BMFG 3213

Engineering Economy
and Management
Combining Factors
References:
1. Blank, L and Tarquin, A. Engineering Economy,8thEdition,McGraw Hill, 2017.
2. Sullivan, W.G., Wicks,E.M., and Koelling,C.P., Engineering Economy,17th Edition, Pearson, 2018
3. Park C.S., Contemporary Engineering Economics, Pearson, 5th Edition, 2011

Faculty of Industrial and Manufacturing Technology and

Engineering
Universiti Teknikal Malaysia Melaka
 Combining Factors Video Guide

• https://youtu.be/BSx4E49njXc?list=PL3D1yxc
3wEejjAX5CjDya0m2YHWM1QexR

• Please visit the link for the explanation on the

slides. Please try the examples given for a
better understanding.

1-2
1-2
LEARNING OUTCOMES
Use multiple factors to find equivalent amounts for cash
flows that have non standard placement

1. Determine the P , F or A values of a series starting at a time

other than period 1.
2. Determine the P , F , or A values of a shifted series and
randomly placed single cash flows.
3. Make equivalence calculations for shifted arithmetic or
geometric gradient series that increase or decrease in size of
cash flows.
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

A = Given FA = ? Shifted series

usually
require the use
0 1 2 3 4 5 of
PA = ? 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
Example Using P/A Factor: Shifted Uniform Series
The present worth of the cash flow shown below at i = 10% is:
(a) RM25,304 (b) RM29,562 (c) RM34,462 (d) RM37,908

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) = RM34,462
 Example Using P/A Factor: Shifted Uniform Series
The present worth of the cash flow shown below at i = 10% is:

A = RM50
Solution:

Answer is, RM 230.82

 Example Using P/A Factor: Shifted Uniform Series
The design group at AMC Berhad just purchased upgraded CAD
software for 6 years and pay RM 5000 now and annual payments of RM
500 per year starting 3 years from now for annual upgrades.
Determine the present worth in year 0 of the payments if the interest
rate is 10% per year.
Solution:
Develop Cash Flow Diagram.
Develop Equation.

Answer is, RM 6309.8

3-7
Example Using F/A Factor: Shifted Uniform Series

How much money would be available in year 10 if RM 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 = RM 8000

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

FA = 8000(F/A,10%,8)
= 8000(11.4359)
= RM 91,487

3-8
 Example Shifted Uniform Series
Recalibration of sensitive measuring devices costs RM 10 000 per year. If the
machine will be recalibrated for each of 6 years starting 3 years after
purchase, analyse the 8 year equivalent uniform series at 10% per year.

A = 10 000

Hint: You can use either P/A or F/A relationship for shifting. Try compare both approach.

Answer is, RM 6 746.4

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

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 = RM 5000
RM 2000
Solution:
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 = RM 5000
RM 2000

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

 PA
PT = ? i = 10%
0 1 2 3 4 5 6 7 8 9 10 Actual year
0 1 2 3 4 5 6 7 8
Series year
A = RM 5000 RM 2000

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

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

Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = RM 933

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

 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 = RM 5000
RM 2000

Solution: Use F/A to get FA in actual year 10: FA = 5000(F/A,10%,8) = 5000(11.4359) = RM 57,180
Move FA back to year 0 using P/F: P0 = 57,180(P/F,10%,10) = 57,180(0.3855) = RM 22,043
Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = RM 933
Now, add two P values to get PT: PT = 22,043 + 933 = RM 22,976 Same as before

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

 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
 Example: Series and Random Amounts
Akramin plans to have RM 100 000, ten years from now, which the rate of
return given is 10%.
Analyse the alternatives to achieve above target through:
1. Deposit required now (present worth P T in year 0)
2. Yearly deposit if he start to invest now.
3. Yearly deposit if he start to invest 5 years from now.
4. Yearly deposit if he plan only to invest from now for 5 years.
 Example: Series and Random Amounts
An engineering consultant company in Ayer Keroh that owns a sizable
amount of land plans to lease the machineries to a company. The contract
calls for the company to pay RM 20,000 per year for 10 years beginning 3
years from now (i.e., beginning at the end of year 3 and continuing through
year 12) plus $10,000 three years from now and RM 15,000 eight years from
now.
Utilize engineering economy relations to analyse the five equivalent values
listed below at 10% per year.
1. Total present worth P T in year 0
2. Future worth F in year 22
3. Annual series over all 22 years
4. Annual series over the first 10 years
5. Annual series over the last 12 years
SHIFTED ARITHMETIC GRADIENTS
1. Shifted gradient begins at a time other than between
periods 1 and 2

