Lecture 3

Combining Factors and

Spreadsheet Functions

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3-1
 LEARNING OUTCOMES

1. Shifted uniform series

2. Shifted series and single
cash flows
3. Shifted gradients

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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

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
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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

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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

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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

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3-7
 Example: Series and Random Single Amounts
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 = $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

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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

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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
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3-10
 Shifted Arithmetic Gradients

Shifted gradient begins at a time other than between periods 1 and 2

Present worth PG is located 2 periods before gradient starts

Must use multiple factors to find PT in actual year 0

To find equivalent A series, find PT at actual time 0 and apply (A/P,i,n)

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3-11
 Example: Shifted Arithmetic Gradient
John Deere expects the cost of a tractor part to increase by $5 per year beginning 4
years from now. If the cost in years 1-3 is $60, determine 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 = $5 and base amount ($60) in actual year 2

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

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

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

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

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 Shifted Geometric Gradients
Shifted gradient begins at a time other than between periods 1 and 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)}

For negative gradient, change signs on both g values

There are no tables for geometric gradient factors

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3-13
 Example: Shifted Geometric Gradient
Weirton Steel signed a 5-year contract to purchase water treatment chemicals
from a local distributor for $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 $35,000, determine the equivalent
present worth in year 0 of all of the cash flows at i = 15% per year.

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3-14
 Example: Shifted Geometric Gradient

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)} = $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) = $83,232
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1-15
 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

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3-16
 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 $700 is in gradient years 1-6

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

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

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3-17
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 -

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3-18
ENGINEERING ECONOMICS

Dr. Marwa Abdel Fattah

LECTURE 1

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1-2
 COURSE INTRODUCTION

HUMANITIES ENGINEERING

ENGINEERING
ECONOMICS
INTENDED LEARNING OUTCOMES OF ECONOMICS
1. Study of role of economic analysis in
engineering
2. Study of foundations of engineering
economics
3. Learn the time value of money using different
techniques such as present worth, annual
worth, and future worth
4. Learn basic economic analysis tools
5. Learn how to make better economic
decisions and improve the economic studies.
Why Engineering Economy is Important to
Engineers

 Engineers design and create

 Designing involves economic decisions
 Engineers must be able to incorporate economic
analysis into their creative efforts
 Often engineers must select and implement from
multiple alternatives
 Understanding and applying time value of money,
economic equivalence, and cost estimation are vital
for engineers
 A proper economic analysis for selection and
execution is a fundamental task of engineering
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
 Time Value of Money (TVM)
Description: TVM explains the change in the
amount of money over time for funds owed by or
owned by a corporation (or individual)

 Corporate investments are expected to earn a return

 Investment involves money
 Money has a ‘time value’

The time value of money is the most

important concept in engineering
economy
© 2012 by McGraw-Hill, New York, N.Y All Rights Reserved
 Engineering Economy
 Engineering Economy involves
 Formulating
 Estimating, and
 Evaluating
expected economic outcomes of alternatives
designed to accomplish a defined purpose
 Easy-to-use math techniques simplify the
evaluation
 Estimates of economic outcomes can be
deterministic or stochastic in nature
General Steps for Decision Making Processes

1. Understand the problem – define objectives

2. Collect relevant information
3. Define the set of feasible alternatives
4. Identify the criteria for decision making
5. Evaluate the alternatives and apply
sensitivity analysis
6. Select the “best” alternative
7. Implement the alternative and monitor
results
Steps in an Engineering Economy Study
 Ethics – Different Levels
 Universal morals or ethics – Fundamental
beliefs: stealing, lying, harming or murdering
another are wrong
Personal morals or ethics – Beliefs that an
individual has and maintains over time; how a
universal moral is interpreted and used by
each person
 Professional or engineering ethics – Formal
standard or code that guides a person in work
activities and decision making
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1-10
 Interest and Interest Rate
 Interest – the manifestation of the time value of money
• Fee that one pays to use someone else’s money
• Difference between an ending amount of money and
a beginning amount of money

