DISCOUNTING FACTORS:

SINGLE PAYMENT FACTORS:

(F/P, i%, N) = (1+i)N

(P/F, i%, N) = 1/(1+i)N

UNIFORM ANNUAL SERIES FACTORS:

(A/F, i%, N) = i/[(1+i)N - 1]

(A/P, i%, N) = i(1 + i)N/[(1+ i)N -1]

(F/A, i%, N) = [(1+i)N - 1]/i

(P/A, i%, N) = [(1 + i)N – 1]/[i(1 + i)N]

UNIFORM GRADIENT SERIES FACTORS:

(F/G ,i%, N) = [(1+ i)N+1- (1+i +Ni)]/i2

(P/G ,i%, N) = [(1+ i)N+1- (1+i +Ni)]/(1+i)Ni2

How to find equivalent amount when future value is given?

Q. To get Rs. 10 lakh after 30 years, how much you have to invest now, if rate of interest is i %?

Rs. 10 lakh

30 years

Ans. Present value, P = 10 x (P/F, i%, 30)

Q. To get Rs. 10 lakh after 30 years, how much you have to invest at the end of each year for 30
years, if rate of interest is i %?

Ans. Equivalent annual amounts, A = 10 x (A/F, i%, 30)

How to find equivalent amount when present value is given?

Q. If Rs. 100 is invested now at the rate of interest of i %, what is the equivalent amount after 50
years?
 50 years
Rs. 10 0

Ans. Future value after 50 years, F = 100 x (F/P, i%, 50)

Q. If Rs. 100 is invested now at the rate of interest of i %, how much you can withdraw annually at
the end of each year for 50 years ?

Ans. Equivalent annual amounts, A = 100 x (A/P, i%, 50)

How to find equivalent present or future values when uniform annual values are given?

Q. If Rs. 15 is invested at the end of each year for 40 years, at the rate of interest of i %, what is the
equivalent present value?

40 years

Ans. Equivalent present value = 15 x (P/A, i%, 40)

Q. If Rs. 15 is invested at the end of each year for 40 years at the rate of interest of i %, what is the
equivalent future value after 40 years?

Ans. Equivalent future value after 40 years= 15 x (F/A, i%, 40)

How to find equivalent present or future values step by step when uniform annual values are
given?

Q. For a project, there is no activity for 30 years. From 31 st years onward, Rs. 10 is invested at the
end of each year for 50 years at the rate of interest of i %, what is the equivalent present value?

30 years 50 years
Initially assume, end of the 30 years as present date. Then find the equivalent present value on that
day.

Equivalent present value on end of the 30 years = 10 x (P/A, i%, 50)

10 x (P/A, i%,
30 50) 50
years years

Now, Equivalent present value on the first day of the project = 10 x (P/A, i%, 50) x (P/F, i%, 30)

How to find equivalent present or future values when uniform annual gradient values are given?

Q. The cash transfers are shown in the cash-flow diagram. Find the present worth of benefits and
cost.

10 12
8
6
2
6
12
18

3 years 8 years

Ans. Present worth of cost = 6 x (P/G, i%, 3)

For benefits:
Here, initially end of 3rd year is taken as the present day. Equivalent value on this date for all yearly
benefits is calculated. This value is 2 x (P/G, i%, 8). Then, considering this amount as future amount
with respect to the actual present day, present worth of benefits is calculated.

Present worth of benefit = 2 x (P/G, i%, 8)(P/F, i%, 3)

Example for Present worth method

Q. A city plans to augment its water supply system. Total life of the project would be 30 years. There
are two project alternatives under consideration. One alternative calls for the construction of a
storage dam and a treatment plan which would cost Rs.48,00,000.00 at the beginning of the first
year and would satisfy the estimated demand over the next 12 years. The expected annual operating
cost would be Rs.3,00,000.00. After 12 years, a second dam and additional treatment facility would
be constructed at a cost of Rs.55,00,000.00 with an additional operating cost of Rs.2,50,000.00.

