3.

Combining Factors Outline

3.1 Introduction
3.2 Shifted Uniform Series
3.3 Uniform Series and Single Amounts
3.4 Shifted Arithmetic Gradients
CVE 267: Civil Engineering Cost Analysis 3.5 Shifted Decreasing Arithmetic
Gradients
Dr. Sami W. Tabsh, P.E.
Civil Engineering, AUS

Reference: Engineering Economy, Blank & Tarquin, McGraw-Hill 2

3.1 Introduction 3.2 Shifted Uniform Series

 Most cash flow series do not fit exactly the  Consider the following cash flow diagram
series for which the economic factors in involving a uniform series that does not
Chapter 2 were developed. Hence, it is start at t = 1. In this case, the equivalent
necessary to combine equations. present worth P can be computed using
 In such cases, there are different ways to different methods.
determine the equivalent present worth P, P=? i=10%
annual worth A, or future worth F.
1 2 3 4 5 6 7 8 9
 This chapter discusses how to combine the 0
different engineering economy factors to
address complex cash flow diagrams. 3 A=$100 4
 3.2 Shifted Uniform Series 3.2 Shifted Uniform Series
 One way to compute P is to use the P/F  Another way is to use F/A factor to find the
factor to find the present worth of each future amount F at t=9, and then compute
disbursement at t=0 and add them (i.e. the present worth P at t=0 using the P/F
P=PIII+PIV+…+PIX): factor
PIV=100(P/F,10%,4)
PIII=100(P/F,10%,3)
F=100(F/A,10%,7) F
1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9
+
0 0
$100 $100 1 2 3 4 6 7 8 0 1 2 3 4 5 6 7 8
5 9
PIX=100(P/F,10%,9) 0 9

7 8 A=$100 P=?
+ . . . +
1 2 3 4 5 6 9
P=PIII+ PIV+...+PIX
0
5 P=F (F/P,10%,9) 6
$100

3.2 Shifted Uniform Series 3.2 Shifted Uniform Series

 Another way to solve the problem is to  A fourth way to find P is to use the P/A
consider a complete uniform series A (from factor to compute the “present worth” (at
t=1 to 9) and then subtract from it a uniform t=2, not t=0), and then find the present
series A applied at t=1 and 2. worth at t=0 by using the P/F factor.
PI=100(P/A,10%,9) F=PII
PII = 100(P/A,10%,2) PII=100(P/A,10%,7)

1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9
0 0 1 3 4 5 6 7 8 9 0 1 3 4 5 6 7 8 9
0
2 2
A=$100 A=$100 P=?
A=$100
P=PI - PII 7
P=PII(P/F,10%,2)
8
 3.2 Shifted Uniform Series 3.2 Shifted Uniform Series
 Typically, the last method is used to  The basic steps to solve problems with
shifted uniform series are:
determine the present worth of a uniform
1) Draw a diagram of the given +ve and –ve
series that does not begin at the end of
cash flows.
period 1.
2) Locate the present worth (or future worth) of
 When using the above method, it is helpful each series on the diagram.
to re-number the cash flow diagram to get 3) Determine n for each series by re-numbering
the accurate value of n. the cash flow diagram.
0 1 2 3 4 5 6 7 8 9 4) Draw another cash flow diagram representing
the desired equivalent cash flow.
Re-numbering of series 1 2 3 4 5 6 7 9 5) Set up and solve the equations. 10

3.2 Shifted Uniform Series 3.2 Shifted Uniform Series

 Example 3.1:
The AHL engineering
company has purchased a
new office building for
$200,000 now and annual AHL Engineering, Inc.
payments of $50,000 per
year for 5 years, starting 4 years from now. n =S G = So 00
,

What is the present worth of the payments if n =

7

P= &
the interest rate is 6% per year? 11 12
i =
6%
 3.2 Shifted Uniform Series 3.2 Shifted Uniform Series
 Solution:  The present worth PA is used to represent
The cash flow diagram is shown below, the present worth of a uniform series A at
where the symbol PT represents the total t=0, while P’A represents the present worth
present worth at t = 0. at time other than t=0 (at t=3, here).

g P Pr so (, 6 % S) =

PT=? T
i=6% P’A 620
i=6% P210 ,

1 2 3 4 5 6 7 8
0 1 2 4 5 6 7 8
0
3
1 2 3 4 5 Renumbering
$50,000 PA
$200,000 $50,000
13
$200,000 14

