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In the final analysis, a proposed automation project should be evaluated againsf the same economic criteria as those used to assess any other investment opportunity: Will the investment pay for itself and contribute to the profits of the firm? In the present chapter we consider production economics, a subject closely related to (and based on) engineering economy. For !he reader unfamiliar with engineering economy, we have included some of the introductory principles in the Appendix to this chapter. The Appendix also includes interest tables that will be of use in solving the problems at the end of the chapter. Production economics is concerned with issues and problems in engineering economy and investment analysis that are specifically relevant to the production function. The subject includes methods of evaluating investment proposals for manufacturing, production costs, and break-even analysis. These topics are generally covered in texts on engineering economy [ 1,4]. Production economics also includes certain issues that are not covered in the usual textbooks. These issues are often overlooked in most corporate investment analyses. As a consequence of the omission, many projects in automation are not approved because they fail to meet the company's investment objectives. A good example of these omitted

Production Economics

issues is work-in-process. A reduction in WIP achieved by automating a certain series of production operations will have a beneficial effect on the firm's annual cash flow. In this chapter an attempt is made to address these types of issues so that the full opportunities offered by automation can be considered. We begin with the more traditional topics.

3.1 METHODS OF EVALUATING INVESTMENT ALTERNATIVES

~

There are several methods of evaluating and comparing investment proposals, including the following:

1. 2. 3. 4.

Payback period method Present worth (PW) method Uniform annual cost (UAC) method Rate-of-return. method

In the discussion of these methods in this section, we adopt the convention that positive cash flows represent money coming in (revenues and/or profits) and negative cash flows represent money expended (costs).

Payback method

The payback method uses the simple concept that the net revenues derived from an investment should pay back the investment in a certain period of time (the payback period). Let us refer to the net revenue in a given year as the net annual cash flow (NACF). If the revenues exceed costs for the year, the NACF is positive. If costs exceed revenues, the NACF is negative. Assuming for the moment that the net annual cash flows are positive and equal from one year to the next, the payback period can be defined as follows:

n =

IC NACF

where 1C is the initial cost of the investment project, and n is the payback period (expressed in years).

EXAMPLE 3.1

A new production machine costs $85,000 installed and is expected to generate revenues of $55,000 per year for 7 years. It will cost $30,000 per year to operate the machine. At the end of 7 years, the machine will be scrapped at zero salvage value. Determine the payback peripd for this investment.

4 years. . (3. some interest rate must be used in the factors. The concept of payback period is nevertheless applicable.Methods of Evaluating Investment Alternatives 49 Solution: ' = The NACF = 55. the project does not meet the rate-of-return criterion. all cash flows are converted to their present values.. the net annual cash flows will not be equal year after year.1 will be used here.000 25.4 years The production machine will pay for itself through the net revenues generated in 3. a summation procedure is used to determine how many years are required for the initial cost to be recovered by the accumulated net annual cash flows.000 . Determine the equivalent present worth of the proposal. Instead of using Eq.30.(IC) + 2 (NACFj) j=. The IC is already a present value.000 $85.000. If the aggregate present worth of the project is positive. The value of n is determined so that the sum of the NACF values equals the IC value. n where NACFj represents the net annual cash flow for year j. l). the return from the project exceeds the rate-of-return criterion.000 per year for 7 years. Present worth method The P W method uses the equivalent present value of all current and future cash ffows to evaluate the investment proposal. The data from Example 3.=--85. Solution: Using the interest factors from the tables in the Appendix. so the - 3. EXAMPLE 3 2 . Assume that the company considering the investment uses a rate-of-return criterion of 20%. This interest rate is decided in advance and represents the rate-ofreturn criterion that the company is using to evaluate its investment opportunities.000 = $25. Accordingly. The procedure is best summarized by the following: 0 = . The IC payback period is . If the present worth of the project is negative. The future cash flows' are converted into their present worths by using the appropriate interest factors. In most real-life situations.

30. UAC = . If the calculated rate is greater than the criterion rate of return. EXAMPLE 3.Production Economics Since the present worth i s positive.3 Again. the data from Example 3. T o determine the return on investment.000 .000(0. the actual rate of return is greater than 20%. i. and the project is therefore meritorious. an equation must be set up with the rate of return as the unknown. Either the PW method orthe UAC method can be used to establish the equation. just as we found x i n g t h e r e s e n t worth method.1 will be used.000 . Solution: A uniform annual cost equation will be set up to illustrate determination of the rate of return. Uniform annual cost method The WAC method converts all current and future cash flows to their equivalent uniform annual costs using the given rate of return. 7 ) = -85. The problem is to determine the equivalent uniform annual cost for the project. UAC = -85. a positive aggregate uniform annual cost means that the project exceeds the criterion.000 .1 will be used to demonstrate computation of the rate of return. goes slightly beyond the PW and UAC methods by actually calculating the rate of return that is provided by the investment. As with the present worth method. also called the return-on-investment(ROI) method.4 The data from Example 3.85.30. the investment is acceptable. EXAMPLE 3. 7 ) + 55.000(AIP.000 + 25. the return from the rnvestment exceeds the rate-of-return criterion of 20%.2774) + 55. we conclude that. 20%. Then the value of the interest rate i that drives the aggregate PW or UAC to zero is determined. all cash flows not already expressed as UAC values are converted to their uniform annual cost equivalents.000(AIP. Solution: Using the interest factors from the tables in the Appendix.000 Since the UAC value is positive. ------------ Rate-of-return method The rate-of-return method.

