Ch 3 : Combining Factors

If cash flow series do not fix engineering

economy factors

Then
Combine P, F or A
that involve
uniform series that are shifted
shifted gradient series

to address
more
complex
situation

1. Uniform series that are shifted

When begins at a time other than at the end
of period 1
P3 = ?
0

Year

Note
P is always located 1 period prior to the 1st
uniform-series amount when using P/A factor

How to calculate ?
Use P/A factor to compute P in year
3
Find P in year 0 using (P/F,i,3)
factor
Determine F value using F/A factor
no. of periods n is equal to the no.
of uniform-series values

Steps that should be followed

1.Draw a diagram of the positive and
negative cash flow
2.Locate P or F of each series
3.Determine n for each series by
renumbering
4.Draw another cash flow diagram
representing the desired equivalent
cash flow
5.Set up and solve the equation

Illustration
An engineering technology group just
purchased new 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
of the payments if the interest rate is
8 % per year ?

Solution
The cash flow diagram
PT =?
PA = ?
1

PA' =?
2
0

A = $500
P0 = $5000

3
1

4
2

5
3

6
4

7
5

8
6

Year

The total P is determined by adding PA

and the initial payment P0 in year 0.
PT = P 0 + P A
= 5000 + 500(P/A,8%,6)(P/F,8%,2)
= $5000 + $500(4.6229)(0.8573)
= $6981.60

2. Uniform-Series and
Randomly Placed Single
Amounts
Use the procedures of section 1 for
uniform-series
the single-amount formulas are
applied to the one-time cash flows.

Illustration
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 1 year from now, plus $10,000
six years from now and $15,000 sixteen years
from now. If the mining company wants to pay
offs its lease immediately, how much should it
pay now if the investment should make 16% per
year

Solution
The cash flow diagram from the owner's
perspective :
$15,000
$10,000
A=$20,000

0
P=?

15 16 17 18 19 20
i = 16 per year

Year

Find the present worth of the 20-year uniform

series and add it to the present worth of the two
one-time amounts.
P = $20,000(P/A,16%,20) +
$10,000(P/F,16%,6) +
$15,000(P/F,16%,16)
= $124,075
Note that the $20,000 uniform series starts at
the end of year 1, so the P/A factor determines
the present worth at year 0.

Remember !
When calculate A value for a randomly cash
flow series :
Convert everything to a present worth or a
future worth
Multiply P or F by the appropriate A/P or A/F
factor

3. Calculations for Shifted

Gradients
P of an arithmetic gradient always two periods
before the gradient starts
If there is a base amount, treated separately
If the gradient starting at any other time : a shifted
gradient
the n value in the P/G and A/G factors is
determined by renumbering the time scale
The period in which the gradient first appear is
labeled period 2
the n value is determined by the renumbered
period where the last gradient occurs

illustration
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 the gradient ?
What is the general relation used to calculate
total present worth in year 0 ?

Solution
Gerri constructed the cash flow diagram as
follow,
0

A = $100
$200
G = $50

Year

$150
$250 $300

It shows that the base amount A = $100 and the

arithmetic gradient G = $50 starting between
periods 4 and 5

PG = ?

5
2

6
3

7
4

8
5

Year
Gradient n

$50

$100
G = $50

$150
$200

The general relation for PT is taken from the

normal gradient series.
PT = PA + PG
= 100(P/A,i,8) + 50(P/G,i,5)(P/F,i,3)

Example 3.6
Set up the engineering economy relations to
compute the equivalent annual series in years
1 through 7 for the cash flow estimates in
figure below,
0

$50

$50 $50

$70
$90 $110
$130

Solution
The base amount annual series is AB = $50 for
all 7 years. Find the present worth P G in year
2 of the $20 gradient that starts in actual year
4. The gradient year is 5
P0=?
A =?
0

PG =?
2

Year

0
1
2
3
4
5
Gradient n
$50 $50 $50
$70
AB = $50
$90
G = $20
$110
$130

The present worth PG is,

PG = $20(P/G,i,5)
Bring the gradient present worth back to actual
year 0.
P0 = PG(P/F,i,2) = $20(P/G,i,5)(P/F,i,2)
Annualize the gradient present worth from
year 0 through year 7 to obtain AG.
AG = P0(A/P,i,7)
Finally, add the base amount to the gradient
annual series
A = $20(P/G,i,5)(P/F,i,2)(A/P,i,7) + $50

Example for geometric gradient

Chemical engineers at a Coleman Industries plant
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 5year contract at $7000 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 these cash flows.
PT=?
0

