CHAPTER 4

How Time and Interest

Affect Money
EXAMPLE 4.1
An engineer received a bonus of $12,000 that he will invest now. He wants to
calculate the equivalent value after 24 years, when he plans to use all the result-
ing money as the down payment on an island vacation home. Assume a rate of
return of 8% per year for each of the 24 years. Find the amount he can pay
down, using the tabulated factor, the factor formula, and a spreadsheet function.
Solution
The symbols and their values are
P  $12,000 F? i  8% per year n  24 years
The cash flow diagram is the same as that in Figure 4.1a.
Tabulated: Determine F, using the F兾P factor for 8% and 24 years. Table 13
provides the factor value.
F  P(F兾P,i,n)  12,000(F兾P,8%,24)
 12,000(6.3412)
 $76,094.40
Formula: Apply Equation [4.1] to calculate the future worth F.
F  P(1  i)n  12,000(1  0.08)24
 12,000(6.341181)
 $76,094.17
Spreadsheet: Use the function  FV(i%,n,A,P). The cell entry is  FV(8%,
24,,12000). The F value displayed is ($76,094.17) in red or $76,094.17 in
black to indicate a cash outflow.
The slight difference in answers is due to round-off error. An equivalence
interpretation of this result is that $12,000 today is worth $76,094 after 24 years
of growth at 8% per year compounded annually.

EXAMPLE 4.2
Hewlett-Packard has completed a study indicating that $50,000 in reduced main-
tenance this year (i.e., year zero) on one processing line resulted from improved
wireless monitoring technology.
a. If Hewlett-Packard considers these types of savings worth 20% per year,
find the equivalent value of this result after 5 years.
b. If the $50,000 maintenance savings occurs now, find its equivalent value
3 years earlier with interest at 20% per year.
Solution
a. The cash flow diagram appears as in Figure 4.1a. The symbols and their
values are
P  $50,000 F? i  20% per year n  5 years
FIGURE 4.2 Use of single-cell spreadsheet functions to find F and P values, Example 2.2.

Use the F兾P factor to determine F after 5 years.

F  P(F兾P,i,n)  $50,000(F兾P,20%,5)
 50,000(2.4883)
 $124,415.00

The function  FV120%,5,,500002 also provides the answer. See Figure 4.2.
b. The cash flow diagram appears as in Figure 4.1b with F placed at time
t  0 and the P value placed 3 years earlier at t  3. The symbols and
their values are

P? F  $50,000 i  20% per year n  3 years

Use the P兾F factor to determine P three years earlier.

P  F(PF,i,n)  $50,000 (PF,20%,3)

 50,000(0.5787)  $28,935.00

Use the PV function and omit the A value. Figure 4.2 shows the result of
entering  PV 120%,3,,500002 to be the same as using the P兾F factor.

EXAMPLE 4.3
Jamie has become more conscientious about paying off his credit card bill
promptly to reduce the amount of interest paid. He was surprised to learn that
he paid $400 in interest in 2007 and the amounts shown in Figure 4.3 over the
previous several years. If he made his payments to avoid interest charges, he
would have these funds plus earned interest available in the future. What is the
equivalent amount 5 years from now that Jamie could have available had he not
paid the interest penalties? Let i  5% per year.
 Year 2002 2003 2004 2005 2006 2007
Interest paid, $ 600 0 300 0 0 400

FIGURE 4.3 Credit card interest paid over the last 6 years, Example 4.3.

F= ?

i = 5%

–5 –4 –3 –2 –1 0 1 2 3 4 5

$300
$400
$600

FIGURE 4.4 Cash flow diagram, Example 4.3.

Solution
Draw the cash flow diagram for the values $600, $300, and $400 from Jamie’s
perspective (Figure 4.4). Use F/P factors to find F in the year labeled 5, which
is 10 years after the first cash flow.

F  600(FP,5%,10)  300(FP,5%,8)  400(FP,5%,5)

 600(1.6289)  30011.4775)  400(1.2763)
 $1931.11
The problem could also be solved by finding the present worth in year 5
of the $300 and $400 costs using the P兾F factors and then finding the future
worth of the total in 10 years.

P  600  300(PF,5%,2)  400(PF,5%,5)

 600  300(0.9070)  400(0.7835)
 $1185.50
F  1185.50(FP,5%,10)  1185.50(1.6289)
 $1931.06

Comment: It should be obvious that there are a number of ways the problem
could be worked, since any year could be used to find the equivalent total of
the costs before finding the future value in year 5. As an exercise, work the
problem using year 0 for the equivalent total and then determine the final
amount in year 5. All answers should be the same except for round-off error.
bLa01293_ch02_027-058 9/4/07 9:47 PM Page 35

P and A values in lieu of applying the P/A and A/P factors. The PV function cal-
culates the P value for a given A over n years, and a separate F value in year n,
if present. The format is
ⴝ PV(i%, n, A, F)
Similarly, the A value is determined using the PMT function for a given P value
in year 0 and a separate F, if present. The format is
ⴝ PMT (i% n P F)

EXAMPLE 4.4
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 (Figure 2.6) fits the P兾A factor. The present worth is:
P ⫽ 600(P兾A,16%,9) ⫽ 600(4.6065) ⫽ $2763.90
The PV function ⫽ PV(16%,9,600) entered into a single spreadsheet cell will
display the answer P ⫽ $2763.93.

A = $600 FIGURE 4.6

Diagram to find
P using the P兾A
factor,
1 2 3 4 5 6 7 8 9 Example 2.4.
0
i = 16%

P=?

The uniform series formulas that relate A and F follow. See Figure 4.7 for
cash flow diagrams.

A ⫽ Fc d
i
(1 ⫹ i) n ⫺ 1
(1 ⫹ i) n ⫺ 1
F ⫽ Ac d
i
It is important to remember that these equations are derived such that the last A
value occurs in the same time period as the future worth F, and n is always equal
to the number of A values.
Standard notation follows the same form as that of other factors. They are
(F兾A,i,n) and (A兾F,i,n). Table 4.3 summarizes the notations and equations.
If P is not present for the PMT function, the comma must be entered to indi-
cate that the last entry is an F value.
bLa01293_ch02_027-058 9/8/07 12:00 AM Page 36

F = given F=?
i = given i = given

0 1 2 n–2 n–1 n 0 1 2 n–2 n–1 n

A=? A = given
(a) (b)
FIGURE4.7 Cash flow diagrams to (a) find A, given F, and (b) find F, given A.

