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Sinking Fund Factor and UniformSeries
Compound Amount Factor (A/F and F/A)
]
]
]
− +
+
·
1 ) 1 (
) 1 (
n
n
i
i i
P A
If we substitute the value of P in this relation, we will get a
relation between the A and F
]
]
]
+
·
n
i
F P
) 1 (
1
We will get
]
]
]
− +
+
]
]
]
+
·
1 ) 1 (
) 1 (
) 1 (
1
n
n
n
i
i i
i
F A
]
]
]
− +
·
1 ) 1 (
n
i
i
F A
Simplifying, we get
]
]
]
− +
·
i
i
A F
n
1 ) 1 (
Example 2.5
Formasa Plastics has major fabrication plants in Texas and Hong Kong. The president
wants to know the equivalent future worth of a $1 million capital investment each year
for 8 years, starting 1 year from now. Formasa capital earns at a rate of 14% per year.
Solution
F = ?
A = $ 1,000,000
n = 8
i = 0.14 (14%)
F = 1000 (F/A, 14%, 8)
Example 2.6
How much money must Carol deposit every year starting 1 year from now at
5.5% per year in order to accumulate $6,000 seven years from now?
Solution
A = ?
F = $6,000
i = 5%
A = $6000 (A/F, 5.5%, 7)
Interpolation in Interest Tables
Suppose we have an interest factor of 0.14238 for 7% and an
interest factor of 0.14903 for 8% and we want to find out the
value of interest factor for 7.3% than,
14238 . 0 14903 . 0
14238 . 0
7 8
7 3 . 7
−
−
·
−
− X
X = 0.14437
Arithmetic Gradient Factor (P/G and A/G)
An arithmetic gradient factor is a cash flow
series that either increases or decreases by a
constant amount.
The cash flow changes by the same arithmetic
amount each period.
The amount of the increase or decrease is the
gradient.
If a manufacturing engineer predicts that the cost of
maintaining a robot will increase by $500 per year
until the machine is retired, a gradient series is
involved and the amount of the gradient is $500.
G = constant arithmetic change in the magnitude of
receipts or disbursements from one period to the
next; G may be positive or negative.
Example 2.9
A sports apparel company has initiated a logolicensing program. it expects to
realize a revenue of $80,000 in fees next year from the sale of its logo. Fees are
expected to increase uniformly to a level of $200,000 in 9 years. Determine the
arithmetic gradient and construct the cash flow diagram.
Solution
increase In 9 years = 200,00080,000 = 120,000
Gradient = (increase)/(n1)
Gradient = (120,000)/(91) = $15,000 per year
Arithmetic Gradient Factor G
]
]
]
+
−
+
− +
·
n n
n
i
n
i i
i
i
G
P
) 1 ( ) 1 (
1 ) 1 (
]
]
]
+
−
+
− +
·
n n
n
i
n
i i
i
i
n i G P
) 1 ( ) 1 (
1 ) 1 ( 1
) , , / (
ArithmeticGradient UniformSeries
Factor
For A/G we know that
]
]
]
− +
+
·
1 ) 1 (
) 1 (
n
n
i
i i
P
A
]
]
]
+
−
+
− +
·
n n
n
i
n
i i
i
i G
P
) 1 ( ) 1 (
1 ) 1 ( 1
Multiplying the two we get
]
]
]
− +
− ·
1 ) 1 (
1
n
i
n
i G
A
The term in bracket is called the arithmeticgradient uniform
series factor
Arithmeticgradient future worth
factor (F/G)
This factor can be derived by multiplying the P/G and F/P
factors.
]
]
]
,
`
.

−
− +
,
`
.

· n
i
i
i G
F
n
1 ) 1 ( 1
Total Present Worth P
T
The total present worth P
T
for a gradient series must consider the base and
the gradient separately. Thus, for cash flow series involving conventional
gradients:
The base amount is the uniformseries amount A that begins in year 1
and extends through year n. its present worth is represented by P
A
.
For an increasing gradient, the gradient amount must be added to the
uniform series amount. The present worth is P
G
.
For a decreasing gradient, the gradient amount must be subtracted from
the uniformseries amount. The present worth is –P
G
.
P
T
So the general equation for calculating the present worth of conventional arithmetic
gradients are
P
T
= P
A
+ P
G
And
P
T
= P
A
– P
G
Similarly, the equivalent total annual series are
A
T
= A
A
+ A
G
And
A
T
= A
A
– A
G
Where A
A
is the annual base amount and A
G
is the annual amount of the gradient series.
Example 2.10
Three counties in Florida have agreed to pool tax resources already designated for
countymaintained bridge refurbishment. At a recent meeting, the county engineers
estimated that a total of $500,000 will be deposited at the end of next year into an
account for the repair of old and safetyquestionable bridges throughout the threecounty
area. Further, they estimate that the deposit will increase by $100,000 per year only 9
years thereafter, then cease. Determine the equivalent (a) present worth and (b) annual
series amount if county funds earn interest at a rate of 5% per year.
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