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    Eng Econ Cash Flow L4 - MME 4272

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    Amir Firdaus
    This document discusses various compound interest factors used in engineering economy analysis. It begins by outlining single payment factors, including the compound amount factor (F/P) and present worth factor (P/F). It then discusses uniform series present worth factors (P/A) and capital recovery factors (A/P) for calculating present or future values of uniform cash flows. Finally, it covers sinking fund factors (A/F) and uniform compound amount factors (F/A) for determining uniform payments required to achieve a future value. The key factors and their equations are summarized in tables.

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    Eng Econ Cash Flow L4 - MME 4272

    Uploaded by

    Amir Firdaus
    87 views43 pages
    This document discusses various compound interest factors used in engineering economy analysis. It begins by outlining single payment factors, including the compound amount factor (F/P) and present worth factor (P/F). It then discusses uniform series present worth factors (P/A) and capital recovery factors (A/P) for calculating present or future values of uniform cash flows. Finally, it covers sinking fund factors (A/F) and uniform compound amount factors (F/A) for determining uniform payments required to achieve a future value. The key factors and their equations are summarized in tables.

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    Eng Econ Cash Flow L4 -MME 4272

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    Eng Econ Cash Flow L4 -MME 4272

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    This document discusses various compound interest factors used in engineering economy analysis. It begins by outlining single payment factors, including the compound amount factor (F/P) and present worth factor (P/F). It then discusses uniform series present worth factors (P/A) and capital recovery factors (A/P) for calculating present or future values of uniform cash flows. Finally, it covers sinking fund factors (A/F) and uniform compound amount factors (F/A) for determining uniform payments required to achieve a future value. The key factors and their equations are summarized in tables.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    87 views43 pages

    Eng Econ Cash Flow L4 - MME 4272

    Uploaded by

    Amir Firdaus
    This document discusses various compound interest factors used in engineering economy analysis. It begins by outlining single payment factors, including the compound amount factor (F/P) and present worth factor (P/F). It then discusses uniform series present worth factors (P/A) and capital recovery factors (A/P) for calculating present or future values of uniform cash flows. Finally, it covers sinking fund factors (A/F) and uniform compound amount factors (F/A) for determining uniform payments required to achieve a future value. The key factors and their equations are summarized in tables.

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    Engineering Economy Factors

    Outline
    Compound amount factor and
    Present worth factor for single
    payment
    Uniform series present worth and
    capital recovery factors
    Uniform series compound amount
    and sinking fund factors

    Engineering Economy Factors


    Single Payment Factor (F/P and
    P/F)
    is a fundamental factor,
    determines the amount of money, F
    accumulated after n years from a
    single present worth, P with
    compound interest.

    Single Payment Factor (F/P and


    P/F)
    Recall that compound interest
    refers to interest paid on top of
    interest.
    Thus, if an amount P is invested
    at time t = 0, the amount F1
    accumulated over 1 year at an
    interest rate i will be
    F1 = P + Pi = P(1 + i)

    Single Payment Factor (F/P and


    P/F)
    At the end of the second year, the
    amount accumulated F2 is the amount
    after year 1 plus the interest from
    the end of year 1 to the end of year 2
    on the entire F1.
    F2 = F1 + F1i
    = P(1+i) + P(1+i)i
    = P(1+i)2
    Similarly, the amount of money
    accumulated at the end of year 3,
    F3 = P(1+i)3

    Single Payment Factor (F/P and


    P/F)
    It is evident by mathematical induction
    that the formula can be generalized for
    n years to
    F = P( 1 + i )n
    The factor,(1+i)n is called the singlepayment compound amount factor (SPCAF).
    It is usually referred to as the F/P
    factor.
    This is the conversion factor, when
    multiplied by P, yields the future
    amount F of an initial amount (P) after
    n years at interest rate i.

    Single Payment Factor (F/P and


    P/F)
    Use the formula to evaluate the
    value of the factor for i=0.06 and
    n=12

    F = P( 1 + i )n
    Verify the validity of rule of 72

    Single Payment Factor (F/P and


    P/F)
    In a reverse situation, the value P can be
    determined for a stated future amount F
    that occurs after n periods in the future,
    by solving the following equation:

    P = F[1/(1+i)n]
    The factor [1/(1+i)n] is known as the single
    payment present worth factor (SPPWF), or
    the P/F factor.
    Relevant cash flow diagrams are shown in
    Figure 2-1.

    Single Payment Factor (F/P and


    P/F)
    P=Given
    i=given
    n
    0

    n-2

    n-1

    (a)

    F=?