TABLE 4.3 F兾A and A兾F Factors: Notation, Equation and Spreadsheet Function
Factor Factor Standard Excel
Notation Name Find/Given Formula Notation Equation Function

(1 ⫹ i) n ⫺ 1
(F/A,i,n) Uniform-series F兾A F ⫽ A(F/A,i,n) ⫽ FV(i%, n, A, P)
i
compound amount
i
(A/F,i,n) Sinking fund A兾F A ⫽ F(A/F,i,n) ⫽ PMT(i%, n, P, F )
(1 ⫹ i) n ⫺ 1

EXAMPLE 4.5
Formasa Plastics has major fabrication plants in Texas and Hong Kong. The
president wants to know the equivalent future worth of $1 million capital invest-
ments each year for 8 years, starting 1 year from now. Formasa capital earns at
a rate of 14% per year.
Solution
The cash flow diagram (Figure 2.8) shows the annual payments starting at the
end of year 1 and ending in the year the future worth is desired. Cash flows are
indicated in $1000 units. The F value in 8 years is
F ⫽ 10001FⲐA,14%,82 ⫽ 1000113.23282 ⫽ $13,232.80
The actual future worth is $13,232,800.
F=?
i = 14%

0 1 2 3 4 5 6 7 8

A = $1000
FIGURE 4.8 Diagram to find F for a uniform series, Example 4.5.
bLa01293_ch02_027-058 9/4/07 9:47 PM Page 40

This equation accounts for all of the cash flow, including the amount in
period 1. For a decreasing geometric gradient, change the sign prior to both g
values. When g ⫽ i, the P value is
P ⫽ A1[n/(1 ⫹ i)] [4.8]
Geometric gradient factors are not tabulated; the equations are used. Spreadsheets
are also an option.
EXAMPLE 4.9
A mechanical contractor has four employees whose combined salaries through
the end of this year are $250,000. If he expects to give an average raise of
5% each year, calculate the present worth of the employees’ salaries over the
next 5 years. Let i ⫽ 12% per year.
Solution
The cash flow at the end of year 1 is $250,000, increasing by g ⫽ 5% per year
(Figure 2.11). The present worth is found using Equation [4.7].
1.05 5
1⫺a b
1.12
P ⫽ 250,000 C S
0.12 ⫺ 0.05
⫽ 250,000(3.94005)
⫽ $985,013
250,000 (1.05)5
= $319,070

$250,000

0 1 2 3 4 5

i = 12%
g = 5%

P=?
FIGURE 4.11 Cash flow with g ⫽ 5%, Example 2.9

In summary, some basics for gradients are:

ɀ Arithmetic gradients consist of two parts: a uniform series that has an A value
equal to the amount of money in period 1, and a gradient that has a value equal
to the change in cash flow between periods 1 and 2.
ɀ For arithmetic gradients, the gradient factor is preceded by a plus sign for in-
creasing gradients and a minus sign for decreasing gradients.
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 41

ɀ Arithmetic and geometric cash flows start between periods 1 and 2, with the A
value in each equation equal to the magnitude of the cash flow in period 1.
ɀ Geometric gradients are handled with Equation [4.7] or [4.8], which yield the
present worth of all the cash flows.

4.4 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. In this case several methods can be used to find the equivalent pres-
ent worth P. For example, P of the uniform series shown in Figure 4.12 could be
determined by any of the following methods:
ɀ Use the P兾F factor to find the present worth of each disbursement at year 0 and
add them.
ɀ Use the F兾P 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(P兾F,i,13).
ɀ Use the F兾A factor to find the future amount F  A(F兾A,i,10), and then compute
the present worth using P  F(P兾F,i,13).
ɀ Use the P兾A 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 (P兾F,i,3) fac-
tor. (Present worth is enclosed in quotation marks here only to represent the
present worth as determined by the P兾A factor in year 3, and to differentiate it
from the present worth in year 0.)
Typically the last method is used. For Figure 4.12, the “present worth” obtained
using the P兾A factor is located in year 3. This is shown as P3 in Figure 4.13.
Remember, the present worth is always located one period prior to the
first uniform-series amount when using the P兾A factor.

P =? FIGURE 4.12
A uniform series that
is shifted.

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Year

A = $50
FIGURE 4.13
Location of present
P3 = ? worth for the shifted
uniform series in
Figure 2.12.
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Year

A = $50
FIGURE 4.14
Placement of F and
renumbering for n for
the shifted uniform F=?
series of Figure 2.12.

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Year

1 2 3 4 5 6 7 8 9 10 n

A = $50

To determine a future worth or F value, recall that the F兾A factor has the F
located in the same period as the last uniform-series amount. Figure 4.14 shows
the location of the future worth when F兾A is used for Figure 4.12 cash flows.
Remember, the future worth is always located in the same period as the
last uniform-series amount when using the F兾A factor.
It is also important to remember that the number of periods n in the P兾A or
F兾A factor is equal to the number of uniform-series values. It may be helpful to
renumber the cash flow diagram to avoid errors in counting. Figure 2.14 shows
Figure 4.12 renumbered to determine n  10.
As stated above, there are several methods that can be used to solve problems
containing a uniform series that is shifted. However, it is generally more convenient
to use the uniform-series factors than the single-amount factors. There are specific
steps that should be followed in order to avoid errors:
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.

EXAMPLE 4.10
An engineering technology group just purchased new CAD software for $5000
now and annual payments of $500 per year for 6 years starting 3 years from
now for annual upgrades. What is the present worth of the payments if the inter-
est rate is 8% per year?
Solution
The cash flow diagram is shown in Figure 4.15. The symbol PA is used through-
out this chapter to represent the present worth of a uniform annual series A, and
P¿A represents the present worth at a time other than period 0. Similarly, PT rep-
resents the total present worth at time 0. The correct placement of P¿A and the
diagram renumbering to obtain n are also indicated. Note that P¿A is located in
actual year 2, not year 3. Also, n  6, not 8, for the PA factor. First find the
value of P¿A of the shifted series.
A  $500(P A,8%,6)
P¿
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 43

PT = ? i = 8% per year

PA = ?
PA = ?
1 2 3 4 5 6 7 8 Year

0 1 2 3 4 5 6 n

A = $500
P0 = $5000
FIGURE 4.15

Cash flow diagram with placement of P values, Example 2.10.

