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Egr403 sv6 Chapter4

This document summarizes key concepts from Chapter 4 of a capital allocation theory course. It discusses uniform payment series formulas including capital recovery factor, compound amount factor, sinking fund factor, and present worth factor. It also covers arithmetic gradients, which involve cash flows that increase by a uniform amount each period. Finally, it introduces geometric series present worth factors, which apply when cash flows increase at a constant rate rather than amount each period. Examples are provided to illustrate the application of these various formulas.

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Jaka Wibowo
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68 views14 pages

Egr403 sv6 Chapter4

This document summarizes key concepts from Chapter 4 of a capital allocation theory course. It discusses uniform payment series formulas including capital recovery factor, compound amount factor, sinking fund factor, and present worth factor. It also covers arithmetic gradients, which involve cash flows that increase by a uniform amount each period. Finally, it introduces geometric series present worth factors, which apply when cash flows increase at a constant rate rather than amount each period. Examples are provided to illustrate the application of these various formulas.

Uploaded by

Jaka Wibowo
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd

Chapter 4

More nterest Formulas


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EGR 403 Capital Allocation Theory
Dr. Phillip R. Rosenkrantz
Industrial & ManuIacturing Engineering Department
Cal Poly Pomona
EGR 403 - Cal Poly Pomona - SA6 2
EGR 403 - The Big Picture
Framework: Accounting & Breakeven Analysis
'Time-value oI money concepts - Ch. 3, 4
Analysis methods
Ch. 5 - Present Worth
Ch. 6 - Annual Worth
Ch. 7, 8 - Rate oI Return (incremental analysis)
Ch. 9 - BeneIit Cost Ratio & other techniques
ReIining the analysis
Ch. 10, 11 - Depreciation & Taxes
Ch. 12 - Replacement Analysis
EGR 403 - Cal Poly Pomona - SA6 3
Components oI Engineering
Economic Analysis
Calculation oI P and F are Iundamental.
Some problems are more complex and
require an understanding oI added
components:
UniIorm series.
Arithmetic or geometric gradients.
Nominal and eIIective interest rates (covered in
presentation #5 on Chapter 3).
Continuous compounding.
EGR 403 - Cal Poly Pomona - SA6 4
UniIorm Payment Series
Capital Recovery Factor
The series oI uniIorm payments that will
recover an initial investment.
A P(A/P, i, n)
EGR 403 - Cal Poly Pomona - SA6 5
UniIorm Payment Series
Compound Amount Factor F
The Iuture value oI an investment based on
periodic, constant payments and a constant
interest rate.
A(/A, i, n)
EGR 403 - Cal Poly Pomona - SA6 6
Example 4-1
0 0
$500
$500
$500
$500
$500
Cash in
-$2763 5
4
3
2
1
Cash out Year
F $500(F/A, 5, 5) $500(5.526) $2763
At 5/year
4 5

5 5 5 5 5

4 5
Year Cash n Cash Out
EGR 403 - Cal Poly Pomona - SA6 7
UniIorm Payment Series
Sinking Fund Factor
The constant periodic amount, at a constant interest
rate that must be deposited to accumulate a Iuture
value.
A F(A/F, i, n)
EGR 403 - Cal Poly Pomona - SA6 8
UniIorm Payment Series
Present Worth Factor
The present value oI a series oI uniIorm
Iuture payments.
P A(P/A, i, n)
EGR 403 - Cal Poly Pomona - SA6 9
Example 4-6
F` $100(F/A, 15, 3) $347.25
F`` $347.25(F/P, 15, 2) $459.24
F 5
$0 4
$100 3
$100 2
$100 1
Cash Ilow Year
EGR 403 - Cal Poly Pomona - SA6 10
Example 4-7
Finding the Present
Value (P) Ior each
cash Ilow is
sometimes the easiest
way to Iind the
equivalent P.
P $20(P/F, 15, 2) $30(P/F, 15, 3)
$20(P/F, 15, 4) $46.28
$ 20 4
$ 30 3
$ 20 2
0 1
P 0
Cash Ilow Year
EGR 403 - Cal Poly Pomona - SA6 11
Arithmetic Gradient
A uniIorm increasing
amount.
The Iirst cash Ilow is
always equal to zero.
G the diIIerence
between each cash
amount.
G $10
EGR 403 - Cal Poly Pomona - SA6 12
Arithmetic Gradient combined
with a UniIorm Series
Decompose the cash Ilows into a uniIorm series and a
pure gradient. Then add or subtract the Present Value oI
the gradient to the Present Value oI the UniIorm series
Example 4-8: Use P/G Iactor to Iind present value oI
the pure gradient portion oI the cash Ilow
EGR 403 - Cal Poly Pomona - SA6 13
Arithmetic Gradient
UniIorm Series Factor
A pure gradient (uniIormly increasing amount) can
also be converted into the equivalent present value
oI uniIorm series:
A
G
G(A/G, i, n)
See Example 4-9: Notice that the uniIorm series
portion oI the cash Ilow was subtracted to separate
the pure gradient.
EGR 403 - Cal Poly Pomona - SA6 14
Geometric Series
Present Worth Factor
Sometimes cash Ilows increase at a constant rate
rather than a constant amount. InIlation, Ior
example, could be reIlected in a cash Ilow
diagram that way. The equivalent present value oI
a geometrically increasing amount. g the rate oI
increase (e.g., .05)
P A(P/A, g, i, n) where (P/A, g, i, n) must be
computed Irom equation 4-30 or 4-31
Example 4-12 uses g .10 and i .08

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