‫كلية الهندسة – قسم الهندسة الكهربائية‬

‫العام الدراسي‪2021 /2020 :‬م – الفصل الدراسي الثاني‬

‫المقرر‪ :‬االقتصاد الهندسي‬ ‫الفرقة‪ :‬الرابعة‬
‫رقم المحاضرة‪3:‬‬ ‫عنوان المحاضر‪HOW TIME & INTEREST AFFECT MONEY :‬‬
‫‪Mr. MUBARAK MOHAMMED‬‬
 SYLLABUS

➢ Fundamentals of Engineering Economy

➢ How Time & Interest Affect Money
➢ Nominal and Effective Interest Rate
➢ Present, Annual, and Rate of Return Analysis
➢ Breakeven, Sensitivity, and Payback Analysis
➢ Replacement and Retention Analysis
➢ Cost Estimation Approaches
➢ Depreciation.
2
 OBJECTIVES

✓ Use the compound amount factor and present worth factor for
single payments. (F/P , P/F)
✓ Use the uniform series factors. (P/A , A/P, F/A , A/F)
✓ Use the arithmetic gradient factors formula.
✓ Use uniform series and gradient factors when cash flows are
shifted.
 Single-Payment Formulas (F/P , P/F)

The determination of the amount of money F accumulated after n years

(or periods) from a single present worth P, with interest compounded
one time per year (or period) i , is given by:

The term 1 + 𝑖 𝑛 is called the single-payment compound amount factor

(SPCAF), or the F/P factor. This is the conversion factor that yields the
future amount F of an initial amount P after n years at interest rate i.
Single-Payment Formulas (F/P , P/F)

single-payment compound amount factor

 Single-Payment Formulas (F/P , P/F)

Reverse the situation to determine the P value for a stated amount F.

Simply solving for P.

1
The term is known as the single-payment present worth
1+𝑖 𝑛
factor (SPPWF), or the P/F factor. This expression determines the
present worth P of a given future amount F after n years at interest
rate i.
Single-Payment Formulas (F/P , P/F)

single-payment compound amount factor

 Single-Payment Formulas (F/P , P/F)

• A standard notation has been adopted for all factors. It is always in

the general form (X/Y,i,n).
• The letter X represents what is sought, while the letter Y represents
what is given. The i is the interest rate in percent, and n represents
the number of periods involved.
• Thus, (F/P,6%,20) represents the factor that is used to calculate the
future amount F accumulated in 20 periods if the interest rate is 6%
per period. The P is given.
 Single-Payment Formulas (F/P , P/F)

• Table : Compound interest factor

 Single-Payment Formulas (F/P , P/F)

Example:
An engineer received a bonus of $12,000 that he will invest now. He
wants to calculate the equivalent value after 24 years, when he plans
to use all the resulting money as the down payment on an island
vacation home. Assume a rate of return of 8% per year for each of
the 24 years. Find the amount he can pay down, using the tabulated
factor, the factor formula, and a spreadsheet function.
Solution:
 Single-Payment Formulas (F/P , P/F)

Solving using formula:

Solving using tables (table 13 – i = 8%): Cash flow diagram

Determine F, using the F/P factor for 8%
and 24 years. Using table 13: n P/F

i = 8%
 Single-Payment Formulas (F/P , P/F)

Example:
Hewlett-Packard has completed a study indicating that $50,000 in
reduced maintenance this year on one processing line resulted
from improved wireless monitoring technology.
a. If Hewlett-Packard considers these types of savings worth
20% per year, find the equivalent value of this result after 5
years.
b. If the $50,000 maintenance savings occurs now, find its
equivalent value 3 years earlier with interest at 20% per year.
‘’’’’ Solve using tables only ‘’’
 Single-Payment Formulas (F/P , P/F)

Solution:
a. Given P find F (table 22 – i = 20%):
 Single-Payment Formulas (F/P , P/F)

Solution:
b. Given F find P (table 22 – i = 20%):
 Uniform Series Formulas (P/A , A/P , A/F , F/A)

• There are four uniform series formulas that involve A, where A

means that:
• 1. The cash flow occurs in consecutive interest periods.
• 2. The cash flow amount is the same in each period.

P = A(P/A, i, n) A = P(A/P, i, n)
Uniform Series Formulas (P/A , A/P , A/F , F/A)

A = F(A/F, i, n) F = A(F/A, i, n)
 Uniform Series Formulas (P/A , A/P , A/F , F/A)

Example:
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?
Solution: Using tables (table 20 – i = 16%):

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

Cash flow diagram

 Uniform Series Formulas (P/A , A/P , A/F , F/A)

Example:
What the equivalent future worth of $1 million capital
investments each year for 8 years, starting 1 year from now. If
the rate of return is 14% per year.
Solution: Using tables (table 18 – i = 14%):

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

Cash flow diagram

 Gradient Formulas

✓ Sometimes the cash flows that occur in consecutive interest periods

are not the same amount (not an A value), but they do change in a
predictable way. These cash flows are known as gradients.
✓ and there are two general types:
1. Arithmetic gradient
2. Geometric gradient.
 Gradient Formulas

Arithmetic gradient
An arithmetic gradient is one wherein the cash flow changes (increases
or decreases) by the same amount in each period.
The equation that represents the present worth of an arithmetic gradient
series is:

P = G(P/G,i%,n)
Conventional arithmetic gradient
series without the base amount.
 Gradient Formulas

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

This equation finds the present worth of the gradient only. It does not
include the base amount of money that the gradient was built upon. The
base amount in time period 1 must be accounted for separately as a
uniform cash flow series.
 Gradient Formulas

The general equation to find the present worth of an arithmetic gradient

cash flow series is:

Where:
A = amount in period 1
G = amount of change in cash flow between periods 1 and 2
n = number of periods from 1 through n of gradient cash flow
i = interest rate per period
 Gradient Formulas

Example:
The Highway Department expects the cost of maintenance for a
piece of heavy construction equipment to be $5000 in year 1, to be
$5500 in year 2, and to increase annually by $500 through year 10.
At an interest rate of 10% per year, determine the present worth of 10
years of maintenance costs.
Solution: Using tables (table 15 – i = 10%):

Cash flow diagram

 Uniform series and gradient factors when
cash flows are shifted.

✓ When a uniform series begins at a time other than at the end of

period 1, it is called a shifted series.

✓ In this case several methods can be used to find the equivalent

present worth P as: (P/F) – (F/P) – (F/A) – (P/A).
 Uniform series and gradient factors when
cash flows are shifted.

Note:
✓ The present worth is always located one period prior to the first
uniform-series amount when using the P/A factor.
 Uniform series and gradient factors when
cash flows 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.
 Uniform series and gradient factors when
cash flows are shifted.
Example:
An engineering technology group just purchased new 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 of the payments if the interest rate is 8% per year?
Solution: Using tables (table 13 – i = 8%):

Cash flow diagram

 Uniform series and gradient factors when
cash flows are shifted.

Notes:
✓ Many of the considerations that apply to shifted uniform series
apply to gradient series as well.
✓ 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.
✓ The n value in the P/G and A/G factors for the shifted gradient is
determined by renumbering the time scale.
✓ The period in which the gradient first appears is labeled period 2.
✓ The n value for the factor is determined by the renumbered period
where the last gradient increase occurs.
 Uniform series and gradient factors when
cash flows are shifted.

Determination of G and n values used in factors for shifted gradients:

 Uniform series and gradient factors when
cash flows are shifted.

Determination of G and n values used in factors for shifted gradients:

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