‫‪ENGINEERING ECONOMY 1‬‬

‫)‪(MNG 151‬‬
‫إقتصاد هندسى ‪1‬‬
‫د ‪ /‬حسنى عباس أبوزيد‬
 Engineering Economy1 ENG151
Week Topic
1 Introduction(Terminology , simple &compound interest ) –Exercises
2 Cash flow Diagram- Exercises
3 Solution of sheet 1 problems
4 Single & series payments factors
5 Use of Interest Tables- Uniform Gradient Factors - Exercises
6 Present Worth, Future Worth, Equivalent Uniform annual Series
calculations
7 Solution of sheet 2 problems
8 Mid Term Exam.
9 Present and future worth for Geometric Gradient - Exercises
10 Project Evaluation Methods : Net Present Value– Internal Rate Of Return
11 Solution of sheet 3 problems
12 Projects selection Methods: Capitalized Cost Calculations, Benefit /cost
ratio , Mutually & Exclusive Alternatives Evaluation
13 Solution of sheet 4 problems
14 Final Exam.

References :
1. ENGINEERING ECONOMY , Leland Blank , P. E. and Anthony
Tarquin , P. E. ,Seventh Edition , © 2012 by The McGraw-Hill
Companies

2. ENGINEERING ECONOMIC ANALYSIS , NINTH EDITION ,

Donald G. Newnan and Ted G. , 2004 by Oxford University
Press, Inc.

3. Fundamentals of engineering economics, Chans S. Park, 2004 by

Pearson Education, Inc. , ISBN 0-13-030791-2

4. SCHAUM'S OUTLINE OF THEORY AND PROBLEMS ENGINEERING

ECONOMICS , JOSE A. SEPULVEDA, Ph.D. , WILLIAM E.
SOUDER,
Ph.D. And BYRON S. GOTTFRIED, Ph.D. , SCHAUM'S OUTLINE
SERIES
McGRAW-HILL
 ENGINEERING ECONOMY I
CHAPTER ONE
TERMINOLOGY AND CASH FLOW DIAGRAMS
1.1 Introduction:
Engineering :
Defined as the profession in which knowledge of mathematics and nature science
gained by experience and practice is applied to develop ways to utilize materials and
nature forces for the benefit of mankind.

Economy:
Defined as the attainment an of objective at low cost in terms of resources input .

Engineering Economy :
Defined as a collection of mathematical techniques which simplify economic
comparison to support making decision for selecting the best alternative or solution.
As an example, the engineering design to accomplish a specific task may be the best
possible, but if it is not economically competitive, the design should not be
implemented.

1.2 Basic terminology:

The main parameters used in engineering economy are:
Alternative – evaluation criterion – time value of money – interest - principle

1.2.1 Alternative:
Define as a stand alone solution for a given situation. This means that there are
several ways of accomplishing a given task. Engineering economy is used to make a
choice between different alternatives which is of a great importance in decision
making processes e.g rent or buy house….travel by bus or train …etc .

1.2.2 Evaluation Criterion:

Is the rule by which correct choice between different alternatives can be made?
It answers the question “how will I know which one is best?” . As an example the
evaluation criterion may be the lowest overall cost or maximum expected benefits …
etc.
1.2.3 Time Value of Money (TVM):
Is the change in the amount of money over a given time period.
It is based on the concept that money received earlier is worth more than the same
amount of money received later; because it can be invested to earn interest with time.
For example if you invest amount a sum of money in a bank with interest of 10% ,then
this sum will become (1.1) of its original value after one year .
TVM calculations can be used to compare between different alternatives as will be
explained later.

1.2.4 Interest:
Is a measure of increase between the original sum borrowed or invested and the final
amount owed or accrued as follow:
a. For invested money :
Interest = total amount accumulated – original investment
b. For borrowed money :
Interest = Present amount owed – original loan

1.2.5 Interest Rate:

Defined as the ratio between the interest accrued per unit time and the original
amount expressed as percentage, or

Interest rate % = Interest accrued per unit time X 100% / original amount

1.2.6 Principle:
Is the original investment or loan.

Example 1:

A company borrowed $100000 and repaid 110000 after one year , compute the
interest and the interest rate ?

Solution:

Interest =110000-10000 = 100000 $

Interest rate = 100000x100%/100000 =10 %

Example 2:
A company invested $100000 for one year at 15% interest. Compute the interest gain
and the amount accumulated.
Solution:
Interest = 0 .15 X 100000 = $ 15000
Total amount accumulated = 100000 + 15000 = $ 115000
1.3 Symbols used in engineering economy computation and their
Meanings:
P = Value or sum of money at the Present time.
F = Value or sum of money at the Future time.
A = A series of consecutives, end of period payments of money per unit time (month,
year...)
n = number of interest periods (month, year...)
i = interest rate per interest period (1 year, 1 month)
I = Interest
Pr= Principle
1.4 Simple And Compound Interest Rates :
1.4.1 Simple Interest
Interest paid (earned) on only the original amount, or principal, borrowed (lent) as
follow:

Total simple interest = Pni

Final sum after n periods = P (1+ni)

Note:
If i is not fixed then;
Total simple interest = P (i1+i2+i3 +…. + in ) where i1,i2,i3 …,in are the interest rates at
Different periods 1, 2, 3, …..

Example 3:

A company borrow $ 100000 for 3 years at simple interest rate of 6 % per year ,
how much money will be the owe at the end of 3 years .

Solution:
Interest = Pni = 100000 * 3 * .06 = $ 18000
Final owe = Principle + Interest = 100000 + 18000 = $ 118000 or calculated as follow:
Final owe after 3 years = P(1+ni) = 100000 (1+3*0.06) = $ 118000

1.4.2 Compound Interest

Interest paid (earned) on any previous interest earned, as well as on the
principal borrowed (lent).
Total compound interest = P [(1+i)n -1]
Final sum after n periods = P (1+i) n
Example 4:
Repeat the previous problem in case of using compound interest.

Solution :
Total compound interest = 100000[(1+.06)3 -1] = $ 19102
Final owe after 3 years = Principle + Interest = 100000 + 19102 = $ 119102
OR Final owe after 3 years = 100000(1+0.06)3 = $ 119102
 Note:
If i is not fixed then; P= original sum ,
P1 = sum at end of year 1 = P(1+i1)
P2 = sum at end of year 2 = P1 + P1 * i2 = P1 (1+ i2 ) = P(1+i1) (1+ i2 )
P3 = sum at end of year 3 = P2 + P2 * i3 = P2 (1+ i3 ) = P(1+i1) (1+ i2 ) (1+ i3 )
…………
Pn = Final sum after n periods = P(1+i1)(1+i2)(1+i3 )(1+i4 )…..(1+in )
Total compound interest =Final sum – principle =
= P[(1+i1)(1+i2)(1+i3 )(1+i4 )…..(1+in ) – 1]

Example 5:
If you have 2000 L.E in a saving account and you deposit 200 L.E each year for 5
years. List the values of engineering economy symbols and the final value at the end
of interest periods if the interest rates are 10% per year.
Solution:
P = 2000 L.E ; A = 200 L.E ; i = 10% ; n = 5 years; F ?
P1 = sum at end of year 1 = P(1+i) + 200 = 2000(1.1) +200 = 2400 L.E
P2 = sum at end of year 2 = P1 (1+ i ) + 200 = 2400(1.1)+200 = 2840 l..E
P3 = sum at end of year 3 = P2 (1+ i ) + 200 = 2840(1.1) + 200 = 3324 L.E
P4= sum at end of year 4 = P3 (1+ i ) + 200 = 3324 (1.1) + 200 = 3856.4 L.E
P5 = sum at end of year 5 = P4 (1+ i ) + 200 = 3856.4(1.1) + 200 = 4444.04 L.E
Final sum at the end of the five years = 4444.04 L.E
Note:
Generally interest rates refer to compound interest unless specified
otherwise.

1.5 Cash Flow Diagram :

1.6 The cash flow defined as the flow of receipts (income) and cash disbursement
(costs) which occur over a given time interval.
The cash flow diagram is simply a graphical representation of cash flows drawn on a
time scale as shown.
+ (year 1) i = ….% (incomes) F?

Cash Flow 0 0 1 2 3 4 5

- P
(disbursements) A=……..L.E

General Rules:

- The cash flow follows the “end – period conventions “i.e. all cash flows occur at the
end of interest period. End of period means one time period from date of
transaction.
- The direction of arrows is very important as “+” represents income & “–
“represents disbursements.
- All unknown values for the symbols P, A, F, n, i are represented by a question
mark “?
 - Time 0 represent the present time while the times 1, 2, ….. , 5 are the end of time
periods 1, 2,3,4,5.

