0% found this document useful (0 votes)
9 views

Ch3_Combining_Factors_and_Spreadsheet_Functions

The document discusses calculations for uniform series that are shifted, detailing methods to find the equivalent present worth, including the use of various financial factors. It provides examples to illustrate these calculations, emphasizing the importance of correctly identifying the timing of cash flows and the number of periods involved. Additionally, it covers the treatment of cash flows that include both uniform series and randomly placed single amounts, as well as shifted gradients.

Uploaded by

Razan Ismail
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
0% found this document useful (0 votes)
9 views

Ch3_Combining_Factors_and_Spreadsheet_Functions

The document discusses calculations for uniform series that are shifted, detailing methods to find the equivalent present worth, including the use of various financial factors. It provides examples to illustrate these calculations, emphasizing the importance of correctly identifying the timing of cash flows and the number of periods involved. Additionally, it covers the treatment of cash flows that include both uniform series and randomly placed single amounts, as well as shifted gradients.

Uploaded by

Razan Ismail
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 61

3.

1 Calculations for
Uniform Series That
Are Shifted

1
2 3.1 Calculations for Uniform
Series 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
3 3.1 Calculations for Uniform
Series That Are Shifted

– In this case, several methods can be used to find the


equivalent present worth P. For example, P of the uniform
series shown in the figure below could be determined by
any of the following methods:
4 3.1 Calculations for Uniform
Series That Are Shifted

• Use the P/F factor to find the present worth of each


disbursement at year 0 and add them
• Use the F/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/F, i, 13)
5 3.1 Calculations for Uniform
Series That Are Shifted

• Use the F/A factor to find the future amount F = A(F/A, i,


10), and then compute the present worth, using P = F(P/F, i,
13)
• Use the P/A factor to compute the “present worth” P3 =
A(P/A, i, 10) (which will be located in year 3, not year 0),
and then find the present worth in year 0 by using the (P/F,
i, 3) factor
6 3.1 Calculations for Uniform
Series That Are Shifted

– Typically the last method is used for calculating the present


worth of a uniform series that does not begin at the end of
period 1
7 3.1 Calculations for Uniform
Series That Are Shifted

– Note:
the present worth is always located one period prior to the
first uniform series amount when using the P/A factor
8 3.1 Calculations for Uniform
Series That Are Shifted

– Note:
The future worth is always located in the same period as
the last uniform series amount when using the F/A factor
9 3.1 Calculations for Uniform
Series That Are Shifted

– It is also important to remember that the number of


periods n in the P/A or F/A factor is equal to the number of
uniform series values
10 3.1 Calculations for Uniform
Series That Are Shifted

– Note:
it may be helpful to renumber the cash flow diagram to
avoid errors in counting
11 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.1:
The offshore design group at Bechtel just purchased
upgraded 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 in year
0 of the payments if the interest rate is 8% per year?
12 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.1 (Solution):


13 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.1 (Solution):


The cash flow diagram is shown in Figure 3–4. The symbol
PA is used throughout 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
represents 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 P∕A factor
14 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.1 (Solution):


First find the value of PA’ of the shifted series

PA’ = $500(P/A, 8%, 6)

Since PA’ is located in year 2, now find PA in year 0

PA = PA’(P/F, 8%, 2)
15 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.1 (Solution):


The total present worth is determined by adding PA and the
initial payment P0 in year 0

PT = P0 + PA
= 5000 + 500(P/A, 8%, 6)(P/F, 8%,2)
= 5000 + 500(4.6229)(0.8573)
= $6981.60
16 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.2:
Recalibration of sensitive measuring devices costs $8000
per year. If the machine will be recalibrated for each of 6
years starting 3 years after purchase, calculate the 8-year
equivalent uniform series at 16% per year. Show hand
solution.
17 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.2 (Solution):


18 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.2 (Solution):


To convert the $8000 shifted series to an equivalent
uniform series over all periods, first convert the uniform
series into a present worth or future worth amount. Then
either the A/P factor or the A/F factor can be used
19 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.2 (Solution):


Present worth method.
Calculate PA’ for the shifted series in year 2, followed by PT in year 0.
There are 6 years in the A series

PA’ = 8000(P/A, 16%, 6)


PT = PA’(P/F, 16%, 2)
= 8000(P/A, 16%, 6)(P/F, 16%,2)
= 8000(3.6847)(0.7432)
= $21,907.75

The equivalent series A’ for 8 years can now be determined via the
A/P factor

A’ = PT(A/P, 16%, 8) = $5043.60


20 3.1 Calculations for Uniform
Series That Are Shifted

– Example 3.2 (Solution):


Future worth method.
First calculate the future worth F in year 8

F = 8000(F/A, 16%, 6) = $71,820

The A/F factor is now used to obtain A’ over all 8 years

A’ = F(A/F, 16%, 8) = $5043.20


3.2 Calculations Involving
Uniform Series and
Randomly Placed Single
Amounts

21
22 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– When a cash flow includes both a uniform series and


randomly placed single amounts, the procedures of section
3.1 are applied to the uniform series and the single-amount
formulas are applied to the one-time cash flows.
23 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.3:
An engineering company in Wyoming that owns 50 hectares of
valuable land has decided to lease the mineral rights to a
mining company. The primary objective is to obtain long-term
income to finance ongoing projects 6 and 16 years from the
present time. The engineering company makes a proposal to
the mining company that it pay $20,000 per year for 20 years
beginning 1 year from now, plus $10,000 six years from now
and $15,000 sixteen years from now. If the mining company
wants to pay off its lease immediately, how much should it pay
now if the investment is to make 16% per year?
24 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.3 (Solution):


