Chapter3 Combining Factors

Chapter 3
Combining Factors
and Spreadsheet
Functions
Lecture slides to accompany
Engineering Economy
7th edition
Leland Blank
Anthony Tarquin
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved

3-1
LEARNING OUTCOMES
1. Shifted uniform series

2. Shifted series and single
cash flows

3-2
Shifted Uniform Series
A shifted uniform series starts at a time other than period 1
The cash flow diagram below is an example of a shifted series
Series starts in period 2, not period 1
FA = ? Shifted series
usually
require the use of
multiple factors
Remember: When using P/A or A/P factor, PA is always one year ahead
of first A
When using F/A or A/F factor, FA is in same year as last A
3-3
Example Using P/A Factor: Shifted Uniform Series
The present worth of the cash flow shown below at i = 10% is:
(a) $25,304 (b) $29,562 (c) $34,462 (d) $37,908
P0 = ?
P1 = ? i = 10%
0 1 2 3 4 5 6
Actual year
0 1 2 3 4 5 Series year
A = $10,000
Solution: (1) Use P/A factor with n = 5 (for 5 arrows) to get P1 in year 1
(2) Use P/F factor with n = 1 to move P1 back for P0 in year 0
P0 = P1(P/F,10%,1) = A(P/A,10%,5)(P/F,10%,1) = 10,000(3.7908)(0.9091) = $34,462

Answer is (c) 3-4 © 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
Example Using F/A Factor: Shifted Uniform Series
How much money would be available in year 10 if $8000 is deposited each year in
years 3 through 10 at an interest rate of 10% per year?
Cash flow diagram is:

FA = ?
i = 10%
Actual year
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8 Series year
A = $8000
Solution: Re-number diagram to determine n = 8 (number of arrows)
FA = 8000(F/A,10%,8)
= 8000(11.4359)
= $91,487

3-5
Shifted Series and Random Single Amounts
For cash flows that include uniform series and randomly placed single amounts:
Uniform series procedures are applied to the series amounts
Single amount formulas are applied to the one-time cash flows
The resulting values are then combined per the problem statement
The following slides illustrate the procedure

3-6
Example: Series and Random Single Amounts
Find the present worth in year 0 for the cash flows
shown using an interest rate of 10% per year.
PT = ?
i = 10%
0 1 2 3 4 5 6 7 8 9
10
A = $5000
$2000
PT = ?
i = 10%
Actual year
0 1 2 3 4 5 6 7 8 9
10 0 1 2 3 4 5 6 7 8
Series year
A = $5000
$2000
Solution:
First, re-number cash flow diagram to get n for uniform series: n = 8

3-7
Example: Series and Random Single Amounts
PA
PT = ? i = 10%
0 1 2 3 4 5 6 7 8 9 Actual year
10
0 1 2 3 4 5 6 7 8
Series year
A = $5000 $2000
Use P/A to get PA in year 2: PA = 5000(P/A,10%,8) = 5000(5.3349) = $26,675
Move PA back to year 0 using P/F: P0 = 26,675(P/F,10%,2) = 26,675(0.8264) = $22,044

Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933
Now, add P0 and P2000 to get PT: PT = 22,044 + 933 = $22,977

1-8
Example Worked a Different Way
(Using F/A instead of P/A for uniform series)
The same re-numbered diagram from the previous slide is used
PT = ? FA = ?
i = 10%
0 1 2 3 4 5 6 7 8 9
10
0 1 2 3 4 5 6 7 8
A = $5000
$2000
Solution: Use F/A to get FA in actual year 10: FA = 5000(F/A,10%,8) = 5000(11.4359) = $57,180
Move FA back to year 0 using P/F: P0 = 57,180(P/F,10%,10) = 57,180(0.3855) = $22,043
Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933
Now, add two P values to get PT: PT = 22,043 + 933 = $22,976 Same as before
As shown, there are usually multiple ways to work equivalency problems

3-9
Example: Series and Random Amounts
Convert the cash flows shown below (black arrows) into
an equivalent annual worth A in years 1 through 8 (red arrows)
at i = 10% per year.
A=?
0 1 2 3 4 5 6 7 8 i = 10%
0 1 2 3 4 5
A = $3000
$1000
Approaches: 1. Convert all cash flows into P in year 0 and use A/P with n = 8
2. Find F in year 8 and use A/F with n = 8
Solution: Solve for F: F = 3000(F/A,10%,5) + 1000(F/P,10%,1)
= 3000(6.1051) + 1000(1.1000)
= $19,415
Find A: A = 19,415(A/F,10%,8)
= 19,415(0.08744)
= $1698
3-10
Summary of Important Points
P for shifted uniform series is one period ahead of first A;

n is equal to number of A values
F for shifted uniform series is in same period as last A;

n is equal to number of A values

3-11

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Chapter 3

Lecture slides to accompany

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

1. Shifted uniform series

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

P0 = P1(P/F,10%,1) = A(P/A,10%,5)(P/F,10%,1) = 10,000(3.7908)(0.9091) = $34,462

Cash flow diagram is:

Solution: Re-number diagram to determine n = 8 (number of arrows)

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

Uniform series procedures are applied to the series amounts

Single amount formulas are applied to the one-time cash flows

The following slides illustrate the procedure

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

First, re-number cash flow diagram to get n for uniform series: n = 8

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

Use P/A to get PA in year 2: PA = 5000(P/A,10%,8) = 5000(5.3349) = $26,675

Move PA back to year 0 using P/F: P0 = 26,675(P/F,10%,2) = 26,675(0.8264) = $22,044

Now, add P0 and P2000 to get PT: PT = 22,044 + 933 = $22,977

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

The same re-numbered diagram from the previous slide is used

As shown, there are usually multiple ways to work equivalency problems

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

P for shifted uniform series is one period ahead of first A;

F for shifted uniform series is in same period as last A;

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

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