Example 2.

27

$500,000 is spent for a SMP machine in order to reduce annual

expenses by $92,500/yr. At the end of a 10-year planning
horizon, the SMP machine is worth $50,000. Based on a 10%
TVOM,
a) what single sum at t = 0 is equivalent to the SMP investment?
b) what single sum at t = 10 is equivalent to the SMP investment?
c) what uniform annual series over the 10-year period is equivalent to
the SMP investment?

Solution:

P = -$500,000 + $92,500(P|A 10%,10) + $50,000(P|F 10%,10)

P = -$500,000 + $92,500(6.14457) + $50,000(0.38554) = $87,649.73

Principles of Engineering Economic Analysis, 5th edition

 Example 2.27 (Solution)

F = -$500,000(F|P 10%,10) + $92,500(F|A 10%,10) + $50,000

F = -$500,000(2.59374) + $92,500(15.93742) + $50,000 = $227,341.40

A = -$500,000(A|P 10%,10) + $92,500 + $50,000(A|F 10%,10)

A = -$500,000(0.16275) + $92,500 + $50,000(0.06275) = $14,262.50

Principles of Engineering Economic Analysis, 5th edition

 Gradient Series

Principles of Engineering Economic Analysis, 5th edition

 Review: Uniform
At = A t = 1,…,n

A A A A A A

P occurs 1 period before first A

sized and spaced

one interval after P
Principles of Engineering Economic Analysis, 5th edition
 Gradient Series

0 t=1 3G
At= { A t-1+G t = 2,…,n 2G
G
 Conditions
1. Payment at =0
2. Initial payment = G
or 3. Constant increase by a value= G

A t = (t-1)G t = 1,…,n
(n-1)G Note: n-1, not n

(n-2)G
2G
G
0
…
0 1 2 3 n-1 n

Principles of Engineering Economic Analysis, 5th edition

 Converting Gradient Series

Converting gradient series to present worth

1  (1  ni )(1  i )  n 
P=G  2
(2.35) 
 i 

 ( P | A i %, n)  n( P | F i %, n) 
P=G  (2.36) 
i

P = G(P|G i%, n) (2.37)

Principles of Engineering Economic Analysis, 5th edition

 Converting gradient series to annual worth

1 n 
A=G  i  (1  i ) n  1
 

1  n( A | F i %, n) 
A=G  i 
 

A = G(A|G i%, n) (2.38)

Principles of Engineering Economic Analysis, 5th edition

 Converting gradient series to future worth

 (1  i ) n  (1  ni ) 
F=G  2 (2.39)
 i 

 ( F | A i %, n)  n 
F=G  
i

F = G(F|G i%, n) (not provided in the tables)

(Note: you could calculate for P or A and then convert to F using
F/P or F/A)
Principles of Engineering Economic Analysis, 5th edition
 Example 2.28 t=1

Maintenance costs for a particular production machine increase

by $1,000/year over the 5-yr life of the machine. The initial
maintenance cost is $3,000. Using an interest rate of 8%
compounded annually, determine the present worth equivalent
for the maintenance costs.

Still n=5
Principles of Engineering Economic Analysis, 5th edition
 P = $3,000(P|A 8%,5) + $1,000(P|G 8%,5)
P = $3,000(3.99271) + $1,000(7.372.43) = $19,350.56
or
P = ($3,000 + $1,000(A|G 8%,5))(P|A 8%,5)
P = ($3,000 + $1,000(1.846.47))(3.99271) = $19,350.55

Is there another approach to solve it?

 A: [(A)+ (A/G)]* (A/P)
 F: (F/A)+ [(P/G)* (F/P)]

Principles of Engineering Economic Analysis, 5th edition

 Example 2.29

Amanda Dearman made 5 annual deposits into a fund that paid

8% compound annual interest. Her first deposit was $800; each
successive deposit was $100 less than the previous deposit. How
much was in the fund immediately after the 5th deposit?

Principles of Engineering Economic Analysis, 5th edition

 A = $800 - $100(A|G 8%,5)
= $800 - $100(1.84647) = $615.35

F = $615.35(F|A 8%,5)
= $615.35(5.86660) = $3,610.01

Principles of Engineering Economic Analysis, 5th edition

 P=G
[ i2 ]
1 - (1 + ni)(1 + i)gradient
-n
series, present worth factor
= G(P|G i%,n)

A=G gradient-to-uniform series conversion

[ ]
(1 + i)n – (1 + ni)
i[(1 +factor
i)n – 1]
= G(A|G i%,n)

F=G gradient series, future worth factor

[ ]
(1 + i)n – (1 + ni)
i2
= A(F|G i%,n)

Principles of Engineering Economic Analysis, 5th edition

 Note:
• If it says in the question: “costs will be a $1,000
gradient series” or “ will be annual payments”, then it
means it starts at t=1.

