Engineering Economy: F/P and P/F Factors P/A and A/P Factors F/A and A/F Factors Factor Values

Engineering Economy
LEARNING OUTCOMES
1. F/P and P/F Factors

2. P/A and A/P Factors
3. F/A and A/F Factors
4. Factor Values
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
1
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
P
(1+i)(1+i)
2
Standard Notation Equation
Factor :
(find/given, effective interest rate per period, no. of
periods)
Equation:
Find = Given (find/given, i%, n )
3
4
Sample page of compound interest factors
5
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)
6
Sample page of compound interest factors
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)
7
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
(3) P is one period Ahead of first A value
The cash flow diagrams are:
A = Given A=?
0 1 2 3 4 5 0 1 2 3 4 5
P = Given
P=?
P = A(P/A,i,n) Standard Factor Notation A = P(A/P,i,n)
Note: P is one period Ahead of first A value
1-17
8
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, what is the equivalent PW value?
(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)
4 5
= $18,954
0 1 2 3
i =10% Answer is (D)
P=?
9
Uniform Series Involving F/A and A/F
The uniform series factors that involve F and A are derived as follows:
(1) Cash flow occurs in consecutive interest periods
(2) Cash flow amount is same in each interest period
(3) Last cash flow occurs in same period as F
Cash flow diagrams are:
A = Given A=?
0 1 2 3 4 5 0 1 2 3 4 5
F=? F = Given
F = A(F/A,i,n) Standard Factor Notation A = F(A/F,i,n)

Note: F takes place in the same period as last A

1-21
10
Example: Uniform Series Involving F/A

An industrial engineer made a modification to a chip manufacturing
process that will save her company $10,000 per year. At an interest rate
of 8% per year, how much will the savings amount be in 7 years?
(A) $45,300 (B) $68,500 (C) $89,228 (D) $151,500
The cash flow diagram is:

F=? Solution:
F = 10,000(F/A,8%,7)
i = 8%
= 10,000(8.9228)
0 1 2 3 4 5 6 7
= $89,228
Answer is (C)
A = $10,000
11
Factor Values for Untabulated i or n
3 ways to find factor values for untabulated i or n values
Use formula
Use spreadsheet function with corresponding P, F, or A value set to 1
Linearly interpolate in interest tables
Formula or spreadsheet function is fast and accurate

Interpolation is only approximate
Example: Untabulated i
Determine the value for (F/P, 8.3%,10)
Formula: F = (1 + 0.083)10 = 2.2197 OK
Spreadsheet: = FV(8.3%,10,,1) = 2.2197 OK
Interpolation: 8% ------ 2.1589

8.3% ------ x
9% ------ 2.3674
x = 2.1589 + [(8.3 - 8.0)/(9.0 - 8.0)][2.3674 – 2.1589]

= 2.2215 (Too high)
Absolute Error = 2.2215 – 2.2197 = 0.0018
12

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Engineering Economy

1. F/P and P/F Factors

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Formulas are as follows:

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Standard Notation Equation

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Example: Finding Future Value

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

The cash flow diagram is:

Example: Finding Present Value

(A) $10,000 (B) $ 31,050 (C) $ 33,250 (D) $319,160

The cash flow diagram is: Solution:

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

The cash flow diagram is as follows: Solution:

F = A(F/A,i,n) Standard Factor Notation A = F(A/F,i,n)

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Example: Uniform Series Involving F/A

(A) $45,300 (B) $68,500 (C) $89,228 (D) $151,500

The cash flow diagram is:

Formula or spreadsheet function is fast and accurate

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

Formula: F = (1 + 0.083)10 = 2.2197 OK

Spreadsheet: = FV(8.3%,10,,1) = 2.2197 OK

Interpolation: 8% ------ 2.1589

x = 2.1589 + [(8.3 - 8.0)/(9.0 - 8.0)][2.3674 – 2.1589]

Absolute Error = 2.2215 – 2.2197 = 0.0018

© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

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