Module 2: Factors

SI-4151 Ekonomi Teknik

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

2-2 SI-4151 Ekonomi Teknik .

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, %

2-3 SI-4151 Ekonomi Teknik

Single-Payment Factors
P F
?
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)

2-4 SI-4151 Ekonomi Teknik

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
2-5 SI-4151 Ekonomi Teknik
Capital-Recovery Factor
P
A A A A A A A ?
0 1 2 3 n-1 n

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

CRF = capital recovery factor

Notation: (A/P, i, n)

2-6 SI-4151 Ekonomi Teknik

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 
2-7 SI-4151 Ekonomi Teknik .
Standard Factor Notations

Standard
Factor Name
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)

2-8 SI-4151 Ekonomi Teknik

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

2-9 SI-4151 Ekonomi Teknik .

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

 Equivalent with: (n-1)G

(n-2)G
3G (n-3)G
2G
G
A1 A1 A1 A1 A1 A1 A1

0 1 2 3 n-1 n
2 - 10 SI-4151 Ekonomi Teknik
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

2 - 11 SI-4151 Ekonomi Teknik .

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
2 - 12 SI-4151 Ekonomi Teknik
Arithmetic Gradient (4)
 Where:
A1 = payment at the end of the first year
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

2 - 13 SI-4151 Ekonomi Teknik

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

2 - 14 SI-4151 Ekonomi Teknik

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

2 - 15 SI-4151 Ekonomi Teknik

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

2 - 16 SI-4151 Ekonomi Teknik .

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
2 - 17 SI-4151 Ekonomi Teknik
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
2 - 18 SI-4151 Ekonomi Teknik .
Using Factors
Finding Given Factor Equation Formula
 1 
P  F n 
P F ( P / F, i % , n ) P = F (P/F, i%, 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 (P/A, i%, n) P = A (P/A, i%, n)  i 1  i  
n

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

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

A G (A/G, i%, n) A = G (A/G, i%, n) 1 n 

A  G  
 i 1  i   1
n

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

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

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SI-4151 Ekonomi Teknik
Interest Table
 For the shake of simplicity and easier calculation all values based on interest formulas have
been tabulated 12% interest factors for continuous compounding
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 + 1.352
0.5 (1.433-1.271) =
2 - 20 SI-4151 Ekonomi Teknik
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 (n,A,P,F)

2 - 21 SI-4151 Ekonomi Teknik .

Exercises Single Payment Factors (F/P) and
(P/F)
1. Ex 2.1

Ex 2.2

22 SI-4151 Ekonomi Teknik

Exercises Uniform series present worth
factor and capital recovery factor (P/A and
A/P)

1. Ex 2.4

23 SI-4151 Ekonomi Teknik

SINKING FUND FACTOR AND UNIFORM
SERIES COMPOUND AMOUNT FACTOR
(A/F AND F/A)

1. Ex 2.5

2. Ex 2.6

24 SI-4151 Ekonomi Teknik

ARITHMETIC GRADIENT FACTORS (P/G
AND A/G)
1. Ex 2.9
A sport 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

2. Ex 2.10
Three counties in Florida have agreed to pool tax resources already
designated for country maintained 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
deposits will increase by $100,000 per year for 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.

25 SI-4151 Ekonomi Teknik

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.

26 SI-4151 Ekonomi Teknik

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.

27 SI-4151 Ekonomi Teknik .

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 $8,000 and is expected to last 6 years with a
$1,300 salvage value for the solenoid mechanisms. The maintenance cost
is expected to be high at $1,700 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 $3,000 now in
order to receive $5,000 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?

28 SI-4151 Ekonomi Teknik .

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.

29 SI-4151 Ekonomi Teknik

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 =
15% to determine the equivalent total present worth for all cash flows.

30 SI-4151 Ekonomi Teknik Muhamad Abduh, Ph.D.

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

31 SI-4151 Ekonomi Teknik

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

32 SI-4151 Ekonomi Teknik