2/6/2025

School of Management
Sciences

Engineering
Economics
(MS291)

Previous Week
• Time value of Money
• Simple and Compound Interest
• Single Payment Compound Amount
Factor
• Single Payment Present Worth Factor
• Uniform Series Present Worth Factor
• Capital Recovery Factor

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Chapter 2
Factors: How Time
and Interest Affect
Money

Engineering
Economics
(MS291)

Content of the Chapter

❖ Single-Payment Compound Amount Factor (SPCAF)

❖ Single-Payment Present Worth Factor (SPPWF)

❖ Uniform Series Present Worth Factor (USPWF)

❖ Capital Recovery Factor (CRF)

❖ Uniform Series Compound Amount Factor

❖ Sinking Fund Factor (SFF)

❖ Arithmetic Gradient Factor

❖ Geometric Gradient Series Factor

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A Standard Notation
• Instead of writing the full formulas of SPCAF and SPPWF for
simplicity there is a standard notation

• This notation includes two cash flow symbols, interest rate and
number of periods

• General form is: (X/Y, i, n) which means “X” represents what is

sought, Y is given, i is the interest rate and n is the number of
periods
• Examples:
Name Equation with Notation Standard Notation Find/
factor formula Equation Given
Single-payment compound F = P(1+i)n F = P(F/P, i, n) F/P
amount (F/P, i, n)
Single-payment present (P/F, i, n) P = F(P/F, i, n) P/F
worth
P = F(1+i)-n

Capital Recovery Factor (CRF)

(1 + 𝑖)𝑛 −1 A=?
𝑃=𝐴
𝑖(1 + 𝑖)𝑛 t=0 1 2 3 n-1 n
t = given
𝑛
𝑖(1 + 𝑖) P = given
𝐴=𝑃
(1 + 𝑖)𝑛 −1
• The term in bracket is called Capital Recovery Factor (CRF)
or A/P factor and it calculates the equivalent uniform annual
worth A over n years for a given P in year 0, when the
interest rate is i
Name Equation with factor Notation Standard Notation
formula Equation

Uniform Series (1 + 𝑖)𝑛 −1

Present Worth 𝑃=𝐴 (P/A, i, n) P = A(P/A, i, n)
𝑖(1 + 𝑖)𝑛

𝑖(1 + 𝑖)𝑛 A = P(A/P, i, n)

Capital Recovery 𝐴=𝑃
(1 + 𝑖)𝑛 −1
(A/P, i, n)

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Summary Slide
Factors Formula Standard Notation
F/P factor F = P(1+i)n F = P(F/P, i, n)

P/F factor P = F(1+i) −n P = F(P/F, i, n)

(1 + 𝑖)𝑛 −1
P/A factor 𝑃=𝐴 P = A(P/A, i, n)
𝑖(1 + 𝑖)𝑛
𝑖(1 + 𝑖)𝑛
A/P factor 𝐴=𝑃
(1 + 𝑖)𝑛 −1
A = P(A/P, i, n)

Spread Sheet Functions

• Our course book (Blank and Tarquin) from time to time refers to
“Spreadsheet functions”

• You will also come across various Spreadsheet formulas while

reading the book

• We will “Ignore” those parts because you cannot use them in

exams. Yes, you will need it while doing projects in real life but
applying that from EXCEL is not difficult if you know what it
means.

• We will discuss the use of spreadsheet functions once we learn

it manually

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Factor Values for

Untabulated i or n

There are 3 ways to find factor values for

untabulated i or n values
1. Use formula
2. Use spreadsheet function
3. Linearly interpolate in interest tables

• Formula or spreadsheet function is fast & accurate

• Interpolation is only approximate

Factor Values for Untabulated i or n

Linear Interpolation
𝑥−𝑥1
formula 𝑓 = 𝑓1 + (𝑓 −𝑓1 )
𝑥2 −𝑥1 2
Factor value
axis Example
f2 Determine the value of (F/P, 8.3%, 10)
We have value of 8% and 9% only in
Tables
Linear from Factor Tables for F/P
unknown assumption
X f(x)
f
8 % ………... 2.1589
8.3% (x)……….. unknown
9 % …….….. 2.3674
f1 𝑥−𝑥1
𝑓 = 𝑓1 + (𝑓 −𝑓1 )
𝑥2 −𝑥1 2
8.3−8.0
𝑓 = 2.1589 + (2.3674 − 2.1589)
9−8
Required 𝑓 = 2.2215
X1 X2
X
Original value for 8.3% is 2.2197
i or n axis Absolute Error = 2.2215 – 2.2197
= 0.0018
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Uniform Series Compound Amount

