ME 291

Engineering

ME-291 Engineering Economy

Economy
Lecture 6

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

Faculty of Mechanical Engineering

Ghulam Ishaq Khan Institute, Topi, Swabi
© Faculty of Mechanical Engineering, GIKI
 Sinking Fund Factor and Uniform-Series Compound
Amount Factor (A/F and F/A)

 i (1  i ) n 
A  P 

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 (1  i ) n
 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  
 (1  i )  (1  i ) n
 1 
Simplifying, we get
 i   (1  i ) n  1
A  F  F  A 
 (1  i ) n
 1   i 
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 Example 2.5

• Formasa Plastics has major fabrication plants in Texas and

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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)

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 ME-291 Engineering Economy
Solution:
The cash flow diagram shows the annual payments
starting at the end of year 1 and ending in the year the
future worth is desired. Cash flows are indicated in
$1000 units. The F value in 8 years is

F = l000(F/A,14%,8) = 1000( 13.23218) = $13,232.80 =

13.232 million 8 years from now/

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 Example 2.6

• How much money must Carol deposit every year starting 1

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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)

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 ME-291 Engineering Economy
Solution
The cash How diagram from Carol's
perspective fits the A/F factor.
A= $6000 (A/F,5.5%,7) = 6000(0.12096) =
$725.76 per year
The A/F factor Value 0f 0.12096 was
computed using the A/F factor formula

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 Use of Tables for Interest rates i

• To simplify routine engineering economy calculations, tables

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of factor values have been prepared for interest rates from
0.25 to 50% and time period from 1 to large n values.
• For a given factor, interest rate, and time, the correct factor
value is found at the intersection of the factor name and n.

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 ME-291 Engineering Economy
© Faculty of Mechanical Engineering, GIKI
 Interpolation in Interest Tables

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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% then,

7.3  7 X  0.14238
 X = 0.14437
8  7 0.14903  0.14238
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 Arithmetic Gradient Factor (P/G and A/G)

• An arithmetic gradient factor is a cash flow series that

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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.

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 Example 2.9

• A sports apparel company has initiated a logo-

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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

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 Arithmetic Gradient Factor G

G  (1  i ) n  1 n 

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P   n
i  i (1  i ) n
(1  i ) 

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

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 Arithmetic-Gradient Uniform-Series Factor

For A/G we know that

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A  i (1  i ) n 
 
P  (1  i ) n  1
P 1  (1  i ) n  1 n 
   n
G i  i (1  i ) n
(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
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 Arithmetic-gradient future worth factor (F/G)

• This factor can be derived by multiplying the

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P/G and F/P factors.
F  1  (1  i) n  1 
    n 
G  i  i 

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 Total Present Worth PT

The total present worth PT for a gradient series must consider

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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.

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 PT

So the general equation for calculating the present worth of

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conventional arithmetic gradients are
PT = PA + PG
Or
PT = PA – PG
Similarly, the equivalent total annual series are
AT = AA + AG
Or
AT = AA – AG
Where AA is the annual base amount and AG is the annual
amount of the gradient series.

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 Example 2.10

• Three counties in Florida have agreed to pool tax resources

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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.

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 ME-291 Engineering Economy
© Faculty of Mechanical Engineering, GIKI
 ME-291 Engineering Economy
© Faculty of Mechanical Engineering, GIKI