 Interest = amount owed now – principal

 Interest rate – Interest paid over a time period expressed

as a percentage of principal

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1-11
 Rate of Return

 Interest earned over a period of time is expressed as a

percentage of the original amount (principal)
interest accrued per time unit
Rate of return (%) = x 100%
original amount

 Borrower’s perspective – interest rate paid

 Lender’s or investor’s perspective – rate of return earned

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1-12
Interest paid Interest earned

Interest rate Rate of return

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1-13
 Commonly used Symbols
t = time, usually in periods such as years or months
P = value or amount of money at a time t
designated as present or time 0
F = value or amount of money at some future
time, such as at t = n periods in the future
A = series of consecutive, equal, end-of-period
amounts of money
n = number of interest periods; years, months
i = interest rate or rate of return per time period;
percent per year or month
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1-14
 Cash Flows: Terms
 Cash Inflows – Revenues (R), receipts,
incomes, savings generated by projects and
activities that flow in. Plus sign used
 Cash Outflows – Disbursements (D), costs,
expenses, taxes caused by projects and
activities that flow out. Minus sign used
 Net Cash Flow (NCF) for each time period:
NCF = cash inflows – cash outflows = R – D
 End-of-period assumption:
Funds flow at the end of a given interest period
 Cash Flows: Estimating
 Point estimate – A single-value estimate of a
cash flow element of an alternative
Cash inflow: Income = $150,000 per month

 Range estimate – Min and max values that

estimate the cash flow
Cash outflow: Cost is between $2.5 M and $3.2 M
Point estimates are commonly used; however, range estimates
with probabilities attached provide a better understanding of
variability of economic parameters used to make decisions
 Cash Flow Diagrams
What a typical cash flow diagram might look like
Draw a time line Always assume end-of-period cash flows

Time
0 1 2 … … … n-1 n
One time
period
F = $100
Show the cash flows (to approximate scale)

0 1 2 … … … n-1 n
Cash flows are shown as directed arrows: + (up) for inflow
P = $-80
- (down) for outflow
 Cash Flow Diagram Example
Plot observed cash flows over last 8 years and estimated sale next
year for $150. Show present worth (P) arrow at present time, t = 0

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 Economic Equivalence
Definition: Combination of interest rate (rate of
return) and time value of money to determine
different amounts of money at different points
in time that are economically equivalent

How it works: Use rate i and time t in upcoming

relations to move money (values of P, F and A)
between time points t = 0, 1, …, n to make
them equivalent (not equal) at the rate i

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1-19
 Example of Equivalence
Different sums of money at different times may
be equal in economic value at a given rate
$110

Year

0 1
Rate of return = 10% per year

$100 now

$100 now is economically equivalent to $110 one year from

now, if the $100 is invested at a rate of 10% per year.
 Simple and Compound Interest

 Simple Interest
Interest is calculated using principal only
Interest = (principal)(number of periods)(interest rate)
I = Pni

Example: $100,000 lent for 3 years at simple i = 10%

per year. What is repayment after 3 years?
Interest = 100,000(3)(0.10) = $30,000

Total due = 100,000 + 30,000 = $130,000

 Simple and Compound Interest
 Compound Interest
Interest is based on principal plus all accrued interest
That is, interest compounds over time

Interest = (principal + all accrued interest) (interest rate)

Interest for time period t is

 Compound Interest Example
Example: $100,000 lent for 3 years at i = 10% per
year compounded. What is repayment after 3
years?
Interest, year 1: I1 = 100,000(0.10) = $10,000
Total due, year 1: T1 = 100,000 + 10,000 = $110,000
Interest, year 2: I2 = 110,000(0.10) = $11,000
Total due, year 2: T2 = 110,000 + 11,000 = $121,000
Interest, year 3: I3 = 121,000(0.10) = $12,100
Total due, year 3: T3 = 121,000 + 12,100 = $133,100
Compounded: $133,100 Simple: $130,000
 Minimum Attractive Rate of Return
 MARR is a reasonable rate
of return (percent)
established for evaluating
and selecting alternatives
 An investment is justified
economically if it is
expected to return at least
the MARR
 Also termed hurdle rate,
benchmark rate and cutoff
rate
 MARR Characteristics
 MARR is established by the financial
managers of the firm
 MARR is fundamentally connected to the cost
of capital
 Both types of capital financing are used to
determine the weighted average cost of capital
(WACC) and the MARR
 MARR usually considers the risk inherent to a
project
 Types of Financing

 Equity Financing –Funds either from retained

earnings, new stock issues, or owner’s
infusion of money.
 Debt Financing –Borrowed funds from outside
sources – loans, bonds, mortgages, venture
capital pools, etc. Interest is paid to the lender
on these funds
For an economically justified project
ROR ≥ MARR > WACC
 Opportunity Cost
 Definition: Largest rate of return of all projects not
accepted (forgone) due to a lack of capital funds
 If no MARR is set, the ROR of the first project not undertaken
establishes the opportunity cost

Example: Assume MARR = 10%. Project A, not

funded due to lack of funds, is projected to
have RORA = 13%. Project B has RORB = 15%
and is funded because it costs less than A
Opportunity cost is 13%, i.e., the opportunity to
make an additional 13% is forgone by not
funding project A
 Introduction to Spreadsheet Functions
Excel financial functions
Present Value, P: = PV(i%,n,A,F)
Future Value, F: = FV(i%,n,A,P)
Equal, periodic value, A: = PMT(i%,n,P,F)
Number of periods, n: = NPER((i%,A,P,F)
Compound interest rate, i: = RATE(n,A,P,F)
Compound interest rate, i: = IRR(first_cell:last_cell)
Present value, any series, P: = NPV(i%,second_cell:last_cell) + first_cell

Example: Estimates are P = $5000 n = 5 years i = 5% per year

Find A in $ per year
Function and display: = PMT(5%, 5, 5000) displays A = $1154.87
 Lecture 2
Factors: How Time and Interest
Affect Money
 Single Payment Factors (F/P and P/F)
Single payment factors involve only P and F. Cash flow diagrams are as follows:

Formulas are as follows:

F = P(1 + i ) n P = F[1 / (1 + i ) n]
Terms in parentheses or brackets are called factors. Values are in tables for i and n values
Factors are represented in standard factor notation such as (F/P,i,n),
where letter to left of slash is what is sought; letter to right represents what is given
 F/P and P/F for Spreadsheets

Future value F is calculated using FV function:

= FV(i%,n,,P)

Present value P is calculated using PV function:

= PV(i%,n,,F)
Note the use of double commas in each function
 Example: Finding Future Value
A person deposits $5000 into an account which pays interest at a rate of 8%
per year. The amount in the account after 10 years is closest to:

(A) $2,792 (B) $9,000 (C) $10,795 (D) $12,165

The cash flow diagram is:

Solution:
F = P(F/P,i,n )
= 5000(F/P,8%,10 )
= 5000(2.1589)
= $10,794.50
Answer is (C)
 Example: Finding Present Value
A small company wants to make a single deposit now so it will have enough money to
purchase a backhoe costing $50,000 five years from now. If the account will earn
interest of 10% per year, the amount that must be deposited now is nearest to:

(A) $10,000 (B) $ 31,050 (C) $ 33,250 (D) $319,160

The cash flow diagram is: Solution:

P = F(P/F,i,n )
= 50,000(P/F,10%,5 )
= 50,000(0.6209)
= $31,045

Answer is (B)
Uniform Series Involving P/A and A/P
The uniform series factors that involve P and A are derived as follows:
(1) Cash flow occurs in consecutive interest periods
(2) Cash flow amount is same in each interest period

The cash flow diagrams are:

A = Given A=?

0 1 2 3 4 5 0 1 2 3 4 5

P = Given
P=?
P = A(P/A,i,n) Standard Factor Notation A = P(A/P,i,n)

Note: P is one period Ahead of first A value

 Example: Uniform Series Involving P/A
A chemical engineer believes that by modifying the structure of a certain water
treatment polymer, his company would earn an extra $5000 per year. At an interest
rate of 10% per year, how much could the company afford to spend now to just
break even over a 5 year project period?

(A) $11,170 (B) 13,640 (C) $15,300 (D) $18,950

The cash flow diagram is as follows: Solution:

A = $5000 P = 5000(P/A,10%,5)
= 5000(3.7908)
4 5
= $18,954
0 1 2 3
i =10% Answer is (D)
P=?
 Uniform Series Involving F/A and A/F
The uniform series factors that involve F and A are derived as follows:
(1) Cash flow occurs in consecutive interest periods
(2) Last cash flow occurs in same period as F

Cash flow diagrams are:

A = Given A=?

0 1 2 3 4 5 0 1 2 3 4 5

F=? F = Given

F = A(F/A,i,n) Standard Factor Notation A = F(A/F,i,n)

Note: F takes place in the same period as last A

 Example: Uniform Series Involving F/A
An industrial engineer made a modification to a chip manufacturing
process that will save her company $10,000 per year. At an interest rate
of 8% per year, how much will the savings amount to in 7 years?

(A) $45,300 (B) $68,500 (C) $89,228 (D) $151,500

The cash flow diagram is:

F=? Solution:
F = 10,000(F/A,8%,7)
i = 8%
= 10,000(8.9228)
0 1 2 3 4 5 6 7
= $89,228

Answer is (C)
A = $10,000
Factor Values for Untabulated i or n
3 ways to find factor values for untabulated i or n values

Use formula
Use spreadsheet function with corresponding P, F, or A value set to 1
Linearly interpolate in interest tables

Formula or spreadsheet function is fast and accurate

Interpolation is only approximate
 Example: Untabulated i
Determine the value for (F/P, 8.3%,10)

Formula: F = (1 + 0.083)10 = 2.2197 OK

Spreadsheet: = FV(8.3%,10,,1) = 2.2197 OK

Interpolation: 8% ------ 2.1589

8.3% ------ x
9% ------ 2.3674

x = 2.1589 + [(8.3 - 8.0)/(9.0 - 8.0)][2.3674 – 2.1589]

= 2.2215 (Too high)

Absolute Error = 2.2215 – 2.2197 = 0.0018

 Arithmetic Gradients
Arithmetic gradients change by the same amount each period

The cash flow diagram for the PG

of an arithmetic gradient is: G starts between periods 1 and 2
PG = ? (not between 0 and 1)

1
This is because cash flow in year 1 is
2 3 4 n
usually not equal to G and is handled
0 separately as a base amount
(shown on next slide)
G
2G
3G
(n-1)G Note that PG is located Two Periods
Ahead of the first change that is equal
to G
Standard factor notation is
PG = G(P/G,i,n)
 Typical Arithmetic Gradient Cash Flow
PT = ?

i = 10%
0 1 2 3 4 5

400
450
Amount in year 1 500
is base amount 550
600

This diagram = this base amount plus this gradient

PA = ? PG = ?
i = 10% i = 10%

+
0 1 2 3 4 5 0 1 2 3 4 5

Amount 400 400 400 400 400

50
in year 1 100
PA = 400(P/A,10%,5) PG = 50(P/G,10%,5) 150
is base 200
amount PT = PA + PG = 400(P/A,10%,5) + 50(P/G,10%,5)
 Converting Arithmetic Gradient to A
Arithmetic gradient can be converted into equivalent A value using G(A/G,i,n)
i = 10% i = 10%
0 1 2 3 4 5 0 1 2 3 4 5