Since P¿A is located in year 2, now find PA in year 0.
PA  P¿A (PF,8%,2)
The total present worth is determined by adding PA and the initial payment P0
in year 0.
PT  P0  PA
 5000  500(PA,8%,6) (PF,8%,2)
 5000  500(4.6229) (0.8573)
 $6981.60

To determine the present worth for a cash flow that includes both uniform series
and single amounts at specific times, use the P兾F factor for the single amounts and
the P兾A factor for the series. To calculate A for the cash flows, first convert every-
thing to a P value in year 0, or an F value in the last year. Then obtain the A value
using the A兾P or A兾F factor, where n is the total number of years over which the
A is desired.
Many of the considerations that apply to shifted uniform series apply to gradient
series as well. Recall that a conventional gradient series starts between periods 1
and 2 of the cash flow sequence. A gradient starting at any other time is called a
shifted gradient. The n value in the P兾G and A兾G factors for the shifted gradient
is determined by renumbering the time scale. The period in which the gradient first
appears is labeled period 2. The n value for the factor is determined by the renum-
bered period where the last gradient increase occurs. The P兾G factor values and
placement of the gradient series present worth PG for the shifted arithmetic gradi-
ents in Figure 4.16 are indicated.
It is important to note that the A兾G factor cannot be used to find an equiva-
lent A value in periods 1 through n for cash flows involving a shifted gradient.
Consider the cash flow diagram of Figure 4.16b. To find the equivalent annual
series in years 1 through 10 for the gradient series only, first find the present worth
of the gradient in year 5, take this present worth back to year 0, and then annual-
ize the present worth for 10 years with the A兾P factor. If you apply the annual
bLa01293_ch02_027-058 9/4/07 7:15 PM Page 44

PG = ?

0 1 2 3 4 5 6 7 8 9 Year

0 1 2 3 4 5 6 7 Gradient n
$30 $30 $30
$40
$50 $60
G = $10 $70 $80 $90
n=7
(P/G, 6%, 7) = 15.4497 for PG in year 2 FIGURE 4.16
(a) Determination of G
PG = ? and n values used in
factors for shifted
gradients.
0 1 2 3 4 5 6 7 8 9 10 Year

0 1 2 3 4 5 Gradient n
$10 $10 $10 $10 $10

$50
$65
G = $15 $80
n=5 $95
(P/G, 6%, 5) = 7.9345 for PG in year 5
$110
(b)

series gradient factor (A兾G,i,5) directly, the gradient is converted into an equiva-
lent annual series over years 6 through 10 only.
Remember, to find the equivalent A series of a shifted gradient through
all the periods, first find the present worth of the gradient at actual
time 0, then apply the (A兾P,i,n) factor.
If the cash flow series involves a geometric gradient and the gradient starts at
a time other than between periods 1 and 2, it is a shifted gradient. The Pg is located
in a manner similar to that for PG above, and Equation [4.7] is the factor formula.

EXAMPLE 4.11
Chemical engineers at a Coleman Industries plant in the Midwest have deter-
mined that a small amount of a newly available chemical additive will increase
the water repellency of Coleman’s tent fabric by 20%. The plant superintend-
ent has arranged to purchase the additive through a 5-year contract at $7000 per
year, starting 1 year from now. He expects the annual price to increase by 12%
per year starting in the sixth year and thereafter through year 13. Additionally,
an initial investment of $35,000 was made now to prepare a site suitable for the
contractor to deliver the additive. Use i ⫽ 15% per year to determine the equiv-
alent total present worth for all these cash flows.
 PT = ? Pg = ? i = 15% per year

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Year

0 1 2 3 4 5 6 7 8 9 Geometric
gradient n
$7000
$7840

$35,000

$17,331
12% increase
per year

FIGURE 4.17 Cash flow diagram including a geometric gradient with

g  12%, Example 2.11.

Solution
Figure 4.17 presents the cash flows. The total present worth PT is found using
g  0.12 and i  0.15. Equation [4.7] is used to determine the present worth
Pg for the entire geometric series at actual year 4, which is moved to year 0
using (P兾F,15%,4).
PT  35,000  A(PA,15%,4)  A1 (PA,12%,15%,9)(PF,15%,4)
1  (1.121.15) 9
 35,000  7000 (2.8550)  c 7000 d (0.5718)
0.15  0.12
 35,000  19,985  28,247
 $83,232
Note that n  4 in the (P兾A,15%,4) factor because the $7000 in year 5 is the
initial amount A1 in Equation [4.7].

4.5 USING SPREADSHEETS FOR EQUIVALENCY COMPUTATIONS

The easiest single-cell Excel functions to apply to find P, F, or A require that the
cash flows exactly fit the function format. Refer to Appendix A for more details.
The functions apply the correct sign to the answer that would be on the cash flow
diagram. That is, if cash flows are deposits (minus), the answer will have a plus
sign. In order to retain the sign of the inputs, enter a minus sign prior to the func-
tion. Here is a summary and examples at 5% per year.
Present worth P: Use the PV function  PV(i%,n, A,F) if A is exactly
the same for each of n years; F can be present or not. For example, if
A  $3000 per year deposit for n  10 years, the function  PV(5%,
10,3000) will display P  $23,165. This is the same as using the P兾A
factor to find P  3000(P兾A,5%,10)  3000(7.7217)  $23,165.
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 50

two parts to the equation: a uniform series that has 6. For shifted gradients, the change equal to G or g
an A value equal to the magnitude of the cash flow occurs between periods 1 and 2. This requires
in period 1 and the gradient that has the same n as renumbering the cash flows to properly identify
the uniform series. which ones are accounted for in the gradient
5. Geometric gradients involve cash flows that equations.
change by a uniform percentage from one period 7. For decreasing arithmetic gradients, it is neces-
to the next, and the present worth of the entire sary to change the sign in front of the P兾G or A兾G
cash flow sequence is determined from Equation factors from plus to minus. For decreasing geo-
[2.7] or [2.8]. metric gradients, it is necessary to change the sign
in front of both g’s in Equation [2.7].

