Engineering Economy

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IE307

Combining Factors
Industrial and Manufacturing Systems Engineering Department

Chapter outline

➢ Shifted uniform series

➢ Shifted series and single cash flows
➢ Shifted gradients

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Shifted Uniform Series

➢ Calculations for Uniform Series That Are Shifted

When a uniform series begins at a time other than at the end of period 1, it is
called a shifted series. In this case several methods can be used to find the
equivalent present worth P.

Normal situation
The equivalent P value in year 0 for a uniform
end-of-period series of A values beginning at
the end of period 1 and extending for n periods.

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Industrial and Manufacturing Systems Engineering Department

Shifted Uniform Series

✓ Use the P/F factor to find the present worth of each disbursement at year 0 and add
them.
✓ Use the F/P factor to find the future worth of each disbursement, add them, and then find
the present worth of the total future amount time 0, using P/F
✓ Use the F/A factor to find the future amount F/A ,and then compute the present worth,
using P/F
✓ Use the P/A factor to compute the “present worth” (which will be located in prior period of
the first annual worth period, not time 0), and then find the present worth in time 0 by
using the P/F factor.

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Industrial and Manufacturing Systems Engineering Department

Shifted Uniform Series

➢ The present worth is always located one period prior to the first uniform series amount when
using the P/A factor.
➢ The future worth is always located in the same period as the last uniform series amount when
using the F/A factor.
➢ Number of periods ,n is equal to the number of uniform series values.

➢ Specific steps should be followed to avoid errors:

1. Draw a diagram of the positive and negative cash flows.
2. Locate the present worth or future worth of each series on the cash flow
diagram.
3. Determine n for each series by renumbering the cash flow diagram.
4. Draw another cash flow diagram representing the desired equivalent cash flow.
5. Set up and solve the equations.
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Industrial and Manufacturing Systems Engineering Department

Shifted Uniform Series

➢ Example:
A company just purchased upgraded CAD a software for $5,000 now and annual payments of
$500 per year for 6 years starting 3 years from now for annual upgrades. What is the present
worth in the year 0 of the payments if the interest rate is 8% per year?

Solution
P`A =500(P/A,8%,6) PA = P`A(P/F,8%,2)
The total present worth is determining by adding PA and
the initial payment P0 in year 0.
PT = P 0 + P A
= 5000 + 500 (P/A,8%,6) (P/F,8%,2)
= 5000 +500 (4.6229)(0.8573)
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= $6981.60
Industrial and Manufacturing Systems Engineering Department

Shifted Series and Random Single Amounts

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

➢ To find total equivalent A series, first convert everything to a present worth or a future
worth.
➢ Example: Series and Random Single Amounts
To find the present worth, do the following:
• Find P for the 20-year uniform series
= 20,000(P/A,16%,20)
• Find P for the $10,000 amount
= 10,000(P/F,16%,6)
• Find P for the $15,000 amount
= 15,000(P/F,16%,16) 7
PT = 20,000(P/A,16%,20) + 10,000(P/F,16%,6) +15,000(P/F,16%,16) =124,075$
Industrial and Manufacturing Systems Engineering Department

Shifted Arithmetic Gradients

➢ To find the present worth of an arithmetic gradient series, we use the relation
P= G(P/G,i,n)
➢ The present worth of an arithmetic gradient will always be located two periods before
the gradient starts.
➢ A gradient that starts at any time that is not the end of second year is called a shifted
gradient
➢ To find the equivalent A series of a shifted gradient through all the n periods, first find the
present worth of the gradient at actual time 0, then apply the (A/P, i, n) factor.

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Industrial and Manufacturing Systems Engineering Department

Shifted Arithmetic Gradients

➢ Example 1:
An engineer has tracked the average inspection cost for 8 years. Cost average was steady at $100 for
the first four years but have increased consistently by $50 for each of the last 4 years. What is the total
present worth in year 0?
Solution:

Original cash flow diagram

PT = PA + PG

Uniform series cash flow Arithmetic gradient cash flow diagram

diagram PA = 100(P/A,i,8) PG = [50(P/G,i,5)](P/F,i,3)

PT = PA + PG =100(P/A,i,8)+ [50(P/G,i,5)](P/F,i,3) 9
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Industrial and Manufacturing Systems Engineering Department

Shifted Arithmetic Gradients

➢ Example 2:
Compute the equivalent annual series in years 1 through 7 for the cash flow

• Find the present worth for the arithmetic gradient series

at year 2: PG =20( P/G, i ,5)
• P0 = PG(P/F,i,2)
• Annualize the gradient present worth from year 1 through
year 7 to obtain AG = P0( A/P,i,7)
• Add the base amount =50 + AG
AT = 50 + AG = 20( P/G, i,5)( P/F, i,2)( A/P, i ,7) + 50 10
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