PA =
PA)(86 %13 ) = 176 837
,

3.2 Shifted Uniform Series 3.2 Shifted Uniform Series

 P’A = $50,000(P/A,6%,5)  Example 3.2:
=-$50,000(4.2124) = $210,620 Ahmad plans to make
Since P’A is located in year 3, we now find annual deposits in his
PA at t = 0: savings account in the
PA = P’A (P/F,6%,3) amount of 20,000
dirhams per year for 5 years, starting 1 year
= $210,620(0.8396) = $176,837
- from now. He then intends to leave the
Finally, PT is obtained by adding P0 to PA: account inactive for 3 more years. How
PT = P 0 + PA much will he have in his account after 8
= $200,000+$176,937 = $376,837 15 years if the interest rate is 10% per year. 16
 f = 20
,
000 h =
S =
%
10
n =
3

3.2 Shifted Uniform Series 3.2 Shifted Uniform Series

F
 Solution: E' = 20( ,
10%jS) F’
The cash flow diagram for the investment 8 =
20(3 6371) .

is: F 1 2 3 4 5 6 7
0 8
i=10% 1 2 3 4 5
20,000
1 2 3 4 5 6 7 F = f (fp ,
10 ,
3)
0 8  F = F’(F/P,10%,3) F =
20(56371) (2 191 .

20,000 = [20,000(F/A,10%,5)](F/P,10%,3)
 Renumber the series, get F’ value at t=5, = 20,000x6.1051x1.3310
and then get the equivalent amount at t=8. 17 => F = 16,2518 dirhams 18

3.2 Shifted Uniform Series 3.2 Shifted Uniform Series

 Example 3.3:  Solution:
XYZ
Ali borrowed $10,000 from the 1. The cash flow diagram for the loan is:
XYZ bank. He is supposed to
pay back the loan in equal
$10,000 A = P(f ,
8 %j)

annual installments over a 6- A = 10000 ( +, 8%, 1)

year period. The interest rate 1 2 3 4 5 6
is 8% per year. i=8%
A 0 = 0
1. How much is his annual payment, A?
A
2. If he missed his third payment (t=3) but made all
others, how much money does he owe the bank A = P(A/P,i%,n) = 10,000(A/P,8%,6)
at the end of the loan’s life (i.e. at t = 6) without
penalty?
19
= (10,000)(0.21632) = $2,163 per year 20
 3.2 Shifted Uniform Series 3.2 Shifted Uniform Series
2. At an interest rate of 8% per year, the  One way to solve the problem is to find F in
following cash flow diagrams are equivalent. both diagrams and equate them:
Therefore, the future value (at t = 6) is the Fa = 2,163(F/A,8%,6)
same. = 2,163x7.3359 = $15,868
1 2 3 4 5 6 1 2 3 4 5 6 Fb = 2,163(P/A,8%,2)(F/P,8%,6)
0 = 0 + 2,163(F/A,8%,3) + F*
A=$2,163 $2,163 $2,163 = 2,163x1.7833x1.5869 + 2,163x3.2464
F*
+ F* = 13,143 + F*
(a) (b)
Equate Fa = Fb => F* = $2,725.
21 22

3.2 Shifted Uniform Series 3.2 Shifted Uniform Series

 Another way to solve the same problem is
 For complex cash flow diagrams, spread
to subtract the two cash flow diagrams:
sheet functions become very useful.
1 2 3 4 5 6 _ 1 2 3 4 5 6
0 0  When a uniform series A is shifted, the
A=$2,163 $2,163 $2,163 F*
NPV function is used in Excel to determine
the present value, P.
3 F*  Note that the NPV function, like the IRR
= 0 1 2 4 5 6 function, can handle any cash flows (not
1.2597 $2,163 just shifted uniform series).
 F* = 2,163(F/P,8%,3) = $2,725 23 24
 3.2 Shifted Uniform Series 3.2 Shifted Uniform Series
75
 To use the NPV function, enter the net A B C D
0
cash flows in continuous cells (rows or 1 0
=NPV(5%,A2:A5)
columns), with ‘0’ for all zero cash flows: 1 2 3 4
2 0
i = 5%
NPV(i%,second_cell:last_cell)+first_cell 3 75 -100 194.52
Example 1
where 4 75 75
first_cell contains the cash flow for t=0, 75
100 75 100
60 5
second_cell contains the cash flow for t=1, 0 6 0
and 1 2 3 4 7 60 111.49
last_cell contains the cash flow for t=n, 100
i = 5%
25
Example 2 =NPV(5%,B4:B7)+B3 26

3.3 Uniform Series and Single

3.3 Shifted Uniform Series
Amounts
 When a cash flow diagram includes both a  Example 3.4:
uniform series and randomly placed single Al-Hasa stone crushing company is leasing a
amounts, the procedure of section 3.2 is mountain from the government of Sharjah for
applied to the uniform series and the single a period of 10 years. The
amount formulas are applied to the one- lease requires the company to
pay the government 2 million
time cash flows. R Dirhams per year, starting 3
i%
years from now until year 10,
1 2 3 4 5 6 7 8 plus two payments of 8 million
0
Dirhams at the end of year 5
Q A 27 and year 8. 28
 3.3 Shifted Uniform Series 3.3 Shifted Uniform Series
 What is the present worth of the lease if the
interest rate is 12%?
 What is the equivalent A over 10 yrs?