Factor (USCAF) F = ?
t = given and i = given
0 1 2 3 n-1 n

A = given

• Similar to Uniform Series Present Worth Factor we have

Uniform Series Compound Amount Factor which is given
as follows (only the term in the parenthesis)
(1 + 𝑖)𝑛 −1
𝐹=𝐴
𝑖

• The term in the parenthesis is called Uniform Series

Compound Amount Factor (USCAF) represented as F/A, to
multiply with a given uniform amount gives the future value of
a uniform series

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• What is meant by Sinking Fund ?

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Sinking Fund Factor (SFF)

t = given and i = given F = given
0 1 2 3 n-1
n
A=?

• Sinking Fund Factor (A/F) can be obtained from USCAF and given as :

(1 + 𝑖)𝑛 −1
𝐹=𝐴
𝑖

𝑖
𝐴=𝐹
(1 + 𝑖)𝑛 −1
• The term in the brackets is Sinking Fund Factor and is used to determines
the uniform annual series A that is equivalent to a given future amount F

13

Example
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?
Solution:
The cash flow diagram is:
A =10,000
i = 8% F=? i =8%
A = $10,000 n =7

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

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Using Factor Tables

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Class Practice:
4 Minutes
Problem 1
The president of Ford Motor
Company wants to know the
equivalent future worth of
a $1 million capital
investment each year for 8
years, starting 1 year from
now. Ford capital earns at a
rate of 14% per year.

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Solution
Problem 1
• i= 14%
• n = 8 years
• A= 1 million F=?
i = 14%
1 2 3 4 5 6 7 8
A = $10,000
• Which factor should be used ?
• F = A(F/A, i, n)
• F = 1 ( F/A, 14%,8)
= 1 (13.2328)
$13.23280 millions

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Class Practice 1:
Allowed Time 7
A chemical product company is considering investment in
cost saving equipment. If the new equipment will cost
$220,000 to purchase and install, how much must the
company save each year for 3 years in order to justify the
investment, if the interest rate is 10% per year?

Hint: Cost savings are benefits

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Class Practice:
Allowed Time 7
A chemical product company is considering investment in
cost saving equipment. If the new equipment will cost
$220,000 to purchase and install, how much must the
company save each year for 3 years in order to justify the
investment, if the interest rate is 10% per year?
Solution:
The cash flow diagram is as follows: P = 220,000
I = 10%
A=? n=3
Which factor should be used ?
A = P(A/P, i, n)
0 1 2 3
A = 220,000(A/P,10%,3)
P = $220,000 i =10%
= 220,000(0.40211)
= $88,464

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A chemical product company is considering investment in cost saving

equipment. If the new equipment will cost $220,000 to purchase and install,
how much must the company save each year for 3 years in order to justify the
investment, if the interest rate is 10% per year?
The cash flow diagram is as follows:
A=?

0 1 2 3
i =10%
P = $220,000
P = $220,000
A = P(A/P, i, n) F = 220,000(F/P,10%,3)
F = 220,000(1.3310)
A = 220,000(A/P,10%,3) F = 292,820
= 220,000(0.40211) A = 292,820(A/F,10%,3)
A= $88,464 A = 292,820(0.30211)
A = 88463.8

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Practice II: 5 minutes

How much money should you be willing to pay now for
a guaranteed $600 per year for 9 years starting next
year, at a rate of return of 16% per year?

