Lecture slides to accompany

Engineering Economy, 8th edition

Leland Blank, Anthony Tarquin

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 Chapter 3

Combining Factors and Spreadsheet

Functions

©McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education.
 LEARNING OUTCOMES

1. Shifted uniform series

2. Shifted series and single

cash flows

3. Shifted gradients

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 Shifted Uniform Series
A shifted uniform series starts at a time other than period 1
The cash flow diagram below is an example of a shifted series
Series starts in period 2, not period 1

A = Given FA = ?
Shifted series
usually
0 1 2 3 4 5
require the use
of
PA = ? multiple factors

Remember: When using P/A or A/P factor, PA is always one year ahead
of first A
When using F/A or A/F factor, FA is in same year as last A

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 Example Using P/A Factor: Shifted Uniform Series
The present worth of the cash flow shown below at i = 10% is:
(a) $25,304 (b) $29,562 (c) $34,462 (d) $37,908

P0 = ?
P1 = ? i = 10%
Actual year
0 1 2 3 4 5 6
0 1 2 3 4 5 Series year

A = $10,000
Solution: (1) Use P/A factor with n = 5 (for 5 arrows) to get P1 in year 1
(2) Use P/F factor with n = 1 to move P1 back for P0 in year 0

P0 = P1(P/F,10%,1) = A(P/A,10%,5)(P/F,10%,1) = 10,000(3.7908)(0.9091) = $34,462

Answer is (c)
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 Example Using F/A Factor: Shifted Uniform Series
How much money would be available in year 10 if $8000 is deposited each
year in years 3 through 10 at an interest rate of 10% per year?

Cash flow diagram is:

FA = ?
i = 10%
Actual year
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8
Series year
A = $8000

Solution: Re-number diagram to determine n = 8 (number of arrows)

FA = 8000(F/A,10%,8)
= 8000(11.4359)
= $91,487
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 Shifted Series and Random Single Amounts
For cash flows that include uniform series and randomly placed single amounts:

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

The following slides illustrate the procedure

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 Example: Series and Random Single Amounts (1)

Find the present worth in year 0 for the cash flows

shown using an interest rate of 10% per year.

PT = ?
i = 10%
0 1 2 3 4 5 6 7 8 9 10

A = $5000
$2000
PT = ?
i = 10%
Actual year
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8
Series year
A = $5000
Solution:

First, re-number cash flow diagram to get n for uniform series: n = 8

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 Example: Series and Random Single Amounts (2)

PA
PT = ?
i = 10%
0 1 2 3 4 5 6 7 8 9 10 Actual year
0 1 2 3 4 5 6 7 8
Series year
A = $5000 $2000

Use P/A to get PA in year 2: PA = 5000(P/A,10%,8) = 5000(5.3349) = $26,675

Move PA back to year 0 using P/F: P0 = 26,675(P/F,10%,2) = 26,675(0.8264) = $22,044

Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933

Now, add P0 and P2000 to get PT: PT = 22,044 + 933 = $22,977

©McGraw-Hill Education.
 Example Worked a Different Way
(Using F/A instead of P/A for uniform series)

The same re-numbered diagram from the previous slide is used

PT = ? FA = ?
i = 10%

0 1 2 3 4 5 6 7 8 9 10

0 1 2 3 4 5 6 7 8

A = $5000
$2000

Solution: Use F/A to get FA in actual year 10: FA = 5000(F/A,10%,8) = 5000(11.4359) = $57,180

Move FA back to year 0 using P/F: P0 = 57,180(P/F,10%,10) = 57,180(0.3855) = $22,043

Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933

Now, add two P values to get PT: PT = 22,043 + 933 = $22,976 Same as before

As shown, there are usually multiple ways to work equivalency problems

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 Example: Series and Random Amounts
Convert the cash flows shown below (black arrows) into an
equivalent annual worth A in years 1 through 8 (red arrows)
at i = 10% per year.
A=?
0 1 2 3 4 5 6 7 8
i = 10%
0 1 2 3 4 5

A = $3000
$1000

Approaches: 1. Convert all cash flows into P in year 0 and use A/P with n = 8
2. Find F in year 8 and use A/F with n = 8
Solution: Solve for F: F = 3000(F/A,10%,5) + 1000(F/P,10%,1)
= 3000(6.1051) + 1000(1.1000)
= $19,415
Find A: A = 19,415(A/F,10%,8)
= 19,415(0.08744)
= $1698
©McGraw-Hill Education.
 Shifted Arithmetic Gradients