Awkward adjustments must be made in the PW method when comparing alternatives with different service lives.Methods of Evaluating Investment Alternatives 51 Scanning the AIP values in the interest tables at n = 7 years for different values of i.2941 is computed. The UAC method is convenient to use when the service lives of the alternatives are different. 7) = 0.15% corresponding to our. this is a common method used in industry and provides a quick performance measure for the investment proposal. The present worth method is also easy to understand. 2596.000(AIF. Despite this deficiency.150. is that it provides a value for the expected return on the investment. Revenues fromeither alternative will be $55.000. Its disadvantage is that a trial-and-error approach is usually required for problems containing more than one interest factor. 20%. i. 7) = 0.5 Two production methods. The payback method is easy to comprehend but does not incorporate the concept of time value of money into its evaluation. Solution: The equivalent UAC for the manual method has already been calculated. UAC = + $142 1 . 5) + 55. The data for the manual method are the same data we have used in Examples 3.2774 and (AIP. By interpolation. The following example illustrates how the uniform annual cost method can be used to compare two production methods.000 .3. we find that (AIP. are to be compared using the UAC method.000 per year. as we saw in Example 3. From Example 3. a value of i = 22. The advantage of the rate-of-return method. A 20% rate of return is to be used as the criterion. In addition.000 at the end of the 5 years. one manual and the other automated. IC = $150. manual UAC = For the automated method. 20%.3163. 20%. 7) = 0. For the automated method. the equipment associated with this alternative will have a salvage value = $15. One of the most practical uses of the methods described above is to compare investment alternatives. Each method has its relative advantages and disadvantages.1 through 3. 5) automated UAC = + $ 1856 .(AIP. the annual.000(AIP. and the service life is expected to be 5 years.5000 + 15. and it does include interest rates in the evaluation. Comparison of investment alternatives Any of the four methods can be used to compare investment alternatives. EXAMPLE 3.operating cost = $5000.4.4.

A fixed cost is one that is constant for any level of production output. Those items that are capital investments (e. A general plot of the relationship is shown in Figure 3.1. cost per hour) which can be determined from the annual cost.2 COSTS IN MANUFACTURING Fixed and variable costs Manufacturing costs can be divided into two major categories.. insurance. we get the total cost of manufacturing as a function of output. All of these fixed costs can be expressed as annual costs. When fixed and variable costs are combined. .g. A variable cost is one that increases as the level of production increases. raw materials.. fixed costs and variable costs.1 Plot of fixed and variable costs as a function of production output. and the cost of production equipment. The annual cost given will often be a calculated equivalent UAC.g. In many of the problems in this book. Cost 4 Output (annual) FIGURE 3. 3. Direct labor costs (plus fringe benefits). property taxes. The difference between the two is based on whether the expense varies in relation to the level of output. and electrical power to operate the production machines are examples of variable costs. Let us consider next the types of costs in manufacturing and how these costs can be reduced to their equivalent annual or hourly rates. it would be selected. The situation depicted in this example is typical of automation projects: A larger initial investment must be made for the sake of lower annual operating costs. factory building and production equipment) can be converted to their equivalent uniform annual costs by the methods of the preceding section. Less labor is required to run the automated process. Examples of fixed costs include cost of the factory building.52 Production Economics The automated method has the higher positive net uniform annual cash value. we will make use of annual costs or costs per other time period (e. Assuming that money is available to make the larger investment. The ideal concept of variable cost is that it is directly proportional to output level.

spage. Overhead can be divided into two categories: factory overhead (sometimes called factory expense) and corporate overhead. WeTiIFiusFdiZctlabor cost 5 illustGtehoGfactory overhead rates are determined. The factor overhead rate for this plant would be figured as factory overhead rate = $500. a n d m on. The material cost is the cost of all the raw materials that are used to produce the finished product of the firm.Costs in Manufacturing Overhead costs . It can be seen that some of these costs are variable whereas others are fixed. including direct labor cost. material cost. - TABLE 3. annual cost of equipment. The overhead can be allocated according to a number of differentbases.2. and so on. The corporate overhead cost is the cost of running the company other than its manufacturing activities.1.matgiaLcost. The types of expenses included in this category are listed in Table 3. FACTORY OVERHEAD. Classification of costs as either fixed or variable is not always convenient for accountants and finance people. The overhead costs of a firm can amount to several times the cost of direct labor. Overhead costs are all the other costs associated with running a manufacturing firm. Suppose that the total cost of operating a plant amounts to $900. maintenance personnel. A list of many of the expenses included under corporate overhead is presented in Table 3. line foremen.2 Typical Corporate Overhead TABLE 3.000 . energy.000 per year. but the financial specialists of a manufacturing firm usually prefer to think in terms of direct labor cost. direct labor hours. Many manufacturing firms operate more than one plant. The direct labor cost is the sum of the wages paid to the people who operate the production machines and perform the processing and assembly operations. This means that $500. Fixed costs and variable costs are valid concepts.000 is direct labor cost.1 Typical Factory Overhead Expenses Plant supervision Line foremen Maintenance crew Custodial services Security personnel Tool crib attendant Materials handling crew Shipping and receiving Applicable taxes Insurance Heat Light Power for machines Factory cost Equipment cost Fringe benefits Expenses Corporate executives Sales personnel Accounting department Finance department Legal counsel Research and development Design and engineering Other support personnel Applicable taxes Cost of office space Security personnel Heat Light Air conditioning Insurance Fringe benefits . Of this total.000 is indirect or overhead expense: plant supervision. and overhead costs. and this is one of the reasons for dividing overhead into factory and corporate categories. In terms of fixed and variable costs.ooo = 1. direct labor and material costs must be considered as variable.25 $400. $400. Factory overhead includes the costs of operating the factory other than direct labor and materials.