29 30

3.3 Shifted Uniform Series 3.3 Shifted Uniform Series

 Solution:  The present worth can be obtained from

The cash flow diagram for the lease is: superposition of 3 cash flows:
PA P’A P5
PT=? 12% 12%
12% 1 3 4 5 6 7 8 9 10
+ 1 2 3 4 5 6 7 8 9 10
0 2 0
1 2 3 4 5 6 7 8
2M AED
1 2 3 4 5 6 7 8 9 10 8M AED
0 P8
12%
man
2 million AED
1 2 3 4 5 6 7 8 9 10
+ 0

8 million AED 8 million AED31 32

8M AED
 3.3 Shifted Uniform Series 3.3 Shifted Uniform Series

 P’A = A(P/A,12%,8)  Therefore, the present worth of the lease is:

= 2(4.9676) = 9.9352 million AED PT = P A + P5 + P8
PA = P’A(P/F,12%,2) = 7.9203 + 4.5392 + 3.2312
= 9.9352(0.7972) = 7.9203 million AED = 15.6907 million Dirhams
P5 = 8.0(P/F,12%,5)  The equivalent annual payment A over 10
= 8.0(0.5674) = 4.5392 million AED years is: P
12%
T

P8 = 8.0(P/F,12%,8) A = PT (A/P,12%,10) 1 2 3 4 5 6 7 8 9 10
0

= 8.0(0.4039) = 3.2312 million AED = 15.6907x(0.17698) A=?

= 2.7769 million Dirhams

33 34

3.4 Shifted Arithmetic Gradients 3.4 Shifted Arithmetic Gradients

 It was shown that the present worth of a  A gradient starting at any other time is
“conventional” arithmetic gradient will called a shifted gradient.
always be located 2 periods before the  The n value in the P/G or A/G factors for a
gradient starts. shifted gradient is found by re-numbering
P the time scale. The period in which the
gradient first appears is labeled period 2.
1 2 3 n-2 n-1 n
0 0 1 2 3 4 5 n-2 n-1 n
(n-3)G

(n-2)G

(n-1)G

(n-5)G

(n-4)G
G G

(n-3)G
2G 2G

35
renumber 2 3... n-4 n-3 n-2 36
 3.4 Shifted Arithmetic Gradients 3.4 Shifted Arithmetic Gradients
 To find the equivalent A series of a shifted  Example 3.5:
gradient through all the periods: The annual maintenance
1. Find the present worth of the gradient at 2 costs of a new A/C N Costs ($)
periods before payment appears, equipment, with a 2-year 1 0
warranty, over a period of 2 0
2. Find then the present worth of the single 3 200
9 years are shown on right.
payment at t = 0, and Find the present worth and
4 200
5 300
3. Finally, apply the (A/P, i%, n) factor to the equivalent annual costs 6 400
amount obtained in the previous step. over the 9 years if the 7 500
37 interest is 10%? 8 600 38
9 700

3.4 Shifted Arithmetic Gradients 3.4 Shifted Arithmetic Gradients

 Solution:
The cash flow diagram for the maintenance
costs of the A/C equipment are shown
below:
i=10%

1 2 3 4 5 6 7 8 9
0

$200
$200

$300

$400

$500

$600

$700
39 40
 3.4 Shifted Arithmetic Gradients 3.4 Shifted Arithmetic Gradients
 The diagram is a combination of shifted
 P’A = A(P/A,10%,7yrs)
uniform series and arithmetic gradient:
PA P’A = $200(4.8684) = $974
1 2 3 4 5 6 7 renumber
3 4 5 6 7 8 9
PA = P’A(P/F,10%,2yrs)
0 1 2 = $974(0.8264) = $805
i=10% A=$200
+ P’G = G(P/G,10%,6yrs)
PG P’G 2 3 4 5 6 renumber = $100(9.6842) = $968
4 5 6 7 8 9
PG = P’G(P/F,10%,3yrs)
$200
0 1 2 3 $300

