Factors: How Time and

Interest Affect Money

TOPIC 2
 Types of Factors
Four types of engineering economy factors to find equivalent cash flows with time
value of money considered:
▪ Single amounts – involve only P and F values
▪ Uniform series – involve A series, plus P and F
▪ Arithmetic Gradient – constant amount of change G in A series over time
▪ Geometric Gradient – constant percentage change g in A series over time

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 Single Payment Factor – F/P

1 𝐹 =𝑃 1+𝑖
Equation

2
Standard
𝐹
𝐹=𝑃 , 𝑖, 𝑛
Factor 𝑃
Notation

3 = 𝐹𝑉 𝑖%, 𝑛, , 𝑃
Excel
Spreadsheet

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 Example
RM100,000 lent for 3 years at i = 10% per year compounded. What is
repayment after 3 years?

𝐹
𝐹=𝑃 , 𝑖, 𝑛
𝑃

𝐹
𝐹 = 100,000 , 10%, 3
𝑃

𝐹 = 100,000 1.331 = 𝑹𝑴𝟏𝟑𝟑, 𝟏𝟎𝟎

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 Single Payment Factor – P/F

1 1
𝑃=𝐹
Equation 1+𝑖

2 𝑃
Standard 𝑃=𝐹 , 𝑖, 𝑛
Factor 𝐹
Notation

3 = 𝑃𝑉 𝑖%, 𝑛, , 𝐹
Excel
Spreadsheet

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 Example
A small company wants to make a single deposit now so it will have enough
money to purchase a backhoe costing $50,000 five years from now. If the
account will earn interest of 10% per year, the amount that must be deposited
now is nearest to:

𝑃
𝑃=𝐹 , 𝑖, 𝑛
𝐹
𝑃
𝑃 = 50,000 , 10%, 5
𝐹

𝑃 = 50,000 0.6209 = $ 𝟑𝟏𝟎𝟒𝟓

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 Uniform Series Factor – P/A

1 1+𝑖 −1
𝑃=𝐹
Equation 𝑖 1+𝑖
A = Given

2 𝑃
Standard 𝑃=𝐴 , 𝑖, 𝑛
Factor 𝐴
0 1 2 3 4 5
Notation

3 P=?
= 𝑃𝑉 𝑖%, 𝑛, , 𝐴
Excel
Spreadsheet

When using P/A,

PA is always one year ahead of first A

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 Example
A chemical engineer believes that by modifying the structure of a certain water
treatment polymer, his company would earn an extra $5000 per year. At an
interest rate of 10% per year, how much could the company afford to spend
now?
𝑃 A = $5000
𝑃=𝐴 , 𝑖, 𝑛
𝐴
𝑃 0
𝑃 = 5,000 , 10%, 5 1 2 3 4 5
𝐴
i =10%
P=?
𝑃 = 5,000 3.7908 = $ 𝟏𝟖𝟗𝟓𝟒

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 Uniform Series Factor – A/P

1 𝑖 1+𝑖
𝐴=𝑃 A=?
Equation 𝑖 1+𝑖 −1

2
Standard 𝐴 4
Factor 𝐴=𝑃 , 𝑖, 𝑛 0 1 2 3 5
Notation 𝑃

P = Given
3 = 𝑃𝑀𝑇 𝑖%, 𝑛, , 𝑃
Excel
Spreadsheet

When using A/P,

PA is always one year ahead of first A
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 Example
An individual is considering the purchase of a used automobile. The total price is
$6200 with $1240 as a down payment and the balance paid in 48 equal monthly
payments with interest at 1% per month. The payments are due at the end of each
month. Compute the monthly payment.

𝐴
𝑃 = 6200 − 1240 = 4960 𝐴=𝑃 , 𝑖, 𝑛
𝑃
𝐴
𝐴 = 4960 , 1%, 48
𝑃

𝐴 = 4960 0.02633 = $ 𝟏𝟑𝟎. 𝟔𝟎

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 Uniform Series Factor – F/A

1 1+𝑖 −1
𝐹=𝐴 F=?
Equation 𝑖 A = Given

2 𝐹
Standard 𝐹=𝐴 , 𝑖, 𝑛
Factor 𝐴
0 1 2 3 4 5
Notation

3 = 𝐹𝑉 𝑖%, 𝑛, , 𝐴
Excel
Spreadsheet

When using F/A factor,

FA is in same year as last A
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 Example
If $100 is deposited at the end of each year in a savings account that pays 6%
interest per year, how much will be in the account at the end of 5 years?