sales staff.00 per hour. would be (3) The allocated corporate overhead charge. both factory and corporate.OOO $500.000. EXAMPLE 3. Direct labor cost is $9.000 $6do. as illustrated in Example 3.000 Toral $600.000 $900. at 160% of direct labor. are simply a means for allocating expenses that are not directly associated with production. not corporate overhead. The principal concern in this book will be with determining the appropriate allocation of factory expenses.000 $300.000 $500.6 A batch of 50 parts is to be processed through the factory for a particular customer. at 125% of direct labor. CORPORATE OVERHEAD. the cost of management. Solution: (1) The direct labor cost for the job is (2) The allocated factory overhead charge.000 $800. engineering. would be . The corporate overhead rate would be based on the total direct labor of the two plants: corporate overhead rate =. and so on. We will use an oversimplified example to illustrate. so this equals 125%. This rate could be applied to a particular production job.000 (100%) = 160% Overhead rates. $960.6. accounting.400.The corporate overhead rate can be determined in a manner similar to that used for factory overhead. Suppose that the firm operates two plants with direct labor and factory overhead expenses as follows: Plant 1 Direct labor Factory expense Total cost Plant 2 $200.54 Production Economics Overhead rates are often expressed as percentages. The factory overhead rate is 125% and the corporate overhead rate is 160%.000 In addition. Raw materials and tooling are supplied by the customer.000 $1. Compute the cost of the job. The total time for processing the parts (including setup and other direct labor) is 100 h. amounts to $960.000 $400.

is $2025 $1440 = $3465.Costs in Manufacturing 55 Interpretation: (1) The direct labor cost of the job. The applicable factory overhead allocated to direct labor might include fringe benefits and line supervision. EXAMPLE 3. The machine cost is the capital cost of the machine apportioned over the life of the asset at the appropriate rate of return used by the fir&.SO. at least some of the factory overhead. Associated with each will be the applicable factory overhead. representing actual cash spent on the customer's order. + Cost of equipment usage The trouble with overhead rates as we have developed them is that they are based on direct labor cost alone. floor space.' including corporate overhead.7 The determination of an hourly rate for a given work center can best be illustrated by means of an example. is $900. Given the following: direct labor rate = $7. is $900 + $1 125 = $2025. These cost components will apply not to the aggregate factory operations but to individual production work centers. These are factory expense items which are appropriately charged as direct labor overhead. maintenance and repair expenses. For example. the price quoted to the customer would be (1. The machine overhead rate is based on those factory expenses which are directly applicable to the machine. To evaluate alternative production methods. (2) The total factory cost of the job. expenses should be included in the cost comparison. Obviously.10)($3465) = $381 1 . The direct labor cost consists of the wages paid to operate the work center. the price would have to be greater than $3465. some arbitrary judgment must be used.1 between direct labor and machine. A work center would typically be one worker-machine system or a small group of machines plus the labor to operate them. If differences between rates of different production machines are not recognized. This provides an annual cost that may be expressed as an hourly rate (or any other time unit) by dividing the annual cost by the number of hours of use per year. including allocated factory overhead.000 investment. To overcome this difficulty. it is appropriate to divide production costs (excluding raw materials) into two components: direct labor and machine cost. the time on the automated machine should be valued at a higher rate. In separating the applicable factory overhead items of Table 3. small engine lathe will be costed at the same overhead rate as the operator who runs a modem NC machining center representing a $250. These would include power for the machine. and to earn a profit over the long run on jobs like this. manufacturing costs will not be accurately measured by the overhead rate structure. A machine operator who runs an old. and so on. (3) The total cost of the job.00/h . To price the job for the customer. if the company uses a 10% markup.

18744) = $18. Solution: The labor cost per hour is $7. Break-even analysis can be used for either of two main purposes: 1.000 service life = 8 years salvage value = zero applicable machine factory overhead rate = 50% rate of return used 10% The machine is operated one 8-h shift per day. Projit analysis.OOO(AIP.8) 100. and profits.744 by 2000 gives $9. the variable cost per unit change in output must be determined. 250 days per year. The machine cost must first be annualized: = UAC = IOO. Applying the 50% overhead rate. the manufacturing costs are divided into fixed costs and variable costs. So the total work center rate = $1 1. Dividing the $18.37(1 + 50%) = $14. The sum of these costs is plotted as a function of production output. Example 3.7 illustrates the general method by which this hourly rate is determined. To plot the total cost. Determine the appropriate hourly cost for this worker-machine system. In this case the break-even chart shows the effect of changes in output on costs and revenues.37/h.26/h In subsequent chapters'there will be problems in which an hourly rate must be applied to a particular automated production system. The break-even point is the output level at which total costs .06 = $25. It is most commonly conceptualized in the form of a break-even chart. 10%.3 BREAK-EVEN ANALYSIS Break-even analysis is a method of assessing the effect of changes in production output on costs. This gives a picture of how profits (or losses) will vary for different output levels. revenues.Production Economics applicable labor factory overhead rate = 60% capital investment in machine = $100. To construct the break-even chart.20lh.744/yr The number of hours per year is 8 x 250 = 2000 hrlyr. the machine cost per hour is $9. 3.20 + $14.000(0.06/h.00(1 + 60%) = $1 1. Revenues can also be plotted on a break-even chart as a function of production output.

