Chapter 2

Factors:
Uniform Series
Single-Amount Factors

Future Value:
n
F = P (1 + i)
F = P (F/P, i, n)

Present Value:
1
P=F n
(1 + i)
P = F (P/F, i, n)
Uniform Series involving P
Note: P is one period ahead of first A value

A = Given A=?

0 1 2 3 4 5 0 1 2 3 4 5

P=? P = Given

" (1+ i)n −1% " i (1+ i)n %

P = A$ n
' A = P$ n
'
$# i(1+ i) '& $# (1+ i) −1'&
P = A (P/A, i, n) A = P (A/P, i, n)
Uniform Series involving F

Note: F takes place in the same period as last A

A = Given A=?

0 1 2 3 4 5 0 1 2 3 4 5

F=? F = Given

" (1+ i)n −1% " %

i
F = A$ ' A = F$ '
$# i '& # (1+ i)n −1&
F = A(F/A, i, n) A = F(A/F, i, n)
 Exercise

A family would like to earn an income by

building an extra floor in their house for
rent at $5,000 per year. At an interest
rate of 10% per year, how much should
the family spend now in building the extra
floor so that they can break-even over a
5 year period?
Find ___ given ___
 Exercise

An engineer made a modification to a chip

manufacturing process that will save her
company $10,000 per year. At an interest
rate of 8% per year, how much will the
savings amount to in 7 years?
Gradients
 Gradients

Arithmetic Gradient Geometric Gradient

PT = ? Pg = ?
i = 12% i = 12%
1 2 3 4 5 Year 1 2 3 4 10
0
0
1000 1070
400 1145
430
460
490
G = $30 520
g = 7% 1838
 Arithmetic Gradient

The cash flow at end

of year 1 is the base
PT = ?
i = 12% amount
0 1 2 3 4 5 Year
Base amount = $400

Constant amount of
400
430
460

G = $30
490
520 change each period is
the gradient
G = $30
 Arithmetic Gradient
PA =?
PT = ? i = 12%
i = 12% 1 2 3 4 5 Year
0
0 1 2 3 4 5 Year

A = 400
400
430
460
490
G = $30 520 PG = ?

G starts between periods 1 and 2 1 2 3 4 n

(not between 0 and 1) 0
G
2G
3G
PT = PA + PG (n-1)G

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

 PT = ?

i = 10% Exercise
0 1 2 3 4 5

400
450
Amount in year 1 500
is base amount 550
600

This diagram = this base amount plus this gradient

PA = ? PG = ?
i = 10% i = 10%

+
0 1 2 3 4 5 0 1 2 3 4 5

Amount 400 400 400 400 400

in year 1 50
100
is base 150
200
amount

PA = PG =
To Calculate PG
PG = ?
1 2 3 4 n

G
2G
3G
(n-1)G

PT = PA + PG
PA = A (P/A, i, n) PG = G (P/G, i, n)
" (1+ i)n −1% " (1+ i)n − in −1%
PA = A $ n
' PG = G $ 2 n
'
$# i(1+ i) '& $# i (1+ i) '&
 Exercise

Find the present worth of $400 in year 1 and

amounts increasing by $30 per year through
year 5 at an interest rate of 12% per year.

PT = ?
i = 12%
0 1 2 3 4 5 Year

400
430
460
490
G = $30 520

PT = PA + PG = ___ (_/_, _%, _ ) + ___ (_/_, _%, _ )

 Converting Arithmetic
Gradient to equivalent A
Arithmetic gradient can be converted into equivalent A
i = 10% i = 10%
0 1 2 3 4 5 0 1 2 3 4 5

G
2G A=?
3G
4G

General equation when base amount is involved:

A = base amount + AG
base amount + G (A/G, i, n)
0 1 2 3 4 5 For decreasing gradients,
change plus sign to minus
4G
3G
2G A = base amount – G (A/G, i, n)
G
To calculate AG
i = 10% i = 10%
0 1 2 3 4 5 0 1 2 3 4 5

G
2G AG = ?
3G
4G

AG = G (A/G, i, n)
"1 n %
AG = G $ − n '
# i (1+ i) −1&

A = base amount + AG
= AA + AG
 Geometric Gradient

Geometric gradients change by the same

percentage each period, g
Pg = ? for g ≠ i: ( " 1+ g %n +
A1 *1− $ '-
1 2 3 4 n *) # 1+ i & -,
0
Pg =
A1 i−g
A 1(1+g)1
A 1(1+g)2 for g = i:
Note: g starts between ! n $
periods 1 and 2 A 1(1+g)n-1
Pg = A1 # &
" 1+ i %
where: A1 = cash flow in period 1, g = rate of increase
Note: If g is negative, change signs in front of both g values
 Exercise

Find the present worth of $1,000 in year 1 and

amounts increasing by 7% per year through
year 10. Use an interest rate of 12% per year.

Pg = ?
i = 12% for g ≠ i:
1 2 3 4 10
( " 1+ g %n +
0 A1 *1− $ '-
1000 1070 *) # 1+ i & -,
1145 Pg =
g = 7% i−g
1838
 Practice Problems

• 2.27 • 2.34
• 2.28 • 2.35
• 2.31 • 2.37
Solving for i or n
 Example: Solving for Unknown i

A contractor purchased equipment for

$60,000 which provided income of
$16,000 per year for 10 years. Find the
annual rate of return of the investment.
 Example: Solving for Unknown i

A contractor purchased equipment for $60,000 which provided

income of $16,000 per year for 10 years. Find the annual rate of
return of the investment. A = $ 16,000

0 1 2 3 4 10

P = $ 60,000
 Example: Solving for Unknown n

A contractor purchased equipment for

$60,000 that provided income of $8,000
per year. At an interest rate of 10% per
year, find the length of time required to
recover the investment.
 Example: Solving for Unknown n

A contractor purchased equipment for $60,000 that provided income of

$8,000 per year. At an interest rate of 10% per year, find the length of
time required to recover the investment.
A = $ 8,000

0 1 2 3 4 n

i = 10%

P = $ 60,000