Chapitre 2.

Factors: How Time

and Interest Affect Money

Instructor: Dr. Christine SAAB References: Blank & Tarquin, Engineering Economy, 8th Edition. ISBN 0073523437, McGraw
Hill Education, 2017
Plan
 F/P and P/F factors
 P/A and A/P factors
 F/A and A/F factors
 Uniform Series
 Factor values
 Arithmetic gradient
 Geometric gradient
 Find i or n
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Single-Amount Factors (F/P and P/F)

 Given P, Find F:
𝐹 =𝑃 1+𝑖 𝑛

With P: Present value

F: Future value after n interest period
i: interest rate per period
n: number of interest periods
(1+i)n: «single payment compound amount factor»

Notation: 𝐹 = 𝑃(F/P, i %, n)
Function: F=FV(i, n,, P)

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Single-Amount Factors (F/P and P/F)
 Given F, Find P:
1
𝑃=𝐹 𝑛
1+𝑖
With P: Present value
F: Future value after n interest period
i: interest rate per period
n: number of interest periods
(1+i)-n: « single-payment present worth factor»

Notation: 𝑃 = 𝐹(P/F, i %, n)
Function: P=PV(i, n,, F)
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Example 1

 A person deposits $5000 into an account which pays interest at a

rate of 8% per year. The amount in the account after 10 years is
closest to:

a) 2,792 $
b) 9,000 $
c) 10,795 $
d) 12,165 $

F?
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Example 2

 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:

a) 10,000 $
b) 31,050 $
c) 33,250 $
d) 319,160 $
P?
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Uniform Series

 Annuity: Uniform series of amounts equal to A, occurring at the

end of each period of the n periods of interest with an interest
rate of i% per period.
 P (equivalent present value) occurs at an interest period before
the first A (uniform amount)
 F (equivalent future value) occurs at the same time as the last A
and n periods after P
 A (equivalent annual value) occurs at the end of periods 1
through n, inclusive.

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Uniform Series

 A Given, Find P:
1+𝑖 𝑛−1
𝑃=𝐴
𝑖 1+𝑖 𝑛
1+𝑖 𝑛 −1
: « uniform series present worth factor »
𝑖 1+𝑖 𝑛

Notation: 𝑃 = 𝐴(P/A, i %, n)
Function: P=PV(i, n,A)

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Uniform Series

 P Given, Find A:
𝑖 1+𝑖 𝑛
𝐴=𝑃
1+𝑖 𝑛−1

𝑖 1+𝑖 𝑛
: « capital recovery factor »
1+𝑖 𝑛 −1

Notation: 𝐴 = 𝑃(A/P, i %, n)
Function: A=PMT(i, n,P)

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Uniform Series

 A Given, Find F:
1+𝑖 𝑛−1
𝐹=𝐴
𝑖
1+𝑖 𝑛 −1
: « uniform series compound amount factor »
𝑖

Notation: 𝐹 = 𝐴(F/A, i %, n)
Function: F=FV(i, n, A)

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Uniform Series

 F Given, Find A:
𝑖
𝐴=𝐹
1+𝑖 𝑛−1

𝑖
: « sinking fund factor »
1+𝑖 𝑛 −1

Notation: 𝐴 = 𝐹(A/F, i %, n)
Function: A=PMT(i, n,F)

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Example 3

 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 to just break even over a 5 year project period?
a) 11,170 $
b) 13,640 $
c) 15,300 $
d) 18,950 $

P?
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Example 4

 An industrial engineer made a modification to a chip manufacturing process

that will save her company $10,000 per year. At an interest rate of 8 % per
year, how much will the savings amount to in 7 years?

a) 45,300 $
b) 68,500 $
c) 89,228 $
d) 151,500 $

F?
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Factor Values for Untabulated i or n

Three ways to find factor values for untabulated i or n values:

 Use formula
 Use spreadsheet function with P, F, or A value set to 1
 Linearly interpolate in the interest tables

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Arithmetic Gradient

 Arithmetic gradient series: cash flow series that either increases or

decreases by constant amount each period.
 Amount of change G: Gradient
 CFn=base amount + (n-1)G

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Arithmetic Gradient

 G Given, Find P:
1 1+𝑖 𝑛−1 𝑛
𝑃𝐺 = 𝐺 𝑛
− 𝑛
𝑖 𝑖 1+𝑖 1+𝑖

1 1+𝑖 𝑛 −1 𝑛
− : « gradient to present equivalent conversion factor »
𝑖 𝑖 1+𝑖 𝑛 1+𝑖 𝑛

Notation: 𝑃𝐺 = 𝐺(P/G, i %, n)

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Arithmetic Gradient

 G Given, Find A:
1 𝑛
𝐴=𝐺 −
𝑖 1+𝑖 𝑛−1

1 𝑛
− : « gradient to uniform series conversion factor »
𝑖 1+𝑖 𝑛 −1

Notation: AG = 𝐺(A/G, i %, n)

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Arithmetic Gradient
 Converting Arithmetic Gradient to A
A=base amount + G(A/G,i,n)

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Example 5
PT=?
i=10 %
0 1 2 3 4 5

Amount in year 400

450
1=Base amount 500
550
600
PA=?
i=10 % PG=?
i=10 %
0 1 2 3 4 5
+ 0 1 2 3 4 5

400 400 400 400 400

PA=? PG=? 50
Amount in year 100
1=Base amount 150 19
200
PT=PA+PG=?
Example 6

 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
closet to:
PT=PA+PG=?
a) 1532 $
b) 1,634 $
c) 1,744 $ The cash flow could also be converted
into an A value:
d) 1,829 $ A=?

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Arithmetic Gradient

 G Given, Find F:

1 1+𝑖 𝑛−1
𝐹𝐺 = 𝐺 −𝑛
𝑖 𝑖

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Geometric Gradient
 Geometric Gradient series: cash flow series that either increases or decreases by a
constant percentage each period.
 Uniform change= rate of change
 g: constant rate of change
 A1: initial cash flow in year 1 of the geometric series
 Pg: present worth of the entire geomtric gradient series, including the initial amount A1

1+𝑔 𝑛
1− 1+𝑖
𝑃𝑔 = 𝐴1 𝑔≠𝑖
𝑖−𝑔
A1: cash flow in period 1
If g=i, Pg = A1n/(1+i)

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Example 7

 Find the present worth of $1000 in year 1 and amounts increasing

by 7 % per year through year 10. Use an interest rate of 12% per
year.
a) 5,670 $
b) 7,333 $
c) 12,670 $
d) 13,550 $
𝑛
1+𝑔
1− 1+𝑖
𝑃𝑔 = 𝐴1 =?
𝑖−𝑔

To find A, multiply Pg by (A/P,12%,10) 23

Example 9
 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:

a) 15%
b) 18%
c) 20%
d) 23%

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Example 10
 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 closet to:

a) 10 ans
b) 12 ans
c) 15 ans
d) 18 ans

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Excel Function

Find/Given Excel Function

F/P =FV(i%,n,,P)
P/F =PV(i%,n,,F)
P/A =PV(i%,n,A)
A/P =PMT(i%,n,P)
F/A =FV(i%,n,A)
A/F =PMT(i%,n,F)

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