PROBLEMS
Use of Interest Tables 4.5 Since many U.S. Navy aircraft are at or near their
usual retirement age of 30 years, military officials
4.1 Find the correct numerical value for the following want a precise system to assess when aircraft
factors from the compound interest factor tables. should be taken out of service. A computational
a. (F兾P,10%,20) method developed at Carnegie Mellon University
b. (A兾F,4%,8) maps in 3-D the microstructure of aircraft materi-
c. (P兾A,8%,20) als in their present state so that engineers can test
d. (A兾P,20%,28) them under different conditions of moisture, salt,
e. (F兾A,30%,15) dirt, etc. Military officials can then determine if an
Determination of P, F, A, and n aircraft is fine, is in need of overhaul, or should be
retired. If the 3-D system allows the Navy to use
4.2 Beckton Steel Products, a company that special- one airplane 2 years longer than it normally would
izes in crankshaft hardening, is investigating have been used, thereby delaying the purchase of a
whether it should update certain equipment now or $20 million aircraft for 2 years, what is the present
wait and do it later. If the cost now is $180,000, worth of the assessment system at an interest rate
what would the equivalent amount be 3 years from of 15% per year?
now at an interest rate of 10% per year? 4.6 GE Marine Systems is planning to supply a Japan-
4.3 By filling carbon nanotubes with miniscule wires ese shipbuilder with aero-derivative gas turbines
made of iron and iron carbide, incredibly thin to power 11 DD-class destroyers for the Japanese
nano wires could be extruded by blasting the car- Self-Defense Force. The buyer can pay the total
bon nanotubes with an electron beam. If Gentech contract price of $2,100,000 two years from now
Technologies spends $2.7 million now in develop- (when the turbines will be needed) or an equiva-
ing the process, how much would the company lent amount now. At an interest rate of 15% per
have to receive in licensing fees 3 years from now year, what is the equivalent amount now?
to recover its investment at 20% per year interest? 4.7 A maker of microelectromechanical systems can
4.4 Arctic and Antarctic regions are harsh environments reduce product recalls by 10% if it purchases new
in which to take data. A TempXZ 3000 portable packaging equipment. If the cost of the new equip-
temperature recorder can take and store 32,767 ment is expected to be $40,000 four years from
measurements at 40°C to 150°C. A research now, how much could the company afford to spend
team from the University of Nova Scotia needs 20 now (instead of 4 years from now) if it uses a min-
of the recorders, and they are trying to decide imum attractive rate of return of 12% per year?
whether they should buy them now at $649 each or 4.8 How much money could Tesla-Sino Inc., a maker
purchase them 2 years from now, which is when of superconducting magnetic energy storage sys-
they will be deployed. At an interest rate of 8% per tems, afford to spend now on new equipment in
year, how much will the 20 recorders have to cost lieu of spending $85,000 five years from now, if
in 2 years to render their decision indifferent? the company’s rate of return is 18% per year?
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 51

4.9 French car maker Renault signed a $95 million annual worth of the purchase over a 10-year amorti-
contract with ABB of Zurich, Switzerland, for au- zation period?
tomated underbody assembly lines, body assem- 4.16 Improvised explosive devices (IEDs) are responsi-
bly workshops, and line control systems. If ABB ble for many deaths in times of war. Unmanned
will be paid in 3 years (when the systems are ground vehicles (robots) can be used to disarm the
ready), what is the present worth of the contract at IEDs and perform other tasks as well. If the robots
12% per year interest? cost $140,000 each and the U.S. Army signs a con-
4.10 What is the future worth 6 years from now of a tract to purchase 4000 of them now, what is the
present cost of $175,000 to Corning, Inc. at an in- equivalent annual cost of the contract if it is amor-
terest rate of 10% per year? tized over a 3-year period at 8% per year interest?
4.11 A pulp and paper company is planning to set aside 4.17 The U.S. Navy’s robotics lab at Point Loma
$150,000 now for possibly replacing its large syn- Naval Base in San Diego is developing robots
chronous refiner motors. If the replacement isn’t that will follow a soldier’s command or operate
needed for 8 years, how much will the company autonomously. If one robot would prevent injury
have in the account if it earns interest at a rate of to soldiers or loss of equipment valued at $1.5
8% per year? million, how much could the military afford to
4.12 A mechanical consulting company is examining spend on the robot and still recover its investment
its cash flow requirements for the next 7 years. in 4 years at 8% per year?
The company expects to replace office machines 4.18 PCM Thermal Products uses austenitic nickel-
and computer equipment at various times over chromium alloys to manufacture resistance heat-
the 7-year planning period. Specifically, the com- ing wire. The company is considering a new
pany expects to spend $7000 two years from annealing-drawing process to reduce costs. If the
now, $9000 three years from now, and $5000 five new process will cost $2.55 million dollars now,
years from now. What is the present worth of the how much must be saved each year to recover
planned expenditures at an interest rate of 10% the investment in 6 years at an interest rate of
per year? 14% per year?
4.13 A proximity sensor attached to the tip of an endo- 4.19 A green algae, chlamydomonas reinhardtii, can
scope could reduce risks during eye surgery by produce hydrogen when temporarily deprived of
alerting surgeons to the location of critical retinal sulfur for up to 2 days at a time. How much could
tissue. If a certain eye surgeon expects that by us- a small company afford to spend now to commer-
ing this technology, he will avoid lawsuits of $0.6 cialize the process if the net value of the hydrogen
and $1.35 million 2 and 5 years from now, respec- produced is $280,000 per year? Assume the com-
tively, how much could he afford to spend now if pany wants to earn a rate of return of 18% per year
his out-of-pocket costs for the lawsuits would be and recover its investment in 8 years.
only 10% of the total amount of each suit? Use an 4.20 HydroKlean, LLC, an environmental soil cleaning
interest rate of 10% per year. company, borrowed $3.5 million to finance start-
4.14 Irvin Aerospace of Santa Ana, CA, was awarded a up costs for a site reclamation project. How much
5-year contract to develop an advanced space cap- must the company receive each year in revenue to
sule airbag landing attenuation system for NASA’s earn a rate of return of 20% per year for the 5-year
Langley Research Center. The company’s computer project period?
system uses fluid structure interaction modeling to 4.21 A VMB pressure regulator allows gas suppliers
test and analyze each airbag design concept. What and panel builders to provide compact gas han-
is the present worth of the contract at 10% per year dling equipment, thereby minimizing the space
interest if the annual cost (years 1 through 5) is required in clean rooms. Veritech Micro Systems
$8 million per year? is planning to expand its clean room to accommo-
4.15 Julong Petro Materials Inc. ordered $10 million date a new product design team. The company es-
worth of seamless tubes for its drill collars from the timates that it can reduce the space in the clean
Timken Company of Canton, Ohio. (A drill collar is room by 7 square meters if it uses the compact
the heavy tubular connection between a drill pipe equipment. If the cost of construction for a clean
and drill bit.) At 10% per year interest, what is the room is $5000 per square meter, what is the annual
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 52

