Module 2: Factors

SI-4251 Ekonomi Teknik

 Outline Modul 2
• Engineering Economy Factors
• Single-Payment Factors
• Uniform-Series Present-Worth Factor
• Capital-Recovery Factor
• Sinking-Fund Factor
• Gradient Formulas

2013 SI-4251 Ekonomi Teknik 2-2

 Engineering Economy Factors
 P = present value, usually used to represent initial
investment
 F = future value, accumulated value at some future time
 A = a series of consecutive, equal, end-of-period amount of
payment
 I = interest, usually compounded
 i = interest rate per interest period, %
 n = number of (interest) periods
 G = arithmetic gradient, uniform arithmetic change in
magnitude of payment / receipts
 g = geometric gradient, constant rate of change in magnitude
of payment / receipts, %

2013 SI-4251 Ekonomi Teknik 2-3

 Single-Payment Factors F
P
?
0 1 2 3 n-1 n
SPCAF = single-payment compound-amount factor
Fn = P (1+i)n Notation: (F/P, i, n)

From the opposite side, if F is given:

P F
?

0 1 2 3 n-1 n

 1  SPPWF = single-payment present worth factor

P  F n
 1  i  
Notation: (P/F, i, n)

2013 SI-4251 Ekonomi Teknik 2-4

 Uniform-Series Present-Worth Factor
? P
A A A A A A A

0 1 2 3 n-1 n
 1   1   1   1   1 
P  A 1
 A  2
 A  3
   A  n 1 
 A  n
 1  i    1  i    1  i    1  i    1  i  

 1   1   1   1   1 
P  A 1
 2
 3
  n 1 
 n 
  1  i    1  i    1  i    1  i    1  i   
SPPWF = single-payment present-worth factor

 1  i n  1
P  A n 
 i 1  i   Notation: (P/A, i, n)
USPWF = uniform-series present-worth factor
2013 SI-4251 Ekonomi Teknik 2-5
 Capital-Recovery Factor
P
A A A A A A A ?
0 1 2 3 n-1 n

What A is needed to equal P at t=0?

 11  i n 
A  P 
 1  i   1
n

CRF = capital recovery factor

Notation: (A/P, i, n)

2013 SI-4251 Ekonomi Teknik 2-6

 Sinking-Fund Factor
A A A A A A A

0 1 2 3 n-1 n
F
 1   i 1  i n 
A  F n  
 1  i   1  i n
 1 

 i 
A  F 
 1  i n
 1 
SFF = sinking-fund factor Notation: (A/F, i, n)

 1  i n  1 USCAF = uniform-series compound-amount factor

F  A  Notation: (F/A, i, n)
 i 
2013 SI-4251 Ekonomi Teknik 2-7
 Standard Factor Notations
Factor Name Standard Notation

Single-Payment Present-Worth SPPWF (P/F , i% , n)

Single-Payment Compound-Amount SPCAF (F/P , i% , n)
Uniform-Series Present-Worth USPWF (P/A , i% , n)
Capital-Recovery CRF (A/P , i% , n)
Sinking-Fund SFF (A/F , i% , n)
Uniform-Series Compound-Amount USCAF (F/A , i% , n)

2013 SI-4251 Ekonomi Teknik 2-8

 Extreme Values
factor n = ∞ ; i known n = 0 ; i known

( F / P, i % , n ) ∞ 1

( P / F, i % , n ) 0 1

( P/A , i % , n ) ~1/i 0

( A / P, i % , n ) ~i NA

( A / F, i % , n ) 0 NA

(F/A , i%, n) ∞ 0

2013 SI-4251 Ekonomi Teknik 2-9

 Arithmetic Gradient (1)
• In some cases, periodic payments do not occur in an equal series, but they
maybe in a constant increase amount

0 1 2 3 n-1 n

(n-1)G
• Equivalent with: (n-2)G
3G (n-3)G
2G
G
A1 A1 A1 A1 A1 A1 A1

0 1 2 3 n-1 n
2013 SI-4251 Ekonomi Teknik 2 - 10
 Arithmetic Gradient (2)
• Equivalent with:
A1 A1 A1 A1 A1 A1 A1

0 1 2 3 n-1 n

+ (n-1)G
(n-2)G
3G (n-3)G
2G
G

0 1 2 3 n-1 n

2013 SI-4251 Ekonomi Teknik 2 - 11

 Arithmetic Gradient (3)
• Equivalent with:
A1 A = AA11 + A2 A1 A1 A1 A1 A1

0 1 2 3 n-1 n

+
A2 A2 A2 A2 A2 A2 A2

0 1 2 3 n-1 n

=
A A A A A A A

0 1 2 3 n-1 n
2013 SI-4251 Ekonomi Teknik 2 - 12
 Arithmetic Gradient (4)
A1 = payment at the end of the first year
• Where:
G = gradient, annual change
n = number of period
A = equivalent equal annual payment  A = A1 + A2