Example 1.6:
A person deposited 10000 L.E now into his account which pays 10% per year. He
plans to withdraw an equal end of year amount of 2000 L.E for 5 years starting
next year and closing the account by with drawing the remaining money at the of
sixth year . Construct the cash flow diagram. Find the amount of exit in each of end
interest periods and the remaining sum.
A=2000 L.E i = 10 % F?
Solution:
P= 10000 L.E
A= 2000 L.E
i = 10 % 0 1 2 3 4 5 6
n = 5 (for A)
F? Time (years)

P = 10000 L.E

P1 = sum at end of year 1 = P (1+i ) - 2000 = 10000(1.1) - 2000 = 9000 L.E

P2 = sum at end of year 2 = P1 (1+ i ) - 2000 = 9000( 1.1 ) – 2000 = 7900 l..E
P3 = sum at end of year 3 = P2 (1+ i ) - 2000 = 7900( 1.1 ) - 2000 = 6690 L.E
P4= sum at end of year 4 = P3 ( 1+ i ) -2000 = 6690 ( 1.1 ) - 2000 = 5359 L.E
P5 = sum at end of year 5 = P4 (1+ i ) - 2000 = 5359( 1.1 ) - 2000 = 3894.9L.E
P6 = sum at end of year 5 = P5(1+ i ) – 0.0 = 3894.9( 1.1 ) – 0.0 = 4284.39 L.E
The remaining sum = 4284.39 L.E
Note:
The height of arrows represents the value of money e.g height of arrow at
10000 L.E < height of 2000 L.E.

Example 1.7:
One want to make a deposit into his account so that he can withdraw an equal
amount of 500 L.E per year for the first 3 years starting one year after deposit and a
different annual amount of 750 L.E per year for the following two years . Draw the cash
flow diagram and find the value of the deposit if i = 10 % per year.
A1=500 L.E A2=750 L.E
Solution:

0 1 2 3 4 5
i = 10 %

P=?
P1= sum at end of year 1= P (1+i ) - 500 = 1.1*P - 500
P2= sum at end of year 2= P1 (1+ i ) - 500 = (1.1*P - 500 )( 1.1 ) – 500 = 1.21*P-1050
P3= sum at end of year 3= P2 (1+ i ) - 500 = (1.21*P-1050 )( 1.1 ) - 500 = 1.331*P-1655
P4 sum at end of year 4 = P3 ( 1+ i ) -750 = (1.331*P-1655 )( 1.1 ) - 750 = 1.4641*P-2570.5
P5=sum at end of year 5= P4(1+ i )- 750 = (1.4641*P-2570.5)( 1.1 )- 750 = 1.61051*P-3577.55
P5= The remaining sum = 0.0 =1.61051*P-3577.55
Then; P = Deposited value = 3577.55/1.61051 = 2221.377 L.E
 Solved Problems
1.Simple and Compound Interest Problems
1.1 The ABC Company deposited $100 000 in a bank account on June 15 and withdrew
a total of $115 000 exactly one year later. Compute: (a) the interest which the ABC
Company received from the $100 000 investment, and (b) the annual interest rate which
the ABC Company was paid.

1.3 Compare the interest earned from an investment of $1000 for 15 years at 10% per
year simple interest, with the amount of interest that could be earned if these funds
were invested for 15 years at 10°/o per year, compounded annually.
The simple interest is given by I = (15)(0.10)($1000=) $1500
Compound interest = F-P = P(1+ i)n - P = $1000(1+0.10)15-$1000
= $1000(4.17725)- $1000 = $3177.25
or more than double the amount earned using simple interest.
1.4 How it would take for an investor to double his money at 10% per year
compounded annually ?

Actually, since the interest is compounded only at the end of each year, the investor
would have to wait 8 years.
1.5 Suppose that a man lends $1000 for four years at 12% per year simple interest. At
the end of the four years, he invests the entire amount which he then has for 10
years at 8% interest per year, compounded annually. How much money will he
have at the end of the 14-year period?
F = P(1+ n1 x il)(l+ i2)n2 = $1000[1+ (4)(0.12)](1+ 0.08)10
= $1000(1.48)(2.15892) = $3195.21
1.6 Suppose that the interest rate is 10% per year, compounded annually.
What is the minimum amount of money that would have to be invested for
a two-year period in order to earn $300 in interest?
I = 300 = F – P = P(1.1)^2 –P
P = 300/ (1.1^2 – 1) = 1428.57
 Higher Technological Institute Engineering economy I
Tenth Of Ramadan Sheet 1_________

1. Calculate the principle and the present value of a sum that has been deposited
three years ago to become 12000 L.E after one year from now in both cases of
simple and compound interest of 12 % per year. Calculate also the interest.
2. If you invest 10000 L.E now in a business venture that promises to return 14641
L.E, how many years required to receive this return in order to make interest rat
of 10 % per year compounded yearly. On your investment?
3. Assume that you have been offered an investment opportunity in which you may
invest $1000 at 7%per year simple interest for 3 years or you may invest the
same $1000 at 6% per year compound interest for 3 years. Which investment
offer you accept?
4. Sales revenues for a lift – truck product line are estimated to be 500,000 L.E in
the first year, then decrease by 40000 L.E per year up to year 5 at interest rate of
15 % per year. Draw the cash flow diagram, and then calculate the future worth
at the end of year five.
5. As a result of an old loan for a bank, there remain 5 equal payments each of
10000 L.E with interest rate of 8 % per year. The house just been sold to a new
owner, who wishes to renegotiate the loan to reduce the annual payments by
increasing it’s number to ten instead of five years. The bank agree but with
interest rate of 10 % per year. Calculate the amount of the new annual payments
and the total amounts of money received by the bank in both cases.
6. The costs of production in a factory is 86120 L.E in the first year , 97100 L.E in
the second year and 105630 L.E in the fourth year with interest rate of 14% per
year . A tooling investment of 12000 L.E is carried out now to reduce all
production costs by 12% per year. Calculate the present worth before and after
carrying out the tooling investment. If this investment is delayed for one year
from now; Calculate the present worth of the cost of delay. Draw the cash flow
diagrams in all cases.
7. Calculate the present worth and the future worth of an expenditure of 17000 L.E
per year for 6 years starting 3 years from now if the interest rate if 15% per year
. Draw the cash flow diagram and list the values of the engineering economy
symbols used in this problem. Calculate the equivalent annual expenditure if it
starts from first year up to the end of the interest period.

Dr HOSNY ABBAS ABOUZEID

 CHAPTER 2
SINGLE PAYMENT FACTORS
2.1 Introduction
The aim of this chapter is to derive a formula for the following engineering economy
factors:
- Single – Payment Factors ( Compound Amount Factor & Present Worth Factor )
- Uniform Series Compound – Amount Factor.
2.2 Derivation of Single – Payment formulas Factors: Compound Amount
𝐹 𝑃
( ) &present worth ( ):
𝑃 𝐹
In this case , it is required to get the final value “F” , in terms of given values of a
single payment “P” with compound interest rate “ i” , and after time period “ n” , as
shown in the cash flow diagram .
Since F1= final sum at year 1=P +P*i , F2=F1+F1*i , P i= …%

Then F2= Final sum at end of year 2 = P*(𝟏 + 𝒊)𝟐 , 0 1 2 n=…

F3= Final sum at end of year 3 =F2+F2*i F?
= F2(1+i)= P*(𝟏 + 𝒊)𝟑 ,
So, Fn =Final sum at end of year n =P*(𝟏 + 𝒊)𝒏
𝑭?
= (𝟏 + 𝒊)𝒏 called single payment compound amount factor
𝑷
𝑷? 𝟏
= called single payment present worth factor
𝑭 (𝟏+𝒊)𝒏
𝑷
2.3 Derivation of Uniform – Series Present Worth Factor ( ):
𝑨
In this case, it is required to get the present worth value P in terms of known values
Of A, i, n as shown in the cash flow diagram.
P? i= …. %
P=P1+P2+P3+…..= Pn

= Sum of all the present worth values 0 1 2 3 n-1 n

𝑨 𝑨 𝑨
= + +……… A = …… L. E
𝟏+𝒊 (𝟏+𝒊)𝟐 (𝟏+𝒊)𝒏
𝟏
Multiply both sides by 𝟏+𝒊 we get :

𝑷 𝟏 𝟏 𝟏 𝟏
= A[ + + ⋯+ + ]
𝟏+𝒊 (𝟏+𝒊)𝟐 (𝟏+𝒊)𝟑 (𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏+𝟏

Then,
 𝑷 𝟏 𝟏 𝟏 𝟏 𝟏 𝟏
𝟏+𝒊
-P=A[
(𝟏+𝒊) 𝟐 + (𝟏+𝒊) 𝟑 +⋯+ (𝟏+𝒊) 𝒏 + (𝟏+𝒊) 𝒏+𝟏 − { 𝟏+𝒊
+ (𝟏+𝒊)𝟐
+
𝟏 𝟏
(𝟏+𝒊)𝟑
+ ⋯ + (𝟏+𝒊)𝒏}]

−𝒊 𝟏 𝑨 𝟏−(𝟏+𝒊)𝒏
P[ ]=A ( )[ 𝟏 𝒏 - 1] = [ ]
𝟏+𝒊 𝟏+𝒊 (𝟏+𝒊) 𝟏+𝒊 (𝟏+𝒊)𝒏

𝑷 (𝟏+𝒊)𝒏 −𝟏
 = , Called Series Present Worth Factor
𝑨 𝒊(𝟏+𝒊)𝒏

𝑨 𝒊(𝟏+𝒊)𝒏
 = , which is called the Capital Recovery Factor “CRF” which
𝑷 (𝟏+𝒊)𝒏 −𝟏
gives The value of A in terms of p , i , n.