The second alternative calls for the construction of a single large storage dam which together with a
treatment plant would cost Rs.62,00,000.00 at the beginning of the first year. The annual operating
cost is Rs.2,60,000.00 for the first 12 years. After 12 years, additional treatment facilities would be
added for Rs.15,00,000.00 and annual operating cost would be Rs.5,20,000.00.

Examine which of the two alternatives is better for adoption. Rate of interest may be assumed
uniform at 8%.

Ans.

Alternative 1:

5.5

12 yr 18 yr
48
55

Present worth of cost

= 48 + 3(P/A, 8%,12) + 55(P/F,8%,12) +5.5(P/A,8%,18)(P/F,8%,12)

=Rs.112.9189 lakh

Alternative 2:
 12 yr 18 yr
15

62
Present worth of cost

= 62 + 2.6(P/A, 8%,12) + 15(P/F,8%,12) +5.2(P/A,8%,18)(P/F,8%,12)

=Rs. 106.9034 lakh

Since Alternative 1 is costlier than Alternative 2, Alternative 2 is recommended.

Q. A project needs three years of construction period. The expenditures in first, second and third
year are 80, 160 and 240 respectively. The life of the project after completion of construction is 30
years. The estimated benefits from the project after completion are 25, 50 and 75 in the first three
years respectively and 100 for the remaining years. The O & M cost is 8. Find the present worth of
the project on the first day of construction. Assume an interest rate of 7% and all the money
transaction are made at the end of each year. All money values are in lakh of rupees.

Ans.

100
75
25 50

80 30 yrs
160
240
Present worth of cost on the first day of construction

= 80(P/G,7%,3) + 8(P/A,7%,30)(P/F,7%,3)

= Rs. 491.4638 lakh

Present worth of benefit on the first day of construction

= 25(P/G,7%,4)(P/F,7%,3) + 100(P/A,7%,26)(P/F,7%,7)
=Rs. 903.4224 lakh

Net present worth of benefit = Rs. 411.9586 lakh

Example for Annual cost method

Q. A community can provide for its water storage needs, either with a high elevated steel tank A, or
a low elevated steel tank B on a nearby hill. Tank A will cost Rs.1,50,000.00 and tank B,
Rs.1,20,000.00. Annual operating, maintenance and repairs costs will be Rs.6,000.00 for tank A and
Rs.10,000.00 for tank B. Using the annual cost method and with 6% interest rate, determine which
tank should be chosen, if either of them have 50 years life and

(a) are without any salvage,

(b) have salvage of 5% when replaced.

Ans.(a)

Tank A

6000.00

50 years

Rs.1,50,000.00
Annual cost of Tank A:

=1,50,000(A/P,6%,50) + 6,000

= Rs. 15,516.64

Tank B
 10,0
00.0
0

50 years

Rs.1,20,
000.00
Annual cost of Tank B:

=1,20,000(A/P,6%,50) + 10,000

= Rs. 17,613.31

Since annual cost of Tank A is cheaper than Tank B, Tank A is recommended.

Ans. (b)

Annual cost of Tank A:

5% of Rs.1,50,000 =
6000.00 Rs.7500/

50 years

Rs.1,50,000.00
Annual cost of Tank A:

=1,50,000(A/P,6%,50) + 6,000 -7500(A/F,6%,50)

= Rs. 15,490.81
Annual cost of Tank B:

Annual cost of Tank B:

=1,20,000(A/P,6%,50) + 10,000 – 6000(A/F, 6%, 50)

= Rs. 17,592.65

Since annual cost of Tank A is cheaper than Tank B, Tank A is recommended.

Example for Rate of Return Method

Q. A city plans to augment its water supply system. Total life of the project would be 30 years. There
are two project alternatives under consideration. One alternative calls for the construction of a
storage dam and a treatment plan which would cost Rs.48,00,000.00 at the beginning of the first
year and would satisfy the estimated demand over the next 12 years. The expected annual operating
cost would be Rs.3,00,000.00. After 12 years, a second dam and additional treatment facility would
be constructed at a cost of Rs.55,00,000.00 with an additional operating cost of Rs.2,50,000.00.