The machine will be used to produce one 'type of part at a rate of 20 unitslh.00/h and the applicable overhead rate is 30%.000 60.OO/unit and the rate-of-return criterion is 20%.2.000 ~ n n & l output FIGURE 3. Determine the profit break-even point if the value added is $l.000 80. We will illustrate the two types of break-even analysis by means of two examples. 2. Labor to run the machine costs $10.3 shows a break-even chart used for production method cost comparison. EXAMPLE 3. . Production rnethod cost comparison. A manually operated production machine costs $66.Break-Even Analysis 57 equal revenues and the profit is zero.8 This example illustrates the use of a break-even chart for profit analysis. there will be a break-even point for each pair of production methods. A machine overhead rate of 15% is applicable to capital cost and maintenance.8). Cost/ revenue t C Profit 20.063. The annual cost to maintain the machine is $2000.2 Profit break-even chart (see Example 3. It will have a service life of 7 years with an anticipated salvage value of $5000 at the end of its life. (When more than two production methods are plotted on the same chart.000 40.) Figure 3. The break-even point for this chart is the output level at which the costs for the two production methods are equal. An example of a break-even chart used for profit analysis is shown in Figure 3. In this case the break-even chart shows the effect of changes in output level on the costs of two (or more) different methods of production.

65/unit 20 pieceslh The variable cost as a function of Q is 0. including applicable overhead. 20%. Revenues = $1.2. ignoring overhead. the fixed cost = $22. we have UAC = 66. 7) = $19. the following equation can be set up: profit = 1.000 80. The sum of the fixed and variable costs provides the total cost equation as a function of Q: total cost = $22. . $lO.063(AIP.00Q. divided by ptoduction rate. 7) Adding the 15% overhead.22.930 .65Q = 0 .000 LI 1 I I 7 Solution: Let Q be the annual level. 20%.930 + 0.65Q Revenues as a function of Q are the product of value added per unit multiplied by Q. First. Variable cost is labor cost.3 Production method cost break-even chart (see Example 3.Production Economics Costs A - Cost function for automated method for I I Annual output FIGURE 3.OO/h(l 30%) = $0. To calculate the break-even point.00Q .000 40. This is plotted in Figure 3.000 60. The break-even point occurs where the revenue line intersects the total cost line.930.0.9).939 + + 2000. 20. The annual fixed cost is figured on the machine investment plus the maintenance.65Q.5000(AIF.

514 unitslyr At a production rate of 20 unitslh this would require 65.890 = 0. Annual maintenance will cost $5000.514120 = 3276 hlyr.00. Determine the break-even point for the automated and manual methods of production.546Q Q = 56. let us compute the profit break-even point for the automated method given that the value added per unit is $1.820 .53. and for the automated method this quantity would require 1131.65Q . EXAMPLE 3. Suppose that an alternative to the manually operated production machine of Example 3.575 unitslyr For the manual method. this corresponds to 2829 h of production per year. The alternative is an automated machine. The overhead rates and rate of return used in Example 3. Its service life is 5 years with no salvage value at the end of that time.820 .9 This example illustrates the cost break-even analysis.8 are applicable.104Q = 22.Break-Even Analysis Q = 65. Setting the two total cost equations equal yields 53. profit = 1.00/h will be required to run the machine. Just to complete the example.00/h)(1/3)(1 + 30%) = 50 pieceslh 104.22.3.820 + 0.8 is available. Solution: C Variable cost for the automated machine is ($12.0. Total cost is variable cost plus fixed cost: total cost = 53. One-third of one operator costing $12.0.930 = 0. but capable of a production rate of 50 unitslh.unit Fixed cost is the capital cost plus maintenance.5 h of operation per year.104Q 30. costing $125.820 + 0. The break-even point is represented by the intersection point for the two methods.000.930 + 0.104Q = 0 .104Q The total cost functions for the two production methods are plotted in Figure 3.65Q 53.00Q . with machine overhead added.

4 UNIT COST OF PRODUCTION In Examples 3. Accordingly. the unit production cost for the automated method of Example 3.4. the unit cost will vary as a function of annual output' Q. The automated method outproduced the manual method. 3. = 0.3 h of operation per year. As indicated in Figure 3. the actual cost per unit of production is strongly dependent on the level of annual output. The reader should recall that these unit costs are calculated under assumed conditions of annual cost and production rate.9 is that the total cost equations for the two alternatives ignore certain practical realities that might influence how the production methods are implemented. Note that the unit costs are equal at the previously determined break-even point of Example 3..9 (56.Production Economics This would require 1201. In the case of the manual method. As the annual output increases. The total cost of production includes both fixed and variable costs. For both methods. we get the unit cost equation. dividing the total cost equation by the quantity Q.8 and 3.8 and 3. To help decide between the alternatives. the number of annual hours of operation at the profit break-even point = 3276 h. it is often useful to determine the unit cost of production for the two (or more) methods under consideration.. one of the complications in the problems was the difference in production rates for the two alternatives. In subsequent chapters we will sometimes use the unit cost as a measure of performance for a production system. which is often the case in comparing automation against manual production. The unit cost for a certain operation is the total cost of production divided by the number of units produced. This is .575 units per year).9.104 53.8 to illustrate. the number of hours of operation were calculated at the various break-even points. the unit cost decreases.9 is given by C. (cost per piece): Similarly.. because of the fixed portion of the cost of production.820 +- Q The two relationships are plotted as a function of Q in Figure 3. One other observation about Examples 3. which we will symbolize by C.4. Using the manual production method from Example 3.