G
2G A=?
3G
4G

General equation when base amount is involved is

A = base amount + G(A/G,i,n)
For decreasing gradients,
0 1 2 3 4 5
change plus sign to minus
4G
3G
2G A = base amount - G(A/G,i,n)
G
 Example: Arithmetic Gradient
The present worth of $400 in year 1 and amounts increasing by $30 per year
through year 5 at an interest rate of 12% per year is closest to:

(A) $1532 (B) $1,634 (C) $1,744 (D) $1,829

Solution:
PT = ? PT = 400(P/A,12%,5) + 30(P/G,12%,5)
i = 12% = 400(3.6048) + 30(6.3970)
0 1 2 3 4 5 Year = $1,633.83
Answer is (B)
400
430 The cash flow could also be converted
460
490 into an A value as follows:
G = $30 520
A = 400 + 30(A/G,12%,5)
= 400 + 30(1.7746)
= $453.24
 Geometric Gradients
Geometric gradients change by the same percentage each period
Cash flow diagram for present worth
of geometric gradient
There are no tables for geometric factors
Pg = ?
Use following equation for g ≠ i:
1 2 3 4 n
Pg = A1{1- [(1+g)/(1+i)]n}/(i-g)
0
A1 where: A1 = cash flow in period 1
A1 (1+g)1 g = rate of increase
A 1(1+g)2

Note: g starts between If g = i, Pg = A1n/(1+i)

periods 1 and 2 A 1(1+g)n-1

Note: If g is negative, change signs in front of both g values

 Example: Geometric Gradient
Find the present worth of $1,000 in year 1 and amounts increasing
by 7% per year through year 10. Use an interest rate of 12% per year.
(a) $5,670 (b) $7,333 (c) $12,670 (d) $13,550

Pg = ? Solution:
i = 12%
1 2 3 4 10 Pg = 1000[1-(1+0.07/1+0.12)10]/(0.12-0.07)
= $7,333
0
1000
1070 Answer is (b)
1145
g = 7%

1838 To find A, multiply Pg by (A/P,12%,10)

 Unknown Interest Rate i
Unknown interest rate problems involve solving for i,
given n and 2 other values (P, F, or A)
(Usually requires a trial and error solution or interpolation in interest tables)

Procedure: Set up equation with all symbols involved and solve for i
A contractor purchased equipment for $60,000 which provided income of $16,000
per year for 10 years. The annual rate of return of the investment was closest to:

(a) 15% (b) 18% (c) 20% (d) 23%

Solution: Can use either the P/ A or A/ P factor. Using A/ P:

60,000(A/P,i%,10) = 16,000
(A/P,i%,10) = 0.26667
From A/P column at n = 10 in the interest tables, i is between 22% and 24% Answer is (d)
 Unknown Recovery Period n
Unknown recovery period problems involve solving for n,
given i and 2 other values (P, F, or A)
(Like interest rate problems, they usually require a trial & error solution or interpolation in interest tables)

Procedure: Set up equation with all symbols involved and solve for n

A contractor purchased equipment for $60,000 that provided income of $8,000

per year. At an interest rate of 10% per year, the length of time required to recover
the investment was closest to:
(a) 10 years (b) 12 years (c) 15 years (d) 18 years

Solution: Can use either the P/A or A/P factor. Using A/P:
60,000(A/P,10%,n) = 8,000
(A/P,10%,n) = 0.13333
From A/P column in i = 10% interest tables, n is between 14 and 15 years Answer is (c)
 Summary of Important Points
In P/A and A/P factors, P is one period ahead of first A

In F/A and A/F factors, F is in same period as last A

To find untabulated factor values, best way is to use formula or spreadsheet

For arithmetic gradients, gradient G starts between periods 1 and 2

Arithmetic gradients have 2 parts, base amount (year 1) and gradient amount

For geometric gradients, gradient g starts been periods 1 and 2

In geometric gradient formula, A1 is amount in period 1
To find unknown i or n, set up equation involving all terms and solve for i or n