Note that P must always be located one period prior to the first A.

2.4 Derivation of the uniform- series compound (given A, F is

unknown) - Amount Factor “F/A”; (USCAF); And the sinking
Fund Factor “A/F”; (SFF): (given F, A is unknown)
𝑭 𝑭 𝑷 (𝟏+𝒊)𝒏 −𝟏 (𝟏+𝒊)𝒏 −𝟏
= ∗ = (𝟏 + 𝒊 )𝒏 ∗ = = 𝑼𝑺𝑪𝑨𝑭
𝑨 𝑷 𝑨 𝒊(𝟏+𝒊)𝒏 𝒊

𝑨 𝒊
∴ = = SFF which gives the value of A in terms of F, i, n.
𝑭 (𝟏+𝒊)𝒏 −𝟏

In these cases A starts at year 1 and ends at year n where F is existed as shown.

0 1 2 3 …………. n-1 n

2.5 Standard Factor Notation and Use of Interest Tables:

The various factors will be represented by a standard notation of the form (X|Y, i%, n)
where:
X = what you want to find (unknown)
Y = what is given (known)
i = interest rate in percent
n = number of periods involved.
 𝑭
e.g (F/P, 6%, 20) means it required to get value of the factor at i= 6% ; n=20. To get
𝑷
𝑭
value of F; multiply this factor by P i.e F = P* or F = P (F/P, 6%, 20)
𝑷

The following table summarize the standard factors notation used in the interest tables .

Notes:
- In all above formulas one parameter only is unknown, the remainders
must be given.
- Annual payment start in year 1 while gradient starts in year 2.
- “i “ must be constant .
The interest tables are prepared the values of all the above mentioned factors starting
from i=0.5% to 50% and times from 1 to 100 years as follow:
Table A- 1
Discrete Cash Flow 0.5%
Discrete Compound interest factors
Single Payment Uniform Series Payments
Compound Present Sinking Compound Capital Present
N
amount worth Fund amount Recovery Worth
F/P P/F A/F F/A A/P P/A

1 1
1.005 0.995 1.0 1.0 1.005 0.995
2 2
1.0151 0.9851 0.33167 3.015 0.33667 2.9702
3 3
4 .
5 .
. .
. .
. .
. .
. .
100 100

Examples:

• (F/A, 0.5%, 3) = 3.015 from table A-1 at i=0.5%; n=3

(𝟏+𝒊)𝒏 −𝟏 (𝟏+𝟎.𝟎𝟎𝟓)𝟑 −𝟏
Or (F/A, 0.5%, 3) = = = 𝟑. 𝟎𝟏𝟓𝟎𝟐𝟓
𝒊 𝟎.𝟎𝟎𝟓
• (P/A, 5%, 10) = 7.7217 from table A-7 at i=5%; n=10
(𝟏+𝒊)𝒏 −𝟏 (𝟏.𝟎𝟓)𝟏𝟎 −𝟏
Or (P/A, 5%, 10) = = = 7.7217
𝒊(𝟏+𝒊)𝒏 𝟎.𝟎𝟓(𝟏.𝟎𝟓)𝟏𝟎
• (P/F, 25%, 35) = 0.0004 from table A-25
𝒊 𝒊
Or (P/F, 25%, 35) = = = 0.0004
(𝟏+𝒊)𝒏 (𝟏.𝟐𝟓)𝟑𝟓

2.6 Interpolation in Interest Tables:

For factors which corresponds to values of either i or n that is not exist in the interest
table, we locate the values of these parameters between two known values in the tables
i1, i2 or n1, n2 then the values of these factors are obtained from the equation:
𝒊−𝒊𝟏
𝑭𝒊 = 𝑭𝒊𝟏 + (𝑭𝒊𝟐 − 𝑭𝒊𝟏 ), where 𝑭𝒊 corresponds to F/P or P/F or P/A, A/p, ….. etc
𝒊𝟐 −𝒊𝟏

Example:
Determine the value of the equivalent uniform annual series for an investment of
100,000 L.E within ten years from now with interest rate of 7.3% per year.
Solution:
A= 100,000 (A/P, 7.3%, 10) From Tables A-9; A-10 we get
i N A/P
𝒊𝟏 = 𝟕% 10 0.14238 = 𝑭𝒊𝟏
i=? 10 F=?
𝒊𝟐 =8% 10 0.14903=𝑭𝒊𝟐
𝑨 𝟕. 𝟑 − 𝟕
∴ | = 𝟎. 𝟏𝟒𝟐𝟑𝟖 + (𝟎. 𝟏𝟒𝟗𝟎𝟑 − 𝟎. 𝟏𝟒𝟐𝟑𝟖) = 𝟎. 𝟏𝟒𝟒𝟑𝟕𝟓
𝑷 𝟕.𝟑 𝟖−𝟕
∴ 𝑨 = 𝒆𝒒𝒖𝒊𝒗𝒂𝒍𝒆𝒏𝒕 𝒖𝒏𝒊𝒇𝒐𝒓𝒎 𝒂𝒏𝒏𝒖𝒂𝒍 𝒔𝒆𝒓𝒊𝒆𝒔
𝑨
=𝑷 ∗ 𝑷| = 𝟏𝟎𝟎, 𝟎𝟎𝟎 ∗ 𝟎. 𝟏𝟒𝟒𝟑𝟕𝟓 = 𝟏𝟒𝟒𝟑𝟕𝟓 𝑳. 𝑬
𝟕.𝟑

2.7 Definition and Derivation of Gradient Formulas:

A uniform gradient is a cash-flow series which either increases or decreases uniformly
i.e changed by the same amount. In this case the cash flow is different with time (i.e. not
constant like the uniform series). The cash flow will be as follow:
0 1 2 3 …………. n-1 n

400
425 450
Ab
Ab Ab 400+ (n-2)25
+G +2G 400+ (n-1)25
Ab+ (n-2) G
Ab+ (n-1) G
Cash Flow Diagram For A Uniform - Gradient
With a gradient G G =25 in this case the value of G is obtained as follow :

𝒇𝒊𝒏𝒂𝒍 𝒑𝒂𝒚𝒎𝒆𝒏𝒕𝒔 𝒐𝒇 𝒖𝒏𝒊𝒇𝒐𝒓𝒎 𝒈𝒓𝒂𝒅𝒊𝒆𝒏𝒕 − 𝑩𝒂𝒔𝒆 𝒑𝒂𝒚𝒎𝒆𝒏𝒕

𝑮=
𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒚𝒆𝒂𝒓 𝒇𝒐𝒓 𝒕𝒉𝒆 𝒖𝒏𝒊𝒇𝒐𝒓𝒎 𝒈𝒓𝒂𝒅𝒊𝒆𝒏𝒕 𝒑𝒆𝒓𝒊𝒐𝒅 − 𝟏

𝑨𝒇 − 𝑨𝒃
∴𝑮=
𝑵−𝟏
If we ignore the base payment, the generalized uniformly increasing-gradient cash-flow
diagram will be as follow:

0 1 2 3 …………. n-1 n

Beginning of 2G 3G
gradient
(n-2) G
(n-1) G
This gradient is called a “Conventional gradient” when it starts at year 2 from the
present time or when the base payment starts at year 1. In all other cases the gradient is
called “unconventional gradient”.
2.8 Derivation of Uniform Gradient Factors Formulas:
𝑷
2.8.1 Uniform-gradient present- worth factor (UGPWF)
𝑮

for conventional gradient :