    P=?
    i=given
    n
    0

    n-2

    (b)

    n-1

    F=Given

    Figure 2-1
    Cash flow diagram for single-payment factors: (a) find F and (b) find P

    Single Payment Factor (F/P and


    P/F)
    Note: The two factors derived
    here are for single payments.
    They are used to find the
    present or future amount when
    only one payment or receipt is
    involved.

    Single Payment Factor (F/P and


    P/F)
    Factor
    Notation

    Name

    Find
    /Given

    Standard
    Notation
    Equation

    Equation with Excel


    factor
    functions
    formula

    (F/P,i,n) Single- F/P


    payment
    compound
    amount

    F=
    F=P(1+i)n
    P(F/P,i,n)

    FV(i%,n,,P)

    (P/F,i,n) Singlepayment
    present
    worth

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

    PV(i%,n,,F)

    P/F

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)

    The equivalent present worth P


    of a uniform series A of end-ofperiod cash flows is shown:
    P=?
    i=given
    0

    n-2

    n-1

    A=Given

    Fig 2-5 (a)


    Cash flow diagram used to determine P of a uniform series

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)
    To reverse the situation, the present
    worth P is known and the equivalent
    uniform-series amount A is sought [Fig
    2-5 (b)]
    P=given
    i=given
    0

    n-2

    A= ?

    n-1

    Fig 2-5 (b)


    Cash flow diagram used to determine A for a present worth

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)

    An expression for the present


    worth [Fig 2-5 (a)] can be
    determined by following the
    steps mentioned below:
    Consider each A value as a future
    worth F,
    Calculate its worth with the P/F
    factor and
    Sum up the results.

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)
    The equation is

    1
    1
    1
    P A
    A
    A
    .....
    1
    2
    3
    (1 i )
    (1 i )
    (1 i )

    1
    1
    A
    A
    n 1
    n
    (
    1

    i
    )
    (
    1

    i
    )

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)
    The terms in brackets are the P/F factors
    for years 1 through n, respectively. By
    factoring out A, we can write

    1
    1
    1
    1
    1
    P A

    ......

    1
    2
    3
    n 1
    n
    (
    1

    i
    )
    (
    1

    i
    )
    (
    1

    i
    )
    (
    1

    i
    )
    (
    1

    i
    )

    To simplify the above equation and obtain


    the P/A factor, multiply the n-term
    geometric progression in brackets by the
    (P/F, i%,1) factor which is 1/(1+i).

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)
    This results in an equation as given
    below:

    P
    1
    1
    1
    1
    1
    A

    ......

    2
    1 i
    (1 i ) 3 (1 i ) 4
    (1 i ) n (1 i ) n 1
    (1 i )
    Subtracting the previous equation from this one i.e.

    P
    1
    1
    1
    1
    1
    A

    ......

    2
    1 i
    (1 i ) 3 (1 i ) 4
    (1 i ) n (1 i ) n 1
    (1 i )

    1
    1
    1
    1
    1

    ......

    1
    (1 i ) 2 (1 i ) 3
    (1 i ) n 1 (1 i ) n
    (1 i )

    P A

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)
    Results in

    i
    1
    1
    P A

    n 1
    1 i
    (1 i )1
    (1 i )

    Or

    Or

    A
    1
    P
    1

    n
    i (1 i )

    (1 i ) n 1
    P A

    n
    i
    (
    1

    i
    )

    For, i 0

    Uniform-series Present Worth Factor and


    Capital Recovery Factor (P/A and A/P)
    (1 i ) n 1
    The term,

    n
    i
    (
    1

    i
    )

    is the conversion factor referred to as the


    uniform-series present worth factor (USPWF).
    It is the P/A factor used to calculate the
    equivalent P value in year 0 for a uniform
    end-of-period series of A values beginning
    at the end of period 1 and extending for n
    periods. Cash flow diagram is in Fig 2-5(a)

    Uniform-series Present Worth Factor


    and Capital Recovery Factor (P/A and
    A/P)
    In a reverse situation, the present worth P
    is known and the equivalent uniform-series
    amount A is sought (Fig 2-5 (b).
    The first A value occurs at the end of period
    1, that is, one period after P occurs. Solve
    previous equation for A to obtain:

    i (1 i ) n
    A P

    n
    (
    1

    i
    )

    The term in brackets is called the capital recovery factor


    (CRF), or A/P factor. It calculates the uniform annual
    worth A over n years for a given P in year 0, when the
    interest rate is i.