𝐹
𝐹=𝐴 , 𝑖, 𝑛
𝐴

𝐹
𝐹 = 100 , 6%, 5
𝐴

𝐹 = 100 5.6371 = $ 𝟓𝟔𝟑. 𝟕𝟏

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 Uniform Series Factor – A/F

A=? F = Given
1 𝑖
𝐴=𝐹
Equation 1+𝑖 −1

2
𝐴 0 1 2 3 4 5
Standard 𝐴=𝐹 , 𝑖, 𝑛
Factor 𝐹
Notation

3 = 𝑃𝑀𝑇 𝑖%, 𝑛, , 𝐹
Excel
Spreadsheet

When using A/F factor,

FA is in same year as last A
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 Example
How much money must an electrical contractor deposit every year in her savings
account starting 1 year from now at 5% per year in order to accumulate $6000 in
seven years from now?
𝐴
𝐴=𝐹 , 𝑖, 𝑛
𝐹

𝐴
𝐴 = 6000 , 5%, 7
𝐹

𝐴 = 6000 0.1228 = $ 𝟕𝟑𝟔. 𝟖𝟎

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 Arithmetic Gradient Cash Flow
Cash flows change by a constant amount each period.
The amount of increase or decrease is known as the gradient.

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Arithmetic Gradient Cash Flow

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 Arithmetic Gradient Factor – P/G

To find P for the arithmetic gradient cash flow:

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 Arithmetic Gradient Factor – P/G

To find P for the declining arithmetic gradient cash flow:

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 Arithmetic Gradient Factor – A/G
To find the uniform annual series, A, for the arithmetic gradient cash flow G:

𝐴
𝐴=𝐺 , 𝑖, 𝑛
𝐺
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 Example
The present worth of $400 in year 1 and amounts increasing by $30 per year through
year 5 at an interest rate of 12% per year is closest to:

𝑃 𝑃
𝑃 =𝑨 , 𝑖, 𝑛 + 𝑮 , 𝑖, 𝑛 PT = ?
𝐴 𝐺 i = 12%
0 1 2 3 4 5 Year
𝑃 = 400 3.6048 + 30 6.3970 = 1,633.83
400
430
460
490
G = $30 520

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 Unknown Interest Rate i
Example

A contractor purchased equipment for $60,000 which provided income of $16,000 per
year for 10 years. The annual rate of return of the investment was closest to:

Can use either the P/A or A/P factor. Using A/P:

16000= 60000 , 𝑖, 10

𝐴
, 𝑖, 10 = 0.26667
𝑃

From A/P column at n = 10 in the interest tables, i is between 22% and 24%
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 Unknown Recovery Period n
Example
A contractor purchased equipment for $60,000 that provided income of $8,000 per
year. At an interest rate of 10% per year, the length of time required to recover the
investment was closest to:

Can use either the P/A or A/P factor. Using A/P:

18000= 60000 , 10%, 𝑛

𝐴
, 10%, 𝑛 = 0.1333
𝑃

From A/P column in i = 10% interest tables, n is between 14 and 15 years

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 Shifted Uniform Series
A shifted uniform series starts at a time other than period 1

FA = ?
A = Given

0 1 2 3 4 5

PA = ?

Series starts in period 2, not period 1

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 Example 1: shifted uniform series
P = ???
A = 10,000

i = 10%
0 1 2 3 4 5 6

𝑃 𝑃
𝑷=𝐴 , 10%, 5 , 10%, 1
𝐴 𝐹

𝑷 = 10,000 3.7908 0.9091 = $𝟑𝟒, 𝟒𝟔𝟐

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Example 2: shifted uniform series
F = ???
A = 8,000

i = 10%
1 2 3 4 5 6 7 8 9 10
0

𝐹
𝐹=𝐴 , 10%, 8
𝐴
𝑭 = 8,000 11.4359 = $𝟗𝟏, 𝟒𝟖𝟕

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 Example 3: shifted uniform series and random single amounts (approach 1)

