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LEARNING OBJECTIVES

1. Dealing with shifted series 2. Shifted series and single amounts 3. Shifted gradients 4. Decreasing gradients 5. Spreadsheet applications

CHAPTER 3

COMBINING FACTORS

Graw Hill

Slide Sets to accompany Blank & Tarquin, Engineering Economy, 6th Edition, 2005

Mc

3-1

© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved

Slide Sets to accompany Blank & Tarquin, Engineering Economy, 6th Edition, 2005

3-2

© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved

**Sct 3.1 Calculations for Uniform Series that are Shifted
**

For a shifted series the present worth point in time is NOT t = 0. It is shifted either to the left of “0” or to the right of “0”. Remember, when dealing with a uniform series:

The PW point is always one period to the left of the first series value, no matter where the series falls on the time line.

Slide Sets to accompany Blank & Tarquin, Engineering Economy, 6th Edition, 2005

**Shifted Uniform Series
**

Consider:

0 1 2 3 4 5 6 7 8

A = $-500/year P0 P2

or F2

**P of this series is at t = 2 (P2) P2 = -500(P/A,i%,4) P0 = P2(P/F,i%,2)
**

Slide Sets to accompany Blank & Tarquin, Engineering Economy, 6th Edition, 2005

**or could refer to as F2 or could be F2(P/F,i%,2) 3-4
**

© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved

3-3

© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved

**Example of Shifted Series P and F
**

F6

**Sct 3.2 Calculations Involving UniformUniform-Series and RandomlyRandomly-Placed Single Amounts
**

Draw and correctly label the cash flow diagram that defines the problem Locate the present and future worth points for each series Write the time value of money equivalence relationships Substitute the correct factor values and solve

0

1

2

3

4

5

6

7

8

**A = $-500/year P0 P2 • F for this series is at t = 6; F6 = A(F/A,i%,4) • P0 for this series at t = 0 is P0 = -500(P/A,i%,4)(P/F,i%,2)
**

Slide Sets to accompany Blank & Tarquin, Engineering Economy, 6th Edition, 2005

3-5

© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved

Slide Sets to accompany Blank & Tarquin, Engineering Economy, 6th Edition, 2005

3-6

© 2005 by McGraw-Hill, New York, N.Y All Rights Reserved

1

2005 3-11 © 2005 by McGraw-Hill. N. 2005 3-7 © 2005 by McGraw-Hill.2 Substitute the factors and solve P = $500( 2. New York. $984. Engineering Economy.3)(P/F.10%.2 Write the Equivalence Statement P = $500(P/A. 6th Edition. Engineering Economy. Engineering Economy.Y All Rights Reserved 3-8 © 2005 by McGraw-Hill. New York. 6th Edition. 6th Edition.Y All Rights Reserved 3. P Solve for the series present worth values then move to t = 0 Then solve for the P at t = 0 for the single cash flows using the P/F factor for each cash flow Add the equivalent P values at t = 0 0 1 2 3 4 5 6 7 8 i = 10% F5 = -$400 For future worth. 6th Edition. Engineering Economy.027.12 Slide Sets to accompany Blank & Tarquin.Y All Rights Reserved 2 .4) 400(P/F.2 The PW Points are: F4 = $300 A = $500 3. Engineering Economy. 2005 •Find the PW at t = 0 for this cash flow Slide Sets to accompany Blank & Tarquin.6830 ) 400( 0.36 Substituting the factor values into the equivalence expression and solving….Y All Rights Reserved 3. 2005 i = 10% Back 5 Periods F5 = -$400 t = 1 is the PW point for the two other single cash flows Slide Sets to accompany Blank & Tarquin. 6th Edition. 2005 3-9 © 2005 by McGraw-Hill.2 The PW Points are: Back 4 periods F4 = $300 A = $500 1 0 1 2 2 3 3 4 5 6 7 8 0 1 1 2 2 3 3 4 5 6 7 8 i = 10% F5 = -$400 t = 1 is the PW point for the $500 annuity.2) + $300(P/F. “n” = 3 Slide Sets to accompany Blank & Tarquin.8264 ) + $300( 0.10%.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin. New York.58 $204. N. New York.90 $248.2 Series with Other cash flows ♦ Consider: A = $500 F4 = $300 For present worth.Y All Rights Reserved 3-10 © 2005 by McGraw-Hill.6209 ) = $1.10%.4869 )( 0.5) 3. F Convert all cash flows to an equivalent F using the F/A and F/P factors in year t = n Add the equivalent F values at t = n Slide Sets to accompany Blank & Tarquin. 6th Edition. 2005 3-12 © 2005 by McGraw-Hill.10%. Engineering Economy. N. New York. randomly-placed cash flows 3. N.Series with additional single cash flows It is common to find cash flows that are combinations of series and single. N. New York. N.