Pg=?
1

$7000

2
0

i = 15% per year

3 4

4 5

$35,000

12% increase
per year

$7840

$17,331

10 11 12 13

Year

Solution
The figure above presents the cash flows. The
total present worth PT is found using g = 0.12
and i = 0.15. Use the geometric gradient factor
formulas to determine the present worth Pg for
the entire geometric series at actual year 4,
which is moved to year 0 using (P/F,15%,4).
PT = 35,000 + A(P/A,15%,4) +
A1(P/A,12%,15%,9)(P/F,15%,4)
= 35,000 + 7000(2.8550) + [7000{1 -(1.12/1.15) 9}/(0.15
0.12)](0.5718)
= $83,232

4. Shifted Decreasing Arithmetic

Gradients
For decreasing gradient

the base amount = the largest amount

gradient amount is subtracted
use -G(P/G,i,n) or -G(A/G,i,n) in computation
for PT and AT, respectively

Follow the same rule,

P, two periods before the gradient starts
A, start at period 1 through n

Illustration of a decreasing gradient series,

G = $-100 --- shifted 1 year forward
PG occurs in actual year 1
PT is the sum of three components
PT = $800(P/F,i,1) +{ 800(P/A,i,5) 100(P/G,i,5)}(P/F,i,1)
$800
$800

0
0

1
1

PT=?

2
2

3
3

4
4

$400
5
Gradient n
6
Year

Example 3.8
that you are planning to invest money at 7% per
Assume
year
as shown by the increasing gradient below .
you expect to withdraw according to the decreasing
gradient
shown.
Further
the net present worth and equivalent annual series
for the entire cash flow sequence and interpret the
result.
Find

$5000
$4000
$3000

P1=?

P2=?
P3=?

$2000

$1000

10

PG =?
$2000

PW =P2+P3

$2500

$3000

$3500

$4000

Cash Flow Diagram for Investment

and withdrawal series

11

12
Year

Solution
For the investment sequence,
G = $500,
the base amount = $2000,
n=5
For the withdrawal sequence through year 10,
G = $-1000,
the base amount = $5000,
n=5
There is a 2-year annual series with A = $1000
in year 11 and 12.

For the investment series,

P1 = present worth of deposits
= $2000(P/A,7%,5) + $500(P/G,7%,5)
= $2000(4.1002) + $500(7.6467)
= $12,023.75
For the withdrawal series, let PW represent the
present worth of the withdrawal base amount
and gradient series in year 6 through 10 (P 2),
plus the present worth of withdrawal in year 11
and 12 (P3).
Then ........

PW = P2 + P 3
= PG(P/F,7%,5) + P3
= [$5000(P/A,7%,5) $1000(P/G,7%,5)](P/F,7%,5)
+ $1000(P/A,7%,2)(P/F,7%,10)
= [$5000(4.1002) -$1000(7.6467)](0.7130)
+ $1000(1.8.80)(0.5083)
= $9165.12 + $919.0 = $10,084.12
Since P1 is actually a negative cash flow and
PW is positive, the net present worth is
P = PW P1 = $10,084.12 - $ 12,023.75
= $-1939.63

The A value may be computed using the

(A/P,7%,12) factor.
A = P(A/P,7%,12)
= $-244.20
The interpretation of these result :

In present-worth equivalence, you will invest

$1939.63 more than you expect to withdraw

This is equivalent to an annual savings of

$244.20 per year for the 12-year period

Additional example
Calculate the total present worth of the
following series of cash flows at i=18% per
year.
Year
Cash Flow,$

0
460

1
460

2
460

3
460

4
460

460

6
460

7
-5000

Solution
The cash flow diagram is shown in figure below
A = $460
Year
0

PT =?

7
F = $5000

Since the receipt in year 0 is equal to the A

series in year 1 through 6, the P/A factor can
be used for either 6 or 7 years. The problem is
worked both ways.
Using P/A and n = 6
The receipt P0 in year 0 is added to the
present worth of the remaining amounts, since
P/A factor for n = 6 will place PA in year 0.
PT = P0 + PA PF
= 460 +460(P/A,18%,6) 5000(P/F,18%,7)
= $499.40

Using P/A and n = 7

By using the P/A factor for n = 7, the present
worth is located in year -1, not in year 0,
because the P is one period prior to the first A.
It is necessary to move the PA value 1 year
forward with the P/F factor.
P = $460(P/A,18%,7)(F/P,18%,1)
$5000(P/F,18%,7)
= $499.38