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Example 2.3
How much money should you be willing to
pay now for a guaranteed $600 per year for
9 years starting next year, at a rate of return
of 16% per year?
A = $600
Solution:
P=?
i = 16% t=0 1 2 3 4 9
n=9
Which factor should be used ?
P=?
P = A(P/A, i, n)
A = $600(P/A,16%, 9) ➔ 600(4.6065) = $2763.90

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Summary Slide
Factors Formula Standard Notation
F/P factor F = P(1+i)n F = P(F/P, i, n)
P = F(1+i) −n P = F(P/F, i, n)
P/F factor
(1 + 𝑖)𝑛 −1
𝑃=𝐴 P = A(P/A, i, n)
𝑖(1 + 𝑖)𝑛
P/A factor
𝑖(1 + 𝑖)𝑛
𝐴=𝑃
(1 + 𝑖)𝑛 −1
A = P(A/P, i, n)
A/P factor
(1 + 𝑖)𝑛 −1
F/A factor 𝐹=𝐴 F = A(F/A, i, n)
𝑖
𝑖
A/F factor 𝐴=𝐹
(1 + 𝑖)𝑛 −1
A = F(A/F, i, n)
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Till Now!

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

❑ Uniform Series Factors (P/A, A/P, F/A, A/F)
❑ Athematic Gradient

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Example
• You bought a used car with one year warranty
• expected costs during first year will be
fuel and insurance that is $2500
• let assume that cost of repair is
increasing by $200 every year
• what will be the amount in Second Year ?
0 1 2 3 n-1 n
Base amount
$2500

$2700
Gradient (G) = $200
$2900
$2500+(n-2)200
$2500+(n-1)200

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Arithmetic Gradient Factors

(P/G)
• Cash flows that increase or decrease constantly are
considered arithmetic gradient cash flows.

• The amount of increase (or decrease) is called the gradient

$2000 Gradient
$175 $1500 series
$150 $1000 could be
$125
$100 $500 both: cash
inflow (as
given
0 1 2 3 4 0 1 2 3 4 here) or
Outflows
G = $25 G = -$500
Base = $100 Base = $2000

Cash Flow Formula CFn = base amount + (n-1)G

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Arithmetic Gradient Factor

(P/G)

• When we have a “Gradient” Series we

cannot apply Single Amount Present
Worth/Future Worth factors or Uniform
Series factors

• We have to use a different methodology to

address problems related to gradient cash
flows.

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Solving Arithmetic Gradient

related problems
Present value of the Arithmetic Gradient series (P/G) can be
calculated as follows:
1. Find the gradient and base
2. Cash flow diagram maybe helpful if you draw it
3. Break the gradient series into a Uniform series and a
Gradient Series as shown on next slide
4. The formula for calculating present value of the
Arithmetic Gradient series is as follows;

PT = PA + PG
5. Calculate PA and PG and use the above formula to
get the present value of the Arithmetic Gradient
Note: the + sign or “−” sign in point 4, depends if gradient is increasing or
decreasing
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Arithmetic Gradient Factor

(P/G)
• The base amount is “A” and the “Gradient is “G” in the
following graph
Cash Flow Formula CFn = base amount + (n-1)G
Important!!!
PG series start
A+(n-1) G with year 2
A+3G
(n-1)G
A+2G
3G
A+G 2G
A A A A A A
G
= + 0

0 1 2 3 4 n 0 1 2 3 4 n
0 1 2 3 4 n

PT = PA + PG
Note: the + sign or “−” sign in above formula depends if gradient is increasing or
decreasing
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Arithmetic Gradient Factors

(P/G)

PT = PA + PG
• PA = A(P/A, i, n) or Uniform Series Present worth
Factor
• PG = G(P/G, i, n) or Arithmetic Gradient Present
Worth Factor … you can use table for it too.
• Alternatively, PG can also be calculated by
following formula
G n
 (1 + i ) − 1 − n 

PG =
i  i (1 + i ) n
(1 + i ) n 
 
G n 
 (1 + i ) − in − 1 
PG =
Or i  i 2 (1 + i ) n 
 

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Arithmetic Gradient Factors

(P/G)
Equivalent cash flows:
$175
$150
$125 $75
$100 $100 $50
$25
=> +
0 1 2 3 4
0 1 2 3 4 0 1 2 3 4
Note: Annuity series (PA) Note: the gradient series
G = $25 (PG) by convention starts
starts from year 1.
Base = $100 in year 2.

