Ch2-Lecture_Notes

Ch2-Lecture_Notes - ENGINEERING ECONOMY Sixth Edition Blank...

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Chapter 2 Factors: How Time and Interest Affect Money ENGINEERING ECONOMY Sixth Edition Blank and Tarquin
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Learning Objectives 05/13/09 2 1. F/P and P/F Factors  (Single Payment Factors) 2. P/A and A/P Factors  (Uniform Series Present Worth Factor  and Capital Recovery Factor) 3. F/A and A/F Factors  (Sinking Fund Factor and Uniform- Series Compound Amount Factor) 4. Interpolate Factor Values 5. P/G and A/G Factors  (Arithmetic Gradient Factors) 6. Geometric Gradient 7. Calculate i  (unknown interest rate) 8. Calculate “n”  (number of years)
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Single Payment Factors (F/P and P/F) Objective: Derive factors to determine the present or future worth of a cash flow Cash Flow Diagram – basic format    0                 1                 2               3                                                    n-1              n  i% / period
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Basic Derivation: F/P factor 05/13/09 4 F n  = P 0 (1+i)     (F/P, i%, n) factor:  Excel: =FV(i%, n, ,P)   P 0  = F n 1/(1+i) n   (P/F, i%, n) factor:  Excel: =PV(i%, n, , F)
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Derivation: F/P factor Find F given P 05/13/09 5
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Present Worth Factor from F/P N n 05/13/09 6
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P/F factor – discounting back in time Discounting back from the future 05/13/09 7 P F n N ………… . P/F factor brings a single future  sum back to a specific point in  time.
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Example- F/P Analysis Example: P= $1,000;n=3;i=10% What is the future value, F? 05/13/09 8  0         1             2             3 P=$1,000 F = ?? i=10%/year F 3  = $1,000 [F/P,10%,3] = $1,000[1.10] 3      = $1,000[ 1.3310 ] = $1,331.00  
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Example – P/F Analysis Assume F = $100,000, 9 years from now. What is the present worth of this amount now if i =15%? 05/13/09 9   0         1            2           3                                       8            9 ………… F 9  = $100,000 P= ??  i = 15%/yr P 0  = $100,000(P/F, 15%,9) = $100,000(1/(1.15) 9 )     = $100,000( 0.2843 ) = $28,426  at time t = 0
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05/13/09 10 Uniform Series Present Worth and Capital Recovery Factors
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Uniform Series Present Worth This expression will convert an annuity cash flow to an equivalent present worth amount one period to the left of the first annuity cash flow. (1 ) 1 0 (1 ) n n i P A for i i i + - = + / %, P A i n factor 05/13/09 11
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Capital Recovery Factor (CRF) = A/P factor Given the P/A factor (1 ) 1 0 (1 ) n n i P A for i i i + - = + (1 ) (1 ) 1 n n i i A P i + = + - 05/13/09 12 Solve for A in terms of P Yielding…. A/P, i%, n
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This note was uploaded on 04/07/2008 for the course MSE 304 taught by Professor Reiner during the Spring '08 term at CSU Northridge.

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