $80,000
fees (revenues) are $80,000 for
the Nirst year with uniform
increases to a total of $200,000
Year
by the end of year 9. Determine 0 1 2 3 4 5 6 7 8 9
the gradient and construct a Figure 2–13
Diagram for gradient series, Example 2.8.
cash Nlow diagram that
identiNies the base amount and The cash flow diagram (Figure 2–13) shows the base amount of $80,000 in years 1 through 9
the gradient series. and the $15,000 gradient starting in year 2 and continuing through year 9.

The total present worth PT for a series that includes a base amount A and conventional arith-
metic gradient must consider the present worth of both the uniform series defined by A and the
arithmetic gradient series. The addition of the two results in PT.
 • The total present worth PT for a series that includes a
5.a Arithmetic base amount A and conventional arith- metic gradient
must consider the present worth of both the uniform
Gradient series defined by A and the arithmetic gradient series

• PT = PA ± PG
Factors of • where PA is the present worth of the uniform series
Present Worth only, PG is the present worth of the gradient series only,
and the + or − sign is used for an increasing (+G) or
(P/G) decreasing (−G) gradient, respectively
 (a) (b)

Figure 2–14
Conversion diagram from an arithmetic gradient to a present worth.

quation [2.23] and simplify to solve for P G , the present worth of the gradient series
Arithmetic Gradient Factors of Present Worth www.downloadslide.com

(P/G) P = —G ——————
2.5
(1 + i) − 1
G
n
− ————
i [ [2.24]
n
P = G(P∕G,i,n)
i(1 + i) n
(1 + i) n ] G

Arithmetic Gradient Factors (P∕G and A∕G) 53

on [2.24] is the general relation to convert an arithmeticPG = ? gradient G (not including the
amount) for n years into a presenti = givenworth at year 0. Figure 2–14a is converted into the
alent cash flow in Figure
0 1 2–14b.
2 3 The 4 arithmetic
n–1 n gradient
0 1present
2 3worth
4 factor,
n – 1 or
n P∕G
, may be expressed in two forms:
1
(P∕G,i,n)2G= — —————
G
[
(1 + i)n − 1
i3G i(1 + i) n
n
− ————
(1 + i)n ]
(n – 2)G
n (n – 1)G
(1 + i) − in − 1
(P∕G,i,n) =
(a) ———————— (b) [2.25]
i2(1 + i)n
Figure 2–14
Conversion diagram from an arithmetic gradient to a present worth.
Remember: The conventional arithmetic gradient starts in year 2, and P is located in year 0.
ember: The conventional arithmetic gradient starts in year 2, and P is located in year 0.
into Equation [2.23] and simplify to solve for P G , the present worth of the gradient series
only. Placement of
uation [2.24] expressed as an engineering economy relation is gradient PG

PG = P G = G
[
(1 + i)n − 1
— ——————
G(P∕G,i,n)
i i(1 + i)n − n
————
(1 + i)n ] [2.24]
[2.26]
 (1 + i)n − in − 1
(P∕G,i,n) = ————————
2 n
[2.25]
i (1 + i)

entional arithmetic gradient starts in year 2, and P is located in year 0.

Placement of
essed as an engineering economy relation is gradient PG

PG = G(P∕G,i,n) [2.26]
Arithmetic Gradient Factors of Annual Worth
www.downloadslide.com
term in Equation [2.19] to calculate total present worth. The G carries a
ng gradients.
rm annual series AG for an arithmetic gradient G is found by multiplying
The equivalent uniform annual series AG for an arithmetic gradient G is
quation [2.26] by the (A∕P,i,n) formula. In standard notation form, the
found by multiplying the present worth (P/G) by the (A∕P) formula.
cancellation of P can be used. 54 Chapter 2 Factors: How Time and Interest Affect Money
AG = G(P∕G,i,n)(A∕P,i,n)
AG = (P/G) (A/P)
= G(A∕G,i,n) AG = ?
i = given
= G(P∕G,i,n)(A∕P,i,n)
G
AG = —
i [ n
(1 + i) − 1
————— − ———— n
= G(A∕G,i,n)
i(1 + i) n
(1 + i)
i(1 + i)
—————— n
(1 + i) − 1
0
][
1 2 3
n
4 n–1 n
n

]0 1 2 3 4 n–1 n

AG = G —
i [
1 − ——————
n
(1 + i)n − 1 ] G
2G
3G
[2.27]

erm in Equation [2.20]. The expression in brackets in Equation [2.27] (n – 2)G is

And Then (n – 1)G
radient uniform series factor and is identified by (A∕G,i,n). This factor
A =A ±A
(a) (b)
nto Figure 2–15b.
T A G
actors and relations are summarized on the first pages of the text. Factor
Figure 2–15
he two rightmost columns of factor values at the rear ofdiagram
Conversion thisof an arithmetic gradient series to an equivalent uniform annual series.
text.