PT = PA + PG
G  (1 + i )n − 1 n 
PG =  − 
$P = $100(P/A,i,4) + $25(P/G,i,4)
i  i (1 + i ) n
(1 + i )n 

Where PA = Present worth uniform series (P/A, i,n) and PG = present worth of the gradient series (P/G,i, n)

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Example (Problem 2.25)

Profits from recycling paper, cardboard, aluminium,
and glass at a liberal arts college have increased at a
constant rate of $1100 in each of the last 3 years.

If this year’s profit (end of year 1) is expected to be

$6000 and the profit trend continues for another 4
years ,
(a) what will the profit be at the end of year 5 and
(b) what is the present worth of the profit at an interest
rate of 8% per year?
G = $1100, Base = $6000

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Example (Problem 2.25)

(a) what will the profit be at the end of year 5 &
(b) what is the present worth of the profit at an interest rate of 8% per
year?
$4400
G = $1100 Base = $6000 $6000 $3300
$2200
$1100
$10400
$9300 +
=> 0 1 2 3 4 5 0 1 2 3 4 5
$8200
$7100 PT = PA + PG
$6000
P = A(P/A, i, n) + G(P/G, i, n)
P = 6000(P/A, 8%, 5) + 1100(P/G, 8%, 5)
+
0 1 2 3 4 5
Find the cash flows as follows: P = 6000(3.9927) 1100(7.3724)
CF = Base + G(n-1)
CF1 = 6000 + 1100(1-1)= 6000 P = 32,066
CF2 = 6000 + 1100(2-1)= 7100
CF3 = 6000 + 1100(3-1)= 8200
CF4 = 6000 + 1100(4-1)= 9300
CF5 = 6000 + 1100(5-1)= 10400

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Example (Problem 2.25)

(a) what will the profit be at the end of year 5 &
(b) what is the present worth of the profit at an interest rate of 8% per
year?

G = $1100 Base = $6000

$10400
$9300
=>
$8200
$7100
$6000

0 1 2 3 4 5
Find the cash flows as follows:
CF = Base + G(n-1)
CF1 = 6000 + 1100(1-1)= 6000
CF2 = 6000 + 1100(2-1)= 7100
CF3 = 6000 + 1100(3-1)= 8200
CF4 = 6000 + 1100(4-1)= 9300
CF5 = 6000 + 1100(5-1)= 10400

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Practice : 5 minutes
Neighboring parishes in Louisiana have agreed to pool
road tax resources already designated for bridge
refurbishment. At a recent meeting, the engineers
estimated that a total of $500,000 will be deposited at
the end of next year into an account for the repair of
old and safety-questionable bridges throughout the area.
Further, they estimate that the deposits will increase
by $100,000 per year for only 9 year thereafter, then
cease. Determine the equivalent: present value, if public
funds earn at a rate of 5% per year.
5% Uniform Series Factors Athematic Gradient
n Sinking Compound Capital Present Gradient Gradient
Fund Amount Recovery Worth Present Worth Uniform
(A/F) (F/A) (A/P) (P/A) (P/G) Series (A/G)
9 0.09069 11.0266 0.14069 7.1078 26.1268 3.6758
10 0.07950 12.5779. 0.12950 7.7217 31.6520 4.0991
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Solution
• Base = 500,000
• Gradient = 100,000
• Taking units in 1000 P = ?
• Base = 500
• Gradient =100
0 1 2 3 4 5 6 7 8 9 10
• i= 5%
• n=1+9 = 10 $500
$600
$700
$800
$900

PT = PA + PG $1000 $1100
$1200
$1300
$1400

P
T = 500(P/A,5%,10) + 100(P/G,5%,10)
= 500(7.7217) + 100(31.6520)
=$7026.05 or ….. ($7,026,050)
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…. What about A/G or F/G?