P = G(P/F, i%, 2) + 2G(P/F, i%, 3) +3G(P/F, i%, 4) +……+ (n-2)G(P/F, i%, n-1)
+ (n-1)G(P/F, i%, n)
𝟏 𝟐 𝒏−𝟐 𝒏−𝟏
P = G[ 𝟐+ 𝟑 + ⋯+ 𝒏−𝟏 + (𝟏+𝒊)𝒏 ] ………….. (A)
(𝟏+𝒊) (𝟏+𝒊) (𝟏+𝒊)
Multiply both sides by (1+i) we get:
𝟏 𝟐 𝟑 𝒏−𝟐 𝒏−𝟏
P(1+i) = G[
𝟏+𝒊
+ 𝟐 + 𝟑 + ⋯ + 𝒏−𝟐 + 𝒏−𝟏 ]…. (B)
(𝟏+𝒊) (𝟏+𝒊) (𝟏+𝒊) (𝟏+𝒊)

(B) – (A) will give:

𝟏 𝟐−𝟏 𝟑−𝟐 (𝒏−𝟏)−(𝒏−𝟐) 𝒏−𝟏

P[ (1+i) -1] = G [ + + + ⋯+ − ]
𝟏+𝒊 (𝟏+𝒊)𝟐 (𝟏+𝒊)𝟑 (𝟏+𝒊)𝒏−𝟏 (𝟏+𝒊)𝒏
𝟏 𝟏 𝟏 𝟏 𝒏−𝟏
Pi = G {[ + 𝟐 + 𝟑 +⋯+ 𝒏−𝟏 ] − }
𝟏+𝒊 (𝟏+𝒊) (𝟏+𝒊) (𝟏+𝒊) (𝟏+𝒊)𝒏
𝑮 𝑷 𝟏 𝒏−𝟏
P= [ ( - )- ] i=….%
𝒊 𝑨 (𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏
𝑮 (𝟏+𝒊)𝒏 −𝟏 𝒏 0 1 2 3 …………. n-1 n
= [ - ]
𝒊 𝒊(𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏

𝑷 𝟏 (𝟏+𝒊)𝒏 −𝟏 𝒏 G=……
∴ = [ - 𝒏 ]
P?
𝑮 𝒊 𝒊(𝟏+𝒊)𝒏 (𝟏+𝒊)

𝑨
2.8.2 Uniform gradient annual series factor (UGASF):
𝑮
This factor is used to convert from uniform gradient to an equivalent annual
series as shown below:

i=….% i=….%
0 1 2 …………. n-1 n 0 1 2 3 …………. n-1 n
G
Ab
A

It’s value is obtained as follow:

𝑨 𝑨 𝑷 𝒊(𝟏+𝒊)𝒏 𝟏 (𝟏+𝒊)𝒏 −𝟏 𝒏 𝟏 𝒏
𝑮
= ∗ =
𝑷 𝑮 (𝟏+𝒊)𝒏 −𝟏
∗
𝒊
[
𝒊(𝟏+𝒊)𝒏
- (𝟏+𝒊)𝒏 ] = 𝒊 - (𝟏+𝒊)𝒏 −𝟏
 These two gradient factors are obtained from tables P/G; A/G appendix A-31 to A-38
as follows:

Example: find the value of (P/G,4%,6)

Solutions:

𝟏 (𝟏+𝟎.𝟎𝟒)𝟔 −𝟏 𝟔
(P/G, 4%, 6) = [ - ] = 12.50624
𝟎.𝟎𝟒 𝟎.𝟎𝟒(𝟏+𝟎.𝟎𝟒)𝟔 (𝟏+𝟎.𝟎𝟒)𝟔

Or from the table:

Present Worth Gradient Factors (P/G)

N 1% 2% 3% 4% 5% 6% N

2 2
3 .
. .
. .
. .
. .
6 14.321 13.68 13.076 12.506 11.968 11.459 6

(P/G, 4%, 6) = 12.506

2.9 Present Worth, Future Worth, Equivalent Uniform annual

Series; and Conventional Gradients:
Steps of Calculations are:
1. Draw the cash flow diagram for the problem
2. Select the suitable engineering economy factors based on which is given and
which is required.
3. Specify correctly the conditions for which the formulas apply e.g uniform- series
factors could not be used if payments or receipts occurred every other (more
than one) year.
4. For conventional gradients (i.e. gradients begins in year 2); the present worth
and the equivalent uniform annual series are obtained from the following
equations:
PT = Present worth due to base payment (or receipts) “PA” + Present worth due
to gradients value “PG” =
Ab(P/A, i%, n) + G(P/G, i, 10) & AT = Ab + AG = Ab + G(A/G; i% , 10)
Or AT = PT (A/O, i%, n)
 Examples:
1. An investor deposited 60000 L.E now; 30000 two years from now; and 40000
L.E five years in order to be able to buy machine after ten years from now.
Calculate the price of this machine at same time if the interest rate is 5% per
year.

F = price of machine after ten years

F?
= 60000(F/P, 5%, 10) + 30000(F/P, 5%, 8) + 40000(F/P, 5%, 5)
= 60000(1.6289) + 30000(1.4775) + 40000(1.2763) 0 1 2 3 4 5
= 193111 L.E i= 5% n=10

30000 40000
60000
0
Or to avoid mistakes in compute n:
F = PT (F/P, 5%, 10)
= [60000 + 30000(P/F, 5%, 2) + 40000 (P/F,5%, 5)] * (F/P, 5%, 10)
= 193110.6 L.E

2. A company buys a machine in the forms installments starting by 50000 L.E at

year 1 and then increasing by 10000 L.E per year up to year 10. Calculate the
present worth and the equivalent uniform annual series of this machine if the
interest rate is 5% per year

Solution:

PT = 50000(P/A, 5%, 10) + 10000(P/G, 5%, 10)

0 1 2 3 …………. n = 10
= 50000(7.7217) + 10000(31.652)
= 702605 L.E 50000
G=10000 L.E
i=5%
EUAS = Ab + G(A/G, 5%, 10) = 50000 + 10000 (4.099) = 90990
Or
EUAS = 702605 (A/P, 5%, 10) = 90990
2.10 Calculation of Unknown Interest Rates “i” & Unknown
years “n”:

Examples

1. Calculate the rate of interest for the case of initial deposit of 60000 L.E and final
receipt of 100000 L.E after 5 years F=
100000
𝟔𝟎𝟎𝟎𝟎 0 1 2 3 4 n=5
(P/F, i%, 5) = = 0.6
𝟏𝟎𝟎𝟎𝟎𝟎
i?

From tables
P=600000 L.E
i N P/F
𝟎. 𝟔𝟐 − 𝟎. 𝟐𝟎𝟗
𝟏𝟎 5 0.6209 ∴ 𝒊 = 𝟏𝟎 + (𝟏𝟏 − 𝟏𝟎)
𝟎. 𝟓𝟗𝟑𝟓 − 𝟎. 𝟔𝟐𝟎𝟗
? 0.6 = 𝟏𝟎. 𝟕𝟔%
𝟏𝟏 5 0.5935
𝑷⁄ − 𝑷⁄
𝑭 𝑭𝟏
∴ 𝒊 = 𝒊𝟏 + (𝒊𝟐 − 𝒊𝟏 )
𝑷⁄ − 𝑷⁄
𝑭𝟐 𝑭𝟏
Using the equation:
𝟏
(P/F, i%, 5) = 0.6 =
(𝟏+𝒊)𝟓
𝟏
∴𝒊= − 𝟏 = 𝟏. 𝟏𝟎𝟕𝟔 − 𝟏 = 𝟎. 𝟏𝟎𝟕𝟔 = 𝟏𝟎. 𝟕𝟔%
𝟎.𝟔𝟎.𝟐

2. An investor borrows 10000 L.E now to buy a machine and repay this loan on the
form of annual installments with interest rate of 15%. Calculate the number of
these installments if it starts one year from now by 10000 L.E and then increased
gradually by 1000 L.E per year after that.
P= 100000
i= 15%
0 1 2 n
100000 = 10000(P/A, 15%, n) + 1000(P/G, 15%, n)
= PT 10000
G=1000 L.E

n P/A P/G PT Notes 𝟏𝟎𝟎𝟎𝟎𝟎−𝟗.𝟗𝟐𝟎𝟐

5 3.3533 5.775 39297 <<10000 ∴ 𝒏 = 𝟐𝟐 + 𝟏𝟎𝟏𝟔𝟑𝟖−𝟗𝟗𝟐𝟎𝟐 (24 -22)
15 5.8474 26.693 85167
20 6.2543 33.582 96175 ∴ 𝒏 = 𝟐𝟐. 𝟔𝟔 𝒚𝒆𝒂𝒓
22 6.3587 35.615 99202 <100000
24 6.4338 37.302 101638 >100000
 Solved Problems
Containing Single ,Uniform-Series ,Gradient - Series Factors
1. Suppose that a person deposits $500 in a savings account at the end of each year,
starting now, for the next 12 years. If the bank pays 8% per year, compounded
annually, how much money will accumulate by the end of the 12-year period?

