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Lecture No. 3 Combining Factors Shifted Uniform Series

This document provides examples and explanations for calculating present and future worth for cash flows that are shifted or have non-uniform payment structures, such as single payments, gradients, and combinations thereof. Key steps outlined include separating cash flows, renumbering time periods, and using the appropriate present/future worth formulas for each component before combining results. Formulas to calculate equivalent uniform annual amounts for shifted series are also demonstrated.

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81 views4 pages

Lecture No. 3 Combining Factors Shifted Uniform Series

This document provides examples and explanations for calculating present and future worth for cash flows that are shifted or have non-uniform payment structures, such as single payments, gradients, and combinations thereof. Key steps outlined include separating cash flows, renumbering time periods, and using the appropriate present/future worth formulas for each component before combining results. Formulas to calculate equivalent uniform annual amounts for shifted series are also demonstrated.

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angry_bird
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Lecture No.

3 Combining Factors Shifted Uniform Series


A shifted series begins at a time other than the end of period 1.

F=? P 0 1 2 3 4 5 6 7 8 9

A = given, $50

To find P: Use P/F to find P of each disbursement at year 0 and then add them all up Use F/P to find F of each disbursement in the last year, year 9, add, and then find P of the total using P = (P/F, i, 9) Use F/A to find F = A(F/A, i, 5) and then the present worth using P = F(P/F, i, 9) Use P/A but to year 4 and then use P/F to translate that value to year 0. (P/F, i, 4) The present worth is always located one period prior to the first uniform series amount when using the P/A factor meaning that the new initial period is the 4th year and not the 5th year. The future worth is always located in the same period as the last uniform series amount when using the F/A factor. The number of periods, n, in the P/A or F/A factor is equal to the number of uniform series payments; it may be helpful to renumber the arrows starting with arrow 1, 2, The procedure for avoiding errors for a shifted amount is: Diagram Locate P or F Determine n by renumbering

Lecture No. 3, Combining Factors Page No. 2 Draw a second diagram with the desired equivalent cash flow Solve

Example 3.1 p. 95 Excel is useful for uniform series A is shifted :NPV(i%, second_cell:last_cell) + first_cell. The easiest way to find an equivalent A over n years for a shifted series is with the PMT(i%, n, cell_with_P, F). Since a function can itself be a function, it is possible to embed the PMT in the NPV: PMT(i%, n, NPV(i%, second_cell:last_cell) + first_cell,F) Example 3.2, p.97.

Uniform Series and Randomly Placed Single Amounts


A uniform series starts in year one and the zero year is therefore one year to the left of the first payment. The uniform series are handled as previously discussed and the single amount formulas are applied to the one-time cash flow; the approach is a combination of combining previous methods. When you calculate the A value for a cash flow series that includes randomly placed single amounts and uniform series, first convert everything to a present worth or a future worth. Then the A value is obtained by multiplying P or F by A/P or A/F Examples 3.3 and 3.4, p. 98
Given: Rubbermaid Plastics plans to purchase a rectilinear robot and consequently experience a decrease in production costs of $200,000 for the first two years and by $300,000 per year for the next 3 years. Interest is 15% per annum. Find: PW of savings P = 200,000(P/A,15%,2) + 300,000(P/A,15%,3)(P/F,15%,2) P = 200,000(1.6257) + 300,000(2.2832)(.7561) P = $843,038 Given: A civil engineer decides to put away some bucks for his newborn daughters education. He estimates that she will need $20,000 for her 18th, 19th, 20th and 21st birthdays. He plans to make deposits through year 17 with the first deposit occurring now. Interest is 8% per year. Find: What is the required size of each deposit. P17 = 20,000(P/A, 8%, 4) = 20,000(3.3121) P17 = $66,242 A = 66,242(A/F,8%,18) = 66242(.02670) A = $1769 Given: An civil engineer is planning for his retirement 30 years from now. He thinks he can set aside $6000 each year for 30 years, starting right now. He plans to start withdrawing in the same year that he makes his last deposit, that is year 30. Interest is 8% per annum. Find: What uniform amount could he withdraw each year for 30 years F30 = $6000(F/A,8%,31) = 6000(123.3459) F30 = $740,075 P29 = 740,075(P/F,8%,1) = 740,075(.9259)

