EMT 341/3

Management
for Engineers
Lecture 3
Part II : Economics
Sem 2 2020/21
 Learning Outcome
1) Definition [keywords]
2) Basic Engineering Economy
Concept
3) Ethics Planning

4) Time Value of Money

Profit
5) Interest and Interest Rate
Investment
6) Cash Flow
7) Economic Equivalent Marketing
8) Simple & Compound interest Manufacturing 2
9) Minimum attractive Rate of Return EMT341_Sem1 2020/21
Money- Time Relationship & Equivalent
LEARNING OUTCOME
•Understand the concept
•Derive basic formula
•Able to solve related problems
Methods :
• Factor Formula
• Spreadsheet
• Linear interpolation
Divided to :
• Equal Value (6 categories)
• Different Value (2 categories)
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction
ii) Single-payment present worth factor (SPPWF)
š Method
iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
 Introduction
šEconomic evaluation questions
1)How much money is given?
2)When is the money given (where on the time
line/cash flow)?
3)What is the time period ( Year, quarter or Month)?
4)What is the interest rate?
5)What need to be calculated?
 Introduction
šApproach problem by SKETCH the time line/cash flow
diagram
Uniform series of equal payment
at each compounding period Future sum of
money at the
end of period
A A A
P F
..........
0 1 2 3 4 5 n-2 n-1 n
Number of period
Present single sum of
money at the time zero
 Introduction
Uniform series of equal payment
at each compounding period Future sum of
money at the
end of period
A A A
P F
..........
0 1 2 3 4 5 n-2 n-1 n
Number of period
Present single sum of
money at the time zero
a) F need to be calculated from given P
b) P need to be calculated from given F
š Proper equations : c) F need to be calculated from given A
d) A need to be calculated from given F
e) P need to be calculated from given A
f) A need to be calculated from given P
Introduction
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction
ii) Single-payment present worth factor (SPPWF)
š Method
iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
Methods
i)Factor Formula
ii)Spreadsheet
iii)Linear interpolation
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction
ii) Single-payment present worth factor (SPPWF)
š Method
iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
 Single-payment compound amount factor
(SPCAF)
š Determine the amount of money (F) after (n) year
from a single present worth (P) with interest compound
one time per year (i)
 Single-payment compound amount factor
(SPCAF)
š Determine the amount of money (F) after (n) year
from a single present worth (P) with interest compound
one time per year (i)

(a) 1st year (c) 3rd year

𝐹! = 𝑃 + 𝑃" 𝐹$ = 𝐹# + 𝐹#"
= 𝑃(1 + 𝑖) - eq 3.1 = 𝑃(1 + 3𝑖 + 3𝑖 # + 𝑖 $ )#
(b) 2nd year
𝐹! = 𝐹! + 𝐹!"
(c) Formulate based on the year
= 𝑃(1 + 𝑖)+ 𝑃 1 + 𝑖 𝑖
𝐹 = 𝑃(1 + 𝑖)% - eq 3.2
= 𝑃(1 + 𝑖)#
Single-payment compound amount factor
(SPCAF)
(SPCAF)
𝐹 = 𝑃(1 + 𝑖)! - eq 3.2
 Single-payment compound amount factor
(SPCAF)
Example 3.1 :
Michael received RM 20,000 as his bonus for this year. He want to
invest his bonus immediately. With an expectation of earning at
rate 4% per year, Michael hope to take the entire amount in
exactly after 10 years. Estimate the amount of investment money
that will be available in the next 10 years
 Single-payment compound amount factor
(SPCAF)
Example 3.1 :
Answer:
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction ii) Single-payment present worth factor (SPPWF)
š Method iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
 Single-payment present worth factor (SPPWF)

š Determine the amount of investment at that time (P)

𝐹 = 𝑃(1 + 𝑖)%

(SPPWF) 𝑃 = 𝐹(1 + 𝑖)!" - eq 3.3

 Single-payment present worth factor (SPPWF)
Example 3.2 :
Calculate the equivalent present value of RM 100 in 5 years from
now with interest rate 10%.
Answer:
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction ii) Single-payment present worth factor (SPPWF)
š Method iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
Uniform series compound amount factor (USCAF)
š Determine the accumulated future value with single
sum of money that is equivalent to all series payment
(A)
1+𝑖 "−1
(USCAF) 𝐹=𝐴 - eq 3.4
𝑖
Uniform series compound amount factor (USCAF)
Example 3.3 :
You save RM 400 per year and invest in the end of year in public
mutual. Public mutual give 6% annually compound interest rate
per year. Estimate on how much money that you will earn after 20
years.
Answer:

1+𝑖 "−1
𝐹=𝐴
𝑖
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction ii) Single-payment present worth factor (SPPWF)
š Method iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
 Sinking-fund deposit factor (SFDF)
š Determine the uniform series of equal payment (A) to
be invested & accumulated future value of all
payment (F)
𝑖
(SFDF) 𝐴=𝐹 - eq 3.5
1+𝑖 "−1
 Sinking-fund deposit factor (SFDF)
Example 3.4 :
Assume you plan to have RM 200,000 after 20 years. You are
offered an investment that could give 6% per year compound
interest rate. How much money do you need to save each year &
invest in the end of each years?
Answer:

𝑖
𝐴=𝐹
1+𝑖 "−1
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction ii) Single-payment present worth factor (SPPWF)
š Method iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
 Uniform series present worth factor (USPWF)

š Determine the accumulated present value of investment

in uniform series (P)
𝐴 1+𝑖 "−1
(USPWF) 𝑃= - eq 3.6
𝑖 1+𝑖 "
 Uniform series present worth factor (USPWF)
Example 3.5 :
Calculate the present value of 10 uniform investment of RM 2,000
to be invested at the end of each year for annually compound
interest of 12%.
Answer:

𝐴 1+𝑖 "−1
𝑃=
𝑖 1+𝑖 "
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction ii) Single-payment present worth factor (SPPWF)
š Method iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
Capital recovery factor/ Uniform series of equal end of period
payment (USEEPP)
(USEEPP)
𝑖 1+𝑖 "
𝐴=𝑃 - eq 3.7
1+𝑖 "−1
Capital recovery factor/ Uniform series of equal end of period
payment (USEEPP)
Example 3.6 :
Calculate the uniform series of equal investment for 5 years from
present at annual compound interest rate of 4% per year which
are equivalent to RM 25,000 today.
Answer:

𝑖 1+𝑖 "
𝐴=𝑃
1+𝑖 "−1
 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction ii) Single-payment present worth factor (SPPWF)
š Method iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
 Arithmetic Gradient factor (AGF)

š Definition : cash flow series that either increase or

decrease by a constant amount each period.

(AGF) 𝐶𝐹" = 𝑏𝑎𝑠𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 + 𝑛 − 1 𝐺 - eq 3.8

 Arithmetic Gradient factor (AGF)

(i) P/G factor "

1 + 𝑖 − 𝑖𝑛 − 1
𝑃% = 𝐺 - eq 3.9
𝑖& 1 + 𝑖 "

(ii) Total present worth 𝑃!

𝑃# = 𝑃$ ± 𝑃% - eq 4.0
 Arithmetic Gradient factor (AGF)
(iii) Uniform annual series 𝐴"
1 𝑛
𝐴% = 𝐺 - eq 4.2
𝑖 1+𝑖 "−1
(iv) Annual worth 𝐴 !
𝐴 # = 𝐴$ ± 𝐴% - eq 4.1

(v) F/G factor 1 1+𝑖 −1 "

𝐹% = 𝐺 −𝑛 - eq 4.3
𝑖 𝑖
 Arithmetic Gradient factor (AGF)
Derivation
Arithmetic Gradient factor (AGF)

- eq 3.9
Arithmetic Gradient factor (AGF)

- eq 4.2

- eq 4.3
 Arithmetic Gradient factor (AGF)
Example 3.7 :

Jabatan Kerja Raya (JKR) had a meeting on the cracked

buildings in Kangar, Perlis. During the meeting the engineers
estimated a total of RM 500,000 will be deposited at the end of
next year into an account for the repair of the buildings. Further,
they estimate that the deposits will increase by RM 100,000 per
year for only 9 years thereafter, then cease.
Determine the equivalent (a) present worth and (b) annual
series amounts, if public funds earn at a rate of 5% per year.
 Arithmetic Gradient factor (AGF)
Example 3.7 :
Answer:
(a) present worth

(b) annual series amounts,

 Outline
š Equal Value
i) Single-payment compound amount factor (SPCAF)
š Introduction ii) Single-payment present worth factor (SPPWF)
š Method iii) Uniform-series compound amount factor (USCAF)
iv) Sinking-fund deposit factor (SFDF)
v) Uniform-series present worth factor (USPWF)
vi) Uniform-series equal end of period payment (USEEPP)

š Different Value
i) Arithmetic Gradient Factor
ii) Geometric Gradient Series Factor
 Geometric Gradient Series Factor (GGSF)
š Cash flow series either increase or decrease by constant percentage each
period.

Geometric Gradient Series Present

Worth Factor (GGSPWF)

% 𝑔≠𝑖
1+𝑔
1−
1+𝑖 - eq 4.4
𝑃& = 𝐴!
𝑖−𝑔

𝑔=𝑖
𝑛
𝑃& = 𝐴! - eq 4.5
1+𝑖
 Geometric Gradient Series Factor (GGSF)
Example 3.8 :
One machine was upgraded with a cost of RM 8,000 and is
expected to last 6 years with RM 200 salvage value. The
maintenance cost is expected to be high at RM 1700 for the 1st
year and increasing by 11% per year thereafter. Estimate the
equivalent present worth of the upgrade at 8% per year.
 Geometric Gradient Series Factor (GGSF)
Example 3.8 :
Answer: