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ENGINEERING ECONOMY
Chapter 3 : Combining Factors
LEARNING OUTCOMES

1. Shifted uniform series

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

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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

FA = ? Shifted series usually

require the use of
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

P of the uniform series

I. Use the P/F factor to find the present worth of each disbursement at year 0 an
d add them.
II. Use the F/P factor to find the future worth of each disbursement in year 13, a
dd them, and then find the present worth of the total using P=F (P/F, i, 13).
III. Use the F/A factor to find the future amount F=A (F/A, i, 10), and then comput
e the present worth using P = F (P/F, i, 3).
IV. Use the P/A factor to compute the “present worth” (which will be located in y
3-3 i,
ear 3 not year 0), and then find the present worth in year 0 by using the (P/F,
3) factor. (Present worth is enclosed in quotation marks here only to represen
t the present worth as determined by the P/A factor in year 3, and to differenti
ate it from the present worth in year 0.
EXAMPLE USING P/A FACTOR: SHIFTED U
12 NIFORM 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
Example Using F/A Factor: Shifted Un
13 iform Series
How much money would be available in year 10 if $8000 is deposited each y
ear 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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SHIFTED SERIES AND RANDOM SIN
GLE 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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EXAMPLE: SERIES AND RANDOM SINGLE AM
OUNTS
Find the present worth in year 0 for the cash flows
14 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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EXAMPLE: SERIES AND RANDOM SINGL
E 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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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 3-9
 EXAMPLE: SERIES AND RANDOM A
MOUNTS
Convert the cash flows shown below (black arrows) into
an equivalent annual worth A in years 1 through 8 (red arrows)
15 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)
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= $1698
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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16Example: Shifted Arithmetic Gradient
John Deere expects the cost of a tractor part to increase by $5 per year beginning 4 y
ears 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 Gradient
s
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 3-13

 Example: Shifted Geometric Gradien
17 t
Weirton Steel signed a 5-year contract to purchase water treatment chemicals fr
om a local distributor for $7000 per year. When the contract ends, the cost of th
e chemicals is expected to increase by 12% per year for the next 8 years. If an i
nitial 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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 Example: Shifted Geometric Gradien
t

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 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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 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 3-17

SUMMARY OF IMPORTANT POI
NTS

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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SELF STUDY
 Present Worth Calculations: 3.3, 3.5, 3.9.
 Annual Worth Calculations : 3.11, 3.13, 3.14, 3.16,
3.19.
 Future Worth Calculations : 3.22, 3.24, 3.25, 3.26.

 Random Single Amounts and Uniform Series : 3.3

0, 3.31, 3.33.
 Shifted Gradients : 3.35, 3.44, 3.45.

 Shifted Decreasing Gradients : 3.46, 3.49, 3.50.

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