The P∕G and A∕G factors determine the present worth and annual series of the gradient only. Any
There is no direct, single-cell spreadsheet function to calculate PG or AG for an arithmetic
other cash Nlows must be consideredgradient.
separately
Use the NPV function to display P and the PMT function to display A after entering
G G
all cash flows (base and gradient amounts) into contiguous cells. General formats for these func-
tions are
18/11/16 11:13

= NPV(i%, second_cell:last_cell) + first_cell [2.28]

= PMT(i%, n, cell_with_PG) [2.29]
 2.5 Arithmetic Gradient Factors (P∕G and A∕
Arithmetic
Gradient Factors 0 1 2 3 4 5 6 7 8 9 10

example …
Neighboring parishes in Louisiana $500
have agreed to pool road tax $600
$700
resources already designated for $800
bridge refurbishment. At a recent $900
meeting, the engineers estimated $1000
that a total of $500,000 will be $1100
$1200
deposited at the end of next year Base Amount = $500,000 $1300
into an account for the repair of old G = $100,000 per year $1400
and safety-questionable bridges
throughout the area. Further, they n =2–16
Figure 9 years
estimated that the deposits will I = 5%
increase by $100,000 per year for Cash flow seriesper
withyear.
a conventional arithmetic gradient (in $1000 units),
PT = …?
only 9 years thereafter, then cease. Example 2.9.
Determine the equivalent (a) AT = …?
present worth, and (b) annual
series amounts, if public funds earn
at a rate of 5% per year.
PA = ? PG = ?
A = $500 G = $100
1 2 9 10 1 2 9 10
+
$100
 $800
$900
$1000
$1100
$1200
$1300
$1400

Figure 2–16
Cash flow series with a conventional arithmetic gradient (in $1000 units),
Example 2.9.

Arithmetic Gradient Factors example …

PA = ? PG = ?
PT = 500(P∕A,5%,10) + 100(P∕G,5%,10) A = $500 G = $100
= 500(7.7217) + 100(31.6520) 1 2 9 10
+
1 2 9 10

= $7026.05 ($7,026,050) $100

Base Gradient $900

PT = ?

Two computations must be

made and added:
the first for the present worth PT = PA + PG

of the base amount PA, and 1 2 3 4 5 6 7 8 9 10

the second for the present
worth of the gradient PG. The
total present worth PT occurs $500
$600
$700
in year 0 $800
$900
$1000
$1100
$1200
$1300
$1400

Figure 2–17
Partitioned cash flow diagram (in $1000 units), Example 2.9.

(b) Here, too, it is necessary to consider the gradient and the base amount separately. The
total annual series AT is found by Equation [2.20] and occurs in years 1 through 10.
AT = 500 + 100(A∕G,5%,10) = 500 + 100(4.0991)
Arithmetic Gradient Factors example …

AT = AA ± AG If the present worth is already

= 500 + 100(A∕G,5%,10)
= 500 + 100(4.0991)
= $909.91 per year ($909,910)
calculated [as in part (a)], PT
can be mulZplied by an A∕P
factor to get AT
AT = PT (A∕P,5%,10)
= 7026.05(0.12950)
= $909.873
6. Geometric Gradient Series Factors
A geometric gradient series is a cash flow series that either increases
or decreases by a constant percentage each period. The uniform
change is called the rate of change.
• 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 + or −.
• A1 = initial cash flow in period 1 of the geometric series
• Pg = present worth of the entire geometric gradient series, including
the initial amount A1

Note that the initial cash flow A1 is not considered separately when working with geometric gradients.
 ( )
Pg ——— − 1 = A1 —————
1+i [
− ———
(1 + i)n+1 1 + i ]
Solve for Pg and simplify.

[ 1+g n
1 − ———
1+i
Pg = A1 ———————
i−g
( ) ] g≠i [2.32]

The term in brackets in Equation [2.32] is the (P∕A,g,i,n) or geometric gradient series present
6. Geometric Gradient Series Factors
worth factor for values of g not equal to the interest rate i. When g = i, substitute i for g in Equa-
tion [2.31] and observe that the term 1/(1 + i) appears n times.
Pg = ? Pg = ?
i = given i = given
g = given g = given

0 1 2 3 4 n 0 1 2 3 4 n

A1 A1(1 – g)n – 1
A1(1 + g) A1(1 – g)3
A1(1 + g)2 A1(1 – g)2
A1(1 + g)3 A1(1 – g)

A1(1 + g)n – 1 A1
(a) (b)

