Chapter 2

Chapter 2
Factors: How Time

and Interest Affect
Money
Lecture slides to accompany
Engineering Economy
7th edition
Leland Blank
Anthony Tarquin
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

2-1
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
5. Arithmetic Gradient
6. Geometric Gradient
7. Find i or n
2-2
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

2-3
F/P and P/F for Spreadsheets
Future value F is calculated using FV function:
= FV(i%,n,,P)
Present value P is calculated using PV function:

= PV(i%,n,,F)
Note the use of double commas in each function
2-4
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)
2-5
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)
2-6
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:
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
2-7
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:

P = 5000(P/A,10%,5)
= 5000(3.7908)
= $18,954
Answer is (D)
2-8
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) Last cash flow occurs in same period as F
Cash flow diagrams are:
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
2-9
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 to 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
2-10
Examples
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?
How much can Haydon Rheosystems, Inc., afford
to spend now on an energy management system if
the software will save the company $21,300 per
year for the next 5 years? Use an interest rate of
10% per year.
1-11
Examples
A family that won a $100,000 prize on America’s

Funniest Home Videos decided to put one-half of
the money in a college fund for their child who was
responsible for the prize. If the fund earned
interest at 6% per year, how much was in the
account 14 years after it was started?

1-12
Examples
A company that sells high-purity laboratory

chemicals is considering investing in new
equipment that will reduce cardboard costs by
better matching the size of the products to be
shipped to the size of the shipping container. If the
new equipment will cost $220,000 to purchase
and install, how much must the company save
each year for 3 years in order to justify the
investment, if the interest rate is 10% per year?
1-13

Chapter 2 - Factors, Effect of Time & Interest On Money

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Factors: How Time

Lecture slides to accompany

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

1. F/P and P/F Factors

Formulas are as follows:

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

Present value P is calculated using PV function:

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

The cash flow diagram is:

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

The cash flow diagram is: Solution:

The cash flow diagrams are:

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

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

The cash flow diagram is as follows: Solution:

Cash flow diagrams are:

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

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

The cash flow diagram is:

How much money should you be willing to pay

A family that won a $100,000 prize on America’s

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

A company that sells high-purity laboratory

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