ENGINEERING ECONOMY

CHAPTER 4: THE TIME VALUE OF MONEY (PART 2)

Time Value of Money
4.7 Uniform Series
a. Series Compound Amount Factor
b. Sinking Fund Factor
c. Capital Recovery Factor
d. Series Present Worth Factor
  (1+ i) −1  
n
i
F=A   A =F  
 (1+ i) −1
n
 i 

F = A (F/A,i,n) A = F(A/F,i,n)

SERIES COMPOUND-AMOUNT FACTOR SINKING FUND FACTOR

CAPITAL RECOVERY FACTOR SERIES PRESENT WORTH FACTOR

 i(1+ i)   (1+ i) − 1
n
n
A = P  P =A  n 
 (1+ i) −1 ( )
n

 i 1 + i 

A = P(A/P,i, n) P = A (P/A, i, n)
4.7.c. Capital Recovery Factor Finding a, given P

Capital recovery represents the return of initially invested capital over

the lifespan of an investment.

A?
𝐴 = 𝑃 𝐴Τ𝑃 , 𝑖, 𝑛
i=8%

0 1 2 3 4 5
This is what we called as
“Capital Recovery Factor”.
100,000
Refer to the TABLE to find
the value.
4.7.c. Capital Recovery Factor Finding a, given p
EXAMPLE 4.7.c (i)
If you had $500,000 today in an account earning 10%
each year, how much could you withdraw each year for 25
years?
Refer TABLE
𝐴 = 𝑃(𝐴Τ𝑃 , 𝑖%, 𝑛) = $500,000 𝐴Τ𝑃 , 10%, 25
𝐴 = $500,000 0.1102 = $55,100
STEP 1: Choose the right STEP 2: Which column to refer to?
table by referring to the 𝐴 = 𝑃 𝐴Τ𝑃 , 10%, 25
interest rate

STEP 3: n value?
n = 25
EXAMPLE 4.7.c (ii)
Biogen company has borrowed RM250,000 to purchase
an equipment for gene splicing. The loan carries an
interest rate of 8% per year and is to be repaid in equal
installments over the next 6 years. Compute the amount
of this annual installment.
 Firstly, you need to
EXAMPLE 4.7.c (ii) extract the information
given.
Biogen company has borrowed RM250,000 to
purchase an equipment for gene splicing. The loan
carries an interest rate of 8% per year and is to be
repaid in equal installments over the next 6 years.
Compute the amount of this annual installment.
Given P, Find A

Formula to use -> A = P (A/P, i, n)

EXAMPLE 4.7.c (ii)
Information given:
P = 250,000 (A/P, i, n) -> Find from
Table
i = 8% = 0.08 = 0.2163
n=6

Formula to use -> A = P (A/P, i, n)

= 250,000 x 0.2163
= RM 54,075
37
EXAMPLE 4.7.c (iii)

Try to do this
example. The answer
should be, A= 436.50
4.7.d. Series Present Worth Factor F i n d i n g P, g i v e n A

The present value of cumulative all investments (P) is to be calculated

based on uniform series of equal investments (A) for n number of
periods at the compound interest rate of i.
5,000
𝑃 = 𝐴 𝑃Τ𝐴 , 𝑖, 𝑛
i=8%

0 1 2 3 4 5
This is what we called as
“Series Present Worth Factor”.
P? Refer to the TABLE to find the
value.
4.7.d. Series Present Worth Factor Finding a, given p
EXAMPLE 4.7.d (i)
How much would it be needed today to provide an annual
amount of $50,000 each year for 20 years, at 9% interest
each year?
*Refer TABLE
𝑃 = 𝐴(𝑃Τ𝐴 , 𝑖%, 𝑛) = $50,000 𝑃Τ𝐴 , 9%, 20
𝑃 = $50,000 9.1285 = $456,427
EXAMPLE 4.7.d (ii)

Do read and understand the scenario

given in the questions. Not all the
“VALUE/NUMBER” given in the question
need to be used in your calculation!
Some might be just a clue OR just a part
of the story ☺
EXAMPLE 4.7.d (ii) CLUE that represent the value
of A “…each year”
So, it is happening repetitively

“…..afford to invest” meaning the value of P

that we are looking for, as INVESTMENT
usually happen at the beginning of the cash
flow.
EXAMPLE 4.7.d (ii)
EXAMPLE 4.7

This question is a bit

tricky. Then, identify
the provided
information first!
EXAMPLE 4.7 This is the ‘hint’ that
represent the value of P
EXAMPLE 4.7

If A= 8, 800, will be paid of in 30 years

So, if A = 10,000… how long will be paid off?

EXAMPLE 4.7
EXAMPLE 4.7

choose the larger

These concepts of A/F, F/A, A/P and P/A
could be applied wherever the economic
decision required such as :
1. Decide whether the equipment purchase
are worth or not.
2. Choose between 2 alternatives.
…….. and many more
EXAMPLE
 EXAMPLE
Q3(a) The XYZ Company is planning to increase their production process by
upgrading the machinery to higher capacity processor with initial cost of RM
86,000, operation and maintenance cost RM 8,600 per year, life cycle seven (7)
years, salvage value of RM 6,000. Hence increase in production that will
generate an income of RM 35,000 per year.

Evaluate the investment based on future worth (FW) method with an expected
MARR of 10%per year using a proper cash flow diagram.
(10 marks)
Do contact me if you have any question/s.

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