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IE - 203
ENGINEERING ECONOMY
BORA TOKGÖZ
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Single Payment Factors (F/P and P/F)

Single payment factors involve only P and F. Cash flow diagrams are as follows:

Formulas are as follows:

F = P(1 + i ) n P = F[1 / (1 + i ) n]

Terms in parentheses or brackets are called factors. Values are in tables for i and n values
Factors are represented in standard factor notation such as (F/P,i,n),
where letter to left of slash is what is sought; letter to right represents what is given
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How to Compute Factors?

u Calculator
u Excel
Reminder:
u Future value F is calculated using
FV function: = FV(i%,n,,P)
u Present value P is calculated using
PV function: = PV(i%,n,,F)
u Factor Tables
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Example: Finding Future Value

A person deposits $5000 into an account which pays interest at a rate of 8% per
year. The amount in the account after 10 years is closest to:

(A) $2,792 (B) $9,000 (C) $10,795 (D) $12,165

The cash flow diagram is:
Solution:
F = P(F/P,i,n )
= 5000(F/P, 8%, 10 )
= 5000(2.1589)
= $10,794.50
Answer is (C)
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Example: Finding Present Value

A small company wants to make a single deposit now so it will have enough money to
purchase a backhoe costing $50,000 five years from now. If the account will earn interest of
10% per year, the amount that must be deposited now is nearest to:
(A) $10,000 (B) $ 31,050 (C) $ 33,250 (D) $319,160

The cash flow diagram is:

Solution:
P = F(P/F,i,n )
= 50,000(P/F,10%,5 )
= 50,000(0.6209)
= $31,045
Answer is (B)
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Uniform Series Involving P/A and A/P

The uniform series factors that involve P and A are derived as follows:
(1) Cash flow occurs in consecutive interest periods
(2) Cash flow amount is same in each interest period
The cash flow diagrams are:

A = Given A=?

0 1 2 3 4 5 0 1 2 3 4 5

P=? P = Given

P = A(P/A,i,n) Standard Factor A = P(A/P,i,n)

Notation
Note: P is one period Ahead of first A value
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Example: Uniform Series Involving P/A

A chemical engineer believes that by modifying the structure of a certain water treatment
polymer, his company would earn an extra $5000 per year. At an interest rate of 10% per year,
how much could the company afford to spend now to just break even over a 5 year project
period?

(A) $11,170 (B) 13,640 (C) $15,300 (D) $18,950

The cash flow diagram is as follows:

Solution:
A = $5000 P = 5000(P/A,10%,5)
= 5000(3.7908)

0 1 2 3 4 5 = $18,954
i =10%
P=? Answer is (D)
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Compound Interest Factors i=10%
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Example: Compound Interest

u Assume you got a loan of $5000 for your expenses at the university. Analyze
the following repayment plans over a 5-year period with 8% interest rate:
u Pay all at the end of the 5 years
u Pay only interest annually, principal is repaid at the end
u Pay interest & principal (as equal installments) each year
u Pay equal annual amount (interest + a portion of principal)
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Solution
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Compound Interest Factors i=8%
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Arithmetic Gradients

Arithmetic gradients change by the same amount

each period
G starts between periods 1 and 2
(not between 0 and 1)
The cash flow diagram for the PG
of an arithmetic gradient is: This is because cash flow in year 1
is usually not equal to G and is
PG = ?
handled separately as a base
1
amount
2 3 4 n
Standard factor notation is (shown on next slide)
0 PG = G(P/G,i,n)
Note that PG is located Two
G
2G Periods Ahead of the first
3G change that is equal to G
(n-1)G
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Arithmetic
Gradient
Factors
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Typical Arithmetic Gradient Cash Flow

PT = ?

i = 10%
0 1 2 3 4 5
Amount in year 1
is base amount
400
450
500
550
PA = ? 600 PG = ?
i = 10%
i = 10%
0 1 2 3 4 5
+ 0 1 2 3 4 5

Amount in 400 400 400 400 400

50
year 1 100
PA = 400(P/A,10%,5)
is base PG = 50(P/G,10%,5) 150
200
amount
PT = PA + PG = 400(P/A,10%,5) + 50(P/G,10%,5)
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Converting Arithmetic Gradient to A

Arithmetic gradient can be converted into equivalent A value using G(A/G,i,n)

i = 10% i = 10%
0 1 2 3 4 5 0 1 2 3 4 5

G
2G
3G
A=?
4G

General equation when base amount is involved:

A = base amount + G(A/G,i,n)
For decreasing gradients,
0 1 2 3 4 5 change plus sign to minus

G
2G
3G A = base amount - G(A/G,i,n)
4G
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Example

The present worth of $400 in year 1 and amounts increasing by $30 per year
through year 5 at an interest rate of 12% per year is closest to:

(A) $1532 (B) $1,634 (C) $1,744 (D) $1,829

Solution:
PT = ? PT = 400(P/A,12%,5) + 30(P/G,12%,5)
i = 12%
= 400(3.6048) + 30(6.3970)
1 2 3 4 5 Year
0 = $1,633.83
Answer is (B)
400 The cash flow could also be converted
430
460 into an A value as follows:
490
G = $30 520
A = 400 + 30(A/G,12%,5)
= 400 + 30(1.7746)
= $453.24
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Negative Shifted Arithmetic Gradient
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Example-1: TVM

Project A requires an investment of 4000 TL today. The investment pays 2000 TL one
year from today and 4000 TL two years from today.
Project B requires an investment of X two years from today. The investment pays
2000 TL today and 4000 TL one year from today.
The net present values of the two projects are equal at an annual effective interest
rate of 10%. Calculate X.

Answer: 5460 ₺
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Example-2

u Money accumulates in a fund at an effective annual interest rate of i during the

first 5 years, and at an effective annual interest rate of 2i thereafter. A deposit of
100 TL is made into the fund at time 0. It accumulates to 309 TL at the end of 10
years and to 1362 TL at the end of 20 years.
What is the value of the deposit at the end of 8 years?

Answer: 229,63 (i=8%)

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Example-3

u At an effective annual interest rate of i, i>0, each of the following two sets of
payments has present value X:
(i) A payment of 121 TL immediately and another payment of 121 TL at the end of
one year.
(ii) A payment of 144 TL at the end of two years and another payment of 144 TL at
the end of three years.
Calculate X.

Answer: 231,9
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Compound Interest Factors i=9%