F = $500 x (FIA, 8%, 12) = $500(18.9771) = $9488.55

2.A man has deposited $50 000 in a retirement income plan with a local bank. This bank
pays 8.75% per year, compounded annually, on such deposits. What is the maximum
amount the man can withdraw at the end of each year and still have the funds last for
12 years?

3.A father wants to set aside money for his 5-year-old son's future college
education. Money can be deposited in a bank account that pays 8% per year,
compounded annually. What equal deposits should be made by the father, on
his son's 6th through 17th birthdays, in order to provide $5000 on the son's
18th, 19th, 20th, and 21st birthdays?

On the son's 17th birthday, the deposits must have accumulated to

P = $5000(P/A, 8%, 4) = $5000(3.312) = $16 560.68
Thus, the deposit size, A, must satisfy
$16 560.68 = A (FIA, 8%, 12)
$16 560.68 = A (18.9771)
A = $872.67
4. The ABD Company is building a new plant, whose equipment maintenance costs are
expected to be $500 the first year, $150 the second year, $200 the third year, $250 the
fourth year, etc., increasing by $50 per year through the 10th year. The plant is
expected to have a 10-year life. Assuming the interest rate is 8% , compounded
annually, how much should the company plan to set aside now in order to pay for the
maintenance?

First we compute the present worth at the end of year 1 , p’

P' = $500 + $150(P/A, 8%, 9) + $50(P/G, 8%, 9)
= $500 + $I50(6.249) + $50(21.808) = $2527.42
The present worth at the end of year 0 is thus
P = P' (PIF, 8%, 1) = $2527.42(1.0800)-' = $2340.20

5. Mr. Jones is planning a 20-year retirement; he wants to withdraw $6000 at

the end of the first year, and then to increase the withdrawals by $800 each
year to offset inflation. How much money should he have in his savings
account at the start of his retirement, if the bank pays 9% per year,
compounded annually, on his savings?

P = A o (P/A, 9%, 20) + G (P/G, 9%, 20)

= $6000(9.17) + $800(61.777) = $104 189.14

6. Mr. Holzman estimates that the maintenance cost of a new car will be $75
the first year, and will increase by $50 each subsequent year. He plans to keep
the car for 6 years. He wants to know how much money to deposit in a bank
account at the time he purchases the car, in order to cover these maintenance
costs. His bank pays 5.5% per year, compounded annually, on
savings deposits

The P/A and P/G factors must be evaluated directly from :

𝟏 (𝟏+𝟎.𝟎𝟓𝟓)𝟔 −𝟏 𝟔
(P/G, 5.5%, 6) = [ - ] = 11.71
𝟎.𝟎𝟓𝟓 𝟎.𝟎𝟓𝟓(𝟏+𝟎.𝟎𝟓𝟓)𝟔 (𝟏+𝟎.𝟎𝟓𝟓)𝟔
P= 75 (4.9955) + 50 ( 11.71) = $ 960.17

7.Find the eight – year equivalent uniform annual series of uniform annual
disbursement of 16000 L.E starting from third year with interest rate of 6% per
year .

First Solution :
EUAS = PT (A/P , 6%, 8)
= P'( P/F , 6% , 2) (A/P , 6%, 8)
= A( P/A, 6% , 6) ( P/F , 6% , 2) (A/P , 6%, 8)
= 16000 (4.9173)(0.890)(0.16104)
= 11276.4 L.E

0 1 2 3 4 5 6 7 8
Second Solution :
EUAS = F(A/F, 6%, 8) = A(F/A, 6%, 6) (A/F, 6%, 8)
= 16000(6.975)(0.10104) = 11274 L.E
EUAS
 8. An investor makes a long – term investment in a company such that he
will pay 20 payments each of 40000 L.E per year beginning 3 years from
now ; 20,000 L.E six year from now and 30000 L.E sixteen years from
now . Calculate the accumulated amount of money that the investor
could obtain at the end of the interest period . Calculate also the present
worth value for this investment if i = 6% per year .

F?

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16……….21 22=n

A=40000
PT A=60000 A=30000

F = A(F/A, 6% , 20) +20000(F/P , 6% , 16) + 30000( F/P , 6% , 6 )

= 40000(36.786) + 200000 ( 2.5404) + 30000 (1.4185) = 1564802 L.E
PT = F( P/F , 6% , 22) = 1564802 ( 0.277505 ) = 434236.4 L.E

9. Calculate the present worth and the EUAS for annual payments that starts
by 2500 L.E at year 1 up to year 3 then increased gradually and uniformly until
reach 7500 L.E at year 8 with interest rate of 6% per year .

0 1 2 3 4 5 6
PI i=6%
0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8

EUAS

PT
7500

PT = PI + PII = 2500(P/A , 6% ,2) + [ 2500(P/A , 6% ,6) +G(P/G, 6% ,6)] (P/F , 6% ,2)

G = (7500 – 2500)/(6-1) = 5000/5 = 1000 L.E
PT = 2500(1.8334) + [2500(4.9173) + 1000 (11.459)](0.89) = 25723.01 L.E
EUAS = PT(A/P , 6% , 8) = 25723.01* 0.16104 = 4142.485 L.E
10. Calculate the present worth and EUAS for the cash flow shown , if the
interest rate is 7% .
G2 P’A
P'T
2000
PG2

0 1 2 3 4 5 6 7 8 9 10 11 12

4000
PG1 G1 8000

G1 = (8000 – 4000)/(5-1) = 1000 L.E ; G2 = (2000 -10000)/(5-1) = - 2000 L.E

PG1 =present worth of increasing gradient or deposits
= 4000(P/A , 7% , 5) + 1000 (P/A , 7%, 5) = 4000(4.1002) +1000(7.646)
= 24046.8 L.E
P'T = present worth of all withdrawals = PG2(P/F,7%,5)+ P'A (P/F,7%,10)
= [10000(P/A, 7%,5)- 2000(P/G ,7% ,5)] (P/F,7%,5) +2000(P/A,7%,2) (P/F,7%,10)
= [ 10000(4.1002) – 2000(7.646)](0.713) + 2000(1.808)(0.5084) = 20169.8 L.E
Pnet = Net or resultant present worth = P'T- PG1 = 20169.6 – 24046.8 = -3877.2 L.E
Which means deposits
EUAS = Pnet(A/P,7%,12) = -3877.2(0.1259) = -488.14 L.E
Higher Technological Institute Engineering economy I

Tenth Of Ramadan Sheet 2________

1. The fixed cost of a machine maintenance will be 3500 L.E per year ; while the
remaining cost will be 200 L.E starting two year from now and increase gradually and
uniformly by 200 L.E per year . Calculate the expected present worth ; future worth ;
and the equivalent uniform annual amounts for the total cost during the next ten years
if the interest rate will be 12.4 % yearly .

2. Determine the present worth of a loan which will be repaid in annual payments
starting one year from now and increase gradually by 1000 L.E per year starting from
year two up to year ten where the final payments will be 10000 L.E with interest rate of
15 % per year compounded quarterly .

3. Calculate the present worth and annual payments for deposits that will be started at
year 2002 and ends at year 2036 with final accumulated value of 275000 L.E and
interest rate of 10% per year.

4. A factory is planned to reduce it’s operating cost for the next four year. If this
reduction will follow a uniformly decreasing gradient of 12000 L.E per year such that
the equivalent uniform annual amount will be 115000 L.E. Calculate the values of
reduction in year 1, 2 ,3 ,and 4 if i = 12 % per year .

5. An investor deposits 6000 L.E now then his annual deposits increase uniformly and
gradually by 300 L.E up to year ten. Where his total investment will reach 115000 L.E.
Calculate the rate of interest.

6. A loan of 4000 L.E has to be repaid in the form of monthly payments each of 400 L.E
starting next year with interest rate of 1.25 per month. How many months does it takes;
and what is the amount of final payments?

7. An Oil Company is considering the purchase of a new machine that will last 5 years
and cost $50 000; maintenance will cost $6000 the first year, decreasing by $1000 each
year to $2000 the fifth year. If the interest rate is 8% per year, compounded annually,
how much money should the company set aside for this machine?

8. An investor deposits 20000 L.E now, 5000 L.E three years from now, and 10000 L.E
five years from now. How many years will it take from now for his total investment to
amount 100000 L.E if the interest rate is 6%?

Dr HOSNY ABBAS ABOUZEID

 CHAPTER 3
Geometric Gradient Factors Formulas
3.1 Derivation of Geometric Gradient to Present Worth
In this case a uniform gradient is a cash-flow series which either increases or decreases
in a form of geometric series as shown below .