    Table 2-2: P/A and A/P Factors:


    Notations and Equations
    Find/
    Given

    Standard
    Notation
    Equation

    (P/A,i,n) Uniformseries
    present
    worth

    P/A

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

    (A/P,i,n) Capital
    recovery

    A/P

    Factor
    Notation

    Name

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

    Equation
    with factor
    formula

    (1 i ) n 1

    n
    i
    (
    1

    i
    )

    i (1 i ) n

    n
    (
    1

    i
    )

    Excel
    Function

    PV(i%,n,A)

    PMT(i%,n,P)

    Example 2.4
    How much money should you be willing to pay
    now for a guaranteed $600 per year for 9
    years starting next year, at a rate of
    return of 16% per year?
    SOLUTION
    The cash flow diagram is
    A=$600

    4
    i=16%

    P=?

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)
    The simplest way to derive the A/F factor
    is to substitute into factors already
    developed.
    We already know
    P = F[1/(1+i)n]

    and

    i (1 i ) n
    A P

    n
    (1 i ) 1
    Now if P from the first equation is
    substituted in the second equation, we get
    the equation as follows: (next slide)

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)
    1 i (1 i ) n
    A F

    n
    n
    (1 i ) (1 i ) 1

    After simplification, the following equation is developed

    i
    A F

    n
    (1 i ) 1
    The expression in brackets in the above equation is
    the A/F or sinking fund factor. It determines the
    uniform annual series that is equivalent to a
    given future worth F.

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    The cash flow diagram can be


    shown as (ex. Investing in Pension Scheme)
    F = Given
    i = given
    0

    n-2

    n-1

    A=?

    The uniform-series A begins at the end of


    period 1 and continues through the period of
    the given F.

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)
    Refer to the following equation (already developed)

    i
    A F

    n
    (
    1

    i
    )

    This equation can be rewritten as

    (1 i ) n 1
    F A

    The term in brackets is called uniform-series


    compound amount factor (USCAF) or F/A factor.

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    The cash flow diagram can be


    shown as
    F = Given
    i = given
    0

    n-2

    n-1

    A=?

    When F/A factor is multiplied by A, it yields


    the future worth of the uniform series, F.

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    Remember that the future amount


    F occurs in the same period as
    the last A.
    Table 2-3 summarizes the
    notations and equations.

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    Table 2-3: F/A and A/F Factors:


    Notations and Equations
    Factor
    Notation

    (F/A,i,n)

    Name

    Uniformseries
    compound
    amount

    Find/
    Given

    F/A

    Standard
    Notation
    Equation

    Equation with
    Excel
    factor formula Function

    F=A(F/A,i,n)

    (1 i ) n 1

    (A/F,i,n)

    Sinking
    fund

    A/F

    A=F(A/F,i,n)

    i
    i (1 i ) n 1

    FV(i%,n,,A)

    PMT(i%,n,F)

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    Example 2.5
    Formasa Plastics has major fabrication
    plants in Texas and Hong Kong. The
    president wants to know the equivalent
    future worth of $1 million capital
    investment cash for 8 years, starting 1
    year from now. Formasa capital earns at
    a rate of 14% per year.

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    Example 2.5 (continued)


    Solution: The cash flow diagram shows the
    annual payments starting at the end of
    year 1 and ending in the year the future
    worth is desired.
    F=?
    i = 14%
    0

    A = $1,000,000

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    Example 2.5 (continued)


    Solution: The F value in 8 years is

    F=?

    i = 14%
    0

    A = $1,000,000

    F = $1,000,000 (F/A,14%,8) = $1,000,000 (13.23281)


    = $13,232,810

    Sinking fund factor and Uniform-series


    compound amount factor (A/F and F/A)

    Example 2.6
    How much money must Carol deposit every year
    starting 1 year from now at 5% per year in order
    to accumulate $6000 seven years from now?

    Solution: The cash flow diagram


    F = $6000
    i = 5%
    0

    A=?

    Sinking fund factor and Uniformseries compound amount factor (A/F


    and F/A)
    A = $6000(A/F,5%,7) = $6000(0.12096)
    = $725.76 per year.
    The A/F factor value of 0.12096 was
    computed using the factor formula

    i
    A F

    n
    (
    1

    i
    )

    Example of interest Table (Partial)


    Discrete cash flows: Compound interest factors 7%)