00 Unit cost function for automated for manual method I I I I I s 20.12 requires the reader to determine the total cost equation and unit cost equation for the three alternatives described here.Unit Cost of Production Unit 4.000 60. it will be running below capacity and the utilization will be low. Problem 3. and there will be other additional costs if the plant does not normally operate a second shift.3 h. or by using two shifts on one machine. Will the extra hours be achieved by using two machines. . as the overtime rate is higher (typically time-and-a-half) than the regular shift rate. the number of hours of annual operation to reach the profit break-even point is 1201. In the case of the automated production machine.000 Annual output - FIGURE 3. the capital cost (fixed cost) is doubled.000 80. or by working overtime by one production worker? In each instance. If two machines are used. In this case. If the company operates the machine at that point or only slightly above. the company might want to consider ways of increasing demand for the product in order to raise the machine utilization.000 40. there are additional costs which are not included in the total cost equation.8and 3. If two shifts are used.9.4 Unit cost as a function of annual output Q for the two production methods of Examples 3. well under 2000 hlyr. the worker on the second shift will probably be paid at a higher rate. greater than the number of hours normally worked by one person per year (40lweek X 50 weekslyr = 2000 hlyr). If overtime is used to achieve the 3276 annual hours of operation. the cost will increase.

and whether simple interest or compound interest was used to compute the amount. The amount of money paid back at the end of n years can be determined from the formula F=P + I = P ( l + ni) (A3.Production Economics (a) Manufacturing lead time for the batch of castings.1) where F represents the future amount to be paid. The interest rate is generally expressed in terms of an annual rate. the final amount F (principal plus interest) grows at a faster rate. The difference is referred to as interest. With simple interest. (b) Total cost to the shop of each casting when it is completed. We can reduce this to the following formula: where i = annual interest rate P = principal (the starting amount) I = interest With simple interest. the interest rate. let us concern ourselves with the difference between simple and compound interest. APPENDIX: INTEREST AND INTEREST TABLES Basic concepts Money is considered to possess a time value because when money is borrowed for a period of time. where n represents the number of years. in this case under simple interest. To compute the interest for a certain amount of money borrowed for exactly 1 year. including the holding cost. If interest is compounded during the length of time. the amount is multipled by the interest rate. To illustrate compound interest. (c) Total holding cost of the batch for the time it spends in the machine shop as work-inprocess. the amount I is directly proportional to the length of time n. when an amount of money is borrowed for a period greater than 1 year. COMPOUND INTEREST. To explain these factors. the interest charge is determined by multiplying the yearly interest charge by the number of years: I = Pni . The amount of interest is determined hy three factors: the length of time the money was borrowed. it is expected that the amount paid back will be greater than that which was borrowed. consider the manner in which a savings account might grow if the interest were com- . SIMPLE INTEREST.

because it reflects more accurately the time value of money. which will be easier to remember and use than the name of the factor: SPCAF = (FIP. Single-payment present worth factor (SPPWF).2).4) The terms in parentheses' can be read: Find F . Thus.Appendix: Interest and Interest Tables 71 pounded annually. 1 . Using an initial deposit of $1000 and an interest rate of 5%. The SPPWF is used to compute the present worth of some future value. i%. n ) (A3. This is the case we have previously considered: finding the future value F of a present sum P As the reader can deduce from Eq. They occur frequently enough that an interest factor has been defined to cover each problem. (A3. given P.2) represents one of six common interest-rate problems: the problem of computing the future worth of some present value. . and n. This is the inverse of the previous interest problem. compound interest is almost always used. Single-payment compound amount factor (SPCAF). the savings account at the end of the first year would be worth F. the formula used to calculate the single-payment compound amount factor is : SPCAF = ( 1 + i)" (A3. = $1000(1 + 0. given the rate of return i and the number of years n. the savings wauld have grown by the end of the second year to The general equation for calculating the future equivalent of some present value P can be determined by the equation F = P(l + i)" (A3. lnterest factors Equation (A3.2) In engineering economy ca?culations.3) We shall adopt the following notation for the SPCAF. i. 2. There are a total of six of these problems. This general form will be used for the interest factors that follow.05) = $1050 This amount is used to compute the interest for the second year. In the paragraphs below the six interest factors are described.