$400

$500
= $968(0.7513) = $727
G=$100 41 42

3.5 Shifted Decreasing Arithmetic

3.4 Shifted Arithmetic Gradients
Gradients
 Therefore, the present worth of the
 Decreasing shifted gradients have the
maintenance costs is: following characteristics:
PT = PA + PG = $805 + $727 = $1532 1. The base amount is equal to the largest
amount in the gradient series,
 The equivalent annual costs A over 9 years
is A = PT (A/P,10%,9 yrs) 2. The gradient is subtracted from the base
amount, instead of added to it, and
or A = $1532 (0.17364) = $266
3. The term -G(P/G,i%,n) or -G(A/G,i%,n) or
1 2 3 4 5 6 7 8 9
= 3 4 5 6 7 8 9 -G(F/G,i%,n) is used in the calculations of
0 0 1 2
$200 PT, AT and FT.
A 43 44

$700
 3.5 Shifted Decreasing Arithmetic 3.5 Shifted Decreasing Arithmetic
Gradients Gradients
For example, consider the following cash flow  PT = PA - PG
diagram. To determine the present worth, we or PT = (P’A)(P/F,i%,1) – (P’G)(P/F,i%,1)
subtract the shifted gradient from the shifted
where,
uniform series. A=240

renumber 1 2 3 4
P’A = A(P/A,i%,4), and
240
180 0 1
120
60 2 3 4 5
P’G = G(P/G,i%,4)
0 =
1 2 3 4 5 PA P’A
180
120
G=60
PT 0 1
2 3 4 5
2 3 445 46
PG P’G renumber

3.5 Shifted Decreasing Arithmetic 3.5 Shifted Decreasing Arithmetic

Gradients Gradients
 Example 3.6:
The price of a computer chip
has been decreasing with
time after a short hold N Cost ($)
because of rapid progress in 1 500
technology. Find the present 2 500
worth and equivalent annual 3 500
4 450
worth of the costs shown in 5 400
the table on right if i=7% per 6 350
year. 7 300
8 250
47 48
 3.5 Shifted Decreasing Arithmetic 3.5 Shifted Decreasing Arithmetic
Gradients Gradients
 The cash flow diagram involves a shifted A=$500

decreasing arithmetic gradient, as shown 0

below: 1 2 3 4 5 6 7 8
$500

$500 G=$50 $250 PA

$450 0 =
1 2 3 4 5 6 7 8
$250 G=$50
0 PT 0 2
1 2 3 4 5 6 7 8 1 3 4 5 6 7 8
2 3 4 5 6
PG renumber
PT 49 P’G 50

3.5 Shifted Decreasing Arithmetic 3.5 Shifted Decreasing Arithmetic

Gradients Gradients
 PT = PA - PG  Example 3.7:

or PT = A(P/A,7%,8) - P’G(P/F,7%,2) A bank loans 350,000 dirhams to a contractor

at an interest rate of 8% per year. It is to be
where paid back in annual installments, starting 3
P’G = G(P/G,7%,6) = 50(10.9784) = $549 years after the loan is initiated. The first
Hence, PT = 500(5.9713) - 549(0.8734) payment will be 100,000 dirhams (in year 3),
followed by a payment of 90,000 dirhams (in
= 2986 - 480 = $2,506 year 4), followed by a payment of 80,000
 Equivalent A = PT (A/P,7%,8) dirhams (in year 5), and so on. How long will
= 2,506(0.16747) = $420 it take the contractor from now to pay off the
51 loan in full? 52
 3.5 Shifted Decreasing Arithmetic 3.5 Shifted Decreasing Arithmetic
Gradients Gradients
M
 Solution:
The cash flow diagram is shown below:
P=350,000

1 2 3 4 5 6 7 n
0 renumber 1 5
2 3 4 n-2
80,000
90,000 G=10,000
53
100,000 54

3.5 Shifted Decreasing Arithmetic 3.5 Shifted Decreasing Arithmetic

Gradients Gradients
P=350,000  The present worth of the payments at t=0
P1 P’1
should be equal to 350,000 dirhams. Hence,
3 4 5 6 7 n 3 4 5 6 7 n P = P1 - P2 = (P’1 - P’2)(P/F,i%,2)
= 1 2
0 1 2 0
renumber 1 2 3 4 n-2
P = [A(P/A,i%,n-2) – G(P/G,i%,n-2)]
100,000 G=10,000 100,000 (P/F,i%,2)
_ which results in:
P2 P’2 P = [100,000(P/A,8%,n-2)
0 1 2
3 4 5 6 7 n
-10,000(P/G,8%,n-2)]
1 2 n-2
5 350,000 (P/F,8%,2)
G=10,000 55 56

0.8573
 3.5 Shifted Decreasing Arithmetic
Gradients
 Solving by trial-and–error for i=8%, we get
the results in the table. We then interpolate:

n-2 P (Dirhams) P
353,000
5 279,000
8 340,000 350,000
9 349,000 349,000
10 353,000
15 323,000 9 ? 10 n-2
(n – 2) = 9.2 => n = 11.2 years 57