25 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.3 (Solution):


PT = 20,000(P/A, 16%, 20) + 10,000(P/F, 16%, 6) +
15,000(P/F, 16%, 16)
= $124,075
26 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– When you calculate the A value for a cash flow series that
includes randomly placed single amounts and uniform
series, first convert everything to a present worth or a
future worth. Then you obtain the A value by multiplying P
or F by the appropriate A/P or A/F factor.
27 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4:
A design-build-operate engineering company in Texas that
owns a sizable amount of land plans to lease the drilling
rights (oil and gas only) to a mining and exploration
company. The contract calls for the mining company to pay
$20,000 per year for 20 years beginning 3 years from now
(i.e., beginning at the end of year 3 and continuing through
year 22) plus $10,000 six years from now and $15,000
sixteen years from now. Utilize engineering economy
relations by hand to determine the five equivalent values
listed below at 16% per year.
28 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4:
(1) Total present worth PT 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
29 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


30 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


1. PT in year 0.
First determine PA’ of the series in year 2. Then PT is the sum of
three P values: the series present worth value moved back to t
= 0 with the P/F factor, and the two P values at t = 0 for the
two single amounts in year 6 and 16
PA’ = 20,000(P/A, 16%, 20)
PT = PA’(P/F, 16%, 2) + 10,000(P/F, 16%, 6) + 15,000(P/F, 16%,
16)
= 20,000(P/A, 16%, 20)(P/F, 16%, 2) + 10,000(P/F, 16%, 6) +
15,000(P/F, 16%, 16)
= $93,625
31 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


2. F in year 22.
To determine F in year 22 from the original cash flows, find
F for the 20-year series and add the two F values for the
two single amounts. Be sure to carefully determine the n
values for the single amounts: n = 22-6 = 16 for the $10,000
amount and n = 22-16 = 6 for the $15,000 amount
F = 20,000(F/A, 16%, 20) + 10,000(F/P, 16%, 16) +
15,000(F/P, 16%, 6)
= $2,451,626
32 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


3. A over 22 years.
Multiply PT = $93,625 from (1) above by the A/P factor to
determine an equivalent 22-year A series, referred to as A1-22
here

A1-22 = PT(A/P, 16%, 22)


= 93,625(0.16635)
= $15,575

An alternate way to determine the 22-year series uses the F


value from (2) above. In this case, the computation is A1-22 =
F(A/F, 16%, 22) = $15,575
33 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


4. A over years 1 to 10.
To determine the equivalent A series for years 1 through 10
only (call it A1-10), the PT value must be used with the A/P
factor for n = 10.

A1-10 = PT(A/P, 16%, 10)


= 93,625(0.20690)
= $19,371
34 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


35 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


5. A over years 11 to 22.
For the equivalent 12-year series for years 11 through 22
(call it A11-22), the F value must be used with the A/F factor
for 12 years

A11-22 = F(A/F, 16%, 12)


= 2,451,626(0.03241)
= $79,457
36 3.2 Calculations Involving Uniform Series
and Randomly Placed Single Amounts

– Example 3.4 (Solution):


3.3 Calculations for
Shifted Gradients

37
38 3.3 Calculations for Shifted
Gradients

– 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
39 3.3 Calculations for Shifted
Gradients

– Example 3.5:
Fujitsu, Inc. has tracked the average inspection cost on a
robotics manufacturing line for 8 years. Cost averages were
steady at $100 per completed unit for the first 4 years, but
have increased consistently by $50 per unit for each of the
last 4 years. Analyze the gradient increase, using the P/G
factor. Where is the present worth located for the gradient?
What is the general relation used to calculate total present
worth in year 0?
40 3.3 Calculations for Shifted
Gradients

– Example 3.5 (Solution):


41 3.3 Calculations for Shifted
Gradients

– Example 3.5 (Solution):


PT = PA + PG
= 100(P/A, i, 8) + 50(P/G, i, 5)(P/F, i, 3)
42 3.3 Calculations for Shifted
Gradients

– It is important to note
that the A/G factor
cannot be used to find an
equivalent A value in
periods 1 through n for
cash flows involving a
shifted gradient
43 3.3 Calculations for Shifted
Gradients

– Consider the shown cash


flow diagram, to find the
equivalent annual series in
years 1 through 10 for the
gradient series only, first
find the present worth PG
of the gradient in actual
year 5, take this present
worth back to year 0, and
annualize the present
worth for 10 years with the
A/P factor
44 3.3 Calculations for Shifted
Gradients

– If you apply the annual


series gradient factor
(A/G, i, 5) directly, the
gradient is converted into
an equivalent annual
series over years 6
through 10 only, not years
1 through 10, as
requested
45 3.3 Calculations for Shifted
Gradients

