Ch3_Combining_Factors_and_Spreadsheet_Functions
Ch3_Combining_Factors_and_Spreadsheet_Functions
1 Calculations for
Uniform Series That
Are Shifted
1
2 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
– 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
PA = PA’(P/F, 8%, 2)
15 3.1 Calculations for Uniform
Series That Are Shifted
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
The equivalent series A’ for 8 years can now be determined via the
A/P factor
21
22 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
– 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
37
38 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
– 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
– 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
PG = 20(P/G, i, 5)
AG = P0(A/P, i, 7)
– 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 3.8:
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
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
20,577 = A1(2.7750)(0.4632)
A1 = $16,009 in year 11
61 THAT’S ALL FOLKS!