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Arithmetic Gradient Uniform

Series Factor (A/G)

• Similar procedure as done for Arithmetic Gradient Present

worth Factor
• Following formula:

AT = AA + AG
AA = A (Annuity Series) Given as base value of G series and AG = G(A/G, i, n)

AG can be get from 1 𝑛

factor tables or through 𝐴𝐺 = 𝐺 −
given formula in box 𝑖 (1 + 𝑖)𝑛 −1

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Example: A/G factor

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Example: A/G Factor

Neighboring parishes in Louisiana have agreed to pool

road tax resources already designated for bridge
refurbishment. At a recent meeting, the engineers
estimated that a total of $500,000 will be deposited at
the end of next year into an account for the repair of
old and safety-questionable bridges throughout the area.
Further, they estimate that the deposits will increase
by $100,000 per year for only 9 year thereafter, then
cease.
Determine the equivalent: Annual series amount, if
public funds earn at a rate of 5% per year.

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Solution
AT = AA + AG
• Base = 500,000
AT = 500 + 100(A/G,5%,10)
• Gradient = 100,000 = 500 + 100(4.0991)
• Taking units in 1000 =$909.91 or ….. ($909,910)

• Base = 500 0 1 2 3 4 5 6 7 8 9 10

• Gradient =100
• i= 5% $500
$600
• n=1+9 = 10 $700
$800
$900
$1000 $1100
$1200
$1300
$1400
0 1 2 3 4 5 6 7 8 9 10

A= $909,910

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43

Arithmetic Gradient Future

Worth Factor (F/G)
• Another factor in “Gradient family” is “Future” value
of an Arithmetic Gradient series (F/G)
• It can be obtained by multiply (P/G) and (F/P) factors
1 (1 + 𝑖)𝑛 −1 𝑃 𝐹 𝐹
𝐹/𝐺 𝑜𝑟 𝐹𝐺 = 𝐺 −𝑛 × =
𝑖 𝑖 𝐺 𝑃 𝐺

No factor table values is available so only formula can be use for calculating “F/G” factor

Note: To get future value of Arithmetic Gradient …. We do not need to

divide the gradient into two separate cash flows like Present value of
Arithmetic gradient series…. This F/G will be the future value of entire
gradient series.

You can also convert athematic gradient first to Present value using P/G and
then convert that present value to Future value using F/P factor
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Final Words about Arithmetic

Gradient
Present value or Annual value of Arithmetic Gradient (P/G or A/G)
…. Base and Gradient considered separately for both P/G and A/G
…. Get Two series… a PA/AA series and one PG/AG series
….use the factor tables to get values for PA/AA & PG/AG
You can also convert the
…… Add both to get PT/AT. athematic gradient first
to the Present value
using P/G and then
Future value of Arithmetic Gradient (F/G)
convert that present
… Base and Gradient are not considered separately value to the Future value
…. No factor values are available so have to rely on formula using the F/P factor
….formula directly calculates the future value of the Arithmetic Gradient

1 (1 + 𝑖)𝑛 −1
𝐹/𝐺 𝑜𝑟 𝐹𝐺 = 𝐺 −𝑛
𝑖 𝑖

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Geometric Gradient
Factors
(Pg /A)

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Geometric Gradient Factors

(Pg /A)
• A Geometric gradient is when the periodic payment is increasing
(decreasing) by a constant percentage:
• the rate at which the cash flow is increasing is “g”
• The initial amount of Geometric Gradient is A1
• Pg is the present value of entire Gradient Series including A1

• It is important to note that “Initial amount” is not considered

separately while working with “Geometric Gradient”
for g ≠ i: for g = i:
1+𝑔 𝑛 𝑛
1− 𝑃𝑔 = 𝐴
1+𝑖 1+𝑖
𝑃𝑔 = 𝐴
𝑖−𝑔

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

47

Geometric Gradient Factors

(Pg /A)
• A Geometric gradient is when the periodic payment is
increasing (decreasing) by a constant percentage: A (1+g)n-1
1
A1 = $100, g = 10% or 0.1
A2 = $100(1+g)
A (1+g)2
A3 = $100(1+g)2 A1 (1+g) 1
A1

An = $100(1+g)n-1
0 1 2 3 4 ……n
where: A1 = cash flow in period 1 and g = rate of increase
It maybe noted that A1
for g ≠ i: is not considered
separately in geometric
1+𝑔 𝑛 for g = i: gradients
1− 1+𝑖 𝑛
𝑃𝑔 = 𝐴 𝑃𝑔 = 𝐴
𝑖−𝑔 1+𝑖