Lecture No. 3, Combining Factors Page No. 3


P29 = $685,236

A = 685,236(A/P,8%,30) = 685,236(.08883) A = $60,869 Given: By spending $10,000 now, $17,000 three years from now and $21,000 five years from now to upgrade equipment. His company can increase income by $15,000 per year in years 1 through 5 and by $17,000 per year in years 6-10. Interest is 8% Find: What is the net present worth of the proposed upgrade? P = -10,000-17,000(P/F,12%,3) 21,000(P/F,12%,5) + 15,000(P/A,12%,5) + 17,000(P/A, 12%,5) (P/F,12%,5) P = -10,000-17,000(.7118) 21,000(.5674) + 15,000(3.6048) + 17,000(3.6048)(.5674) P = $54,827 Given: A concrete company is trying to bring its portion of the retirement program into government compliance. The company has already deposited $20,000 in each of the last 5 years. They must have at least $350,000 4 years from now. Interest is 15% per annum. Find: When must a deposit of $50,000 be made in order to reach the goal. Size of fund now = $20,000(F/A,15%,5) = $20,000(6.7424) Size of fund now = $134,848 Let F9 be the future worth of $134,848 in year 9 F9 = $134,848(F/P,15%,4) =$134,848(1.7490) F9 = $235,849 The $50,000 deposit must grow to 350,000-235,849 = $114,151. This will take n years. $114,151 = $50,000(F/P,15%,n) (F/P,15%,n) 2.28302 From 15% interest table, n is between 5 and 6 years and close to 6. Therefore, the deposit must be made 2 years from now.

3. Calculations for Shifted Gradients


The present worth of an arithmetic gradient will always be located two periods before the gradient starts. When there is a base amount, the base amount and the arithmetic gradient must be treated separately. Then the equivalent P or A can be summed to obtain the total, PT or AT. A conventional gradient series starts between periods 1 and 2 of the cash flow sequence. A gradient starting at any other time is a shifted gradient. n is determined by renumbering the time scale. The period in which the gradient first appears is labeled period 2. The n value for the factor is determined by the renumbered period when the last gradient increase occurs. A/G cannot be used to find an equivalent A value in periods 1 through n for shifted gradient cash flows. To find the equivalent A series of a shifted gradient through all the periods, first find the present worth of the gradient at actual time 0, then apply the (A/P, i, n) factor. Examples p.104, 3.5 through 3.7

Lecture No. 3, Combining Factors Page No. 4

Given: Levi jeans purchased semi-automatic machines that cost $19,000 each at t=0. The machines cost $15,000 each year for each machine in O & M costs. 3 years latter the machines were made fully automatic at a cost of $10,000 each. In fully automatic mode, the O & M costs are $6000 the first year, increasing by $1000 per year each year thereafter. The contract is for 7 years and the interest rate is 15% per year. Find: What is the equivalent uniform annual cost for one machine (years 1 through 7)? P = -19,000-15,000(P/A,15%,3)-10,000(P/F,15%,3) [6000(P/A,15%,4) + 1000(P/G,15%,4)](P/F,15%,3) P = -19,000-15,000(2.2832)-10,000(.6575) [6000(2.8550) + 1000(3.7864)](.6575) P = $-73,576 A = -73,576(A/P,15%,7) = -73,576(.24036) A = $-17,685

Shifted Decreasing Arithmetic Gradients


With decreasing gradients: The base amount is equal to the largest amount, which is period 1. The gradient amount is subtracted from the base amount. The appropriate equations involve G. Examples p. 109, 3.8.
Given: Exxon is planning to sell wells. The wells are expected to produce 100,000 barrels for 10 years or more and the price is currently $35/barrel but expected to decrease by $1/barrel for every year. The first decrease is expected to occur immediately after the start of year 3. Assume an interest rate of 15% and that the oil sales occur at the end of each year. Find: How much are the wells worth now. P = 35(100,000)(P/F,12%,1) + [35(100,000)(P/A,12%,9)-100,000(P/G,12%,9)](P/F,12%,1) P = 35(100,000)(.8929) + [35(100,000)(5.3282)-100,000(17.3563)](.8929) P = $18,226,830 Given: Calculate the beginning of period annual worth of the A-1 Box Company of leasing a computer if the yearly cost is $15,000 for year 1 and $16,500 for year 2 with costs increasing by 10% each year thereafter. Assume that the lease payments must be made at the beginning of the year and that a 5-year lease is planned. 16% per year is the MARR. Find: Annual worth P-1 = -15,000[1-(1.10/1.16)5/(.16-1.10) P-1 = $-58,304 A = $-58,304(A/P,16%,5) = $-58,304(.30541) A = -17,807 Given: Interest = 12% per annum Find: Present Worth P = -340(P/F,12%,2)-[500(P/A,12%,9) 20(P/G,12%,9)](P/F,12%,2) P = -340(.7972)-[500(5.3282) 20(17.3563)](.7972) P = $-2118

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