ME 291

Engineering
Economy

ME-291 Engineering
Economy
Lecture 8

Chapter 3
Combining Factors

Faculty of Mechanical Engineering

Ghulam Ishaq Khan Institute, Topi, Swabi
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 Calculations for Uniform Series that
are shifted

• When a uniform series begins at a time other than at the end

of period 1, it is called a shifted series.
• The present worth is always located one period prior to the

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first uniform series amount when using the P / A factor.
• The future worth is always located in the same period as the
last uniform series amount when using the F / A factor.

Economy
• Steps to solve a shifted series
– Draw a diagram of the positive and negative cash flows.
– Locate the present worth or future worth of each series
on the cash flow diagram.
– Determine n for each series by renumbering the cash
flow diagram.
– Draw another cash flow diagram representing the desired
equivalent cash flow.
– Setup and solve the equations.

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 Example 3.1

• An Engineering technology group just purchased new CAD

software for $5000 now and annual payments of $500 per

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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?

Economy
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 Example 3.2

• Recalibration of sensitive devices cost $8000 per year. If

the machine will be recalibrated for each 6 years starting 3

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years after purchase, calculate the 8-year equivalent
uniform series at 16% per year.

Economy
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 Calculations involving uniform-series and
randomly placed single amounts

• When a cash flow includes both a uniform series and

randomly placed amounts, both are handled separately.

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• Total is then calculated, by summing them.

Economy
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 Example 3.3

• An engineering company in Quetta 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

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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,

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

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 Example 3.4

• Assume similar cash flow estimate to those projected in the

previous example for the engineering company planning to

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lease its mineral rights. However, move the beginning year
for the $20,000 per year series forward 2 years to start in
year 3. it will now continue through year 22. Utilize
engineering economy relations to determine the five

Economy
equivalent values listed below at 16% per year.
– Total present worth PT in year 0
– Future worth F in year 22
– Annual series over all 22 years
– Annual series over the first 10 years
– Annual series over the last 12 years

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 Example 3.4 (Cash Flow
Diagram)

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Economy
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 Calculations for Shifted
Gradients
• The present worth of an arithmetic gradient will always be
located two periods before the gradient starts.

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• To find the equivalent A series of a shifted gradient through
all the periods, first find the present worth of the gradient at
actual time 0, then apply the (A / P, i , n) factor.

Economy
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 Example 3.5

• Gerri, an engineer at Fujitsu, has tracked the average

inspection cost on a robotics manufacturing line for 8 years.

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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

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

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 Example 3.6

• Setup the engineering economy relations to compute the

equivalent annual series in year 1 through 7 for the cash

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flow estimate in figure below.

Economy
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 Example 3.7

• Chemical engineers at a Coleman Industries plant in the

Midwest have determined that a small amount of a newly

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available chemical additive will increase the water
repellency of Coleman’s tent fabrics by 20%. The plant
superintendent has arranged to purchase the additive
through 5-year contract at $7000 per year, starting 1 year

Economy
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.

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 Figure Example 3.7

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Economy
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 Example 3.8

Assume that you are planning to invest money at 7% per year

as shown by the increasing gradient of figure below.

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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.

Economy
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 Example 3.10

• Present worth by combining factors

– Calculate the total present worth of the following series

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of cash flows at i = 18% per year.

Economy
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