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

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Future value (F/G) and Annuity

(A/G) from Geometric Gradient
Series

• We just learned how to get “Present Value” of a

Geometric Gradient

• We can first derive the Present value of the Geometric

Gradient and then can use F/P factor for
calculating future value of a geometric gradient

• Similarly, A/P factor can be applied to P/G factor to

calculate the Annual value/Annuity series from
Geometric Gradient
49

Class Practice: 4 Minutes

Determine the present value of a geometric
gradient series with a cash flow of $50,000 in
year 1 and increases of 6% each year
through year 8. The interest rate is 10% per
year.

for g ≠ i:
1+𝑔 𝑛 for g = i:
1− 1+𝑖 𝑛
𝑃𝑔 = 𝐴 𝑃𝑔 = 𝐴
𝑖−𝑔 1+𝑖

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Class Practice: 4 Minutes

Determine the present value of a geometric
gradient series with a cash flow of $50,000 in
year 1 and increases of 6% each year
through year 8. The interest rate is 10% per
year.
   1 + 0.6  
8
1+ g  1− 
n
1− 
      1 − 0.743 

Pg = A  1+ i   == 50000 1 + 0.10  
 0.10 − 0.06 
== 50,000 
i−g   0.04 
   
   
   

 0.257 
== 50,000  == 50,000(6.425)
 0.04 
= $321,250
51

Summary of all
Factors!!!

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Single payment Factors

F=?
F/P Factor
F= P(F/P, i%, n)

n and i is given

P is given

P/F Factor
P =? P= F(P/F, i%, n)

n and i is given

F = given
53

Uniform Series Factors

P/A Factor A/P Factor

P = A(P/A, i%, n) A = P(A/P, i%, n)

F/A Factor A/F Factor

F = A(F/A, i%, n) A = F(A/F, i%, n)

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Athematic Gradient

FG = ?
F = PT(F/PT, i%, n)
or
PA = A(P/A, i%, n) 1 (1 + 𝑖)𝑛 −1
𝐹/𝐺 𝑜𝑟 𝐹𝐺 = 𝐺 −𝑛
𝑖 𝑖
PG = G(P/G, i%, n)

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Athematic Gradient

A = PT(A/PT, i%, n)
or
AT = AA + AG
PA = A(P/A, i%, n) AA = A (Annual value) &
AG = G(A/G, i, n)
PG = G(P/G, i%, n) 1 𝑛
𝐴𝐺 = 𝐺 −
𝑖 (1 + 𝑖)𝑛 −1

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Geometric Gradient

Pg = ?

Fg = ?
for g ≠ i: F = Pg(F/P, i%, n)
𝑛
1+𝑔
1− 1+𝑖 Similarly …
𝑃𝑔 = 𝐴
𝑖−𝑔
for g = i:
𝑛
𝑃𝑔 = 𝐴 A = Pg(A/P, i%, n)
1+𝑖

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Chapter 3
Combining Factors
and Spreadsheet
Functions

Engineering
Economics
(MS291)

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This Chapter Objectives

1. Shifted uniform series

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

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Example

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Year

P=? A = $50
F
P3 = ?

How can we get “Present value of this series” ?

• Use the P/F factor to find the present value of each disbursement at year 0 and add
them.
• Use the F/P factor to find the future value of each disbursement in year 13, add
them, and then find the present value of the total, using P/F= F( P/F, i ,13).
• Use the F/A factor to find the future amount F/A =A( F/A, i ,10), and then compute
the present value, using P/F=F(P/F, i ,13).
• Use the P/A factor to compute the “present value” P3 =A( P/A , i ,10) (which will be
located in year 3, not year 0), and then find the present value in year 0 by using the
(P/F , i ,3) factor.

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Shifted Uniform Series

• Typically the last method is used for calculating the present value
of a uniform series that does not begin at the end of period 1.

• Note that a P value is always located 1 year or period prior to the

beginning of the first series amount. Why? Because the P/A factor
was derived with P in time period 0 and A beginning at the end of
period 1.