1 n 
A2  G   
 i 1  i n
 1 
UGSF = uniform-gradient-series factor

2013 SI-4251 Ekonomi Teknik 2 - 13

 Arithmetic Gradient Formulas

1  1  i n  1 n 
P  G   n 
 i  i 1  i  1  i   
n

UGPWF = uniform-gradient-present-worth factor

1  1  i n  1 
F  G   n
 i  i  
UGFWF = uniform-gradient-future-worth factor

2013 SI-4251 Ekonomi Teknik 2 - 14

 Negative Arithmetic Gradient (1)
• In some cases, periodic payments do not occur in an equal series, but they
maybe in a constant decrease amount

0 1 2 3 n-1 n

2013 SI-4251 Ekonomi Teknik 2 - 15

 Arithmetic Gradient (2)
• Equivalent with:
A1 A1 A1 A1 A1 A1 A1

0 1 2 3 n-1 n

- (n-1)G
(n-2)G
3G (n-3)G
2G
G

0 1 2 3 n-1 n

2013 SI-4251 Ekonomi Teknik 2 - 16

 Arithmetic Gradient (3)
• Equivalent with: A = A1 – A2
A1 A1 A1 A1 A1 A1 A1

0 1 2 3 n-1 n
-
A2 A2 A2 A2 A2 A2 A2

0 1 2 3 n-1 n
=
A A A A A A A

0 1 2 3 n-1 n
2013 SI-4251 Ekonomi Teknik 2 - 17
 Geometric Gradient
• In many situations, periodic payments decreases or increases
not by a constant amount, but at a constant percentage
F1(1+g)n-1
F1(1+g)n-2
F1(1+g)3
growth-free rate
F1(1+g)2
1 i
F1(1+g) g  1
F1 1 g

0 1 2 3 n-1 n

1  1  g   1
n
P  F1
1  g   g 1  g n 
GGSF = geometric-gradient-series factor
2013 SI-4251 Ekonomi Teknik 2 - 18
 Using Factors
Finding Given Factor Equation Formula
 1 
P F ( P / F, i % , n ) P = F (P/F, i%, n) P  F n 
 1  i  

F  P 1  i 
n
F P ( F / P, i % , n ) F = P (F/P, i%, n)
 1  i n  1
P A ( P/A , i % , n ) P = A (P/A, i%, n) P  A 
 i 1  i  
n

A P ( A / P, i % , n ) A = P (A/P, i%, n)  11  i n 

A  P 
 1  i   1
n

 i 
A F ( A / F, i % , n ) A = F (A/F, i%, n) A  F 
 1  i   1
n

F A (F/A , i%, n) F = A (F/A, i%, n)  1  i n  1

F  A 
 i 
1 n 
A G (A/G, i%, n) A = G (A/G, i%, n) A  G  
 i 1  i   1
n

1  1  i n  1 n 
P G ( P/ G , i % , n ) P = G (P/G, i%, n) P  G   
 i  i 1  i 
n
1  i n  

2013 SI-4251 Ekonomi Teknik 2 - 19

 Interest Table
12% interest factors for continuous compounding
 For the shake of simplicity and easier calculation all values based on interest formulas have
been tabularized Uniform
Single Payment Equal Payment Series Gradient
n Series
(F/P, i, n) (P/F, i, n) (F/A, i, n) (A/F, i n) (P/A, i n) (A/P, i, n) (A/G, i n)
1 1.128 0.8869 1.000 1.0000 0.8869 1.1275 0.0000
2 1.271 0.7866 2.128 0.4700 1.6736 0.5975 0.4700
3 1.433 0.6977 3.399 0.2942 2.3712 0.4217 0.9202
4 1.616 0.6188 4.832 0.2070 2.9900 0.3345 1.3505
5 1.822 0.5488 6.448 0.1551 3.5388 0.2826 1.7615
10 3.320 0.3012 18.197 0.0550 5.4810 0.1825 3.5332
20 11.023 0.0907 78.625 0.0127 7.1318 0.1402 5.8480

 For any values that are not available in the interest table, interpolation or extrapolation can be
applied: Example: find value of (F/P, i, n) for i = 12% and n = 2.5 period  n = 2 , (F/P,
12, 2) = 1.271; n = 3 , (F/P, 12, 3) = 1.433  n = 2.5, (F/P, 12, 2,5) = 1.271 +
0.5 (1.433-1.271) = 1.352

