Table 3.

2: The Main Factors

To Find Given Equation
P F P=F(P/F,i,n)
F P F=P(F/P,i,n)
P A P=A(P/A,i,n)
A P A=P(A/p,i,n)
A F A=F(A/F,i,n)
F A F=A(F/A,i,n)
P G P=G(P/G,i,n)
A G A=G(A/G,i,n)

1
 (F/P)

P=given F=?

P=? F=given

(P/F)
F=?

A A (F/A)

P=?

A+G
A+2G

Gradient =Arithmetic series

A+(n-1)G

Figure3.1 : Cash flow diagram representation

2
3.5 Solved problems

2. Which of the following has a better rate of return:$200 invested

for 1 year with $6.25 in interest or $500 invested for 1 year with
$18 paid in interest?.
Solution:
Interest=Pi
6.25=200(i)
i=6.25/200=0.03125=3.125%
And
i=18/500=0.036=3.6%

5. You have just invested $10,000 in a friend’s business venture

that promises to return $15,000 or more at some time in the future.
What is the minimum number of years (whole number) that you
can wait to receive the $15,000 in order to make 10% or more per
year compounded yearly?.
Solution:
15,000=10,000(1+0.1)n then, (1.1)n=1.5
n(ln 1.1)=ln (1.5)
n=4.25

3
7. A married couple is planning to pay a new sport utility vehicle
(SUV) 5 years from now. They expect the SUV to cost $32,000 at
the time of purchase. If they want to have half of the cost for a
down payment, how much must they save each year if they can
earn 10% per year on their savings? .
Solution:
0.5(32000)=16000

A=?

16000

A=16000(A/F,10%,5)=16000(0.1638)=$2620.8

8. If the couple in expects to inherit ‫ ﯾﺮث‬some money 2 years from

now; how much would they have to set aside in a lump sum at that
time in order to have their down payment? Assume i=10% per year.
Solution:
P2=16000(P/F,10%,3)=16000(0.7513)=$12021

P2=?

0.5(32,000)=16,000

4
9. To keep up with your increasing number of accounts receivable,
you are considering the purchase of a new computer system. If you
go the “cheap” way, you can buy a basic system now for $6000 and
then upgrade at the end of year 1 for $2000 and again at the end
of year 3 for $2800. Alternatively, you can buy a first-class system
now that will provide the same level of service as the upgraded
cheap system for the same length of time. If you can invest money
at 20% per year, how much could you afford to spend now for the
first-class system?

Solution:
P=6000+2000(P/F,20%,1)+2800(P/F,20%,3)=$271,913

$2000 $2800
6000

10. How much money must you deposit in year 6 if you deposit
$5000 now and you want to have $12,000 at the end of year 11?
Assume your deposits earn interest at 6% per year.
Solution:

N=6

$12,000
P6=?

5
$12,000=5000(F/P,6%,11)+P6 (F/P,6%,5)
=5000(1.8983)+P6(1.3382)
P6=1874.53

6
Example:
A person buys a small piece of land for $5000 down and deferred
annual payments of $500 a year for 6 year starting 3 years from
now. What is the present worth of the investment if the interest rate
is 8% per year?
Solution:
The cash-flow diagram is shown in Figure 5-1 . The symbol PA
used throughout this chapter to represents the present worth of a
uniform annual series A and PA′ represents the present worth at a
time other than period 0. Similarly, PT represents the total present
worth at time 0. The correct placement of PA′ and diagram
renumbering to obtain n are also indicated in Figure 5-3. Note that
PA′ is located in year 2. not year 3, and n=6, not 8, for the P/A of the
shifted series.

PT
2
PA 1 3 4 5 6 7 8 Year
0

A=$500 6
P1=$5000

Figure 5.3: Placement Of Present-Worth Values

PA′ =500(P/A,8%,6) located in year 2, it is necessary to find PA in
year 0:
PA= PA′ (P/F, ,8%,2)

7
The total present worth is determined by adding PA and initial
investment P1, PT=P1+PA=5000+500(P/A,8%,6)(P/F,8%,2)
=5000+500(4.6229)(0.8573)=$6981.6.
Example:
Calculate the 8-year equivalent uniform annual worth amount at
16% per year interest for the uniform disbursements in Figure5-4.

0
Year

A=$800

Figure 5.4: Series of Uniform Disbursements

1. Present-worth method
PA′ = 800( P / A,16%,6)
PT= PA′ (P/F,16%,2)= 800( P / A,16%,6)

(P/F,16%,2)=800(3.6847)(0.7432)=$2190.78
Where PT is the total present worth of the cash flow. The equivalent
series A′ for 8 years can now be determined via the P/A factors.
A′ =PT(A/P,16%,8)$504.36

Future-worth method:
The first step is to calculate the future worth F in year 8.
F=800(F/A,16%,6)=$7184
The A/F factor is now used to obtain A′ .