• The most common mistake made in working problems of this type

is improper placement of P .
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
• The number of periods n in the P/A or F/A factor is equal to the number of uniform
series values

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PA is always one year ahead

of first A

0 1 2 3 4 5 6 7 8 9 10 11 12 13
Year

A = $50
P3 = ?

FA is in same year as last A

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Year

A = $50 F=?
The number of periods n in the P/A or
F/A factor is equal to the number of
uniform series values

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Steps for applying factors to

Shifted Cash Flows

1. Draw a diagram of the positive and negative cash flows.

2. Locate the present value or future value of each series on
the cash flow diagram.
3. Determine n for each series by renumbering the cash flow
diagram.
4. Draw another cash flow diagram representing the desired
equivalent cash flow. (Optional)
5. Set up and solve the equations.

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Example
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
value in year 0 of the payments if the interest rate is 8%
per year?
Solution 1. Draw a diagram of the positive and negative cash flows.
2. Locate the present
value or future value of
each series on the cash
i= 8% per year flow diagram.
0 1 2 3 4 5 6 7 8 Year
PA = ? 0 1 2 3 4 5 6 n

P’A = ?
PT = ? A = $500 3. Determine n for each
series by renumbering the
P0 = $5000 cash flow diagram.

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5. Set up P' A = $500( P /A ,8%,6)

and solve
the P = P' ( P /F ,8%, 2)
A A
equations.
P = $500( P /A ,8%,6) ( P /F ,8%, 2)
A

PT = P0 + PA
=5000 + 500( P /A ,8%,6)( P / F ,8%,2)
=5000 +500(4.6229)(0.8573)
$6981.60

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Class Practice 5 Minutes Time

Calculate the present value of the cash flow shown below at i = 10%

i = 10%
0 1 2 3 4 5 6 Actual year

A = $10,000

10% Single Payments Uniform Series Factors

n Compound Present Sinking Compound Capital Present

Amount Worth Fund Amount Recovery Worth
(F/P) (P/F) (A/F) (F/A) (A/P) (P/A)
1 1.1000 0.9091 1.00000 1.0000 1.10000 0.9091
5 1.6105 0.6209 0.16380 6.1051 0.26380 3.7908

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Class Practice 5 Minutes Time

Calculate the present value of the cash flow shown below at i = 10%

i = 10%
0 1 2 3 4 5 6 Actual year
0 1 2 3 4 5 Series year

P’A = ? A = $10,000
PT = ?
Solution
(1) Use P/A factor with n = 5 (for 5 arrows) to get P’A in year 1 ----→ A(P/A,10%, 5)

(2) Use P/F factor with n = 1 to move P’A back for PT in year 0 ----→ (P/F,10%, 1)

PT = A(P/A,10%, 5) (P/F,10%,1)
= 10,000(3.7908)(0.9091)
$34462
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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

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Example
Find the present value in year 0 for the cash flows shown using an interest
rate of 10% per year.
i = 10%
0 1 2 3 4 5 6 7 8 9 10

A = $5000
Solution: $2000

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
PT = ? $2000

• Find the cash flows both positive and negatives

• Locate the present value/ future value
• Determine the “n” by re-numbering the cash flows series
• 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
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Example:

PT = ? PA = ?

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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Class Practice: 8 Minutes

An engineering company lease the mineral rights to a mining
company on its land. 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?
16% Single Payments Uniform Series Factors

n Compound Present Worth Capital Present Worth

Amount (F/P) (P/F) Recovery (A/P) (P/A)
6 2.4364 0.4104 0.27139 3.6847
7 2.8262 0.3538 0.24761 4.0386
16 10.7480 0.0930 0.17641 5.6685
17 12.4677 0.0802 0.17395 5.7487
20 19.4608 0.0514 0.16867 5.9228

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Solution

0 1 2 3 4 5 6 7 16 17 18 19 20

A =$20,000

P=?
$10,000
$15,000

P = 20,000(P/A ,16%,20)+
10,000( P /F ,16%,6) +
15,000(P/F,16%,16)
P = $20,000(5.9288)+ $ 10,000( 0.4104) + $ 15,000(0.0930)
= $124,075

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This Chapter Objectives

1. Shifted uniform series

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

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Shifted Gradient Series

• We already learnt how to get P (Present

value) or A ( Annuity or a Uniform series)
from a Gradient Series

• We will now discuss how to calculate P or

A from “Shifted Gradient Series” … a
gradient series not starting from year 1.