.. 6th Edition.. 6th Edition.2) = 2667.3349) = $2667. 0 1 2 … n-1 n 0 1 2 … n-1 n This represents a conventional gradient The present worth point is t = 0 The present worth point for the base series and the gradient is here! This represents a shifted gradient Slide Sets to accompany Blank & Tarquin. 2005 3-17 © 2005 by McGraw-Hill. Two periods to the left of the “1G” cash flow Shifted Gradient A Shifted Gradient has its present value point removed from time t = 0 A Conventional Gradient has its present worth point at t=0 Slide Sets to accompany Blank & Tarquin. 6th Edition. N. ………. 2005 3-13 © 2005 by McGraw-Hill. 2005 3-15 © 2005 by McGraw-Hill. Engineering Economy. N. Engineering Economy.Y All Rights Reserved Example of a Conventional Gradient ♦ Consider: Gradient Series ……. 9 10 0 1 2 3 4 ………. New York.45(0. 2005 P2 = 500(P/A. New York. 6th Edition. 2005 Slide Sets to accompany Blank & Tarquin.3 Calculation for Shifted Gradients The Present Worth of an arithmetic gradient (linear gradient) is always located: One period to the left of the first cash flow in the series ( “0” gradient cash flow) or. N.38 Slide Sets to accompany Blank & Tarquin. Engineering Economy.. N.45 P0 = 2667. N. Engineering Economy. i = 10%. 6th Edition.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin..Base Series ……. Engineering Economy.8264) = $2204.8) = 500(5.Y All Rights Reserved 3-18 © 2005 by McGraw-Hill. Engineering Economy. Example of a Shifted Gradient Gradient Series ……. New York. 6th Edition.. New York.10%.Sct 3.Base Series ……. ……….Y All Rights Reserved 3-14 © 2005 by McGraw-Hill..10%..Y All Rights Reserved 3 . 2005 3-16 © 2005 by McGraw-Hill.Y All Rights Reserved Shifted Gradient: Numerical Example Shifted Gradient: Numerical Example PW of the base series P0 P2 nseries = 8 time periods Base Series = $500 G = $+100 Base Series = $500 0 1 2 3 4 ………. New York. New York. N. Find P at t = 0 Slide Sets to accompany Blank & Tarquin. 9 10 Cash flows start at t = 3 $500/year increasing by $100/year through year 10.45(P/F.

.87(P/F.Y All Rights Reserved To Find A for a Shifted Gradient 1) Find the present worth of the gradient at actual time 0 2) Then apply the (A/P. N. Engineering Economy. New York.10%.602.87 P0 = $1.Y All Rights Reserved Shifted Geometric Gradient Shifted Geometric Gradient Shifted Geometric Gradient Example i = 10%/year 0 1 2 3 4 5 6 7 8 A = $700/year A1 0 1 2 3 … … … n A1 = $400 in year t = 5 12% increase/year Present worth point is at t = 2 for this example Slide Sets to accompany Blank & Tarquin.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin. N.324.99 P2 G = +$100 0 1 2 3 4 ………. New York. N.10%. N. 6th Edition.61 Slide Sets to accompany Blank & Tarquin. New York. New York. 9 10 P2 = $100(P/G. 2005 3-19 © 2005 by McGraw-Hill..324. N.n) factor to convert the present worth to an equivalent annuity (series) 0 Shifted Geometric Gradient Conventional Geometric Gradient A1 1 2 3 … … … n Present worth point is at t = 0 for a conventional geometric gradient Slide Sets to accompany Blank & Tarquin. Engineering Economy.61 = $3528. New York.Y All Rights Reserved 4 . ……….Shifted Gradient: Numerical Example P0 PW for the gradient component Example: Total Present Worth Value For the base series P0 = $2204. 6th Edition. Engineering Economy.2) = $1. 6th Edition. New York. Engineering Economy. 2005 3-24 © 2005 by McGraw-Hill.324. 6th Edition.38 For the arithmetic gradient P0 = $1.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin. 2005 3-23 © 2005 by McGraw-Hill. 2005 3-22 © 2005 by McGraw-Hill.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin.i. N. 6th Edition.0287) = $1. 2005 3-21 © 2005 by McGraw-Hill.8) = $100(16. Engineering Economy. 6th Edition.38 + $1.87(0.602. 2005 3-20 © 2005 by McGraw-Hill. Engineering Economy.8264) = $1.61 Total present worth P = $2204.602.