P = ???
A = 5,000 2,000

i = 10%
1 2 3 4 5 6 7 8 9 10
0

Use P/A to get PA in year 2

𝑃
𝑷𝑨 = 𝐴 , 10%, 8 = 5000 5.3349 = $26,675
𝐴
Move PA back to year 0 using P/F
𝑃
𝑷𝑨𝟎 = 𝐹 , 10%, 2 = 26,675 0.8264 = $22,044
𝐹
𝑃 = 22,044 + 933 = $22,977
Move $2000 single amount back to year 0
𝑃
𝑷𝟐𝟎𝟎𝟎 = 𝐹 , 10%, 8 = 2,000 0.4665 = $933
𝐹
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 Example 3: shifted uniform series and random single amounts (approach 2)

P = ???
A = 5,000 2,000

i = 10%
1 2 3 4 5 6 7 8 9 10
0

Use F/A to get FA in actual year 10

𝐹
𝑭𝑨 = 𝐴 , 10%, 8 = 5000 11.4359 = $57,180
𝐴

Move FA back to year 0 using P/F

𝑃
𝑷𝑨𝟎 = 𝐹 , 10%, 10 = 57,180 0.3855 = $22,043
𝐹
𝑃 𝑃 = 22,044 + 933 = $22,977
𝑷𝟐𝟎𝟎𝟎 = 𝐹 , 10%, 8 = 2,000 0.4665 = $933
𝐹

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 Example 4: shifted and random single amounts (approach 1)

1,000
A = ??? A = 3,000

1 2 3 4 5 6 7 8
0
i = 10%

𝑃 𝑃
𝑷𝑨𝟎 = 3000 , 10%, 5 , 10%, 3 = 3000 3.791 0.7513 = $8544
𝐴 𝐹

𝑃
𝑷𝟏𝟎𝟎𝟎 = 𝐹 , 10%, 7 = 1000 0.5132 = $513
𝐹
𝐴
𝑃 = 8544 + 513 = $9057 𝐴 = 9057 , 10%, 8 = 9057 0.1874 = $𝟏𝟔𝟗𝟕
𝑃

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 Example 4: shifted and random single amounts (approach 2)

1,000
A = ??? A = 3,000

1 2 3 4 5 6 7 8
0
i = 10%

𝐹
𝑭𝑨 = 𝐴 , 10%, 5 = 3000 6.105 = $18315
𝐴
𝐹
𝑭𝟏𝟎𝟎𝟎 =𝑃 , 10%, 1 = 1000 1.100 = $1100
𝑃
𝐴
𝐹 = 18315 + 1100 = $19415 𝐴 = 19415 , 10%, 8 = 19415 0.0874 = $𝟏𝟔𝟗𝟔
𝐹

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Example 5: shifted arithmetic gradient (approach 1) 95
90
85
80
G=5 75
P = ??? 70
65
60 60 60

i = 12%
1 2 3 4 5 6 7 8 9 10
0

𝑃 𝑃 𝑃
𝑃 = 𝑃 + 𝑃 = 60 , 12%, 8 + 5 , 12%, 8 = 370.41 𝑃 = 370.41 , 12%, 2 = 𝟐𝟗𝟓. 𝟐𝟗
𝐴 𝐺 𝐹

𝑃
𝑃 = 60 , 12%, 2 = 𝟏𝟎𝟏. 𝟒𝟏
𝐴

𝑃 = 295.29 + 101.41 = $396.70

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Example 5: shifted arithmetic gradient (approach 2) 95
90
85
80
G=5 75
P = ??? 70
65
60 60 60

i = 12%
1 2 3 4 5 6 7 8 9 10
0

𝑃 𝑃
𝑃 =5 , 12%, 8 = 72.355 𝑃 = 72.355 , 12%, 2 = 57.68
𝐺 𝐹

𝑃
𝑃 = 60 , 12%, 10 = 339
𝐴

𝑃 = 57.68 + 339 = $396.68

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 Example 6: shifted arithmetic gradient

700 G = - 50
650 F = ???
600
550
500
450
i = 10%
1 2 3 4 5 6 7
0

𝑃 𝑃
𝑃 = 𝑃 − 𝑃 = 700 , 10%, 6 − 50 , 10%, 6 = 2565
𝐴 𝐺

𝐹
𝐹 = 2565 , 10%, 6 = 4544
𝑃

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