worth of the savings at 10% per year interest if the the withdrawal rate from the fund is $158 million
cost is amortized over 10 years? per year starting 1 year from now, how many years
4.22 New actuator element technology enables engi- will it take to completely deplete the fund if the
neers to simulate complex computer-controlled conservatively managed fund grows at a rate of 7%
movements in any direction. If the technology re- per year?
sults in cost savings in the design of new roller
coasters, determine the future worth in year 5 of Arithmetic and Geometric Gradients
savings of $70,000 now and $90,000 two years
from now at an interest rate of 10% per year. 4.29 Allen Bradley claims that its XM1Z1A and XM442
4.23 Under an agreement with the Internet Service electronic overspeed detection relay modules pro-
Providers (ISPs) Association, ATT Communica- vide customers a cost-effective monitoring and
tions reduced the price it charges ISPs to resell its control system for turbo machinery. If the equip-
high-speed digital subscriber line (DSL) service ment provides more efficient turbine performance
from $458 to $360 per year per customer line. A to the extent of $20,000 in year 1, $22,000 in year 2,
particular ISP, which has 20,000 customers, plans and amounts increasing by $2000 per year, how
to pass 90% of the savings along to its customers. much could Mountain Power and Light afford to
What is the total future worth of these savings in spend now at 10% per year interest if it wanted to
year 5 at an interest rate of 10% per year? recover its investment in 5 years?
4.24 Southwestern Moving and Storage wants to have 4.30 A low-cost noncontact temperature measuring tool
enough money to purchase a new tractor-trailer in may be able to identify railroad car wheels that are
5 years at a cost of $290,000. If the company sets in need of repair long before a costly structural fail-
aside $100,000 in year 2 and $75,000 in year 3, ure occurs. If the BNSF railroad saves $100,000 in
how much will the company have to set aside in year 1, $110,000 in year 2, and amounts increasing
year 4 in order to have the money it needs if the by $10,000 each year for five years, what is the
money set aside earns 9% per year? equivalent annual worth of the savings at an inter-
4.25 Vision Technologies, Inc., is a small company that est rate of 10% per year?
uses ultra-wideband technology to develop de- 4.31 Southwest Airlines hedged the cost of jet fuel by
vices that can detect objects (including people) in- purchasing options that allowed the airline to pur-
side buildings, behind walls, or below ground. The chase fuel at a fixed price for 5 years. If the market
company expects to spend $100,000 per year for price of fuel was $0.50 per gallon higher than the
labor and $125,000 per year for supplies for three option price in year 1, $0.60 per gallon higher in
years before a product can be marketed. At an in- year 2, and amounts increasing by $0.10 per gal-
terest rate of 15% per year, what is the total equiv- lon higher through year 5, what was the present
alent present worth of the company’s expenses? worth of SWA’s savings per gallon if the interest
4.26 How many years would it take for money to in- rate was 10% per year?
crease to four times the initial amount at an inter- 4.32 NMTeX Oil company owns several gas wells in
est rate of 12% per year? Carlsbad, NM. Income from the depleting wells
4.27 Acceleron, Inc., is planning to expand to new fa- has been decreasing according to an arithmetic
cilities in Indianapolis. The company will make gradient for the past five years. If the income in
the move when its real estate sinking fund has a to- year 1 from well no. 24 was $390,000 and it de-
tal value of $1.2 million. If the fund currently has creased by $15,000 each year thereafter, (a) what
$400,000 and the company adds $50,000 per year, was the income in year 3, and (b) what was the
how many years will it take for the account to equivalent annual worth of the income through
reach the desired value, if it earns interest at a rate year 5 at an interest rate of 10% per year?
of 10% per year? 4.33 The present worth of income from an investment
4.28 The defined benefits pension fund of G-Tech Elec- that follows an arithmetic gradient was projected
tronics has a net value of $2 billion. The company to be $475,000. If the income in year one is
is switching to a defined contribution pension plan, expected to be $25.000, how much would the gra-
but it guaranteed the current retirees that they will dient have to be in each year through year 8 if the
continue to receive their benefits as promised. If interest rate is 10% per year?
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 53

4.34 Very light jets (VLJs) are one-pilot, two-engine 4.39 The National Institute on Drug Abuse has spent
jets that weigh 10,000 pounds or less and have $15 million on clinical trials toward finding out
only five or six passenger seats. Since they cost whether two vaccines can end the bad habits of
half as much as the most inexpensive business jets, nicotine and cocaine addiction. A Switzerland-
they are considered to be the wave of the future. based company is now testing an obesity vaccine.
MidAm Charter purchased 5 planes so that it can If the vaccines are semi-successful such that treat-
initiate service to small cities that have airports ment costs and medical bills are reduced by an av-
with short runways. MidAm expects revenue of erage of $15,000 per person per year, what is the
$1 million in year 1, $1.2 million in year 2, and present worth of the vaccines if there are 10 mil-
amounts increasing by $200,000 per year there- lion beneficiaries in year 1 and an additional 15%
after. If the company’s MARR is 10% per year, each year through year 5? Use an interest rate of
what is the future worth of the revenue through 8% per year.
the end of year 5? 4.40 Find the future worth in year 10 of an investment
4.35 Fomguard LLC of South Korea developed a high- that starts at $8000 in year 1 and increases by 10%
tech fiber-optic fencing mesh (FOM) that contains each year. The interest rate is 10% per year.
embedded sensors that can differentiate between 4.41 The effort required to maintain a scanning electron
human and animal contact. In an effort to curtail il- microscope is known to increase by a fixed per-
legal entry into the United States, a FOM fence has centage each year. A high-tech equipment mainte-
been proposed for certain portions of the U.S. bor- nance company has offered its services for a fee
der with Canada. The cost for erecting the fence in that includes automatic increases of 7% per year
year 1 is expected to be $7 million, decreasing by after year 1. A certain biotech company offered
$500,000 each year through year 5. At an interest $75,000 as prepayment for a 3 year contract to
rate of 10% per year, what is the equivalent uni- take advantage of a temporary tax loophole. If the
form annual cost of the fence in years 1 to 5? company used an interest rate of 12% per year in
4.36 For the cash flows shown, determine the future determining how much it should offer, what was
worth in year 5 at an interest rate of 10% per year. the service fee amount that it assumed for year 1?
4.42 Hughes Cable Systems plans to offer its employees
Year 1 2 3 4 5 a salary enhancement package that has revenue
Cash Flow $300,000 $275,000 $250,000 $225,000 $200,000 sharing as its main component. Specifically, the
company will set aside 1% of total sales for year-
4.37 Verizon Communications said it plans to spend end bonuses for all its employees. The sales are ex-
$22.9 billion in expanding its fiber-optic Internet pected to be $5 million the first year, $5.5 million
and television network through 2010 so that it can the second year, and amounts increasing by 10%
compete with cable TV providers like Comcast each year for the next 5 years. At an interest rate of
Corp. If the company gets 950,000 customers in 8% per year, what is the equivalent annual worth in
year 1 and grows its customer base by 20% per years 1 through 5 of the bonus package?
year, what is the present worth of the subscription 4.43 Determine how much money would be in a sav-
income through year 5 if income averages $600 ings account that started with a deposit of $2000 in
per customer per year and the company uses a year 1 with each succeeding amount increasing by
MARR of 10% per year? 15% per year. Use an interest rate of 10% per year
4.38 A concept car that will get 100 miles per gallon and a 7-year time period.
and carry 4 persons would have a carbon-fiber and 4.44 The future worth in year 10 of a decreasing geo-
aluminum composite frame with a 900 cc three- metric gradient series of cash flows was found to
cylinder turbodiesel/electric hybrid power plant. be $80,000. If the interest rate was 10% per year
The extra cost of these technologies is estimated to and the annual rate of decrease was 8% per year,
be $11,000. If gasoline savings over a comparable what was the cash flow amount in year 1?
conventional car would be $900 in year 1, increas- 4.45 Altmax Ltd, a company that manufactures automo-
ing by 10% each year, what is the present worth of bile wiring harnesses, has budgeted P  $400,000
the savings over a 10-year period at an interest rate now to pay for a certain type of wire clip over the
of 8% per year? next 5 years. If the company expects the cost of the
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 54

