# ENGINEERING ECONOMICS

LECTURE # 5 Equivalence

Dictionary meaning
     Sameness Likeness Similar Correspondence Equal

 But not identical  Two things can be identical but they may not be equivalent

Why Equivalence
 Two or more alternatives are required to be judged on an equivalent criteria  If two or more situations are to be compared, their characteristics must be placed on an equivalent basis  Which is more? A pounds of product A or 2.5 Kilograms of product B ± It is necessary to place the two products on an equivalent basis by applying a conversion factor  Only then you can decide which is more!!!

Equivalence
 Two things are said to be equivalent if they have the same effect  Three elements are involved in the equivalence of sums of money
± The amounts of the sum ± The time of occurrence of the sum ± The interest rate

 Interest formulas consider all the above elements

Example
 An engineer sells his product and he is offered a choice of \$ 12500 now or \$ 2000 per year for the next ten years. years. Engineer is paying 12% interest on his other loans. What 12% loans. should he do?  He needs to create equivalence in the two situations. HOW situations. !!!!!  He should find out the present worth of \$ 2000. 2000.  Can we use this formula

Sn = P0(1+i)n

No«.. What should we do

 How about factors «. But which factor to be used  In this question u have to find P for an equal annual payment (A) of \$ 2000 ««««

Factors
 F / P = Single payment future worth factor  P / F = Single payment present worth factor  F / A = Equal payment series future worth factor  A / F = Equal payment series sinking fund factor  P / A = Equal payment series present worth factor  A / P = Equal payment series capital recovery factor  A / G = Arithmetic gradient series factor  F / G = Arithmetic gradient future worth factor  P / G = Arithmetic gradient present worth factor  Geometric Gradient factor

Example
 We need to use P / A = Equal payment series present worth factor

 Here A = \$2000, i = 12% and n = 10  Putting the values P = \$ 11322.75 which is less then the \$12500 therefore 12500, He should go for \$ 12500 now

Principles of Equivalence
 Equivalent cash flows have the same values  Equivalence can be established at any point of time since it is know that for one cash flow to be equivalent to another, their values must be equal