25

4. Combining Factors

4.1 Calculations for Uniform Series that are shifted

4.2 Calculations Involving Uniform Series and Randomly Placed Single Amounts
4.3 Calculations for Shifted Gradients
4.4 Shifted Decreasing Arithmetic Gradients
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

In engineering economy, most estimated cash flow series do not fit exactly the series for which the
factors and equations in Chapter 2 were developed. Therefore, it is necessary to combine the factors.
In this chapter explains how to combine the engineering economy factors to address more complex
situation in solving problems.

4.1 Calculations for Uniform Series that are shifted

When a uniform series begins at a time other than at the end of first year, it is called a shifted series as
seen in figure below, which is uniform series begins at the end of year 5: F

P0 P4 A=$50/year F10

0 1 2 3 4 5 6 7 8 9 10 [year]

F10 → The future worth is always located at the last

period of uniform series amount when using the
F/A factor: F10 = A(F/A, i%, 6) = 50(F/A, i%, 6)

P4 → The present worth is always located one period

prior to the first uniform-series amount when
using the P/A factor: P4 = A (P/A, i%, 6) = 50(P/A, i%, 6)

In this case: P0 = P4 (P/F,i%,4)

= 50 (P/A, i%, 6)(P/F, i%, 4)
Or
P0 = F10 (P/F, i%, 10)
= 50 (F/A, i%, 6)(P/F, i%, 10)

Civil Engineering Department

Petra Christian University
Surabaya
New User | [SCHOOL]
 26

Example 4.1: An engineering technology group just purchased new SAP software for $5000 now and
annual payments of $500 per year for 6 years starting 3 years from now for annual upgrades.
(a) What is the present worth of the payments if the interest rate is 8% per year?
(b) Calculate the 8-year equivalent uniform series?
Solution:
(a) The cash flow model:

0 1 2 3 4 5 6 7 8 [year]

A=$500/year
$5000 P2

P0=? P0 = 5000+500(P/A,8%,6)(P/F,8%,2) = 5000+500(4.6229)(0.8573) = $6981.6

The PW of the payments ($5000 now and $500 per year start from EOY 3) is $6981.6

(b) Convert the $500/year shifted series and a single payment of $5000 at year 0 to an equivalent
uniform series over all period (8 years):
0 1 2 3 4 5 6 7 8 [year]

A=$500/year
$5000 P2
F8

0 1 2 3 4 5 6 7 8 [year]

A=?

In combining factor; we can use either:

▪ Present worth method:
A = [5000+500(P/A,8%,6)(P/F,8%,2)](A/P,8%,8)
= [5000+500(4.6229)(0.8573)](0.17401
= …………$/year
or
▪ Future worth method:
A = [5000(F/P,8%,8)+500(F/A,8%,6)](A/F,8%,8)
= [5000(1.8509)+500(7.3359)](0.09401)
= …………$/year

(Both methods illustrated above are shown in the same answer)

Civil Engineering Department

Petra Christian University
Surabaya
New User | [SCHOOL]
 27

4.2 Calculations Involving Uniform Series and Randomly Placed Single Amounts

When a cash flow includes both a uniform series and randomly placed single amounts, the procedure of
section 3.1 are applied to the uniform series and the single-amount formulas are applied to the one-
time cash flow.

Example 4.2: An engineering company who owns 50 hectares of valuable land has decided to lease the
mineral rights to a mining company. The primary objective is to obtain long term income to finance
ongoing projects 6 and 16 years from the present time. The engineering company makes a proposal to
the mining company that it pay $20,000 per year for 20 years beginning 1 year from now, plus $10,000
six years from now and $15,0000 sixteen years from now. If the mining company wants to pay off its
lease immediately, how much should it pay now if the investment should make 16% per year?
Solution: The cash flow diagram is shown as follow:

$10,000 $15,000

20,000$/yr

0 1 2 3 4 5 6 7 …………..15 16 17 18 19 20 [year]

P=? P = 20,000(P/A,16%,20)+10,000(P/F,16%,6)+15,000(P/F,16%,16) = $124,075

Example 4.3: Assume similar cash flow estimates to those projected in example 3.2, for the engineering
company planning to lease its mineral rights. However, move the beginning year for the $20,0000 per
year series forward 2 years to start in year 3. It will now continue through year 22. Utilize engineering
economy relations to determine the five equivalent values listed below at 16% per year:
1. Total present worth PT in year 0 or P0
2. Future worth F in year 22
3. Annual series over all 22 years
4. Annual series over the first 10 years
5. Annual series over the last 12 years.

Solution:
(1) Total Present worth: (2) Future worth F in year 22:
P0=? F=?
$10,000 $15,000

20,000$/yr
…………

0 1 2 3 4 5 6 7 …………..15 16 17 18 19 20 21 22 [year]

P0 = 20,000(P/A,16%,20)(P/F,16%,2)+10,000(P/F,16%,6)+15,000(P/F,16%16) = $93,625
F = 20,000(F/A,16% 20)+10,000(F/P,16%, 16)+15,000(F/P,16%,6) = $2,451,626

Civil Engineering Department

Petra Christian University
Surabaya
New User | [SCHOOL]
 28

(3) Annual series over all 22 years: A F=2,451,626

1
P0=93,625
A1 = ?
…………..

0 1 2 3 4 5 6 7 …………..15 16 17 18 19 20 21 22 [year]

A1= 93,625 (A/P,16%,22) = $15,575/year or

A1 = 2,451,626 (A/F,16%,22) = …………….. (same answer)

(4) Annual series over the first 10 years: A2

P0=93,625 F=2,451,626

A2 = ?
…………………..