2013 SI-4251 Ekonomi Teknik 2 - 20

 Spreadsheet Formulas

Factors in Engineering Economy Excel Functions

P = Present Value = PV (i%,n,A,F)

F = Future Value = FV (i%,n,A,P)

A = Equal, Periodic Value = PMT (i%,n,P,F)

n = Number of Periods = NPER (i%,A,P,F)

i = Compound Interest Rate = RATE (i%,A,P,F)

2013 SI-4251 Ekonomi Teknik 2 - 21

 Exercises (1)
1. How much money should you be willing to pay now for a guaranteed
$600 per year for 9 years starting next year, at a rate of return of 16%
per year?
2. Determine the value of the A/P factor for an interest rate of 7.3% and n
of 10 years, that is, (A/P, 7.3%, 10).
3. HP has completed a study indicating that $50,000 in reduced
maintenance this year on one processing line resulted from improved
integrated circuit (IC) fabrication technology based on rapidly changing
designs.
a. If HP considers these types of savings worth 20% per year, find the equivalent
value of this result after 5 years.
b. If the $50,000 maintenance savings occur now, find its equivalent value 3
years earlier with interest at 20% per year.

2013 SI-4251 Ekonomi Teknik 22

 Exercises (2)
4. Three contiguous 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 $500,000 will be deposited at the end
of the next year into an account for the repair of old and
safety-questionable bridges throughout the three-county
area. Further, they estimate that the deposits will increase
by $100,000 per year for only 9 years thereafter, then cease.
Determine the equivalent:
a. Present worth if county funds earn interest at a rate of 5% per year.
b. Annual series amounts if county funds earn interest at a rate of 5%
per year.

2013 SI-4251 Ekonomi Teknik 23

 Exercises (3)
5. How long will it take for $1000 to double if the interest rate is 5% per
year?
6. Engineers at SeaWorld, a division of Busch Garden, Inc., have completed
an innovation on an existing water sports ride to make it more exciting.
The modification costs only $8000 and is expected to last 6 years with a
$1300 salvage value for the solenoid mechanisms. The maintenance cost
is expected 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. The interest rate is 8% per year.
7. If Laurel can make an investment in a friend’s business of $3000 now in
order to receive $5000 five years from now, determine the rate of
return. If Laurel can receive 7% per year interest on a certificate of
deposit, which investment should be made?

2013 SI-4251 Ekonomi Teknik 24

 Exercises (4)
8. An engineering technology group just purchased new CAD software for $5,000 now and
annual payment of $500 per year for 6 years starting 3 years from now for annual
upgrades. What is the present worth of the payments if the interest rate is 8% per year?
9. Recalibration of sensitive measuring devices costs $8,000 per year. If the machine will be
recalibrated for each of 6 years starting 3 years after purchase, calculate the 8-year
equivalent uniform series at 16% per year.
10. 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 3 years from now, plus $10,000 six years from now and $15,000
sixteen years from now. Determine the equivalent values listed below at 16% per year:
1. Total present worth in year 0.
2. Future worth 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.

2013 SI-4251 Ekonomi Teknik 25

 Exercises (5)
11. Gerri, an engineer at Fujitsu, Inc., has tracked the average inspection
cost on a robotics manufacturing line for 8 years. Cost averages were
steady at $100 per completed unit for the first 4 years, but have
increased consistently by $50 per unit for each of the last 4 years. Gerri
plans to analyze the gradient increase using the P/G factor. Where is the
present worth located for gradient? What is the general relation used to
calculate total present worth in year 0?
12. Chemical engineers at a Coleman Industries plants in the Midwest have
determined that a small amount of a newly available chemical additive
will increase the water repellency of Coleman’s tent fabric by 20%. The
plant superintendent has arranged to purchase the additive through a 5-
year contract at $7,000 per year, starting 1 year from now. He expects
the annual price to increase by 12% per year thereafter for the next 8
years. Additionally, an initial investment of $35,000 was made now to
prepare a site suitable for the contractor to deliver the additive. Use i =
2013 15% to determine the equivalent totalTeknik
SI-4251 Ekonomi present worth for all cash flows. 26
 Exercises (6)
13. Assume that you are planning to invest money at 7% per year as shown
by the increasing gradient of the following figure. Further, you expect to
withdraw according to the decreasing gradient shown. Find the net
present worth and equivalent annual series for the entire cash flow
sequence and interpret the results.
$5000
$4000
$3000
$2000
$1000 $1000 $1000

0 1 2 3 4 5 6 7 8 9 10 11 12

$2000
$2500
$3000
$3500
$4000

2013 SI-4251 Ekonomi Teknik 27

 Homework #2
• Redo all exercises (#1 to #13) in this session
using a computer (spreadsheet application).

2013 SI-4251 Ekonomi Teknik 28