2. Present worth PG is located 2 periods before gradient

starts

3. Must use multiple factors to find PT in actual year 0

4. To find equivalent A series, find PT at actual time 0 and

apply (A/P,i,n)
 Example: Shifted Arithmetic Gradient
John Deere expects the cost of a tractor part to increase by RM 5 per year beginning
4 years from now. If the cost in years 1-3 is RM 60, analyse the present worth in year
0 of the cost through year 10 at an interest rate of 12% per year.
i = 12%
PT = ? Actual years
0 1 2 3 4 5 10
0 1 2 3 8 Gradient years
60 60 60
65
70
G=5 95
Solution: First find P2 for G = RM 5 and base amount (RM 60) in actual year 2

P2 = 60(P/A,12%,8) + 5(P/G,12%,8) = RM 370.41

P0 = P2(P/F,12%,2) = RM 295.29
Next, move P2 back to year 0

Next, find PA for the RM 60 amounts of years 1 and 2 PA = 60(P/A,12%,2) = RM 101.41

Finally, add P0 and PA to get PT in year 0 PT = P0 + PA = RM 396.70

 Example: Shifted Arithmetic Gradient
Analyse the present worth in year 0 of the cash flow diagram below at an interest
rate of 10% per year.

Approach 1 Approach 2

Answer is, RM 356.83

 Example: Shifted Arithmetic Gradient
Analyse the present worth in year 0 of the cash flow diagram below at an
interest rate of 10% per year.

Answer is, RM 791.27

 Example: Shifted Arithmetic Gradient
FKP Automation Sdn Bhd has tracked the average inspection cost
on a robotics manufacturing line for 10 years. Cost averages were
steady at RM 1000 per completed unit for the first 5 years, but
have increased consistently by RM 200 per unit for each of the
last 5 years.
Analyze the present worth.

Try to get the answer and discuss it

with your friends.
SHIFTED GEOMETRIC GRADIENTS
1. Shifted gradient begins at a time other than between
periods 1 and 2

2. Equation yields Pg for all cash flows (base amount A1 is

included)

Equation (i ≠ g): Pg = A 1{1 - [(1+g)/(1+i)]n/(i-g)}

3. For negative gradient, change signs on both g values

There are no tables for geometric gradient factors

 Example: Shifted Geometric Gradient
Weirton Steel signed a 5-year contract to purchase water treatment chemicals
from a local distributor for RM 7000 per year. When the contract ends, the cost
of the chemicals is expected to increase by 12% per year for the next 8 years. If
an initial investment in storage tanks is RM 35,000, determine the equivalent
present worth in year 0 of all of the cash flows at i = 15% per year.
Gradient starts between actual years 5 and 6; these are gradient years 1 and 2.
Pg is located in gradient year 0, which is actual year 4
Pg = 7000{1-[(1+0.12)/(1+0.15)]9/(0.15-0.12)} = RM 49,401
Move Pg and other cash flows to year 0 to calculate PT

PT = 35,000 + 7000(P/A,15%,4) + 49,401(P/F,15%,4) = RM 83,232

NEGATIVE SHIFTED GRADIENTS
For negative arithmetic gradients, change sign on G term from + to -

General equation for determining P: P = present worth of base amount - PG

Changed from + to -

For negative geometric gradients, change signs on both g values

Changed from + to -

Pg = A1{1-[(1-g)/(1+i)]n/(i+g)}

Changed from - to +

All other procedures are the same as for positive gradients

 Example: Negative Shifted Arithmetic Gradient
For the cash flows shown, find the future worth in year 7 at i = 10% per year

F=?
PG = ? i = 10%
0 1 2 3 4 5 6 7
Actual years
0 1 2 3 4 5 6 Gradient years
450
500
550
600
650
700

G = $-50
Solution: Gradient G first occurs between actual years 2 and 3; these are gradient years 1 and 2
PG is located in gradient year 0 (actual year 1); base amount of RM 700 is in gradient years 1-6

PG = 700(P/A,10%,6) – 50(P/G,10%,6) = 700(4.3553) – 50(9.6842) = RM 2565

F = PG(F/P,10%,6) = 2565(1.7716) = RM 4544

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

For gradients, first change equal to G or g occurs

between gradient years 1 and 2

For negative arithmetic gradients, change sign on G from + to -

For negative geometric gradients, change sign on g from + to -