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Pervious Lecture!!!
3/31/2015
F/P Factor
F= P(F/P, i%, n)
n and i is given
P is given
P/F Factor
P =?
P= F(P/F, i%, n)
n and i is given
F = given
P/A Factor
P = A(P/A, i%, n)
A/P Factor
A = P(A/P, i%, n)
F/A Factor
F = A(F/A, i%, n)
A/F Factor
A = F(A/F, i%, n)
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Athematic Gradient
FG = ?
F = PT(F/P, i%, n)
or
PA = A(P/A, i%, n)
PG = G(P/G, i%, n)
1 (1 + ) 1
Athematic Gradient
A = PT(A/P, i%, n)
or
AT =
PA = A(P/A, i%, n)
PG = G(P/G, i%, n)
AA
AG
(1 + ) 1
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Geometric Gradient
Fg = ?
Pg = ?
for g i:
=
1+
1 1+
F = Pg(F/P, i%, n)
Similarly
for g = i:
=
1+
A = Pg(A/P, i%, n)
Chapter 3
Combining Factors
and Spreadsheet
Functions
Engineering Economy
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Example
P=?
P3 = ?
10
11
12
13
Year
A = $50
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P3 = ?
10
11
12
13
Year
A = $50
F=?
FA is in same year as last A
0
A = $50
The number of periods n in the P/A or
F/A factor is equal to the number of
uniform series values
10
11
12
13
Year
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Example
The offshore design group at Bechtel just purchased
upgraded CAD software for $5000 now and annual
payments of $500 per year for 6 years starting 3 years
from now for annual upgrades. What is the present
worth in year 0 of the payments if the interest rate is
8% per year?
Solution 1. Draw a diagram of the positive and negative cash flows.
PT = ?
2. Locate the present
worth or future worth of
each series on the cash
PA = ?
PA = ?
i= 8% per year
flow diagram.
6
7 8 Year
4 5
3
0 1
2
2 3
n
0 1
4
6
5
A = $500
P0 = $5000
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5. Set up
and solve
the
equations.
P = P' ( P /F ,8%, 2)
P = $500( P /A ,8%,6) ( P /F ,8%, 2)
A
PT = P0 + PA
=5000 + 500( P /A ,8%,6)( P / F ,8%,2)
=5000 +500(4.6229)(0.8573)
$6981.60
Actual year
A = $10,000
10%
Single Payments
Compoun
d Amount
(F/P)
Present
Worth
(P/F)
Sinking
Fund
(A/F)
Compound Capital
Amount
Recovery
(F/A)
(A/P)
Present
Worth
(P/A)
1.1000
0.9091
1.00000 1.0000
1.10000
0.9091
1.6105
0.6209
0.16380 6.1051
0.26380
3.7908
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PA = ?
0
Actual year
Series year
A = $10,000
Solution
(1) Use P/A factor with n = 5 (for 5 arrows) to get PA in year 1
---- A(P/A,10%, 5)
---- (P/F,10%, 1)
PT = A(P/A,10%, 5) (P/F,10%,1)
= 10,000(3.7908)(0.9091)
$34462
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Example
Find the present worth in year 0 for the cash flows shown using an interest
rate of 10% per year.
i = 10%
0
10
A = $5000
Solution:
$2000
PT = ?
0
i = 10%
1
Actual year
8
6
10
Series year
A = $5000
$2000
Uniform series procedures are applied to the series amounts. Single amount
formulas are applied to the one-time cash flows
The resulting values are then combined per the problem statement
Example:
PA = ?
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16%
Compound
Amount (F/P)
Present Worth
(P/F)
Capital
Recovery (A/P)
Present Worth
(P/A)
2.4364
0.4104
0.27139
3.6847
2.8262
0.3538
0.24761
4.0386
16
10.7480
0.0930
0.17641
5.6685
17
12.4677
0.0802
0.17395
5.7487
20
19.4608
0.0514
0.16867
5.9228
Solution
P=?
$15,000
$10,000
A =$20,000
16
17
18
19
20
P = 20,000(P/A ,16%,20)+
10,000( P /F ,16%,6) +
15,000(P/F,16%,16)
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PA = A(P/A, i%, n)
PG = G(P/G, i%, n)
PA = ?
PG = ?
PG = ?
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Example:
Shifted Geometric Gradient
Weirton Steel signed a 5-year contract to purchase water treatment chemicals from a
local distributor for $7000 per year. When the contract ends, the cost of the chemicals is
expected to increase by 12% per year for the next 8 years. If an initial investment in
storage tanks is $35,000, determine the equivalent present worth in year 0 of all of the
cash flows at i = 15% per year.
Pg = ?
PT = ?
0 1
3 4
5 6 7 8
0
$7000
1 2 3
9 10 11 12 13
4
5 6
7 8
$7840
$35000
$17331
12% increase
per year
Year
Geometric
Gradient n
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$83,232
.
.
(0.5718)
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PT = ?
0
0
60
60
Actual years
10
Gradient years
60
65
70
G=5
Solution:
95
P0 = P2(P/F,12%,2) = $295.29
PA = 60(P/A,12%,2) = $101.41
PT = P0 + PA = $396.70
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PG = ?
Set up the
equations
only
F=?
i = 10%
1
0
600
700
5
4
550
6
5
500
Actual years
7
6
Gradient years
450
650
G = $-50
Solution:
PG is located in gradient year 0 (actual year 1); base amount of $700 is in gradient years 1-6
PG = A(P/A,10%,6) G(P/G,10%,6)
PG = 700(P/A,10%,6) 50(P/G,10%,6) = 700(4.3553) 50(9.6842) = $2565
PG= PG(F/P,10%,1) = 2565(0.9091) = $2331.84
Method 1
Method 2
Method 4
3/31/2015
THANK YOU