values are tabulated for a wide variety of interest rates and years. Uniform series compound amountfactor (USCAF). a SFF = (AIF. Instead of paying off a borrowed sum with a single future payment. Although this list is not nearly complete. with interest compounded. 4 . n ) = i(l (1 + i)" + i)" .1 + i)" 5 . "Sinking fund" refers to the situation in which we want to put aside a certain sum of money at the end of each year so that after n years. CRF = (AIP. n ) = (1 + i)" i 1 (A3. n ) = 1 (1 + i)" 3. and 50%. 12%. Uniform series present worth factor (USPWF). i%. will be worth F . The reverse of the preceding problem arises when it is desired to know how much money has accumulated after n years of uniform annual payments at interest rate i . n ) = 1 (1 + i)n - 1 6 .This solves the preceding problem in reverse: finding the present value of a series of n future end-of-year equal payments. i%. Capital recovery factor (CRF). n ) = I (1 i(l + iln . i%. 4096. the interest factors are given for interest rates equal to 1096. 25%. .1 where A represents the amount of the annual payment. these values cover the range of annual rates of return that seem to prevail during the period in which this book is being written. 20%. USCAF = (FIA. The capital recovery factor is designed specifically for this case. In this appendix. The sinking fund factor allows us to determine the amount A to be put aside each year.9) TABLES INTEREST OF FACTORS. i%. USPWF = (PIA. 15%. another common method is to make uniform annual payments at the end of each of n years.72 Production Economics SPPWF = (PIF. i%. the accumulated fund. Sinkingfund factor (SFF). 3096. The amount of each payment is figured to yield the required interest rate i. Instead of calculating the value of the interest factor needed in a given problem.

Thuesen and W.n F/A.121 9 0.477 271.275 64.1 23 .0737 0.7355 2.8832 8.0002 0.1 278 0.5132 0.0694 0.4790 9.0641 4.5645 0.i. Fabrycky.n A!F.0875 0.n P/F.0521 0.1 000 0.0061 0.9848 9.1117 0.4269 9.6061 . 6th ed.4241 0. .Present.1 085 7.210 148.0962 9.579 15.954 20474.0050 0.4091 8.548 28.0000 0.1055 0.n 1.1762 8.8628 9.747 12718 9 5 2048.81 6 4893.676 13780.023 8556.194 21.0408 0.n Uniform gradientseries factor T o find A Given G A/G.0083 0.631 164. (Englewood Cliffs.0221 0.1628 0.9410 9.1635 0.114 23.3186 6.0003 0.8265 0.1 59 57.0140 0.0037 0.4665 0.403 79.1 296 0.21 76 0.3649 8.2638 0.3021 0.0763 0.927 18.2633 ' 0.225 25.0001 0.975 31.9091 1.9796 9.772 1.2861 6.2881 7.449 19.6086 9.002 32979.310 4. 'Tah1r.252 245. 7.1610 9.6209 0.100 1.0008 0.61 87 7.0358 0.0033 0..1037 03023 0.100 134.7791 9.0126 0.059 304.1001 0.0573 0.1 175 0.0356 0.545 45.i.1 31 5 0.2962 8.1067 0.91 13 9.000 1. Engineering Economy.4869 3.4580 7.0023 0.0041 0.1247 0.1875 0.8672 9.1487 0.9366 1.0001 0.0009 0.01 56 0.3553 4.0468 0.9471 9.1 229 0.391 189.0000 1.751 3 0.1799 0.2789 5.1054 0.7704 7.612 0.21 55 0.1 034 7.110 14.1083 0.9672 9.0923 0.3349 5.421 15.2372 9.2897 0.9609 9.7590 6.1075 0.1045 0.177 4.1 351 0. n 1.5694 9.9742 9.1 196 0.1061 0.4762 0.5081 6.1 000 0.i.0003 0.2014 8.949 2.i.8237 8.384 24.8137 7.3696 9.7908 4.8071 6.105 7.0001 0.8684 5.1005 0. pp.0137 0.863 17.943 201.0000 0.560 6.210 1.3155 0.1979 0.728 7.0085 0.400 8.1000 0.436 13.1 000 0.0053 0.690 53120.1009 0.Compound.954 9.n 0.452 3.0001 2.1 002 0.0001 0.1 638 0.641 6.599 51.9631 9.853 3.9970 9.6988 4.0005 0.0000 0. 0.760 137796.021 9 0.1446 6.1 540 0.3856 0.470 12708.707 7887.9951 9.2394 0. 1984).1 44 2.0431 0.7075 9.482 490.2054 0.1 102 0.909 1880.0013 0.01 96 0.835 11.102 45.2236 2.i.3505 0.0175 0.2296 0.331 1.100 3.3884 4.9189 7.1 38 222.4951 6.0055 0.1001 0.oooo 0.3724 3.8101 2.611 1.i.1003 0.n F/P.0045 0.TABLE A3.7086 9.9091 0.1113 0.054 5.01 13 0.9921 9.Sinkingfund worth worth amount amount factor factor factor factor factor T o find F To find P T o find F To find A To find P Given A Given F Given A Given P Given F P/A.J .464 1.969 5313.4021 0.021 6 8.1 092 0.5704 9.0075 0.850 10.1000 Capitalrecovery factor T o find A Given P A/P.3741 9.7255 4.487 11. 574-588.138 3.6442 9.1 10% Interest Factors for Annual Compounding* Equal Payment Series Single Payment PresentCompound.543 88.91 37 8.595 5. NJ: Prenricr-Hall Inc.031 5 0.1 16 6.798 4.1 737 0.621 6 3.8023 9.0067 0.0392 0.0020 0.0005 0.358 2.5264 9.9873 9.3066 9.918 13.523 27.226 85556.0526 6.0839 0.9928 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 40 45 50 55 60 65 70 75 80 85 90 95 100 0.003 71.1 156 0.7189 6.9993 .182 121.0102 0.0489 8.0000 0.3812 1.6830 0.0540 0.531 21.1468 0.1041 0.0014 0.0045 3.772 35.890 117.950 40.497 98.1 140 0.1050 0.5493 5.0278 0.400 3298.0771 9.9955 5.594 2.51 52 8.905 1163.6487 8.4762 0.1014 0.6149 8.1001 0.591 3034.259 72.1 126 0.9981 9.347 109.i.0092 .51 36 8.0002 0.1015 0.0628 0.5762 0.0630 0.71 6 9.024 4421593 718.0247 0.9889 9.371 789.494 181.1408 0.771 6 8.s are reprinted by permission from G.0474 0.3667 7.1699 3.1 358 0.9148 9.140 8.9988 9.