The second alternative calls for the construction of a single large storage dam which together with a
treatment plant would cost Rs.62,00,000.00 at the beginning of the first year. The annual operating
cost is Rs.2,60,000.00 for the first 12 years. After 12 years, additional treatment facilities would be
added for Rs.15,00,000.00 and annual operating cost would be Rs.5,20,000.00.

Rate of interest at the time of project implementation is uncertain. Examine which of the two
alternatives is better for adoption subject to different rate of interest.

Ans.

Alternative 1:

3
5.5

12 yr 18 yr
48
55

Alternative 2:

2.6 5.2

15

62
Alternative 1 minus Alternative 2:

14

0.3
0.4

40

Present Cost of Alt1 minus Alt 2 = -14 + 0.4(P/A, i%, 12) + 40(P/F, i%, 12) + 0.3(P/A, i%,18)(P/F,8%,12)

 Now assume different values of i (rate of interest) and calculate the present worth of cost of
Alt1 minus Alt 2.

 If the expression gives positive value for any value of i, means Alt 1 is costlier.

 If the expression gives negative value for any value of i, means Alt 2 is costlier.

 The value of i for which the expression gives zero value, is the limiting rate of interest.

Assumed rate of interest (%) Alt 1 minus Alt 2

8 601549

9 401956

10 225468

11 69101

12 -69700

11.5 -2351 ≈ 0
 11.4 11603

Alternative 1 is costlier than Alternative 2, when the rate of interest is less than 11.5%. So,
Alternative 2 should be implemented till the rate of interest does not exceed 11.5%. If the rate of
interest is higher than 11.5%, Alternative 1 should be implemented.

Example for Benefit cost ratio method

The flood control project for a river basin involves evaluation of the five alternatives. The
investment, average annual flood damage and annual O&M charges for each of the alternative
projects are listed in the following table. The average flood damage without flood control is Rs.35
lakh. Assuming life of dam as 100 years, life of channel improvement as 30 years and a rate of
interest of 8%, determine which of the project alternatives should be adopted as the most
economical in design.

Project alternatives Investment Average annual flood Annual O&M

damage cost
(Lakh Rs.)
(Lakh Rs.) (Lakh Rs.)

(a) Channel improvement alone 30 23 6

(b) Dam at site A 180 6 4

(c) Dam at site B 250 4 2

(d) Dam at site A with Channel improvement 280 3 2.5

(e) Dam at site B with Channel improvement 300 2 3

Solution:

Here, Alternative (d) is Alternative (b) plus channel improvement.

Alternative (e) is Alternative (c) plus channel improvement.

(A/P,8%,100)= 0.08

(A/P,8%,30)= 0.089
 Project Investmen Averag Annua Capital Annual Annual Benefit Incrementa Incrementa ∆B/∆C Net
alternative t e l O&M Recovery cost, C benefit cost l benefit, l cost, ∆C benefit
s annual cost cost or ,B ratio, ∆B
flood Annual B/C
damag investment
e
(Lakh Rs.) (Lakh (Lakh (Lakh Rs.) (Lakh (Lakh (Lakh
Rs.) Rs.) Rs.) Rs.) Rs.)
1 2 3 4 5=(2) x 6=(4)+(5) 7=35- 8=(7)/ 9 10 11=(9)/ 12=(7)-
CRF (3) (6) (10) (6)
a) 30 23 6 2.67 8.67 12 1.38       3.33
b) 180 6 4 14.4 18.4 29 1.58 17 9.73 1.75 10.6
c) 250 4 2 20 22 31 1.41 2 3.6 0.56 9
d) 23.30
280 (14.40+8.90
(180+100) 3 2.5 ) 25.8 32 1.24 1 3.8 0.26 6.2
e) 24.45
300 (20.00+4.45
(250+50) 2 3 ) 27.45 33 1.2 1 1.65 0.61 5.55

Remark: Since, ratio of incremental benefit to incremental cost and net benefit for Alternative (b) are maximum, Alternative (b) is recommended for adoption.