Figure 2–21
Cash flow diagram of (a) increasing and (b) decreasing geometric gradient series and present worth Pg.
 (
Pg = A1 ———1 + ———
2.6 (1 + i)
1 + ——— 1 + . . . + ———
(1 + i) (1 + i)
1
(1 + i) )
Geometric Gradient Series Factors
nA1
Pg = ———
(1 + i) Pg = A1 ———1 + ———
(
1 + ——— 1 + . . . + ———
(1 + i) (1 + i) (1 + i)
1
(1 + i)
[2.33]
)
6. Geometric
factor calculates P in periodPt =
Gradient
nA Series
= 0 for a geometric
——— 1 Factors
gradient series starting in [2.33]
g g (1 + i)
amount A1 and increasing by a constant rate of g each period. Placement of
The (P∕A,g,i,n) factor calculates Pg in period t = 0 for a geometric gradient series starting ingradient P
g
period 1 in the amount A and
Pg and the (P∕A,g,i,n) factor formula are
1 increasing by a constant rate of g each period. P

The equation for Pg and the (P∕A,g,i,n) factor formula are

Pg = A1(P∕A, g,i,n) [2.34]

1 − ———
(P∕A,g,i,n) = ——————
1+i ( g≠
)
1 + g n Pg = A1(P∕A,g,i,n)
1
1 −i ———
+
1+i
g n

( )
[2.34]

i −(P∕A,g,i,n)
g = —————— g≠i
i−g
n [2.35] [2.35]
——— g =———
ni g=i
1+i 1+i

It isfor
erive factors possible to derive factors
the equivalent A andforFthe equivalent
values; A and Fitvalues;
however, however,
is easier it is easier to determine
to determine
the Pg amount
nd then multiply by the and
A∕Pthen
or multiply by the A∕P or F∕P factor.
F∕P factor.
As with the arithmetic gradient series, there are no direct spreadsheet functions for geometric
ithmetic gradient series,Once
gradient series. theretheare
cashno direct
flows spreadsheet
are entered, P and Afunctions for geometric
are determined using the NPV and PMT
Once the cash flows are
functions, entered, P and A are determined using the NPV and PMT
respectively.
tively.
 Solution by Hand
The cash flow diagram (Figure 2–22) shows the salvage value as a positive cash
costs as negative. Use Equation [2.35] for g ≠ i to calculate Pg. Total PT is the
present worth components.
PT = −8000 − Pg + 200(P∕F,8%,6)

[
1 − (1.11∕1.08)6
= −8000 − 1700 ——————— + 200(P∕F,8%,6) ]
Geometric Gradient Series Factors example 0.08 − 0.11
= −8000 − 1700(5.9559) + 126 = $−17,999
PT = ? Figure 2–22
A coal-fired power plant has Cash flow diagra
gradient, Exampl
upgraded an emission
control valve. The Pg = ? i = 8%
modificaOon costs only g = 11% $200
$8000 and is expected to last
6 years with a $200 salvage 1 2 3 4 5 6

value. The maintenance cost

is ex- pected to be high at
$1700 the first year, $1700
$1700(1.11)
increasing by 11% per year $1700(1.11)2
thereaUer. Determine the $8000
$1700(1.11)3
equivalent present worth of
the modificaOon and $1700(1.11)4
maintenance cost by hand
and by spreadsheet at 8% $1700(1.11)5
per year

bla23437_ch02_038-071.indd 59
EXAMPLE 2.11
A coal-fired power plant has upgraded an emission control valve. The modification costs only
$8000 and is expected to last 6 years with a $200 salvage value. The maintenance cost is ex-
pected to be high at $1700 the first year, increasing by 11% per year thereafter. Determine the
equivalent present worth of the modification and maintenance cost by hand and by spreadsheet
Geometric Gradient Series Factors example
at 8% per year.
SolutionThe
bycash
Hand
flow diagram shows the salvage value as a posiIve cash flow and all
The cash flow
costsdiagram (Figure
as negaIve. Use2–22) shows
EquaIon for the
g ≠ salvage valuePg.
i to calculate as aTotal
positive
PT is cash flowofand all
the sum
three present
costs as negative. worth components
Use Equation [2.35] for g: ≠ i to calculate Pg. Total PT is the sum of three
present worth components.
PT = −8000 − Pg + 200(P∕F,8%,6)
PT = −8000 − Pg + 200(P∕F,8%,6)

[
1 − (1.11∕1.08)6
]
= −8000 − 1700 ——————— + 200(P∕F,8%,6)
0.08 − 0.11
= −8000 − 1700(5.9559) + 126 = $−17,999
PT = ? Figure 2–22
Cash flow diagram of a geometric
gradient, Example 2.11.

Pg = ? i = 8%
g = 11% $200
1 2 3 4 5 6
The End of
Chapter 2

Discussion….

Individual Task….