Scribd
Upload
7 views17 pages

Engineering Economics Lecture 4

The document outlines five types of cash flows in engineering economics: single cash flow, uniform series, linear gradient series, geometric gradient series, and irregular series. It explains the concepts of present worth and future worth using formulas and examples, including the calculation of equivalent cash flows and the application of present-worth and capital recovery factors. Additionally, it discusses the decomposition and superposition method for handling uneven cash flows and provides examples to illustrate these concepts.

Uploaded by

alihaiderb845
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
7 views17 pages

Engineering Economics Lecture 4

The document outlines five types of cash flows in engineering economics: single cash flow, uniform series, linear gradient series, geometric gradient series, and irregular series. It explains the concepts of present worth and future worth using formulas and examples, including the calculation of equivalent cash flows and the application of present-worth and capital recovery factors. Additionally, it discusses the decomposition and superposition method for handling uneven cash flows and provides examples to illustrate these concepts.

Uploaded by

alihaiderb845
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 17

UNIFORM SERIES/

ARITHMETIC
GRADIENT/GEOMETRIC
GRADIENT
Engineering Economics
The Five Types of Cash Flows
• Cashflow transactions can be generally classified into five general
categories:
• (1) Single cash flow

• (2) Uniform series

• (3) Linear gradient series

• (4) Geometric gradient series, and

• (5) Irregular series


Single Cash Flow (F/P and P/F factors)
• The simplest case involves the equivalence of a single present amount and
its future worth
• Thus,
the single-cash-flow formulas deal with only two amounts: a single
present amount P and its equivalent future worth F
Single Cash Flow
You have P and find F (F/P)

You have F find P (P/F)

Example: find P
F = Rs 5955.08
i = 6%
n = 3 years
Single-payment Factor
We know that the amount of money F accumulated after n years from a
present worth P with interest compounded one time per year is given by the
following equation  F = P(1+i)n
The factor (1+i)n is called the single-payment compound amount factor and
is usually referred to as the F/P factor
The factor P/F is known as the single-payment present worth factor
A standard notation has been adopted for all the economic factors and 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
For example, F/P means find F when P is given
Single-Payment Factors Example
If you had $2,000 now and invested it at 10%, how much would it be worth
in eight years?

F = P(1+i)n = $2,000 × (1+0.1)8 = $4,287.18


Or
F = P(F/P,i,n) = 2,000(F/P,10%,8)

4287.18
Single-Payment Factors Example
The office supplies for an engineering firm for different years were as
follows:
Year 0: $600; Year 2: $300; and Year 5: $400
What is the equivalent value in year 10 if the interest rate is 5% per year?
Draw the cash flow diagram for the values $600, $300, and $400
Use F/P factors to find F in year 10
F = 600(F/P,5%,10) + 300(F/P,5%,8) + 400(F/P,5%,5) = 600×(1.6289) +
300×(1.4775) + 400×(1.2763) = $1931.11
Example

Decomposition and Superposition


•A company wishes to set aside money now to invest
over the next four years. The company can earn 10%
on a lump sum deposited now, and it wishes to
withdraw the money in the following increments:

• Year 1: $25,000
• Year 2: $3,000
• Year 3: No expenses
• Year 4: $5,000

• How much money must be deposited now to cover the


anticipated payments over the next 4 years?
Example
Decomposition and Superposition

• Apparently, one way to deal with an uneven series of


cash flows is to calculate the equivalent present value
of each single cash flow and to sum the present values
to find P

• Thatis, the cash flow is broken into three components


(decomposition) and later all the three present values
are summed up (superposition)
Example
Decomposition and Superposition
Example
Decomposition and Superposition
• To see if the needed $28,622 is sufficient, let’s calculate the balance at
the end of each year

• Ifyou deposit $28,622 now, it will grow to (1.10)($28,622), or $31,484, at


the end of year 1. From this balance, you pay out $25,000

• The remaining balance, $6,484, will again grow to (1.10)($6,484), or


$7,132, at the end of year 2. Now you make the second payment
($3,000) out of this balance, which will leave you with only $4,132 at the
end of year 2

• Since no payment occurs in year 3, the balance will grow to


$(1.10)2($4,132), or $5,000, at the end of year 4

• Thefinal withdrawal in the amount of $5,000 will deplete the balance


completely
Uniform series (Present-Worth Factor)
• Whatwould you have to invest now P in order to withdraw A dollars at the
end of each of the next n periods?

• In
this case, it is the P/A factor used to calculate the equivalent P value in
year 0 for a uniform series of A values beginning at the end of period 1 and
extending for n periods

• Theterm in brackets is the conversion factor known as the uniform-series


present worth factor (USPWF)
Uniform series (Capital Recovery Factor)
• To
reverse the situation, the present worth P is known and the
equivalent uniform-series amount A is sought

• Thefirst A value occurs at the end of period 1, that is, one period after P
occurs

• Theterm in brackets is called the capital recovery factor (CRF), or A/P


factor. It is like investing P now and getting the equivalent through
annual uniform n number of equal payments (A)
Present-Worth and Capital Recovery Factor

•\
Present-Worth Factor
• 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?

• The present worth is:


•P = 600(P/A,16%,9) = 600×(4.6065) = $2,763.90
Present-Worth Factor
• Wecan solve the previous example in the following way using the
superposition theory

• Simply assume each $600 dollar due by the end of each year is the
future value of a present value (at time = 0)

• Thereafter,
sum up all these present values to arrive at the total
present value that yield the equal payments of $600 at the end of
each year
Present-Worth Factor

You might also like