– Note:
To find the equivalent A series of a shifted gradient through
all the n periods, first find the present worth of the
gradient at actual time 0, then apply the (A/P, i, n) factor
46 3.3 Calculations for Shifted
Gradients

– Example 3.6:
Set up the engineering economy relations to compute the
equivalent annual series in years 1 through 7 for the
following cash flow diagram
47 3.3 Calculations for Shifted
Gradients

– Example 3.6 (Solution):


48 3.3 Calculations for Shifted
Gradients

– Example 3.6 (Solution):


The base amount annual series is AB = $50 for all 7 years.
Find the present worth PG in actual year 2 of the $20
gradient that starts in actual year 4. The gradient n is 5

PG = 20(P/G, i, 5)

Bring the gradient present worth back to actual year 0

P0 = PG(P/F, i, 2) = 20(P/G, i, 5)(P/F, i, 2)


49 3.3 Calculations for Shifted
Gradients

– Example 3.6 (Solution):


Annualize the gradient present worth from year 1 through
year 7 to obtain AG

AG = P0(A/P, i, 7)

Finally, add the base amount to the gradient annual series

AT = 20(P/G, i, 5)(P/F, i, 2)(A/P, i, 7) + 50


50 3.3 Calculations for Shifted
Gradients

– Note:
the present worth of a geometric gradient series will always
be located two periods before the gradient starts, and the
initial amount is included in the resulting present worth
51 3.3 Calculations for Shifted
Gradients

– Example 3.7:
Chemical engineers at a Coleman Industries plant in the
Midwest have determined that a small amount of a newly
available chemical additive will increase the water repellency
of Coleman’s tent fabric by 20%. The plant superintendent has
arranged to purchase the additive through a 5-year contract at
$7000 per year, starting one year from now. He expects the
annual price to increase by 12% per year thereafter for the
next 8 years. 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
equivalent total present worth for all these cash flows.
52 3.3 Calculations for Shifted
Gradients

– Example 3.7 (Solution):


53 3.3 Calculations for Shifted
Gradients

– Example 3.7 (Solution):


PT = 35,000 + A(P/A, 15%, 4) + A1(P/A, 12%, 15%, 9)(P/F,
15%, 4)
1+0.12 9
1−
1+0.15
= 35,000 + 7000(2.8550) + 7000 (0.5718)
0.15−0.12
= 35,000 + 19,985 + 28,247
= $83,232
54 3.3 Calculations for Shifted
Gradients

– Example 3.8:
Morris Glass Company has decided to invest funds for the
next 5 yeas so that development of “smart” glass is well
funded in the future. This type of new-technology glass
uses electrochrome coating to allow rapid adjustment to
sun and dark in building glass, as well as assisting with
internal heating and cooling cost reduction. The financial
plan is to invest first, allow appreciation to occur, and then
use the available funds in the future. All cash flow
estimates are in $1000 units, and the interest rate
expectation is 8% per year
55 3.3 Calculations for Shifted
Gradients

– Example 3.8:
Years 1 through 5: Invest $7000 in year 1, decreasing by
$1000 per year through year 5
Year 6 through 10: No new investment and no withdrawals
Year 11 through 15: Withdraw $20,000 in year 11,
decreasing 20% per year through year 15
Determine if the anticipated withdrawals will be covered by
the investment and appreciation plans.
56 3.3 Calculations for Shifted
Gradients

– Example 3.8 (Solution):


57 3.3 Calculations for Shifted
Gradients

– Example 3.8 (Solution):


Investment series.
Decreasing, conventional arithmetic series starting in year
2 with A = $-7000, G = $-1000, and gradient n = 5 years. The
present worth in year 0 is

PG = -[7000(P/A, 8%, 5) – 1000(P/G, 8%, 5)]


= $-20,577
58 3.3 Calculations for Shifted
Gradients

– Example 3.8 (Solution):


Withdrawal series.
Decreasing, shifted geometric series starting in year 12 with A1
= $20,000, g = -0.20, and gradient n = 5 years. If the present
worth in year 10 is identified as Pg,10, the present worth in year
0 is Pg,o.

Pg,0 = Pg,10(P/F, i, n)
= A1(P/A, g, i, n)(P/F, i, n)
1+ −0.20 5
1−
1+0.08
= 20,000 (0.4632)
0.08− −0.20
= 20,000(2.7750)(0.4632)
= $25,707
59 3.3 Calculations for Shifted
Gradients

– Example 3.8 (Solution):


The net total present worth

PT = -20,577 + 25,707 = $+5130

This means that more is withdrawn than the investment


series earns. Either additional funds must be invested or
less must be withdrawn to make the series equivalent at
8% per year
60 3.3 Calculations for Shifted
Gradients

– Example 3.8 (Solution):


To find the exact amount of the initial withdrawal series to
result in PT = 0, let A1 be an unknown in Equation [3.7] and
set Pg,0 = −PG = 20,577.

20,577 = A1(2.7750)(0.4632)
A1 = $16,009 in year 11
61 THAT’S ALL FOLKS!

You might also like