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ARITHMETIC GRADIENT
2/15/2016
PT = PA + PG
5. Calculate PA and PG and use the above formula to
get the present value of the Arithmetic Gradient
0 1 2 3 4 n 0 1 2 3 4 n
0 1 2 3 4 n
PT = PA + PG
2/15/2016
PT = PA + PG
• PA = A(P/A, i, n) or Uniform Series Present worth
Factor
PT = PA + PG
G (1 i )n 1 n
PG
i i (1 i )n (1 i )n
$P = $100(P/A,i,4) + $25(P/G,i,4)
Where PA = Present worth uniform series (P/A, i,n) and PG = present worth of the gradient series (P/G,i, n)
2/15/2016
Solution
• Base = 500,000 PT = PA + PG
• Gradient = 100,000 PT = 500(P/A,5%,10) + 100(P/G,5%,10)
• Taking units in 1000 = 500(7.7217) + 100(31.6520)
=$7026.05 or ….. ($7,026,050)
• Base = 500
• Gradient =100 0 1 2 3 4 5 6 7 8 9 10
• i= 5%
$500
• n=1+9 = 10 $600
$700
$800
$900
$1000 $1100
$1200
$1300
$1400
P=?
2/15/2016
AT = AA + AG
AA = A (Annual Worth) Given as base value of G series and AG = G(A/G, i, n)
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
$700
• n=1+9 = 10 $800
$900
$1000 $1100
$1200
$1300
$1400
0 1 2 3 4 5 6 7 8 9 10
A= $909,910
2/15/2016
No factor table values is available so only formula can be use for calculating “F/G” factor
1 (1 + ) −1
/ = −
2/15/2016
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+ for g = i: gradients
1− 1+
= =
− 1+
for g ≠ i:
1+ for g = i:
1− 1+
= =
− 1+
2/15/2016
1 1 g
n
1 0 .743
Pg A 1 i 50000 1 0 .10
0 .10 0 .06
50 ,000
ig 0 .04
0 .257
50 ,000 50 ,000 ( 6 .425 )
0 .04
$ 321 , 250
Summary of all
Factors!!!
2/15/2016
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
Athematic Gradient
FG = ?
F = PT(F/P, i%, n)
or
PA = A(P/A, i%, n) 1 (1 + ) −1
/ = −
PG = G(P/G, i%, n)
Athematic Gradient
A = PT(A/P, i%, n)
or
AT = AA + AG
PA = A(P/A, i%, n) AA = A (Annual Worth) &
AG = G(A/G, i, n)
PG = G(P/G, i%, n) 1
= −
(1 + ) −1
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Geometric Gradient
Fg = ?
Pg = ?
Chapter 3
Combining Factors
and Spreadsheet
Functions
Engineering Economy
2/15/2016
Example
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Year
P=? A = $50
F
P3 = ?
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Year
A = $50
P3 = ?
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
2/15/2016
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
worth 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
worth or future worth 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.
2/15/2016
PT = P0 +PA
=5000 + 500( P /A ,8%,6)( P / F ,8%,2)
=5000 +500(4.6229)(0.8573)
$6981.60
Calculate the present worth of the cash flow shown below at i = 10%
i = 10%
0 1 2 3 4 5 6 Actual year
A = $10,000
Calculate the present worth 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
• The resulting values are then combined per the problem statement
2/15/2016
Example
Find the present worth 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
Example:
PT = ? PA = ?
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
2/15/2016
Solution
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
Set up the
0 1 2 3 4 5 6 Gradient years
equations
only… 500
450
550
PG = ? P’G 600
700
650 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(F/P,10%,1) = 2565(0.9091) = $2331.84
Method 3
Method 4
So for ….
1. Introduction
What is Economics? Economics for Engineers ?
What is Engineering Economy ? Performing Engineering Economy
Study ?
Some Basic Concepts Utility & Various cost concept, Time value of
money (TVM), Interest rate and Rate of Returns, Cash Flow, Economic
Equivalence, Minimum Attractive Rate of Return, Cost of Capital and
MARR, Simple and compound interest rates
2. Various Type of Factors
These were three
Factors Single payment Factors “Foundational
P/F, F/P Pillars” we need
Uniform Series Factors
P/A, A/P, F/A, A/F for using “various
Gradient Series Factors engineering
Arithmetic Gradient and Geometric Gradient economy criteria”
for decision
3. Dealing with Shifted Series making
Shifted uniform series
Shifted series and single cash flows
Shifted gradients
2/15/2016
Chapter 4
Nominal and Effective
Interest Rates
Compounded daily
Rate is 15% per year but compounding is daily … so the rate at per day is 0.15/365 =
0.000411 per day or 0.0411% per day
Days Amount ($) Interest earned Total due ($) 1161.815863 …..
But this is around
1 1000 Amount x r =0.411 1000.411
16.81% rate … rather
2 1000.411 0.411169 1000. 82269 than 15% stated
Previous Learning
• Our learning so for is based “one” interest rate that’s
compounded annually
Interest Rate:
important terminologies
Compounding period (CP) – The time unit over which interest is charged or earned.
For example,10% per year, here CP is a year.
IMPORTANT: Compounding
Period and Interest Rate
Calculating Effective
Interest Rate
Example:
Example: Calculating
Effective Interest rates per CP
a. 9% per year, compounded quarterly.
b. 9% per year, compounded monthly.
c. 4.5% per 6 months, compounded weekly.
Class Practice 1:
• Nominal rates are converted into Effective Annual Interest Rates (EAIR)
via the equation:
= (1 + ) −1 = (1 + ) −1
Example
For a nominal interest rate of 12% per year, determine the nominal and effective
rates per year for
(a) quarterly, and ia = (1 + i)m – 1
(b) monthly compounding
where ia = effective annual interest rate
i = effective rate for one compounding
Solution: period (r/m)
m = number times interest is compounded
per year
(a) Nominal r per year = 12% per year
Nominal r per quarter = 12/4 = 3.0% per quarter
Effective i per year = (1 + 0.03)4 – 1 = 12.55% per year
(b) Nominal r per month = 12/12 = 1.0% per month
Effective I per year = (1 + 0.01)12 – 1 = 12.68% per year
15% per year
Compounded daily
Economic Equivalence:
From Chapter 1
0 1 2 3 4 5 6 7 8 9 10 11 12 Months
│PP │
1 month PP = CP, PP >CP, or PP<CP
Thank You