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P from Arithmetic Shifted Gradient Series

P from Normal Arithmetic Gradient Series Shifted Arithmetic gradient Series
PT = ?
PA = A(P/A, i%, n)
PG = G(P/G, i%, n)

PA = ?

PG = ? P’G = ?

• Shifted gradient begins at a

time other than between periods • Present value PG is located 2
1 and 2 periods before gradient starts

P T =P A +P G
• Must use multiple factors to find PT
=100(P/A , i ,8) + 50(P/G, i ,5)(P/F, i ,3)
in actual year 0

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What will be the procedure for calculating “P” from

Shifted “Geometric” Gradient Series?

Lets discuss it directly from a Numerical Example

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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 value in year 0 of all of the
cash flows at i = 15% per year.

PT = ? Pg = ? i =15% per year

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Year
0 1 2 3 4 5 6 7 8 9 Geometric
Gradient n
$7000 $7840

$35000

$17331
12% increase
per year

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P from Shifted Gradient Series

PT = 35,000 + A ( P /A ,15%, 4) + A1 ( Pg/A ,12%,15%,9) (P/F ,15%,4)

1− 1.12⁄1.15 9
PT = 35,000 + 7000 ( 2.8550) + 7000 (0.5718)
0.15−0.12

$83,232

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A from Shifted Gradient Series

Shifted gradient Series A (Annuity or Uniform Series)

0 1 2 3 4 5 6 7 8

• To calculate A for shifted Gradient Series (Arithmetic or

Geometric), there are several possibilities.

• The easiest way (and recommended also) is to get the “P” of

shifted Gradient Series first (procedure just explained in pervious slides) then
use A/P factor to get A for the shifted gradient series

• A, for above example will be: A = PT (A/PT, i%, n),

• where PT refers to the present value of the shifted gradient series that procedure is
already explained on pervious slide.

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Important Points for P and A

of Shifted Gradient Series
• Must use multiple factors to find P in actual year 0, for shifted
gradient series

• The present value (P) of an arithmetic gradient will always be

located two periods before the gradient starts.

• To find the equivalent A series of a shifted gradient through

all the n periods, first find the present value of the gradient at
actual time 0, then apply the (A/P, i, n) factor.

• F from gradient series can also be find by first calculating P

and then using F/P factor

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Example: Comparisons
For the cash flows shown, find the future value in year 7 at i = 10% per year

i = 10%
0 1 2 3 4 5 6 7
Actual years
Using
0 1 2 3 4 5 6 Gradient years
Multiple
Methods 450
500
550
PG = ? 600
650
P’G 700
F=?
G = $-50
Solution: PG is located in gradient year 0 (actual year 1); base amount of $700 is in gradient years 1-6
P’G = A(P/A,10%,6) – G(P/G,10%,6)
P’G = 700(P/A,10%,6) – 50(P/G,10%,6) = 700(4.3553) – 50(9.6842) = $2565
PG= P’G(P/F,10%,1) = 2565(0.9091) = $2331.84

F = P’G(F/P,10%,7) = 2331.84(1.9487) = $4544 Method 1

F = P’G(F/P,10%,6) = 2565(1.7716) = $4544 Method 2

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Using Single Amount factors (Correct

but not Standard methods)

Method 3

Method 4

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Assignment No. 1
• Will be posted on MS Team by or Before Sunday 9th
February 2025
• Submission will be due by 17:00 hours on Friday,
February 14th , 2025
• Submission has to be made on MS Team within due
date. No late submission will be accepted or graded.
• It will cover 2% weight in your grades
• You have to solve it on paper, write your name, reg#,
section, and upload it on MS Team by or before due
date.

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Quiz No. 1

• Tentatively on Wednesday 19th February 2025 in

evening in Exam Halls
• Will be based on topics covered in Chapter 1
• Can be theory/numerical mix
• Can have subjective/objective structure

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Thank You

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