0234 0.2046 0.1242 0 1237 0.896 4.0374 0.230 2400.583 241.5638 4.6282 6.0004 0.613 9.2147 5.960 33.800 93.8921 7.1721 2.9803 .3606 0.0108 0.8375 6. i.1 267 0.5917 0.0238 0.2071 7.4524 0.1 457 0.750 29.0588 0.4683 4.1233 0.9676 5.1 275 0.6407 6.429 384.089 12.1 300 0.8431 7.1 232 0.0026 0.334 150.1 223 0.0926 0.052 81.9377 6.381 1 7.0813 0.884 26.2 12% Interest Factors for Annual Compounding r Production Economics Single Payment I n Compoundamount factor T o find F To find P To find F Given P Given A Given F FIA.0374 3.574 1.655 24.364 4. Capitalrecovery factor T o find A Given P AIP.041 9 0.2574 3.1755 8.0357 0.974 2. n 1.1 247 0.549 20.1 574 0.5847 3.3292 0.664 Equal Payment Series SinkingPresentfund worth factor factor To find A To find P Given F Given A AIF.1296 0.051 163.2292 0.1 770 0.374 4.0096 0.0525 0. n 1. n P / A .521 431.1 597 1 2 3 4 5 6 .6502 5.6048 4.133 28.0007 0.040 21. i.0037 0.3220 0.1 161 0.0738 0.1 204 Uniform gradientseries factor To find A Given G AIG.4353 5.552 15.254 1.405 1.646 10.887 5.120 1.603 118.690 8.179 17.3589 1.2974 7. I 200 0.699 214.988 289.471 7 0. i.1 684 0.2497 7.479 3.0677 0.776 17.1 631 0.8957 7.0059 0.211 2.201 3 0.884 55.0268 0.0061 0.OOOO 0.1434 0.0049 7.753 48.699 92.1098 7.1339 0.74 TABLE A3.0298 0.0218 8.0013 0.0000 0.474 6.0266 0.3283 '5.7746 2.4018 3.440 72.0139 0.1 259 0. n 0.1877 0.6355 0.71 18 0. 767.2774 0.1 21 3 0.300 14.0047 0.9132 3.848 342.3514 6.0309 0.374 190.0179 0.7317 4.779 6.5066 0.804 12.4695 7. i.0469 0. n 1.7972 0.476 2.325 23.501 0 6.8929 0.1 207 0.8109 6.5620 7. n P/F.6577 7.2191 0.0991 0.1405 0.0212 0.866 7.551 5 2.1 354 8.2092 0.092 47.0075 0.555 37.1 55 133.1509 0.2567 0.393 37.1 253 0.7708 6.4717 0.4039 0.000 2.0029 0.750 63.6447 7.0035 .0033 0.120 3.0205 0.1 229 0.6901 2.2875 0.002 0.1379 0.1468 0.029 32.100 13.1 61 4 0.130 6.0827 0.1196 7.4586 7.2432 0.0023 0.1 226 0.280 42.8929 1.2964 0. i.0572 8.293 304.1 285 0.0189 0.0067 0.503 104.2825 8.0042 0.01 8 .0053 0.9426 7. i.1 566 8.582 42.0085 0.1 557 0.353 8.3045 .9844 8.0551 8.41 64 0.0202 6.773 3. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 40 45 50 0.7843 7.091 1358.1 827 0.1114 4.1897 4.1913 6.8988 8.9740 7.5674 1.5965 7.0484 0.0108 0.4236 6.9246 1.0414 0.762 1. n i.5303 7.2438 8.0570 0.1323 0.01 58 0.0123 0.106 3.0334 0.3658 7.143 52.0659 0.6427 5. FIP.1037 0.1308 0.5.8953 4.334 169.000 19.1358 0.1 15 10.1944 6.7184 7.0850 &I116 8.333 271.

