Chapter 4

(4-1)Future Value (FV) single-payment compound amount formula:

Future Value (FV) : Is the value of an asset at a specific date. It measures the nominal future sum
of money that a given sum of money is "worth" at a specified time in the future with a certain
interest rate.

F=?

n
F = p (1+i) n
F = P (F/P, i%n) P

F=?

(𝟏+𝐢)𝐧 −𝟏 0 1 3 4
F=A[ ] 2
𝐢

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

Example:
A company deposited in a bank 100,000 $ with an interest 10% for 9 years. What is the summation
of these payments?

Sol. F

0 1 2 3 4 5 6 7 8 9

100000
n 9
F = P(1+i) = 100000 × (1+0.1) =235794.761 $

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Engineering economics Shang Asmat Mohammed
Example:
If you had $2,000 now and invested it at 10%, how much would it be worth in eight years?
Sol.

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

Example.
A company deposited yearly in a bank 7.825*10 6 $ with an interest 6% for 9 years.
What is the summation of these annual payments?
Sol.

Compounding factor for the uniform series of payments is:

(1+i)n −1
F= A [ ]
i
(1+0.06)9 −1
F= 7.825*106 [ ] = 89.919 * 106 $
0.06

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Engineering economics Shang Asmat Mohammed
(4-2) Present Value( PV) single-payment present worth formula:
Present value (PV): is the current value of a future sum of money or stream of cash flows given
a specified rate of return. Future cash flows are discounted at the discount rate, and the higher
the discount rate, the lower the present value of the future cash flows. Determining the appropriate
discount rate is the key to properly valuing future cash flows, whether they be earnings or
obligations.to find P we need this equation

F n
P=
(1+i)n

P = F (P/F, i%, n) P=?

0 1 2 3 4

(1+i)n −1
P= A [ ]
i(1+i)n
A A A A
P = A(P/A, i%, n)
P=?

Example:
Calculate the principal that have been borrowed 5 years ago, which must be returned it as 5000$.
The interest rate was 10%. find the interest added to this principal during the 5 years.?

F5 = 5000 $

F
P=
(1+i)n

5000 0 1 2 3 4 5
P = (1+0.1)5 =3104.6$

I=5000-3104.6=1895.39$

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Engineering economics Shang Asmat Mohammed
Example:
For cash flow diagram find value of p=?

0 1 2 3 4

A A A A
P=? A=1000?

Sol. i=10%

(1+i)n −1
P= A [ ]
i(1+i)n

(1+0.1)4 −1
P= 1000 [ 0.1(1+0.1)4]=3169.9$

(4-3)Derivations of a uniform series of payments worth – fact(A.V):

Annual Worth (AW) : is defined as the equivalent uniform annual worth of all estimated receipts
(income) and disbursements (costs) during the life cycle of a project. Initial Cost Annual Cost
Overhaul Cost Salvage Value Income Equivalent Uniform Annual Worth ($/year)

0 1 2 3 4

𝐢(𝟏+𝐢)𝐧
A= p [ ]
(𝟏+𝐢)𝐧 −𝟏
A A A A

P A=?
A = P(A/P, i%, n) F

𝐢 0 1 2 3 4
A=F [ (𝟏+𝐢)𝐧 ]
−𝟏

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

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Engineering economics Shang Asmat Mohammed
Example:
The international construction bank gives a dept. equal to 8.79*10 6 $ with an interest
8% for a certain project which must be recovered in 10 years what is the annual
payment that must be paid to the bank?
p = 8.79*106

0 1 2 9 10

A= ?
Sol.
𝐢(𝟏+𝐢)𝐧
A= p [ ]
(𝟏+𝐢)𝐧 −𝟏

0.08(1+0.08)10
A = 8.79 * 106 [ ]
(1+0.08)10 −1

A = 1.3 * 106 $
Example:
For cash flow diagram find value of A=?
1-
i = 10% F =5000$
A=?

0 1 2 3 4

A A A A A

𝐢
A=F [ (𝟏+𝐢)𝐧 ]
−𝟏

0.1
A=5000 [ (1+0.1)5 −1 ] =818.98 $

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Engineering economics Shang Asmat Mohammed
2-

p= 5000$ i = 10%

A=?

0 1 2 3 4

A A A A

𝐢(𝟏+𝐢)𝐧
A= p [ ]
(𝟏+𝐢)𝐧 −𝟏

0.1(1+0.1)4
A=5000 [(1+0.1)n −1] =1572.9$

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Engineering economics Shang Asmat Mohammed