Y All Rights Reserved Sct 3. 2005 3-29 © 2005 by McGraw-Hill. N.239.494.Y All Rights Reserved 3.70( 0.000. 2005 P0 = $1.4) = $700( 3. Engineering Economy.1699 ) = $2. New York. 2005 3-28 © 2005 by McGraw-Hill. decreasing gradient PW for Shifted Decreasing Gradient First.70 PW point for the gradient is t = 4 Slide Sets to accompany Blank & Tarquin. Engineering Economy. New York. 6830 ) P0 = $1.494.3 The Gradient Amounts t 51 62 73 84 Base Amt $400.218.94 $1.88 P0 = $2. 2005 3-26 © 2005 by McGraw-Hill.88 3-25 © 2005 by McGraw-Hill. 6th Edition.00 $448.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin. 2005 3-30 © 2005 by McGraw-Hill. Engineering Economy. N. New York.82 ♦ Annuity ♦ ♦ Total Present Worth” A = $700/yr ♦ ♦ P0 = $700(P/A. 6th Edition.Geometric Gradient Example i = 10%/year 0 1 2 3 4 5 6 7 8 3.218. G = $-100 F3 = $1.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin. New York. New York.88 + $2. N.12%.94 = $3.10%. N.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin.218.Y All Rights Reserved 5 .4 Shifted Decreasing Arithmetic Gradients Given the following shifted. Engineering Economy.020. 6th Edition. New York.4) = $1. 2005 3-27 © 2005 by McGraw-Hill.10%.76 $561.94 Slide Sets to accompany Blank & Tarquin.73674 P4 = $400{ P/A1. N. 6th Edition.494.020. find PW at t = 2 F3 = $1.000. N.00 $501. Engineering Economy.4 } = $ 12% increase/year 1. 6th Edition.3 The Annuity Present Worth ♦ PW of the Annuity 3.70( P/F.020. 6th Edition. G = -$100 i = 10%/year i = 10%/year 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 Find the present worth at t = 0 PW point at t = 2 Slide Sets to accompany Blank & Tarquin.97 A = $700/year PW point for the A series is t = 0 Present Worth of the Gradient at t = 4 3. Engineering Economy.10%.3 Total Present Worth ♦ Geometric Gradient @ t = ♦ i = 10%/year 0 1 2 3 4 5 6 7 8 P0 = $1.

6th Edition. N. N.Shifted Decreasing Gradient Example Second.4 Time Periods Involved F3 = $1.8264 ) = $2. N.10%. Engineering Economy.104.Y All Rights Reserved 3-34 © 2005 by McGraw-Hill. 6th Edition.8618 ) = $3.000 1 2 3 4 5 1 2 3 4 5 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 P2 or.000. G=-$100 G = -$100/yr i = 10%/year $1. New York. 2005 © 2005 by McGraw-Hill. 2005 P2 The gradient amount is subtracted from the base amount 3-31 © 2005 by McGraw-Hill. Engineering Economy. Engineering Economy.Y All Rights Reserved Slide Sets to accompany Blank & Tarquin.000( P/A.Y All Rights Reserved 6 . New York.5 ) P2= $1.Y All Rights Reserved 3. N. G=-$100 i = 10%/year 3. New York. New York. G = -$100 i = 10%/year F3 = $1. New York.000.2 ) = $3104. New York.62( P/F. N.$100( 6. 6th Edition. 6th Edition. 2005 3-32 © 2005 by McGraw-Hill.62( 0 . Engineering Economy.10%.5 ) – 100( P/G.104. 6th Edition.000. F2: Take back to t = 0 P2 = $1. Engineering Economy.4 Time Periods Involved F3 = $1.7908 ) . 3-33 © 2005 by McGraw-Hill.Y All Rights Reserved P0 here Slide Sets to accompany Blank & Tarquin. find the PW at t = 0 i = 10%/year Shifted Decreasing Gradient Example F3 = $1.62 P0 = $3. G = $-100 Base amount = $1.Y All Rights Reserved Summary Chapter summarizes cash flow patterns that are shifted away from time t=0 Illustrations of using multiple factors to perform PW or FW analysis for shifted cash flows Illustrations of shifted arithmetic and geometric gradients Illustrations of the power of Excel 3-35 financial functions CHAPTER 3 End of Slide Set Slide Sets to accompany Blank & Tarquin. 6th Edition. 2005 P0 here Slide Sets to accompany Blank & Tarquin.000( 3. N. 2005 3-36 © 2005 by McGraw-Hill.000 0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8 P2 P0 here Slide Sets to accompany Blank & Tarquin. 2005 Dealing with n = 5.565.65 Slide Sets to accompany Blank & Tarquin. Engineering Economy.000.10%.

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