Lecture No.

6
Chapter 3
Contemporary Engineering Economics
Copyright © 2010

Contemporary Engineering Economics, 5th edition, ©2010

Types of Common Cash
Flows in Engineering
Economics

 Single cash flow

 Equal (uniform)
payment series at regular
intervals
 Linear gradient series
 Geometric gradient
series
 Irregular (random)
payment series

Contemporary Engineering Economics, 5th edition, © 2010

Equivalence
Relationship
Between P and F
Compounding Process –
Finding an equivalent future
value of current cash
payment

 Discounting Process –
Finding an equivalent
present value of a future
cash payment

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.7 Single
Amounts: Find F,
Given i, N, and P
Given: P = $2,000, i =  Single Cash Flow Formula –
10%, N = 8 years Compound Amount Factor
Find: F
F
F  $2,000(1  0.10)8
F  P(1  i) N
 $2,000(F / P ,10%,8)
 $4,287.18 F  P(F / P , i , N)
 Excel Solution: 0
N

Contemporary Engineering Economics, 5th edition, © 2010

A Typical
Compound Interest
Table – say 12%
To find the compound interest
factor when the interest rate
is 12% and the number
interest periods is 10, we
could evaluate the following
equation using the interest
table.

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.8 Single
Amounts: Find P,
Given i, N, and F
Given: F = $1,000, i =  Single Cash Flow Formula – Present
12%, N = 5 years Worth Amount Factor
Find: P
N F
P  $1,000(1  0.12)5
P  F (1  i)
 $1,000(P / F ,12%,5)
 $567.43 P  F (P / F , i , N)
 Excel Solution: 0
N

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.9 Single
Amounts: Find i,
Given P, F, and N
Given: F = $40, P = $20, N  Solving for i
= 5 years
Find: i

 Excel Solution:

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.10 Single
Amounts: Find N,
Given P, F, and i
Given: P = $6,000, F =  Solving for N
$12,000, and i = 20%
Find: N
F  2P  P(1  0.20)N
2  1.2N
log2  N log1.2
log2
N
log1.2
 3.80 years

 Excel Solution:

Contemporary Engineering Economics, 5th edition, © 2010

Rule of 72
Approximating  Number of Years Required to Double an
Initial Investment at Various Interest Rates
how long it will take
for a sum of money
to double

72
N
interest rate (%)
72

20
 3.6 years

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.11
Uneven Payment
Series
How much do you
need to deposit today (P)
to withdraw $25,000 at n
=1, $3,000 at n = 2, and
$5,000 at n =4, if your
account earns 10%
annual interest?

$25,000

$3,000 $5,000
0
1 2 3 4

Contemporary Engineering Economics, 5th edition, © 2010

Check to see if $28,622 is indeed sufficient
0 1 2 3 4
Beginning 0 28,622 6,484.20 4,132.62 4,545.88
Balance
Interest 0 2,862 648.42 413.26 454.59
Earned
(10%)
Payment +28,622 -25,000 -3,000 0 -5,000

Ending $28,622 6,484.20 4,132.62 4,545.88 0.47

Balance

Rounding error
It should be “0.”

Contemporary Engineering Economics, 5th edition, © 2010

Example 3.12 Future
Value of an Uneven Series
with Varying Interest
Rates
 Given: Deposit series as given
over 5 years

 Find: Balance at the end of

year 5

Contemporary Engineering Economics, 5th edition, © 2010