clips to increase by 4% each year, what is the ex- estimates that ATR spectroscopy can save the
pected cost in year 2 if the company uses and inter- company $5000 per year by reducing returns of
est rate of 10% per year? out-of-spec parts. What is the future worth of the
4.46 Thomasville Furniture Industries offers several savings if they start now and extend through year 5
types of high-performance fabrics that are capable at an interest rate of 10% per year?
of withstanding chemicals as harsh as chlorine. A 4.52 To improve crack detection in aircraft, the U.S. Air
certain midwestern manufacturing company that Force combined ultrasonic inspection procedures
uses fabric in several products has a report showing with laser heating to identify fatigue cracks. Early
that the present worth of fabric purchases over a detection of cracks may reduce repair costs by as
specific 5-year period was $900,000. If the costs much as $200,000 per year. If the savings start
are known to have increased geometrically by 5% now and continue through year 5, what is the pres-
per year during that time and the company uses an ent worth of these savings at an interest rate of
interest rate of 15% per year for investments, what 10% per year?
was the cost of the fabric in year 1? 4.53 Some studies have shown that taller men tend to
4.47 Find the equivalent annual worth of a series of earn higher salaries than equally qualified men of
investments that starts at $1000 in year 1 and shorter stature. Homotrope growth hormone can
increases by 10% per year for 15 years. Assume increase a child’s height at a cost of $50,000 per
the interest rate is 10% per year. inch. Clyde’s parents wanted him to be 3 inches
4.48 A northern California consulting firm wants to taller than he was projected to be. They paid for
start saving money for replacement of network the treatments for 3 years (at a cost of $50,000 per
servers. If the company invests $5000 at the end of year) beginning on their son’s 8th birthday. How
year 1 but decreases the amount invested by 5% much extra money would Clyde have to earn per
each year, how much will be in the account 4 years year from his 26th through 60th birthdays (a total
from now, if it earns interest at a rate of 8% per of 35 years) in order to justify their expenditure at
year? an interest rate of 8% per year?
4.49 A company that manufactures purgable hydrogen 4.54 Calculate the annual worth (years 1 through 7) of
sulfide monitors is planning to make deposits such Merchant Trucking Company’s cash flow. Use an
that each one is 5% smaller than the preceding interest rate of 10% per year.
one. How large must the first deposit be (at the end
Year 0 1 2 3 4 5 6 7
of year 1) if the deposits extend through year 10
and the fourth deposit is $1250? Use an interest Cash Flow, $ millions 450 40 200 200 200 200 200 200
rate of 10% per year. 4.55 The by-product department of Iowa Packing uti-
lizes a cooker that has the cost stream shown. De-
Shifted Cash Flows termine the present worth in year 0 of the costs at
an interest rate of 10% per year.
4.50 Akron Coating and Adhesives (ACA) produces a
hot melt adhesive that provides a strong bond Year Cost ($1000)
between metals and thermoplastics used for 0 850
weather stripping, seals, gaskets, hand grips for 1 300
tools, appliances, etc. ACA claims that by elimi- 2 400
nating a primer coat, manufacturers can cut costs 3 400
and reduce scrap. If Porter Cable is able to save 4 400
$60,000 now and $50,000 per year by switching 5 500
to the new adhesive, what is the present worth of
the savings for 3 years at an interest rate of 10% 4.56 An entrepreneurial electrical engineer approached
per year? a large water utility with a proposal that promises
4.51 Attenuated Total Reflectance (ATR) is a method to reduce the utility’s power bill by at least 15%
for looking at the surfaces of materials that are through installation of patented surge protectors.
too opaque or too thick for standard transmission The proposal states that the engineer will not be
methods. A manufacturer of precision plastic parts paid for the first year, but beginning in year 2, she
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 55