OR
 Proof :

An = A1 / (1+g) n-1

here g =uniform rate of cash flow increase/decrease ( + / - )from period to period, that is,
the geometric gradient
A1 = Base amount or value of cash flow at Year 1 and g is the growth rate.
An =value of cash flow at any Year n
P = the present worth of any cash flow An at interest rate i
n
= An / (1+i) n = A1 ((1+g) n-1 / (1+i) n
In the general case, where i not equal fg ,then :
The present worth of the entire gradient series of cash flows , P, may be obtained by
 Example 1 :
The first-year maintenance cost for a new automobile is estimated to be $100,
and it increases at a uniform rate of 10%per year. Using an 8% interest rate,
calculate the present worth of cost of the first 5 years of maintenance.

Step by step solution :

Maintenance PW of
Year n Cost (P/F,8%,n ) Maintenance
1 100.0 = 100.0 x 0.9259 = $ 92.59
2 100.0 + 10%(100.0) = 110.0 x 0.8573 = 94.30
3 110.0 + 10%(110.0) = 121.0 x 0.7938 = 96.05
4 121.0 + 10%(121.0) = 133.0 x 0.7350 = 97.83
5 133.0 + 10% (133.0) = 146.41 x 0.6806 = 99.65
$ 480.42
Solution using geometric series present worth factor
𝟏−(𝟏+𝒈)𝒏 (𝟏+𝒊)−𝒏
P = A1 [ ] , where i not equal g
𝒊−𝒈

𝟏−(𝟏.𝟏)𝟓 (𝟏.𝟎𝟖)−𝟓
= 100.0 [ ] = $480.42
−𝟎.𝟎𝟐

the present worth of cost of the first 5 years of maintenance is $480.42 .

(1) i > g > 0:  use tables or formula
(2) g < 0:  use tables or formula
(3) g > i > 0:  Must use formula

(4) g = i > 0: 
Example 2 :
􀂃 Engineers at a specific company need to make some modifications to
an existing machine
􀂃 The modification costs only $8,000 and is expected to last 6 years with
a $1,300 salvage value
􀂃 The maintenance cost is expected to be high a $1,700 the first year,
increasing by 11% per year thereafter
􀂃 Determine the equivalent present worth of the modification and
maintenance cost. The interest rate is 8% per year
􀂃 The present worth value is comprised of three components
􀂃The present modification cost = $8,000
􀂃The present value of the future salvage value
􀂃The present value of all the maintenance values throughout the 6 years and
these are represented by the geometric gradient series

3.2 Derivation of Geometric Gradient to Future Worth

To compute a future worth from a geometric gradient series use:
𝟏−(𝟏+𝒈)𝒏 (𝟏+𝒊)−𝒏
F=P(1+i) = A1 [
n
](𝟏 + 𝐢) n
𝒊−𝒈
F = A1[((1 + i)n -
(1 + g)n)/(i
- g)] use only if i does not equal g.
n -n
The term [(1-(1 + g) (1 + i) )/(i - g)] is called the geometric-gradient-series future worth
factor.
F = nA1(1 + i)n-1 , use if i = g.

Example 3 :

Suppose that your retirement benefits during your first year of retirement
are $50.000. Assume that this amount is just enough to meet your cost of
living during the first year. However, your cost of living is expected to
increase at an annual rate of 5%, due to inflation. Suppose you do not
expect to receive any cost-of-living adjustment in your retirement pension.
Then. some of your future cost of living has to come from your savings
other than retirement pension, If your savings account earns 7% interest a
year, how much should you set aside in order to meet this future increase in
cost of living over 25 years?

Given: Al = $50.000, g = 5%. i = 7%, and N = 25 years, as shown in above

Figure
Find: P.
Find the equivalent amount of total benefits paid over 25 years:
P1 = 50000 ( P/A,7%,25) = 50000 x 11.65358 = $582679.159
Find the equivalent amount of total cost of living with inflation ,P2
P2= 50000 (P/A,5%,7%,25) =50000 x 18.80334 = $940167.2185
The required additional savings to meet the future increase in cost of living
will be P,
P = P2 – P1 = 940167.2185 - $582679.159 = $357488.06
Project Evaluation Methods
2. NET PRESENT VALUE
The net present worth (NPV) of a given series of cash flows is the equivalent
value of the cash flows at the end of year 0 (i.e., at the beginning of year 1). For
the case of annual compounding ,NPV is calculated as follow:

NPV(i) = Net present Value calculated at interest rate a minimum attractive rate
of return (MARR) i

An = net cash flow at the end of period n,

i = MARR , and
n = service life of the project.
An will be positive if the corresponding period has a net cash inflow and negative if the
period has a net cash outflow.

We will first summarize the basic procedure for applying the net-present-worth
criterion to a typical investment project, as well as for comparing alternative projects.

Evaluation of a Single Project

Step 1: Determine the interest rate that the firm wishes to earn on its investments. This
interest rate is often referred to as either a required rate of return or a minimum
attractive rate of return (MARR). Usually this selection is a policy decision made by top
management.
Step 2: Estimate the service life of the project.
Step 3: Estimate the cash inflow for each period over the service life.
Step 4: Estimate the cash outflow for each period over the service life.
Step 5: Determine the net cash flows for each period (net cash flow = cash inflow - cash
outflow).
Step 6: Find the present worth of each net cash flow at the MARR. Add up these
present-worth figures; their sum is defined as the project's NPV

Step 7: In this context, a positive NPV means that the equivalent worth of the inflows is
greater than the equivalent worth of the outflows, so the project makes a profit
.Therefore , if the NPV(i) is positive for a single project, the project should be accepted;
if it is negative, the project should be rejected. The process of applying the NPV
measure is implemented with the following decision rule:

If NPV(i) > 0, accept the investment.

If NPV(i) = 0, remain indifferent.

If NPV(i) < 0, reject the investment.

Example 4 :
The cash flows associated with a milling machine are Ao= -$50000. Aj = $15000
( j = 1,. . . ,5 ) . Determine the economic acceptability of this machine at interest rates of
(a) 10°/o, (b) 15%, and (c) 20% per year, all compounded annually .

The machine is seen to be an economically acceptable investment when the interest rate
is 1O0/0, and (barely) when the interest rate is 15%. It is not economically justifiable to
buy the machine if the interest rate is 20%.
Example 5
Tiger Machine Tool Company is considering the acquisition of a new metal cutting
machine. The required initial investment of $75,000 and the projected cash benefits over a
three-year project life are as follows

You have been asked by the president of the company to evaluate the economic
merit of the acquisition. The firm's MARR is known to be 15%.
Given: Cash flows as tabulated; MARR = 15% per year.
Find: PW.
If we bring each flow to its equivalent at time zero as shown in Figure below, we find that
NPV = -$75000 + $24000(P/F,15%,1) +$27340(P/F,15%,2) + $55760(p/f,15%,3)
= $3553 .
Since the project results in a surplus of $3,553, the project is acceptable. It is returning
a profit greater than 15%.

2.Internal Rate Of Return ( IRR )

The internal rate of return (IRR) for a series of cash flows is that particular value, i*, of
the interest rate for which the NPV vanishes. Thus, if we plot the NPV as a function of i,
using 0ne of the following equations , the curve will cross the i-axis at i*. Alternatively,
we could find, by trial and error, i-values for which the NPV is slightly positive and
slightly negative, and interpolate linearly between them for i*. If a more accurate
approximation for i* is required, a numerical technique can be used to solve these
equations for i, with the left side replaced by zero.
IRR could be calculated one of the following equations :
• PW of benefits - PW of costs = 0 or ,
• Net present worth(NPV) = 0 or ,
• PW of benefits / PW of costs =1 or,
• PW of costs = PW of benefits or,
• EUAB - EUAC = 0
EUAB AND EUAC are the equivalent uniform annual series of benefits and costs
respectively .

Example 6 :
Find the IRR (internal rate of return ) for the machine of Example 4.
We can use NPV = 0
By linear interpolation between the results of Example l (b) and (c):
The IRR criterion (i*) could applied to take a decision for a typical simple investment
project according to the following rule :
If IRR > MARR. accept the project.
If IRR = MARR. remain indifferent.
If IRR < MARR, reject the project.

Example 7:
An investment resulted in the following cash flow .Compute the internal rate of return

We can use EUAB - EUAC = 0 ,then

100+ 75(A/G, i, 4) -700(A/ P, i, 4) =0
by trial and error. Try i =5% first: At i = 5%,
EUAB - EUAC=100+ 75(1.439) -700(0.2820) = 208 -197 = +11
Then try i =8%: At i =8%,
EUAB - EUAC = 100+ 75(1.404) - 700(0.3019) = 205 - 211 = -6
We see that the true rate of return is between 5% and 8%. Try
i =7%: At i = 7%,
EUAB - EUAC = 100+ 75(AfG, 7%, 4) -700(Af P, 7%, 4) = 100+ 75(1.416) - 700(0.2952)
= 206- 206= 0
The IRR is 7%.