0 1 2 3 4 …………………10……………………………17 18 19 20 21 22 [year]

A2 = 93,625(A/P,16%,10) = $19,371/year or
A2 = 2,451,626(P/F,16%,12)(A/F,16%,10) = …………………..(same answer)

(5) Annual series over the last 12 years: A3

P0=93,625 F=2,451,626

A3 = ?
…………..

0 1 2 3 4 …………………10 11 12 13 …………18 19 20 21 22 [year]

A3 = 93,625(F/P,16%,10)(A/P,16%, 12) =…………….$/year or

A3 = 2,451,626(A/F,16%,12) = ……………….$/year (same answer)

Civil Engineering Department

Petra Christian University
Surabaya
New User | [SCHOOL]
 29

4.3 Calculations for Shifted Gradients

The present worth of an arithmetic gradient will always be located two periods before the gradient
starts.

Example 4.4: An engineer has tracked the average inspection cost on a robotic manufacture line for 8
years. Cost averages were steady at $ 100 per completed unit for the first 4 years, but have increased
consistently by $50 per unit for each of the last 4 years. The engineer plans to analyse the gradient
increase using P/G factor.
➢ Where is the present worth located for the gradient?
➢ What is the general relation used to calculate total present worth in year 0?

The cash flow model:

0 1 2 3 4 5 6 7 8

A=$100/yr $150 $200

P0 $250 $300 → G = $50/yr
(a)

0 1 2 3 4 5 6 7 8

P0 A=$100/yr

(b)

0 1 2 3 4 5 6 7 8
0 1 2 3 4 5
G=$50/yr
PG

(c)

(a) = (b) + (c)

➢ The present worth for the gradient is located at year 3 as PG
➢ Total present worth in year 0: P0 = P0 + PG(P/F,i%,3)
= 100(P/A,i%,8) + 50(P/G,i%,5)(P/F,i%,3)
To find the equivalent A series of a shifted gradient through all the periods, first find the present worth of the
gradient at actual time 0, then apply the (A/P, i%,n) factor

Civil Engineering Department

Petra Christian University
Surabaya
New User | [SCHOOL]
 30

4.4 Shifted Decreasing Arithmetic Gradients

In the case of decreasing gradient the following are true:
1. The base amount is equal to the largest amount in the gradient series→ the amount in period 1
of the series.
2. The gradient amount is subtracted from the base amount instead of added to it.
3. The term –G(P/G, i%,n) or –G(A/G,i%,n) is used in the computations and in equation of:
PT = PA-PG and AT=AA-AG

PT $800 $800 G= -100$/yr

Gradient n

0 1 2 3 4 5 6 Year

PA
A=$800/yr

$800 PG
$100 $200 $300 $400

0 1 2 3 4 5 6 Year 0 1 2 3 4 5 6 Year

PT = 800(P/F,i%,1)+800(P/A,i%,5)(P/F,i%,1) - 100(P/G,i%,5)(P/F,i%,1)

PA PG
PT = ……………….

Civil Engineering Department

Petra Christian University
Surabaya
New User | [SCHOOL]
 31

Assignment:
4.1 A building will be constructed in 5 years.
The yearly construction expenditures during this five year are expected to be $400,000 per
year. The building life is 40 years after the end of the construction. The yearly net rental
income during these 40 years is anticipated to be $200,000.
Assuming an interest rate of 10% in the first 20 years (including 5 years of construction time &
15 years of the building’s life) and an interest rate of 12% in the remaining 25 years of the
building’s life. Calculate the value of the building at the end of its life?

4.2 A manufacturer of pleasure watercraft has a contract with a part supplier that involves
purchases amounting to $15,000 per year for 5 years. The first purchase is to be made 2 years
from now. Determine the present worth of the contract at an interest rate of 10% per year.

4.3 An engineer decides to set aside money for his newborn daughter’s college education. He
estimates that the needs will be $20,000 on her 18 th, 19th, 20th, and 21st birthdays. If he plans to
make uniform deposits through year 17, with the first deposit now, what should be the size of
each deposit, if the account earn interest at a rate of 8% per year.

4.4 How much money would have to be deposited each year for 8 years, starting 3 years from now,
to have $66,000 eighteen years from now? Assume the interest rate is 8% per year

4.5 Calculate the future worth in year 14 of the following series of incomes and expenses, if the
interest rate is 8% per year.

Year Income, $ Expense, $

0 12,000 2000
1-6 800 200
7-11 900 200

4.6 Determine the uniform annual payment that is equivalent to the cash flow below. Use an
interest rate of 12% per year.
Year 2, 3, 4 = $1,200; Year 5, 6, 7 = $2,000; Year 8 = $3000; Year 9 = $2,000
0 1 2 3 4 5 6 7 8 9 Year

Civil Engineering Department

Petra Christian University
Surabaya
New User | [SCHOOL]