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Af and Fa, PG and Ag

The document discusses engineering economics concepts including sinking fund factors, arithmetic gradient factors, and their applications in financial calculations. It provides formulas for calculating future worth and present worth of cash flows, along with examples illustrating these concepts. Additionally, it covers interpolation in interest tables and the total present worth for gradient series.

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mfarrukhnadeem1
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10 views16 pages

Af and Fa, PG and Ag

The document discusses engineering economics concepts including sinking fund factors, arithmetic gradient factors, and their applications in financial calculations. It provides formulas for calculating future worth and present worth of cash flows, along with examples illustrating these concepts. Additionally, it covers interpolation in interest tables and the total present worth for gradient series.

Uploaded by

mfarrukhnadeem1
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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HM-202

Engineering Economics

A/F and F/A, P/G and A/G

NFC Institute of Engineering & Technological


Training, Multan
Sinking Fund Factor and Uniform-Series
Compound Amount Factor (A/F and F/A)
 i (1  i ) n 
A P  n 
 (1  i )  1 
If we substitute the value of P in this relation, we will get a
relation between the A and F
 1 
P F  n 
 (1  i ) 
We will get
 1   i (1  i ) n 
A F  n n 
 (1  i )  (1  i )  1 
Simplifying, we get
 i   (1  i ) n  1
A F  n  F  A 
 (1  i )  1   i 
Example 2.5
• Formasa Plastics has major fabrication plants in Texas and Hong
Kong. The president wants to know the equivalent future worth of a
$1 million capital investment each year for 8 years, starting 1 year
from now. Formasa capital earns at a rate of 14% per year.

Solution
F=?
A = $ 1,000,000
n=8
i = 0.14 (14%)
F = 1000 (F/A, 14%, 8)
Example 2.6
• How much money must Carol deposit every year starting 1
year from now at 5.5% per year in order to accumulate $6,000
seven years from now?

Solution
A=?
F = $6,000
i = 5%
A = $6000 (A/F, 5.5%, 7)
Interpolation in Interest Tables

Suppose we have an interest factor of 0.14238 for 7% and an


interest factor of 0.14903 for 8% and we want to find out the
value of interest factor for 7.3% than,

7.3  7 X  0.14238
 X = 0.14437
8  7 0.14903  0.14238
Arithmetic Gradient Factor (P/G and A/G)

• An arithmetic gradient factor is a cash flow


series that either increases or decreases by a
constant amount.
• The cash flow changes by the same arithmetic
amount each period.
• The amount of the increase or decrease is the
gradient.
• If a manufacturing engineer predicts that the
cost of maintaining a robot will increase by $500
per year until the machine is retired, a gradient
series is involved and the amount of the gradient
is $500.
• G = constant arithmetic change in the magnitude
of receipts or disbursements from one period to
the next; G may be positive or negative.
Example 2.9
• A sports apparel company has initiated a logo-licensing program. it
expects to realize a revenue of $80,000 in fees next year from the
sale of its logo. Fees are expected to increase uniformly to a level of
$200,000 in 9 years. Determine the arithmetic gradient and construct
the cash flow diagram.
Solution
increase In 9 years = 200,000-80,000 = 120,000
Gradient = (increase)/(n-1)
Gradient = (120,000)/(9-1) = $15,000 per year
ARITHEMETIC PROGRESSION
SERIES
A’

0 1 2 3 4 5 n-1 n

(n-2)G (n-1)G

2G 3G
G

0 1 2 3 4 5 n-1 n
Arithmetic Gradient Factor G
G  (1  i ) n  1 n 
P  n
 n
i  i (1  i ) (1  i ) 

1  (1  i ) n  1 n 
( P / G , i, n)   n
 
i  i (1  i ) (1  i ) n 
Arithmetic-Gradient Uniform-Series
Factor
For A/G we know that
A  i (1  i ) n 
 n 
P  (1  i )  1
P 1  (1  i ) n  1 n 
  n
 n
G i  i (1  i ) (1  i ) 
Multiplying the two we get

A 1 n 
  
G  i (1  i ) n  1
The term in bracket is called the arithmetic-gradient uniform-
series factor
Arithmetic-gradient future worth
factor (F/G)
• This factor can be derived by multiplying the P/G
and F/P factors.
F   1   (1  i ) n  1 
     n  
G   i  i 
Total Present Worth PT
The total present worth PT for a gradient series must consider
the base and the gradient separately. Thus, for cash flow
series involving conventional gradients:
• The base amount is the uniform-series amount A that begins
in year 1 and extends through year n. its present worth is
represented by PA.
• For an increasing gradient, the gradient amount must be
added to the uniform series amount. The present worth is
PG.
• For a decreasing gradient, the gradient amount must be
subtracted from the uniform-series amount. The present
worth is –PG.
PT
So the general equation for calculating the present worth of
conventional arithmetic gradients are
PT = P A + P G
And
PT = P A – P G
Similarly, the equivalent total annual series are
AT = A A + A G
And
AT = A A – A G
Where AA is the annual base amount and AG is the annual
amount of the gradient series.
Example 2.10
• Three counties in Florida have agreed to pool tax resources
already designated for county-maintained bridge refurbishment.
At a recent meeting, the county 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 three-county area. Further, they estimate that the
deposit will increase by $100,000 per year only 9 years
thereafter, then cease. Determine the equivalent (a) present
worth and (b) annual series amount if county funds earn interest
at a rate of 5% per year.

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