Example 8
For the series of cash flows
determine the NPV at annual interest rates 0% , 5%, lo%, 20%, 30%, SO%, and 70%.
From a graph of the results, find the rate(s) of return.
For the given flows,
NPV = -$3000 + $6000(P/A,i%, 2)(P/F,i %, 1)- $10 000(P/F,i %, 5)
and evaluation at the specified interest rates gives the points

which are plotted in the following figure . It is seen that there are two rates of return in
this case, i* - 7% and i* = 54%.

If multiple i*-values exist, it is usually better to abandon the IRR method and instead to

investigate the sign of the NPV for various assumed values of the interest rate.
Summary of Discrete Compounding Formulas with Discrete Payment
Higher Technological Institute Engineering economy I

Tenth Of Ramadan Sheet 3________

1. What is the amount of 10 equal annual deposits that can provide five annual
withdrawals, when a first withdrawal of $1,000 is made at the end of year 11, and
subsequent withdrawals increase at the rate of 6% per year over the previous year's if
the interest rate is 8%, compounded annually?
2. • Facility has aging cooling system which currently runs 70% of the time the plant is
open – Pump will only last 5 more years. As it deteriorates, the pump run time is expected
to increase 7% per year . New cooling system would only run 50% of the time •
What is the value of replacing the pump , if :
• Either pump uses 250 kWh, Electricity cost $0.05/KWh
• Plant runs 250 days per year, 24 hours per day
• Firm’s discount rate is 12%
3. Tuition costs are expected to inflate at the rate of 8% per year. The first
year’s tuition is due one year from now and will be $10,000. To cover tuition
cost for 4 years, a fund is to be set up today in an account that will earn
interest at the rate of 5% per year, compounded annually.
How much must be deposited into the fund today in order to pay the 4 years of
tuition expenses ?

4.

5. A new plant to produce steel tubing requires an initial investment of $10 million. It is
expected that after three years of operation an additional investment of $5 million will
be required; and after six years of operation, another investment of $3 million. Annual
operating costs will be $3 million and annual revenues will be $8 million. The life of the
plant is 10 years. If the interest rate is 15% per year, compounded annually, what is the
NPV of this plant?
6. Compute the IRR for the following cash flows:

Dr . HOSNY ABBAS ABOUZEID

 CHAPTER 4
Comparison Of Alternatives For Proposed
Investments
Different methods are used:
◼ Present /Future worth
◼ Capitalized cost
◼ Annual equivalent cash flow
◼ Internal rate of return
◼ Benefit/cost ratios

1. Present / future worth Analysis :

This analysis is used for alternatives of finite periods. When comparing
Alternatives from cost or disbursements point of view, the lowest present /
future alternative should be selected. But when comparing alternatives
where income is greater than costs, then the highest present/future worth
should be selected.

1.1 Equal lived alternatives :

Example 1
It is required to select one of the two following machines for a project.
Machine A has a first cost of 100000 L.E, annual operating cost of 36000L.E
and salvage of 8000 L.E . Machine B has a first cost of 140000 L.E, annual
operating cost of 28000 L.E. and salvage value of 14000 L.E . Determine
which of these two machines should selected based on the present worth
analysis if the interest rate was 10% per year and both machines has a life
time of five years .
14000 L.E
Solution: 8000 L.E
0 1 2 3 4 5
0 1 2 3 4 5

28000 L.E
36000 L.E 140000
100000
0
PWA = PA + A(P/A,10%,5) – S.V(P/F,10%,5)
= 100000 + 36000(3.7908) – 8000(.6209) = 231501.6 L.E
PWB = 140000 + 28000(3.7908) – 14000(.6209) = 237449.8 L.E
PWA < PWB , Then machine A should be selected .

Different lived alternatives:

In this case the alternatives must be compared over the same number of
years by calculating the least common multiple of the two alternatives (for
example the least common multiple of 8 and 12 is 24) as explained in the
following example.
Example 2:
Determine which of the following two projects should be selected on the
basis of a present worth analysis using an interest rate of 15% per year .
First cost Annual operating cost Salvage value Life ,years
Project A 110000L.E 35000 L.E 10000 L.E 6
Project B 180000L.E 31000L.E 20000L.E 9
Solution :
10000 10000 10000 i=15% 20000

0123456 12 18 0 6 9 12 18

A=35000L.E A =31000L.E
110000 110000 110000 110000 110000

PWA = 110000+110000(P/F,15%,6)-10000(P/F,15%,6)+110000(P/F,15%,6)
-10000(P/F,15%,12) --10000(P/F,15%,18)+35000(P/A,15%,18)
= 11000(1+.4323+0.1869)-10000(.4323+.1869)+0.0808)+35000(6.128)
= 385592 L.E
PWB = 180000+180000(P/F,15%,9)+31000(P/A,15%,18) -20000 (P/F,15%,9)
-20000(P/F,15%,18)=180000(1+.2843)+31000(6.128)-20000(.2843+.0808)
= 413840 L.E
PWA < PWB Then project A should be accepted

2.Capitalized Cost Calculations :

Capitalized cost refers to the present – worth value of a projects that
assumed to last forever e.g Dames, Bridges , Roads …..etc.
Capitalized Cost = EUAC( or EUAB) / i
Where , EUAC &EUAB are the equivalent uniform annual series of costs &
Benefits respectively and is the interest rate .
Example 3
Calculate the capitalized cost of a project that has an initial cost of 300000L.E
And additional investment cost of 100000L.E after ten years . The annual
operating cost will be 10000 L.E for the first four years and 16000 L.E after that.
It is expected that the recurring major rework costs of 30000 L.E every 13
years with interest rate of 5%per year.
Solution:
Draw the cash flow diagram .
Present worth of non-recurring costs = PNR = 300000+10000(P/A,5%,4)+
+100000(P/F,5%,10)= 300000+10000(3.546)+100000(0.6139) =396830L.E
Capitalized cost of recurring costs=[16000(P/F,5%,4) + 30000(A/F,5%,13)]/0.05
=[16000(.8227)+30000(.05646)]/0.05=297140 L.E
Total Capitalized cost = 396850+2971.40 = 693990 L.E

Example 4:
Two sites are currently under consideration to construct either a
suspension bridge or a truss bridge to cross a river . In the north site , the
suspension bridge would have to stretch from one hill to another to span the
widest part of the river ,railroad tracks ,and local highways below . Its first
cost will be 30millon L.E with annual maintenance and inspection costs of
15000 L.E . In addition the concrete deck would have be resurfaced every ten
years at cost of 50000 L.E. The cost of purchasing right –of - way is expected
to cost 800000 L.E.
In the south site the truss bridge will be constructed but would require a new
roads construction. The first cost of this bridge will be 10 million L.E while
the cost of the new roads will be 80000 L.E . This bridge have to painted
every 3 years at cost of 100000 L.E. In Addition , this bridge would have a
major reworks every ten years at cost of 450000 L.E. The cost of
purchasing right –of - way is expected to be 11million L.E. Determine which
of these two sites should be selected if the interest rate is 6% per year .
Solution :
North site (suspension bridge)

Present worth (or cap. Cost )for non-recurring cost = 30x106 +0.8x106
= 30.8x106 L.E
Cap. Cost for recurring cost = (15000/0.06) + [50000(A/F,6%,10)/0.06]
= 313223.3 L.E
Total Tap. Cost = 30.8x106 +.3132233x106 = 31.113223x106
For South site(or truss bridge)
Present worth (or cap. Cost )for non-recurring cost =(10+3)x106 =23x106L.E

Cap. Cost for recurring cost =(80000/0.06) +100000[A/F,6%,3)/0.06]

450000(A/F,6%,10)/0.06 = 2.425859x 106 L.E
Total Tap. Cost = (23+2.425859)x 106 L.E
South site (or truss bridge) should be selected.

Example 5:

Present Cost of A
Present Cost of B

Example 6 :
Three alternatives

Select the best alternative based on : future / present worth

Future worth of alternative C

Results of future worth analysis :

Accept alternative C
Benefit cost ratio Evaluation
Introduction
The benefit /cost ratio is one of the methods used to compare two alternatives and would
agree with the PW and the EUAC . This method must carried out when the proposal with
higher PW (or EUAC) yields a higher benefit , for example :
PWA =100000 L.E ; PWB =80000 L.E
Benefit A=20000 L.E ; Benefit B = 16000 L.E
But it is not necessary to use this method when lower PW (or EUAC) gives lower benefits .