    Single Payment

    Uniform series Payments

    Arithmetic Gradients

    Compound
    Amount

    F/P

    Present
    worth
    P/F

    Sinking
    fund
    A/F

    Compound
    Amount
    F/A

    Capital
    Recovery
    A/P

    Present
    worth
    P/A

    Gradient
    Pres.
    worth
    P/G

    Gradient
    uni. series
    A/G

    1.8385

    0.5439

    0.08349

    11.9780

    0.15349

    6.5152

    23.1404

    3.5517

    10

    1.9672

    0.5083

    0.07238

    13.8164

    0.14238

    7.0236

    27.7156

    3.9461

    11

    2.1049

    0.4751

    0.06338

    15.7836

    0.13336

    7.4987

    32.4665

    4.3296

    Interpolation in interest tables


    When it is necessary to locate a factor
    value for an i or n in the interest
    tables, the desired value can be
    obtained in one of the two ways:
    (1) by using the formulas derived or
    (2) by linearly interpolating between
    the tabulated values.
    However, the value obtained through linear
    interpolation is not exactly correct,
    since the equations are nonlinear.

    Interpolation in interest tables


    Nonetheless, interpolation is sufficient in most
    cases as long as the values of i and n are not
    too distant from one another.
    In linear interpretation it is necessary to set
    up the known (values 1 and 2) and unknown factors
    as shown in Table 2-4:
    Table 2-4: Linear Interpretation setup

    tabulated

    value 1

    desired
    tabulated

    unlisted
    value 2

    Interpolation in interest tables


    A ratio equation is then set up and solved for
    the value of unknown quantity, C

    a
    c

    b
    d

    Or

    a
    c
    d
    b

    Where a, b, c, and d represent the differences


    between the numbers shown in the interest
    tables.

    Example 2.7
    Determine the value of the A/P factor for an interest rate of 7.3%
    and n of 10 years, that is (A/P,7.3%,10)
    Solution
    The values of the A/P factor for interest rate of 7 and 8% and n=10
    are listed in interest tables (Tables 12 and 13)
    7%

    0.14238

    a
    b

    c
    7.3%

    8%

    x
    0.14903

    Example 2.7
    The unknown X is the desired factor value.
    For the ratio equation

    a
    7.3 7
    c d
    0.14903 0.14238
    b
    87
    = 0.00199
    Since the factor is increasing in value as the interest
    rate increases from 7 to 8%, the value of c must be
    added to the value of the 7% factor. Thus
    X = 0.14238+0.00199 = 0.14437.
    Compare this with the exact factor value (0.144358)

    Example 2.8
    Find the value of the

    (P/F,7.3%,10)

    factor.
    From the interest table, the values of
    the P/F factor for 45 and 50 years are
    found.
    45

    0.1712

    a
    b

    c
    48

    50

    x
    0.1407

    Example 2.8
    From the equation,

    a
    48 45
    c d
    0.1712 0.1407 0.0183
    b
    50 45
    Since the value of the factor decreases as n increases, c is
    Subtracted from the factor value for n = 45
    X= 0.1712 0.0183 = 0.1529
    Comment: Though it is possible to perform two-way linear
    Interpolation, it is much easier and more accurate to use the
    Factor formula or a spreadsheet function.

    Table 12 (Partial): Discrete cash


    flows: Compound interest factors 7%)
    Single Payment

    Uniform series Payments

    Arithmetic Gradients

    Compound
    Amount F/P

    Present
    worth
    P/F

    Sinking
    fund
    A/F

    Compound
    Amount
    F/A

    Capital
    Recovery
    A/P

    Present
    worth
    P/A

    Gradient
    Pres. worth
    P/G

    Gradient
    uni. series
    A/G

    1.8385

    0.5439

    0.08349

    11.9780

    0.15349

    6.5152

    23.1404

    3.5517

    10

    1.9672

    0.5083

    0.07238

    13.8164

    0.14238

    7.0236

    27.7156

    3.9461

    11

    2.1049

    0.4751

    0.06338

    15.7836

    0.13336

    7.4987

    32.4665

    4.3296

    Table 13 (Partial): Discrete cash


    flows: Compound interest factors (8%)
    Single Payment

    Uniform series Payments

    Arithmetic Gradients

    Compound
    Amount F/P

    Present
    worth
    P/F

    Sinking
    fund
    A/F

    Compound
    Amount
    F/A

    Capital
    Recovery
    A/P

    Present
    worth
    P/A

    Gradient
    Pres. worth
    P/G

    Gradient
    uni. series
    A/G

    1.990

    0.5002

    0.08008

    12.4876

    0.16008

    6.2469

    21.8081

    3.4910

    10

    2.1589

    0.4632

    0.06903

    14.4866

    0.14903

    6.7101

    25.9768

    3.8713

    11

    2.3316

    0.4289

    0.06008

    16.6455

    0.14008

    7.1390

    30.2657

    4.2395

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