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A/F and F/A, P/G and A/G

Sinking Fund Factor and Uniform-Series


Compound Amount Factor (A/F and F/A)
 i (1 + i ) n 
A = P n 
 (1 + i ) − 1 
If we substitute the value of P in this relation, we will get a
relation between the A and F

 1 
P =F  n 
(1 +i ) 
We will get
 1   i (1 + i ) n 
A = F n  n 
 (1 + i )   (1 + i ) − 1
Simplifying, we get
 i   (1 + i ) n − 1
A = F n  F = A 
 (1 + i ) − 1   i 
Example 2.5
 Formasa Plastics has major fabrication plants in Texas and Hong Kong. The president
wants to know the equivalent future worth of a $1 million capital investment each year
for 8 years, starting 1 year from now. Formasa capital earns at a rate of 14% per year.

Solution
F=?
A = $ 1,000,000
n=8
i = 0.14 (14%)
F = 1000 (F/A, 14%, 8)
Example 2.6
 How much money must Carol deposit every year starting 1 year from now at
5.5% per year in order to accumulate $6,000 seven years from now?

Solution
A=?
F = $6,000
i = 5%
A = $6000 (A/F, 5.5%, 7)
Interpolation in Interest Tables

Suppose we have an interest factor of 0.14238 for 7% and an


interest factor of 0.14903 for 8% and we want to find out the
value of interest factor for 7.3% than,

7. 3 − 7 X − 0.14238
= X = 0.14437
8 − 7 0.14903 − 0.14238
Arithmetic Gradient Factor (P/G and A/G)
 An arithmetic gradient factor is a cash flow
series that either increases or decreases by a
constant amount.
 The cash flow changes by the same arithmetic
amount each period.
 The amount of the increase or decrease is the
gradient.
 If a manufacturing engineer predicts that the cost of
maintaining a robot will increase by $500 per year
until the machine is retired, a gradient series is
involved and the amount of the gradient is $500.
 G = constant arithmetic change in the magnitude of
receipts or disbursements from one period to the
next; G may be positive or negative.
Example 2.9
A sports apparel company has initiated a logo-licensing program. it expects to

realize a revenue of $80,000 in fees next year from the sale of its logo. Fees are
expected to increase uniformly to a level of $200,000 in 9 years. Determine the
arithmetic gradient and construct the cash flow diagram.
Solution
increase In 9 years = 200,000-80,000 = 120,000
Gradient = (increase)/(n-1)
Gradient = (120,000)/(9-1) = $15,000 per year
Arithmetic Gradient Factor G
G  (1 + i ) n − 1 n 
P=  n
− n
i  i (1 + i ) (1 + i ) 

1  (1 + i ) n − 1 n 
( P / G , i , n) =  n
− 
i  i (1 + i ) (1 + i ) n 
Arithmetic-Gradient Uniform-Series
Factor
For A/G we know that
A  i (1 + i ) n 
= n 
P  (1 + i ) − 1
P 1  (1 + i ) n − 1 n 
=  n
− n
G i  i (1 + i ) (1 + i ) 
Multiplying the two we get

A 1 n 
= − 
G  i (1 + i ) n − 1
The term in bracket is called the arithmetic-gradient uniform-
series factor
Arithmetic-gradient future worth
factor (F/G)
 This factor can be derived by multiplying the P/G and F/P
factors.
F  1  (1 + i ) n − 1 
=   − n 
G  i  i 
Total Present Worth PT
The total present worth PT for a gradient series must consider the base and
the gradient separately. Thus, for cash flow series involving conventional
gradients:
 The base amount is the uniform-series amount A that begins in year 1
and extends through year n. its present worth is represented by PA.
 For an increasing gradient, the gradient amount must be added to the
uniform series amount. The present worth is PG.
 For a decreasing gradient, the gradient amount must be subtracted from
the uniform-series amount. The present worth is –PG.
PT
So the general equation for calculating the present worth of conventional arithmetic
gradients are
PT = P A + PG
And
PT = P A – PG
Similarly, the equivalent total annual series are
AT = A A + A G
And
AT = A A – AG
Where AA is the annual base amount and AG is the annual amount of the gradient series.
Example 2.10
 Three counties in Florida have agreed to pool tax resources already designated for
county-maintained bridge refurbishment. At a recent meeting, the county engineers
estimated that a total of $500,000 will be deposited at the end of next year into an
account for the repair of old and safety-questionable bridges throughout the three-county
area. Further, they estimate that the deposit will increase by $100,000 per year only 9
years thereafter, then cease. Determine the equivalent (a) present worth and (b) annual
series amount if county funds earn interest at a rate of 5% per year.