Benefits , Disbenefits and Cost Calculation Of A Single Project :

The Benefit /Cost ratio “B /C’’ is calculated as follow :
B/C =( Benefits – Disbenefits) /Costs
If B/C > 1.0 Accept the project economically .
If B/C < 1.0 Reject the project economically .
Where ;
Benefits : Are the advantage , expressed in terms of money units which happened to the
owner ; e.g annual income …….
Disbenefit : Are the disadvantage , expressed in terms of money units which happened to the
Owner ; e.g loss due to accidents , ……
Costs : Are the expected expenditures for construction , operation , maintenance , ……
Another method called “B-C” method could be used as follow :
If B- C > 0 Accept the project economically .
If B- C < 0 Reject the project economically .
Example :
Two routes N & S are under consideration for a new interstate highway that last 30 years with
no salvage value . The north road has an initial cost of 10 millions L.E , annual operation and
maintenance cost of 35000 L.E and expected loss due to construction in agriculture land will
be 400000 L.E per year .The south route has initial cost of 15 millions L.E ,annual operation and
maintenance cost of 55000 L.E. The expected annual income is 1 million L.E for north route
and 1.1 million L.E for south route with an interest rate of 5% per year . Determine which route
should be selected on the bases of B /C ratio analysis .
Solution :
EUACN = 10 x 106 ( A/P,5% , 30) + 35000 = 685500 L.E
EUACS = 15 x 106 ( A/P,5% , 30) + 55000 = 1030750 L.E
Then ; B /CN = [106 – 0.4x 106 ] /685500 = 0.875 < 1.0
B /CN = 1.1x 106 / 1030750 = 1.067 > 1.0
Accept the south route .

Example :
An educational research organization is thinking to make an investment of 1.5 millions L.E in
Grants to develop new ways for teaching . The grants would extend over a 10 ten years period
and would create an estimated saving of 500000 L.E/year in professor’s ; salaries student , ..etc
An estimated 200000L.E per year have to be released from other programs to support the
educational research . If the rate of return is 6% ; determine the advisability of the program over
10 year period using : a) B/C method b) B- C analysis .
Solution ;
EAUC = 1.5 x 106 (A/P,6%,10) =203805 L.E/year
Benefit = 500000 L.E /year ; Disbenefit = 200000 L.E
a) B/C==( Benefits – Disbenefits) /Costs = (500000 – 200000) /203805 = 1.47 > 1
This project is accepted
b) B – C = ( Benefits – Disbenefits) – Costs = (500000 – 200000) – 203805
= 96195 > 0 Also ,this project is accepted

Selection From Mutually Exclusive Alternatives Using Incremental B/C

Ratio Analysis :
This method could summarized as follow ;
• Identify all alternatives
• Arrange the alternatives from the smallest to large initial investment cost (or EUAC)
• Evaluate first two alternatives ,then eliminate the alternative that has B/C <1.0
• Repeat evaluation until all alternatives have been evaluated as shown in the following
example.

Example :
It is required to construct a dam on a river with the following construction cost and average
Annual operating coat and annual income as follow :
Cost (L.E) A B C D E F
Construction cost 6x106 8 x106 3 x106 10 x106 5x106 11x106
Annual income 350x103 420 x103 125 x103 700x103 350x103 700x103
AOC 11000 12000 10000 13000 11000 13000

Assume AOC is disbenefit . Select the best location using the B /C ratio method if the minimum
rate of return is 6% .
Solution :
Since dam life is infinity ,so EUAC = Px i then the alternatives are first ranked from smallest to
largest initial investment cost (or EUAC) according to the following table :
Parameters C E A B D F Remarks
EUAC x10-3 180 300 360 480 600 660 =Px i (1)
Annual 125 350 350 420 700 700 (2)
Benefit x10-3
Annual dis- 10 11 11 12 13 13 (3)
benefit x10-3
Ben – Disb. 115 339 339 408 687 687 [(2)-(3)] (4)
Site C to none E to none A to E B to E D to E F to D (5)
comparison
Incremental 180 300 60 180 300 60 (6)
(or ∆)EAUC (180-0) (300-0) (360-300) (480-300) (600-300) (660-600)
Incremental 115 339 0 69 348 0 (7)
(or∆)Benefit (115-0) (339-0) (339-339) (408-339) (687-339) (687-687)
Incremental 0.639 1.13 0 0.383 1.16 0 (7)/(6) (8)
(or∆)B/C
Site None E E E D D
Selected

Location D is selected .
Higher Technological Institute Engineering economy I
Tenth of Ramadan City Sheet 4________
1.It is required to construct a large shopping center in a site within 3 years from now . During
this period , the will exposed to 12 heavy thundershowers at rate of one every 3 months . The
losses of these thundershowers are expected to be 20000 L.E per thundershower in the
project site . Determine if it would be economically feasible to install rainwater drain pipe to
protect the site OR not . The cost of drain pipe would be 130 L.E per meter with total length of
2000 meters and expected salvage value of 60000 L.E after 3 years , with nominal interest rate
Of 5% per year .

2.A company received two proposals to update the production lines . The first proposal “A” has
an initial cost of 60000 L.E and an AOC of 8000 L.E /year for the next four years , then it
becomes 10800 L.E / year after that . Proposal “B” has an initial cost of 112000 L.E and an
AOC of 4800 L.E /year for the first 3 years , then it will increase by 480 L.E /year . The salvage
value of machines in this proposal will be 8000 L.E after 20 years . Which of the two
proposals should be accepted on the basis of a present worth analysis if they have same
lifetime and rate of interest of 10% per year .

3.Select one of the two machines below on the basis of their present worth , using an interest
Rate Of 18% per year .
Machine P Machine Q
First cost $290000 $370000
Salvage Value $40000 $50000
Annual maintenance cost $30000 $35000
Overhaul every 2 years $37000 $20000
Life , years 3 5

4.A park has a first cost of 350000 L.E with AOC of 120000 L.E for the first year ; then it
Increased by 20000 L.E per year up to year 5 , and after that it remain constant at 200000
L.E /year . The expected costs for improving the park will be 6000 L.E / year for the first
five years . The expected profits will be 110000 L.E in the first year , then it increased by
30000 L.E /year up to 8 years , after which the net profit will remain the same . Calculate
the capitalized cost and the capitalized profits of the park if the interest rate is 6% per year

5.Compare between the following two machines on the bases of their capitalized cost with
Interest rate of 14 % per year .
Machine First Cost AOC Salvage Over haul Lift ,years
Value after 6 years
X 50000 L.E 62000 L.E 10000 L.E --------------------- 7
Y 200000 L.E 24000 L.E 0 5000 L.E ∞

6.There are three sites for flood – control dams ( designated as sites A , B ,and C) . The
construction costs are $10 millions , $ 12 millions , and $20 millions , and maintenance costs
are expected to be $15000 , $ 20000 , and $23000 respectively , for sites A , B , and C . In
addition , a $75000 expenditure will be required every 10 years at each site . The present cost
 of flood damage is $2 million per year . If only the dam at site A is constructed , the flood
damage will be reduced to $1.6 million per year . If only the dam at site B is constructed , the
flood damage will be $1.2 million per year . If only the dam at site c is built , the flood
damage will be reduced to $0.77 million per year . Since the dams would be built on different
branch of a large river , either one or all the dams could be constructed and the decrease in
flood damages would be additive . If the interest rate is 5% per year , determine which ones ,
if any , should be built on the bases of their B /C ratios . Assume that the dams will be
permanent .

7.A city trying to attract professional strong teams is considering construction a large public
Sporting area or a conventional stadium . The public area would cost $90 million to construct
and would have a useful life of 50 years . The maintenance and operation costs would be
$300000 the first year , with costs increasing by $10000 per year . Every ten years , an
expenditure of $800000 would be required to renewing the interior . The conventional stadium
would cost $50 million to construct and would also have a useful life of 50 years . The cost of
maintenance would be $75000the first year , increasing by $8000 per year . Periodic costs for
repairing , resurfacing , etc .., would be $100000 every 4 years . Revenue from the public area
is expected to be greater than that from the conventional stadium by $500000 the first year ,
with amounts increasing by $200000 per year through year 15 . Thereafter , the extra revenue
from the public area would remain the same at $3.3 million per year . Assuming that both
structures would have a salvage value of $5 million , use an interest rate of 8% and a B / C
analysis to determine which structure should be built .

8.Select the best mutually exclusive alternative using the B /C ratio method from the proposals
Shown below if the MARR is 10% per year and the project have a useful life of 15 years .
Assume that the cost of the land will be recovered when the project is terminated . Treat
maintenance costs as disbenefits .

Propo.
No 1 2 3 4 5 6 7
Cost
Land Cost $50000 $40000 $70000 $80000 $49000 $65000 $75000
Construction $200000 $150000 $170000 $185000 $165000 $175000 $190000
Cost
Annual $15000 $16000 $14000 $17000 $18000 $13000 $12000
Maintenance
Annual $52000 $49000 $68000 $50000 $81000 $77000 $45000
Income