Engineering Economy 1

University of Diyala
Engineering Economy: Third Stage

College of Engineering

Engineering Economy
Third Stage
Dep. of Civil Eng.

Lecturer
M.S. Sultan N. Al-Gaisi
2018-2019
Sultan Noori AL-Gaisi
Engineering Economy: Third Stage Engineering Economy 2

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 3

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 4

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 5

Single Payment Factors (F/P and P/F)

Engineering Economy: Third Stage

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 6

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 7

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 8

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 9

Uniform Series Involving P/A and A/P

Engineering Economy: Third Stage

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

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 10

Uniform Series Involving P/A and A/P

Engineering Economy: Third Stage

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 11

Example: Uniform Series Involving P/A

Engineering Economy: Third Stage

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?

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 12

Uniform Series Involving F/A & A/F

Engineering Economy: Third Stage

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

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 13
Uniform Series Involving F/A & A/F
Engineering Economy: Third Stage

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 14

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 15

Factor Values for Un-tabulated i or n

Engineering Economy: Third Stage

Three ways to find factor values for un-tabulated i or

n values

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

Formula or spreadsheet function is fast and accurate

Interpolation is only approximate

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 16

Example: Un-tabulated i
Engineering Economy: Third Stage

Determine the value for (F/P, 8.3%,10)

Absolute Error = 2.2215 – 2.2197 = 0.0018

Sultan Noori AL-Gaisi
 Chapter 2 Factors: How Time and Interest Affect Money 17

Arithmetic Gradients
Engineering Economy: Third Stage

Arithmetic gradients change by the same amount each

period
G starts between periods 1 and 2
The cash flow diagram for the
(not between 0 and 1)
PG of an arithmetic gradient is:
This is because cash flow in year 1 is
usually not equal to G and is handled
separately as a base amount
(shown on next slide)

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)

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 18

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 19

Converting Arithmetic Gradient to A

Engineering Economy: Third Stage

Arithmetic gradient can be converted into equivalent A value

using G(A/G,i,n)

General equation when base amount is involved is

A = base amount + G(A/G,i,n)

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 20

For decreasing gradients, change plus sign to minus

A = base amount - G(A/G,i,n)

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 21

Example: Arithmetic Gradient

Engineering Economy: Third Stage

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 22

Geometric Gradients
Engineering Economy: Third Stage

Geometric gradients change by the same percentage

each period
Cash flow diagram for present worth
of geometric gradient

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

values
Sultan Noori AL-Gaisi
 Chapter 2 Factors: How Time and Interest Affect Money 23

Geometric Gradients
Engineering Economy: Third Stage

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 24

Example: Geometric Gradient

Find the present worth of $ 1,000 in year 1 and amounts increasing
Engineering Economy: Third Stage

by 7% per year through year 10. use an interest rate of 12% per year.

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 25

Unknown Interest Rate i

Engineering Economy: Third Stage

Unknown interest rate problems involve for 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

Ex/

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 26
Unknown Recovery Period n
Unknown recovery period problems involve solving for n, given i
Engineering Economy: Third Stage

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
Ex/ 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:

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money 27
Summary of Important Points
Engineering Economy: Third Stage

Sultan Noori AL-Gaisi

 Chapter 2 Factors: How Time and Interest Affect Money
Engineering Economy: Third Stage 28

Sultan Noori AL-Gaisi