will receive three equal, annual payments that are Year Income, $ per year Expense, $ per year
equivalent to 60% of the power savings achieved
0 20,000,000
in year 1 due to the protectors. Assuming that the
1–5 8,000,000 1,000,000
utility’s power bill of $1 million per year is re-
6–8 9,000,000 2,000,000
duced by 15% after installation of the surge pro-
tectors, what will be the future worth in year 4 of 4.62 A supplier of certain suspension system parts for
the uniform payments to the engineer? Use an in- General Motors wants to have a contingency fund
terest rate of 10% per year. that it can draw on during down periods of the econ-
4.57 Metropolitan Water utility is planning to up- omy. The company wants to have $15 million in the
grade its SCADA system for controlling well fund 5 years from now. If the company deposits $1.5
pumps, booster pumps, and disinfection equip- million now, what uniform amount must it add at the
ment so that everything can be controlled from end of each of the next 5 years to reach its goal if the
one site. The first phase will reduce labor and fund earns a rate of return of 10% per year?
travel costs by $31,000 per year. The second 4.63 A rural utility company provides standby power
phase will reduce costs by $20,000 per year. If to pumping stations using diesel-powered genera-
phase I will occur in years 1 through 3 and phase tors. An alternative has arisen whereby the utility
II in years 4 through 8, what is the equivalent an- could use a combination of wind and solar power
nual worth (years 1 through 8) of the upgraded to run its generators, but it will be a few years be-
system at an interest rate of 8% per year? fore the alternative energy systems are available.
4.58 Infrared thermometers by Delta Thermal Products The utility estimates that the new systems will re-
are compatible with type K thermocouples and can sult in savings of $15,000 per year for 3 years,
provide rapid non contact measurement capabili- starting 2 years from now, and $25,000 per year
ties at a cost of $135 per unit. A small private elec- for 4 more years after that (i.e., through year 8).
tric utility company plans to purchase 100 of the At an interest rate of 8% per year, determine the
thermometers now and 500 more 1 year from now equivalent annual worth (years 1–8) of the pro-
if the anticipated savings in labor costs are realized. jected savings.
What would the future worth of the savings have to 4.64 A design-construct-operate (DSO) company signed
be 4 years from now in order to justify the equip- a contract to operate certain industrial wastewater
ment purchases at an interest rate of 12% per year? treatment plants for 10 years. The contract will
4.59 Encon Systems, Inc., sales revenues for its main pay the company $2.5 million now and amounts
product line are as shown. Calculate the equivalent increasing by $250,000 each year through year
annual worth (years 1–7) using an interest rate of 10. At an interest rate of 10% per year, what is the
10% per year. present worth (year 0) of the contract to the DSO
company?
Year Revenue, $ Year Revenue, $ 4.65 Expenses associated with heating and cooling a
0 4,000,000 4 5,000,000 large manufacturing facility owned by Nippon
1 4,000,000 5 5,000,000 Steel are expected to increase according to an
2 4,000,000 6 5,000,000 arithmetic gradient. If the cost is $550,000 now
3 4,000,000 7 5,000,000 (i.e., year 0) and the company expects the cost to
increase by $40,000 each year through year 12,
4.60 Cisco’s gross revenue (the percentage of revenue what is the equivalent annual worth in years
left after subtracting the cost of goods sold) was 1–12 of the energy costs at an interest rate of
70.1% of total revenue over a certain 4-year pe- 10% per year?
riod. If the total revenue per year was $5.8 billion 4.66 Lifetime Savings Accounts, known as LSAs,
for the first 2 years and $6.2 billion per year for the allow people to invest after-tax money without
last 2, what was the future worth of the gross rev- being taxed on any of the gains. If an engineer in-
enue in year 4 at an interest rate of 14% per year? vests $10,000 now and then increases his deposit
4.61 Calculate the annual worth in years 1 to 8 of the by $1000 each year through year 20, how much
following series of incomes and expenses at an in- will be in the account immediately after the last
terest rate of 10% per year. deposit, if the account grows by 12% per year?
4.67 A software company that installs systems for in- uniform amount each year through year 5, how
ventory control using RFID technology spent much must the increase be each year, if the com-
$600,000 per year for the past 3 years in develop- pany uses an interest rate of 15% per year?
ing its latest product. The company wants to re- 4.68 The future worth in year 8 for the cash flows
cover its investment in 5 years beginning now. If shown in $20,000. At an interest rate of 10%
the company signed a contract that will pay per year, what is the value x of the cash flow in
$250,000 now and amounts increasing by a year 4?

4.69 The annual worth (years 1 through 8) of the cash the cash flow in year 3, if the interest rate is 10%
flows shown is $30,000. What is the amount x of per year?

4.70 Levi Strauss has some of its jeans stone-washed maintenance of its crossing gates at $11,500 per
under a contract with independent U.S. Garment year. Beginning 3 years from now, however, the
Corp. If U.S. Garment’s operating cost per ma- costs are expected to increase by 10% per year into
chine is $22,000 per year for years 1 and 2 and the foreseeable future (that is, $12,650 in year 3,
then it increases by 8% per year through year 10, $13,915 in year 4, etc.) If the railroad uses a
what is the equivalent uniform annual cost per 10-year study period and an interest rate of 15% per
machine (years 1–10) at an interest rate of 10% year, how much could the railroad afford to spend
per year? now on the overpass in lieu of the maintenance
4.71 Burlington Northern is considering the elimina- contracts?
tion of a railroad grade crossing by constructing a 4.72 Thunder Mountain Concrete and Building Mate-
dual-track overpass. The railroad subcontracts for rials is trying to bring the company-funded
bLa01293_ch02_027-058 9/4/07 12:22 PM Page 57