Shifted gradient begins at a time other than between periods 1 and 2

Present worth PG is located 2 periods before gradient starts

Must use multiple factors to find PT in actual year 0

To find equivalent A series, find PT at actual time 0 and apply (A/P,i,n)

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 Example: Shifted Arithmetic Gradient
John Deere expects the cost of a tractor part to increase by $5 per year beginning 4
years from now. If the cost in years 1-3 is $60, determine the present worth in year 0
of the cost through year 10 at an interest rate of 12% per year.
i = 12%
PT = ? Actual years
0 1 2 3 4 5 10
0 1 2 3 8 Gradient years
60 60 60
65
70
G=5 95

Solution: First find P2 for G = $5 and base amount ($60) in actual year 2

P2 = 60(P/A,12%,8) + 5(P/G,12%,8) = $370.41

Next, move P2 back to year 0 P0 = P2(P/F,12%,2) = $295.29

Next, find PA for the $60 amounts of years 1 and 2 PA = 60(P/A,12%,2) = $101.41

Finally, add P0 and PA to get PT in year 0 PT = P0 + PA = $396.70

©McGraw-Hill Education.
 Shifted Geometric Gradients

Shifted gradient begins at a time other than between periods 1 and 2

Equation yields Pg for all cash flows (base amount A1 is included)

Equation (i ≠ g): 𝐏𝐠 = 𝐀 𝟏{𝟏 − [(𝟏 + 𝐠)/(𝟏 + 𝐢)]𝐧/(𝐢 − 𝐠)}

For negative gradient, change signs on both g values

There are no tables for geometric gradient factors

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 Example: Shifted Geometric Gradient (1)

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.

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 Example: Shifted Geometric Gradient (2)

Gradient starts between actual years 5 and 6; these are gradient years 1 and 2.
Pg is located in gradient year 0, which is actual year 4
𝐏𝐠 = 𝟕𝟎𝟎𝟎{𝟏 − [(𝟏 + 𝟎. 𝟏𝟐)/(𝟏 + 𝟎. 𝟏𝟓)]𝟗/(𝟎. 𝟏𝟓 − 𝟎. 𝟏𝟐)} = $𝟒𝟗, 𝟒𝟎𝟏
Move Pg and other cash flows to year 0 to calculate PT
𝐏𝐓 = 𝟑𝟓, 𝟎𝟎𝟎 + 𝟕𝟎𝟎𝟎(𝐏/𝐀, 𝟏𝟓%, 𝟒) + 𝟒𝟗, 𝟒𝟎𝟏(𝐏/𝐅, 𝟏𝟓%, 𝟒) = $𝟖𝟑, 𝟐𝟑𝟐

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 Negative Shifted Gradients

For negative arithmetic gradients, change sign on G term from + to −

General equation for determining P: P = present worth of base amount − PG

Changed from + to −

For negative geometric gradients, change signs on both g values

Changed from + to −

𝐏𝐠 = 𝐀𝟏{𝟏 − [(𝟏 − 𝐠)/(𝟏 + 𝐢)]𝐧/(𝐢 + 𝐠)}

Changed from − to +

All other procedures are the same as for positive gradients

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 Example: Negative Shifted Arithmetic Gradient
For the cash flows shown, find the future worth in year 7 at i = 10% per year

F=?
PG = ? i = 10%
Actual years
0 1 2 3 4 5 6 7
0 1 2 3 4 5 6 Gradient years
450
500
550
600
650
700

G = $−50

Solution: Gradient G first occurs between actual years 2 and 3; these are gradient years 1 and 2
PG is located in gradient year 0 (actual year 1); base amount of $700 is in gradient years 1-6

𝐏𝐆 = 𝟕𝟎𝟎 𝐏/𝐀, 𝟏𝟎%, 𝟔 − 𝟓𝟎 𝐏/𝐆, 𝟏𝟎%, 𝟔 = 𝟕𝟎𝟎 𝟒. 𝟑𝟓𝟓𝟑 − 𝟓𝟎(𝟗. 𝟔𝟖𝟒𝟐) = $𝟐𝟓𝟔𝟓

𝐅 = 𝐏𝐆(𝐅/𝐏, 𝟏𝟎%, 𝟔) = 𝟐𝟓𝟔𝟓(𝟏. 𝟕𝟕𝟏𝟔) = $𝟒𝟓𝟒𝟒

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 Summary of Important Points
P for shifted uniform series is one period ahead of first A;
n is equal to number of A values

F for shifted uniform series is in same period as last A;

n is equal to number of A values

For gradients, first change equal to G or g occurs

between gradient years 1 and 2

For negative arithmetic gradients, change sign on G from + to −

For negative geometric gradients, change sign on g from + to −

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