6605 60 .836 88.0017 0.358 10.0264 0.367 18.4873 4.0808 0.01 13 0.0472 6.91 9 37.5135 6.1 604 4.993 6.0462 0.1 229 0.076 8.0084 0.066 57.0073 0. n I I I Capital- 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 40 45 1.n AIF.521 1.i.4906 6.375 14.652 5.001 5 0.021 0 0.0188 5.0063 0.31 25 6.7716 5.793 245.0086 0.4642 6.7845 4.575 66. i.3988 6.957 577.2337 5.2843 0.645 24.21 2 76.805 133.6575 0.761 12.6005 6.0904 0.352 40.444 118.0037 0.01 51 0.0031 0.0013 0.2003 0.01 1 2.891 28. n P/F.657 0.090 3585.0041 0.3269 0.625 32.71 7 65.0402 0.1 53 7.304 24.059 3.061 1 0.144 87.0703 0.5832 5.5791 6.786 20.5718 0.1280 6.0230 0.075 75.700 11 5.041 1 0.1 982 6.0047 0.1 04 377.745 500.749 2.01 31 0.0596 0.1 50 3.01 32 0.1 70 1779.323 1.61 66 6.8474 5.0006 0.2832 2.1 37 9.4651 0.1 00 664.31 3 2.0304 0.000 2.0729 0.4206 5.001 1 0.1 483 0.8696 1.660 3. i.518 4.0002 0.1 41 3 0.0349 0.21 50 0.1 70 434.822 21.9542 6.365 881.727 16.0009 1.535 50.8550 3.3587 6.0154 0.0929 0.4972 0.4323 0.002 34.3759 0.7245 5.n F/A.0291 0.0345 0.0493 0.0003 0.3522 3.212 102.232 16.7562 0.473 4.0247 0.001 9 0.i.6257 2.2472 0.3 15% Interest Factors for Annual Compounding n Equal Payment Series Single Payment I~ompound-1 SinkingPresentomp pound-1 Presentamount fund worth worth amount factor factor factor factor factor T o find F To find P To find F T o find A To find P Given F Given A Given F Given A Given P F/P.349 29.6418 6.0023 0.8696 0.71 2 283.0531 0.754 11.067 13.769 1083.716 1.864 538.2880 '0.0027 0.150 1.1 28 721 7.0099 0.580 55.046 4.565 100.0098 0.1 142 0.5509 6.OOOO 0.666 765.0200 0.857 43.5905 6.Appendix: Interest and Interest Tables - 75 TABLE A3.569 327. i.350 6.742 8.0035 0.6091 6.1 76 267.5660 6.1 869 0.0075 0.2593 6.6543 6.018 0 0.0054 0.632 159.0020 0.1 68 21 2.1 625 0.1 069 0. n P/A.810 137.5335 6.01 14 0.4338 6.505 47.276 184.01 74 0.

Production Economics TABLE A3.4 20% Interest Factors for Annual Compounding .

5 25% Interest Factors for Annual Compounding .Appendix: Interest and Interest Tables TABLE A3.

6 30% Interest Factors for Annual Compounding .Production Economics TABLE A3.

7 40% Interest Factors for Annual Compounding .Appendix: Interest and Interest Tables TABLE A3.

9329 1. and A .4000 0.6752 1.0005 0. Our definitions of the six interest factors were based on 1-year intervals or periods.5012 i Uniform gradientseries factor To find .5482 0.765 14961.4075 1.1976 0.9001 0.188 20.5002 0.0000 0.occur during the year.4445 0.9991 P/F.929 437.9657 1.9987 1.transaction.5001 0.0261 0. n 0.746 194.0014 0.9769 1.781 32.5004 0.671 6648. 1 COMMENTS THE USEOF THE INTEREST FACTORS.256 4987.250 3.0023 0.0001 0.9971 1.i.991 5 1.0016 0.995 257.5000 0.0000 Capitalrecovery factor To find A Given P A/P.4001 0.9654 1.001 8 0.0001 0.9996 1.750 8.493 387.9898 1. 0.9999 2.0391 0.9879 1.5001 .841 985. 0.0001 .9958 1.0026 0.172 49. P.640 22443.9999 1.0001 0.887 113. F. In using the interest factors.i.5059 0.594 11.5002 0.0004 0.go68 1. Savings accounts are often compounded quarterly.0482 0.5759 0. interest can be compounded more frequently than annually.4 Given G AIG.498 129. n i.0003 0. n 1.239 581.261 1477.330 n Presentworth factor To find P Given F Sinkingfund factor To find A Given F AIF.5204 0.501 8 0.522 2953.681 1968. n 0.8714 1.2963 0.4226 1.0004 0.0001 .125 13.80 TABLE A3. 1 2 3 4 5 6 7 8 9 10 11 12.8245 1.620 291.894 656. ON we must be clear as to when the various cash flow transactions represented by P. .837 3325.000 2.01 34 0.0059 0. 13 14 15 16 17 18 19 20 21 22 23 24 25 7.7369 1.9980 1.9980 1.0001 0.783 4431.9986 1.8830 1.7367 1.9757 1.8236 1.0001 0. n i.51 1 9973. occurs at the beginning of the year.5039 0.5003 0.0007 0.5001 0.5008 0.500 2.891 2216.0089 0.0759 Presentworth factor To find P Given A P/A.1231 0.0078 0.6667 0.2106 0.0006 0. for our purposes it will be sufficient and convenient to maintain the annual compounding convention.8 50% Interest Factors for Annual Compounding Production Economics Single Payment Compoundamount factor To find F Given P F/P.443 57.0008 0.001 1 0.0052 0. 0.730 16834. The foregoing interest factors can be adapted to periods other than annual periods.0586 0.0002 0.531 1 0.375 5.21 0 50500.086 25.330 170. The present worth. Actually.6667 1.258 74.9220 1.0001 0..5089 0. n i.9994 1.9970 1.9846 1.0204 0.951 9 1.5006 0.9991 1.i.5001 0.0003 0.6231 0.9828 1.0311 0.063 7.500 4.9955 1.0002 0. 1.i.5649 1.0039 0.7106 0. However.824 !1222.665 86.01 74 0. n 1.1317 0.9940 1.01 54 1.470 33666.5026 0.1112 1.9998 1.0035 0.9932 1.391 17. F and A transactions are assumed to be end-of-year cash flows.160 Equal Payment Series Compoundamount factor To find F Given A F/A.0878 0.01 16 0.1 00 25251.629 38.9480 1.6050 1.2418 1.7597 1.858 873.882 7481.51 34 0.0002 0.788 1311.

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