A′ =F(A/F,16%,8)=$504.46

8
3. Calculation Involving Uniform-Series and Random Placed A
mounts, when a cash flow includes both a uniform series and
randomly placed single amounts, the procedures are applied to the
uniform series and the single-amount formulas are applied to the
one-time cash flows. This type of problem, illustrated in the
following example.
Example:
A couple owning 5000 m2 of valuable land have decided to sell the
right of use their property to a company. Their primary objective is
to obtain long-term investment income and sufficient money to
finance the college education of their two children. Since the
children are currently 12 and 2 years of age, the couple estimates
that the children will start college in 6 and 16 years, respectively,
from the present time. They therefore make a proposal to the
company that it pay $20000 per year for 20 years beginning 1 year
hence, plus$10000 six years from now and $15000 sixteen years
from now. If the company wants to pay off its lease immediately,
how much should it pay now if the investment could make 16% per
year?
Solution:
1. Draw Cash-flow diagram

9
 $10000 $15,000
A=$20000 20

1 6 15 16 Year

Figure 5.5: A Uniform Series And Single Amounts

The cash-flow diagram is shown in Figure 5.5 from the couple’s
perspective. This problem is solved by finding the present worth of
the 20 year uniform series and adding it to the present worth of the
two one-time amounts.
P=20000(P/A,16%,20)+10000(P/F,16%,6)+15000(P/F,16%,16)
=$124075
Note that the uniform series started at the end of year 1 so that the
present worth obtained with the P/A factor represents the present
worth at year 0. So, it is not necessary to use the second
displacement by P/F factor on the uniform series.
If the uniform series described above in example begins in year 3
after the contract is signed, determine the present worth at t=0.
Solution:
The cash-flow diagram is shown below , with n=20 but shifted 3
year .
PA′ =20000(P/A,16%,20)

PT= PA′ (P/F,16%,2)+

10000(P/F,16%,6)+15000(P/F,16%,16)=$93625

10
 6 $10000 15000$
3 A=$20000
15
16

0 22 Year

Figure 5.6: A Uniform Series & Single Amounts

Comment:
Delaying the start of the annual series by only 2 more years has
decreased the total present worth by $30450.
4. Equivalent uniform annual worth of both uniform-series and
randomly placed amounts
To calculate the equivalent uniform annual series A of cash flows
which include randomly placed single amount and uniform-series
amounts, the most important fact to remember is to first convert
everything to a present worth or a future worth. Then the equivalent
uniform series is obtained with the appropriate A/P or A/F.
Calculate the 20-years equivalent uniform annual worth for the
cash flows described as following.
Solution:
A=20000+10000(P/F,16%,6)(A/P,16%,20)+15000[(P/F,16%,16)(
A/P,16%,20)]= $20928 per year
Or:
A=20000+10000(F/P,16%,14)(A/F,16%,20)
+15000[(F/P,16%,4)(A/F,16%,20)]= $20928 per year

11
 $10000 15000$
A=$20000 20

1 6 15 16 Year

Figure 5.7: Annual Series And Random Payment

4. Calculate the present worth of the following series of income and

expenses if the interest rate 8% per year compounded yearly.
Year Income $ Expense$
0 12,000 1,000
1-6 800 100
7-11 900 200
Solution:
Year Income $ Expense$ Net profit
0 12,000 1,000 11,000
1-6 800 100 700
7-11 900 200 700
P=11,000+7,000(P/A,8%,11)=11,000+7,00(7.139)
=$15,997

5. Calculate the value of X, such that the equivalent total value in

month 4 is $9,000 using an interest rate of 1.5% per month.
Month Cash Month Cash
flow,$ flow,$
0 200 6 X
1 200 7 X
2 600 8 X
3 200 9 900
4 200 10 500
5 X 11 500

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Solution:

$9000 N=11
1.5%
$500
$200
$200
X
$600
$900

9,000=200(F/A,1.5%,5)+400(F/P,1.5%,2)+X(P/A,1.5%,4)
+[500(P/A,1.5%,2)+900](P/F,1.5%,5)=200(5.1523)+400(1.0302)
+X(3.8544)+[500(1.9559)+900](0.9283).
Then X=$1,508.

Two or more alternatives:

when only one can be selected (i.e., alternatives are mutually
exclusive), select the alternative with the PW value that is
numerically larger, that is, less negative or more positive,
indicating a lower PW of costs or larger PW of net cash flow of
receipts and disbursements, select the alternative with the PW
value that is numerically larger.
1. The Same Period (Equal Life Year)
Make a Present worth comparison of equal-service machines for
which the costs are shown below if i=10% per year.

