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Chapter 2 How Time and Interest Affect Money

This document provides an overview of engineering economy factors related to time value of money calculations. It discusses single payment compound amount factors and present worth factors, uniform series factors, arithmetic and geometric gradient factors, and how to apply uniform series and gradient factors to cash flows that are shifted in time. The objectives are to use these engineering economy factors to account for the time value of money in analyses of projects with cash flows occurring at different points in time.

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75 views

Chapter 2 How Time and Interest Affect Money

This document provides an overview of engineering economy factors related to time value of money calculations. It discusses single payment compound amount factors and present worth factors, uniform series factors, arithmetic and geometric gradient factors, and how to apply uniform series and gradient factors to cash flows that are shifted in time. The objectives are to use these engineering economy factors to account for the time value of money in analyses of projects with cash flows occurring at different points in time.

Uploaded by

FlorDelaRama
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Engineering

Economy
Chapter 2
Factors: How Time and
Interest Affect Money
Objectives
Purpose:
Use engineering economy factors to account for the time value of money
1. Use the compound amount factor and
present worth factor for single payments.
2. Use the uniform series factors.
3. Use the arithmetic gradient factors and the
geometric gradient formula
4. Use uniform series and gradient factors when
cash flows are shifted.
Use the compound amount factor and
present worth
factor for single payments
Single-payment compound amount factor
(SPCAF)
Use the uniform series factors
Uniform Series Formulas (P/A, A/P, A/F, F/A)
Use the arithmetic gradient factors and
the geometric gradient formula
Sometimes the cash flows that occur in consecutive interest periods
are not the same amount (not an A value), but they do change in a
predictable way. These cash flows are known as gradients, and there
are two general types:
arithmetic and geometric.
An arithmetic gradient is one wherein the cash flow changes (increases
or decreases) by the same amount in each period.
Gradient Formula
The equation that represents the present worth of an arithmetic
gradient series is:
Base Amount

Gradient Amount

The general equation to find the present worth of an arithmetic gradient


cash flow series is:
If the gradient cash flow decreases from one period to the next, the
only change in the general equation is that the plus sign becomes a
minus sign. Since the gradient G begins between years 1 and 2, this is
called a conventional gradient.
Use uniform series and gradient factors
when cash flows are shifted
Calculations for Cash Flows that are Shifted
When a uniform series begins at a time other than at the end of period
1, it is called a shifted series
• Use the PF factor to find the present worth of each disbursement at year 0
and add them.
• Use the FP factor to find the future worth of each disbursement in year 13,
add them, and then find the present worth of the total using P F(PF,i,13).
• Use the FA factor to find the future amount F A(FA,i,10), and then compute
the present worth using P F(PF,i,13).
• Use the PA factor to compute the “present worth” (which will be located in
year 3 not year 0), and then find the present worth in year 0 by using the
(PF,i,3) factor. (Present worth is enclosed in quotation marks here only to
represent the present worth as determined by the PA factor in year 3, and
to differentiate it from the present worth in year 0.)
1. Draw a diagram of the positive and negative cash flows.
2. Locate the present worth or future worth of each series on the cash
flow diagram.
3. Determine n for each series by renumbering the cash flow diagram.
4. Set up and solve the equations.

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