portion of its employee retirement fund into production will decrease revenue by 10% each year.
compliance with HB-301. The company has al- If the aquifer will be totally depleted in 20 years,
ready deposited $200,000 in each of the last 5 what is the present worth of the desalting option at
years. If the company increases its deposits (be- an interest rate of 6% per year?
ginning in year 6) by 15% per year through year 4.74 Revenue from gas wells that have been in produc-
20, how much will be in the fund immediately tion for at least 5 years tends to follow a decreasing
after the last deposit, if the fund grows at a rate geometric gradient. One particular rights holder
of 12% per year? received royalties of $4000 per year for years 1
4.73 San Antonio is considering various options for pro- through 6, but beginning in year 7, income de-
viding water in its 50-year plan, including desalting. creased by 15% per year through year 14. What
One brackish aquifer is expected to yield desalted was the future value (year 14) of the income from
water that will generate revenue of $4.1 million the well, if all of the income was invested at 10%
per year for the first 4 years, after which declining per year?
4-76. An investor deposits L.E. 400 now, L.E. 1300
three years from now and L.E. 1500 seven years thereafter.
How much will he have in his account 10 years from now if contract to process the waste liquids for 10 years for a fixed
the interest rate is 10%? price of $15,000 per year, payable at the end of each year.
Either way, there should be no need for waste treatment
4.77 A start-up direct marketer of car parts expects to after 10 years. The refinery manager considers 8 % to be a
spend $1,000,000 the first year for advertising, with suitable interest rate. Determine whether the refinery
amounts decreasing by $100,000 each year. Income is manager should accept the Hydro-Clean offer or not
expected to be $4,000,000 the first year, increasing by
$500,000 each year. Determine the equivalent annual worth 4.83 You are preparing to buy a vacation home eight
in years 1 through 5 of the company's net cash flow at an years from now. The home will cost $50,000 at that time.
interest rate of 16% per year. You plan on saving three deposits at an interest rate of
10%. Deposit 1: Deposit $10,000 today. Deposit 2:
4.78 San Antonio is considering various options for Deposit $12,000 two years from now. Deposit 3: Deposit
providing water in its 50-year plan, including desalting. $X five years from now. How much do you need to invest
One brackish aquifer is expected to yield desalted water in year five to ensure that you have the necessary funds to
that will generate revenue of $4.1 million per year for the buy the vacation home at the end of year eight?
first 4 years, after which less production will decrease
revenue each year by $50,000 per year. If the aquifer will 4.84 A couple plan to start saving money by
be totally depleted in 25 years, what is the present worth of depositing $500 into their savings account one year from
the desalting option at an interest rate of 6% per year? now. They estimate that the deposits will increase by $100
each year for 9 years thereafter. What would be the present
4.79 A rural utility company provides standby power worth of the investments if the interest rate is 5% per year?
to pumping stations using diesel-powered generators. An
alternative has arisen whereby the utility could use a 4.85 A company has a retirement program in which
combination of wind and solar power to run its generators, employees invest LE 1,200 every year for 25 years starting
but it will be a few years before the alternative energy one year after their initial employment. If the company
systems are available. The utility estimates that the new guarantees at least LE 50,000 at the time of retirement,
systems will result in savings of $15,000 per year for 3 what is the rate of return on the investment?
years, starting 2 years from now, and $25,000 per year for 4
more years after that. At an interest rate of 8% per year, 4.86 An investor holds a time payment purchase
determine the equivalent annual worth of the projected contract on some machine tools. The contract calls for the
savings. payment of $140 at the end of each month for a 5-years
period. The first payment is due in one month. He offers to
4.80 Expenses associated with heating and cooling a sell you the contract for $6800 cash today. If you otherwise
large manufacturing facility owned by Nippon Steel is can make 1% per month on your money, would you accept
expected to increase according to an arithmetic gradient. If or reject the investor's offer?
the cost is $550,000 now and the company expects the cost
to increase by $40,000 each year through year 12, what is 4.78 Suppose we decided to pay the $6800 for the
the equivalent annual worth in years 1–12 of the energy time purchase contract in problem (11), what monthly rate
costs at an interest rate of 10% per year? of return would we obtain on our investment?

4.81Two engineering graduates who recently got

married are planning for their early retirement 20 years
from now. They believe that they will need $2,000,000 in
year 20. Their plan is to live on one of their salaries and
invest the other. They already have $25,000 in their 4.88 Akron Coating and Adhesives (ACA) produces a
investment account. (a) How much will they have to invest hot melt adhesive that provides a strong bond between
each year if the account grows at a rate of 10% per year? metals and thermoplastics used for weather stripping, seals,
(b) If the maximum they have available to invest each year gaskets, hand grips for tools, appliances, etc. ACA claims
is $40,000, will they reach their goal of $2 million by year that by eliminating a primer coat, manufacturers can cut
20? costs and reduce scrap. If Porter Cable is able to save
$60,000 now and $50,000 per year by switching to the new
4.82 An oil refinery finds that it is now necessary to adhesive, what is the present worth of the savings for ٥
subject its waste liquids to a costly treating process before years at an interest rate of 10% per year?
discharging them into a nearby stream. The engineering
department estimates that the waste liquid processing will 4.89 A city engineer knows that she will need $25
have a cost of $30,000 by the end of the first year. By million after 3 years to replace toll booths on a toll road in
making process and plant alterations, it is estimated that the the city. Traffic on the road is estimated to be 20 million
waste treatment cost will decline $3000 each year. As an vehicles per year. How much per vehicle should the toll be
alternate, a specialized firm, Hydro-Clean, has offered a to cover the cost of the toll booth replacement project?
Interest is 10%. (Simplify your analysis by assuming that
the toll receipts are received at the end of each year in a
lump sum).
 4.90 An engineer has a fluctuating future budget for
the maintenance of a particular machine. During each of the
rate of 10% per year.
first 5 years, $1000 per year will be budgeted. During
the second 5 years, the annual budget will be $1500 per
year. In addition, $3500 will be budgeted for an
overhaul of the machine at the end of the fourth year,
and another $3500 for an overhaul at the end of the
eighth year. The engineer asks you to compute the
uniform annual expenditure that would be equivalent to
these fluctuating amounts, assuming interest at 6% per
year.

4.91 If a sum of L.E 5000 is deposited now, L.E

7000 two years from now, and L.E 2000 per year in
years 6 through 10. What will be the amount in year 10
if the interest rate is 10%?

4.92 A company expects to install smog control

equipment on the exhaust of a gasoline engine. The
local smog control district has agreed to pay to the firm
a lump sum of money to provide for the first cost of the
equipment and maintenance during its l0-year useful
life. At the end of 10 years the equipment, which
initially cost $10,000, is valueless. The company and
smog control district have agreed that the following are
reasonable estimates of the end-of-year maintenance costs:
4.95 Find the present worth in year 0 for the cash flow
End of Year

shown. Let i =10% per year.

10
1
2
3
4
5
6
7
8
9

4.96 Austin Utilities is planning to install solar panels

Maintenance

to provide some of the electricity for its groundwater

150

200

250

300

400

300

200

100
50

50
Cost ($)

desalting plant. The project would be done in two phases.

The first phase will cost $4 million in year 1 and $5 million
in year 2. This investment will result in energy savings
Assuming interest at 6% per year, how much should the (phase 2) of $540,000 in year 3, $546,000 in year 4, and
smog control district pay to the company NOW to provide amounts increasing by $6000 each year through year 10.
for the first cost of the equipment and its maintenance for Let i= 10% per year. (a) What is the future worth of the
10 years? savings? (b) Is the cost of the solar project justified by the
savings?
4.93 If equal end of year deposits of $5,000 are made
to a project fund paying 8% per year for 10 years, how 4.97 A low-cost noncontact temperature measuring
much can be expected to be available for withdrawal from tool may be able to identify railroad car wheels that are in
the account for capital expenditure immediately after the need of repair long before a costly structural failure occurs.
last deposit is made? If BNF Railroad saves $100,000 in years 1 through 5,
$110,000 in year 6, and constant amounts increasing by
4.94 For the cash flow shown in the following $10,000 each year through year 20, what is the equivalent
diagram, determine the future worth in year 8 at an interest annual worth over the 20 years of the savings? The interest
rate is 10% per year.