Principles of Engineering Economic Analysis, 5th edition

 Geometric Series

Principles of Engineering Economic Analysis, 5th edition

 Geometric Series

A t = A t-1(1+j) t = 2,…,n

 
or

A t = A1(1+j)t-1 t = 1,…,n
A1(1+j)n-1 Note: n-1 not n
A1(1+j)n-2
A1(1+j)2
A1(1+j)
A1

…
0 1 2 3 n-1 n

Principles of Engineering Economic Analysis, 5th edition

 Converting geometric series to present worth

1  (1  j ) n (1  i )  n  (2.42)
P  A1   i j
 i  j 

1  ( F | P j %, n)( P | F i %, n)  (2.44)
P  A1   i j j0
 i j 

P = nA1/(1+i) i=j (Needs to be memorized) (2.42)

P = A1(P|A1 i%,j%,n) (2.43)

Principles of Engineering Economic Analysis, 5th edition

 Converting geometric series to future worth

 (1  i ) n  (1  j ) n  (2.45)
F  A1   i j
 i  j 

 ( F | P i %, n)  ( F | P j %, n) 
F  A1   i j j0
 i  j 

F = nA1(1+i)n-1 i=j (Needs to be memorized)

F = A1(F|A1 i%,j%,n) Notice the symmetry

Note: (F|A1 i%,j%,n) = (F|A1 j%,i%,n)

Principles of Engineering Economic Analysis, 5th edition

 P/A1 F/A1

Principles of Engineering Economic Analysis, 5th edition

 Example 2.30
A firm is considering purchasing a new machine. It will have
maintenance costs that increase 8% per year. An initial
maintenance cost of $1,000 is expected. Using a 10% interest
rate, what present worth cost is equivalent to the cash flows for
maintenance of the machine over its 15-year expected life?

A1 = $1,000, i = 10%, j = 8%, n = 15, P = ?

P = $1,000(P|A110%,8%,15)
1000(1.08)14
= $1,000(12.03040) = $12,030.40
1000(1.08)13
1000(1.08)2
1000(1.08)
Note: be careful they’re costs! 1000

…
0 1 2 3 14 15

Principles of Engineering Economic Analysis, 5th edition

 Example 2.31

Norah deposits her annual bonus in an investment project that

pays 8% compound annual interest. Her annual bonus is
expected to increase by 10% each year. If her initial deposit is
$500, how much will be in her account immediately after her 10th
deposit?

A1 = $500, i = 8%, j = 10%, n = 10, F = ? 500(1.1)9

500(1.1)3
F = $500(F|A1 8%,10%,10) = $500(21.74087)
500(1.1)2
F = $10,870.44 500(1.1)
500

…
0 1 2 3 9 10

Principles of Engineering Economic Analysis, 5th edition

 Example 2.32 (similar to 2.30 but with two changes)

Sara invested $100,000 in a limited partnership in a natural

gas drilling project. Her net revenue the 1st year was $25,000.
Each year, thereafter, her revenue decreased 10%/yr. Based on
a 12% TVOM, what is the present worth of her investment
over a 20-year period?

A1 = $25,000, i = 12%, j = -10%, n = 20, P = ?

P = -$100,000 + $25,000(P|A1 12%,-10%,20) Not in the Appendix A
P = -$100,000 + $25,000[1 – (0.90)20(1.12)-20]/(0.12 + 0.10)
P = $13,636.36

1  (1  j ) n (1  i )  n 
P  A1   i j
 i  j 
Principles of Engineering Economic Analysis, 5th edition
 [ ]
1 - (1 + j)n(1 + i)geometric
-n
P = A1 series, present worth factor
i-j
ij
P = nA1/(1 + i) i=j
P = A1(P|A1 i%,j%,n)

F = A1
[ ]
(1 + i)n – (1 + j)n

F = nA1(1 + i)n-1
i-j
i=j
geometric series, future worth factor
ij

F = A1(F|A1 i%,j%,n)

Principles of Engineering Economic Analysis, 5th edition

 Uniform Gradient Geometric
A G A1, j
A-a-1 to A-a-25 A-b-1 to A-c-5
One period Two periods One period

Principles of Engineering Economic Analysis, 5th edition