13
 A1 A2
Alternative
First cost (P)$ 2500 3500
Annual operating and maintenance 900 700
cost 200 350
Salvage value(SV) 5 5
Life year(n)
Solution:
Cash flow diagram for alternative A1:
900$

SV=200$

PC=2500+900(p/A,0.1,5)- 00(p/f,0.1,5)=
=2500+900*3.791-200*0.6209=$5,787.72
Cash flow diagram for alternative A2:
PC (A2)=3500+700(p/A, 0.1,5)- 350(p/f, 0.1,5)=
=3500+700*3.791-350*0.6209=5936.385
The cost of alternative A1 is less the cost A2. Type A1 is
selected.
2. Present worth comparison of Different Life Alternative
Example:
A plant superintendent is trying to decide between two excavating
machined with the estimates present below.
Alternative Machine(A1) Machine(A2)
First cost $ 11,000 18.000
O&M costs $ 3.500 3.100
Salvage value 1.000 2.000
Life time 6 9

14
1. Determine which one should be selected on the basis of a
present-worth comparison, i=15%.
2. If a study period of 5 years is specified and salvage value are
not expected to change, which alternative should be selected?
3. Which machine should be selected over 6 year horizon if SV
of machine B is estimated to be 6000$ after 6 year.
Solution:
1. Cash flow diagram for M (A1) by (LCM) at n=18 year.
PC(A1)=11,000+3500(p/A,0.15,18)+10,000(p/F,0.15,6)+
10,000(p/F,0.15,12)- 1000(p/F,0.15,18)
=11,000+3500*6.128+10,000*0.4323+10000*0.1869
-1,000*0.0808=$38,559.2
PC(A2)=18,000+3100(p/A,0.15,18)+16,000(p/F,9)-
2,000(p/F,0.15,18)=$41,384
The best alternative is the Machine A, the lowest cost.

1000 1000 1000

N=18
6
1000 12 1000
1000

Figure 5.10: Cash flow-Diagram for A1

15
2. Cash flow diagram for M(A2) by (LCM) at n=18 year.

2,000 2,000

3100
18,000
18,000

Figure 5.11: Cash flow-Diagram for A2

b. For horizon 5 year, no cycle repeated and SV(A)=$1000 ,
SV(B)=$2000
PC=11,000+3500(p/A, 0.15,5)-1,000(p/F, 0.15,5)
=11,000+3500*3.352-1,000*0.4972=22,235
PC=18,000+3100(p/A, 0.15,5)-2,000(p/F, 0.15,5)
=18,000+3100*3.352-2,000*0.4972=$27,397

$3100
18,000
Machine A1 is the best alternative.
a. For the case of 6 year planning horizon, SV of
M(B)=$6000, and SV (A1)=$1000.
PC(A1)=11,000+3500(p/A,0.15,6)-1,000(p/F,0.15,6)
=$23,813
PC (A2)=18,000+3,100(p/A,0.15,6)-6,000(p/F,0.15,6)
=$27,138
The alternative M (A1) is the lowest and must be selected.

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Example for different-life PW Analysis:
Sewes cement corporation plans to open a new rock pit. Two plans
have been devised for movement of raw material from the quarry
to the plant. Plan A requires the purchase of two earth movers and
construction of an unloading pad at the plant. Plan B calls for
construction of a conveyor system from the quarry to the plant. The
costs for each plan are detailed in the following table. Using PW
analysis to determine.
1. Which plan should be selected based on Present cost if interest
rate 15% per year, and select the better plan for a 12-year period .
Table 5.3 Details Of Plans To Move Rock From Quarry To
Cement Plant
COSTS PLAN A PLAN B
Mover Pad Conveyor
Initial cost $ 45000 28000 175000
Annual operating cost $ 6000 300 2500
Salvage value $ 5000 2000 10000
Life year 8 12 24
Solution
1. Evaluation must take place over the LCM of 8 and 12, that is, 24
years. Reinvestment in the two movers will occur in years 8 and
16, and the unloading pad must be repurchase in year 12. No
reinvestment is necessary for the plan B. You should construct your
own cash-flow diagram for each plan to follow the PW analysis.

17
Solution:

5000 5000 5000

N=8 N=16
Mover: N=24

6000
45000 45000 45000

PW of plan A:

2000 2000
Pad: N=12 N=24

300
28000 28000

10000
Conveyor: N=24

2500
175,000

PCA=2PCmovers+PCpad
PCmovers= 2(45,000)[1+(P/F,15%,8)+(P/F,15%,16)]
-2(5,000)[(P/F,0.15,8)+(P/F,15%,16)+
(P/F,15%,24)]+2(6,000)(P/A,15%,24)=
PCmovers= 2(45,000)[1+(0.3269)+(0.1069)]
-2(5,000)[( 0.3269)+( 0.1069)+
(0.0349)]+2(6,000)(6.4338)=$201,560.6
PCpad= 28000[1+(P/F,15%,12)]+

18
-2000[(P/F,15%,12)+(P/F,15%,24)]+300(P/A,15%,24)=
PCpad= 28000[1+(0.1869)]+
-2000[(0.1869)+(0.0349)]+300(6.4338)=$34,719.74
PCA=$201,560.6+$34,719.74=236,280.35
PC of plan B:
PCB= PCconveyer=
175,000+2,500(P/A,0.15,24) -10000(P/F,15%,24)=
=175,000+2,500(6.4338) -10000(0.0349)=$190,735.5
Since the PC of plan B is less than of plan A, the conveyer should
be constructed.

19