The Time Value of Money: (Part 2)

CHAPTER 4
The Time Value of Money
(Part 2)
Copyright ©2012 by Pearson Education, Inc.

Engineering Economy, Fifteenth Edition
Upper Saddle River, New Jersey 07458
All rights1reserved.
By William G. Sullivan, Elin M. Wicks, and C. Patrick Koelling
4.7 Uniform Series
CAPITAL RECOVERY SERIES COMPOUND AMOUNT
FACTOR FACTOR
é (1+ i) -1ù
n
é i(1+ i) ù
n
A = Pê F=A ê ú
ú i
ë (1+ i) -1û ë û
n
A = P(A/P,i, n) F = A (F/A,i,n)
SERIES PRESENT WORTH SINKING FUND FACTOR

FACTOR
é i ù
é (1+ i)n - 1ù A =F ê ú
P =A ê ë (1+ i) -1û
n
n ú
ë i(1+ i) û
P = A (P/A, i, n) A = F(A/F,i,n)

All rights 2reserved.
Finding F when Given A
There are interest factors for a series of end-of-

period cash flows.
(1 + 𝑖)! −1
𝐹=𝐴 = 𝐴(𝐹 ⁄𝐴 , 𝑖%, 𝑛)
𝑖
Example:
How much will you have in 40 years if you save $3,000
each year and your account earns 8% interest each year?
𝐹 = 𝐴(𝐹 ⁄𝐴 , 𝑖%, 𝑛)
𝐹 = $3000 𝐹 ⁄𝐴 , 8%, 40 = $3000 259.0565 = $777,170

All rights reserved.
Uniform Series Formulas Finding F when Given A
ª E X A M P L E 1. 5
Suppose you make an annual contribution of RM 3,000 to your
savings account at the end of each year for 10 years. If your
savings account earns 7% interest annually, how much can be
withdrawn at the end of 10 years?

Uniform Series Formulas Finding F when Given A
ª Solution Ex 1. 5 ª Based on Formulas
Suppose you make an annual
contribution of RM 3,000 to your F =A ê
é (1+ i)n - 1ù
ú
i
savings account at the end of each ë û
é (1+ 0.07 )10 - 1ù
year for 10 years. If your savings = 3000 ê
ë 0.07
ú
û
account earns 7% interest annually, = RM 41,449.20
how much can be withdrawn at the

end of 10 years?
ª Based on Compound Interest Table
F = A (F/A, i, n)
= 3,000 (P/F, 7%, 10)
= 3,000 (13.8164)
= RM 41,449.20

Example:
A student bought RM1000 worth of home furniture. If

the items are expected to last 10 years, what will the
equivalent uniform annual cost be if interest is 7%?

Example:
A student bought RM1000 worth of home furniture. If

the items are expected to last 10 years, what will the
equivalent uniform annual cost be if interest is 7%?
If the furniture can be sold at the end of 10 years for

RM200, under this circumstances, what is the
equivalent uniform annual cost?

Finding F when Given A - Table

Finding F when Given A - Table

Finding P when Given A
Finding the present amount from a series of end-of-period

cash flows.
How much would is needed today to provide an annual

amount of $50,000 each year for 20 years, at 9% interest
each year?

Finding P when Given A

Finding A when Given F
Finding A when given F.

𝑖
𝐴=𝐹 !
= 𝐹(𝐴⁄𝐹 , 𝑖%, 𝑛)
(1 + 𝑖) −1
Example:
How much would you need to set aside each year for 25
years, at 10% interest, to have accumulated $1,000,000 at
the end of the 25 years?
𝐴 = 𝐹(𝐴⁄𝐹 , 𝑖%, 𝑛)
𝐴 = $1,000,000 𝐴⁄𝐹 , 10%, 25 = $1,000,000 0.0102 = $10,200

Finding A when Given F
Finding A when given F.
How much would you need to set aside each year for 25
years, at 10% interest, to have accumulated $1,000,000 at
the end of the 25 years?

Finding A when Given P
Finding A when given P.
If you had $500,000 today in an account earning

10% each year, how much could you withdraw
each year for 25 years?

Uniform Series Formulas
ª E X A M P L E 1. 6
Biogen company has borrowed RM250,000 to purchase an
equipment for gene splicing. The loan carries an interest rate of
8% per year and is to be repaid in equal installments over the
next 6 years. Compute the amount of this annual installment.
ª Cash Flow Diagram
RM 250,000
+ i=8%
- 0 1 2 3 4 5 6
?/year
By William
copyright @ mia G. Sullivan, Elin M. Wicks, and C. Patrick Koelling 20reserved.
All rights
Uniform Series Formulas
ª Solution Ex 1.6 ª Based on Formulas
é i(1+ i)n ù
Biogen company has borrowed A =Pê ú
ë (1+ i) - 1û
n
RM250,000 to purchase an equipment é 0.08(1+ 0.08 )6 ù

for gene splicing. The loan carries an = 250,000 ê ú
ë (1+ 0.08 ) - 1 û
6
interest rate of 8% per year and is to = RM 54,075

be repaid in equal installments over
the next 6 years. Compute the amount
of this annual installment. ª Based on Compound Interest Table
ª Cash Flow Diagram A = P (A/P, i, n)

RM 250,000 = 250,000 (A/P, 8%, 6)
+ = 250,000 (0.2163)
i=8% = RM 54,075
- 0 1 2 3 4 5 6

?/year Copyright ©2012 by Pearson Education, Inc.
By William
copyright @ mia G. Sullivan, Elin M. Wicks, and C. Patrick Koelling 21reserved.
All rights

EXAMPLE TEST 2
SEM 2 SESI 1314

EXAMPLE FINAL EXAM
SEM 1 SESI 20142015
Q3(a) The XYZ Company is planning to increase their production process

by upgrading the machinery to higher capacity processor with
initial cost of RM 86,000, operation and maintenance cost RM
8,600 per year, life cycle seven (7) years, salvage value of RM
6,000. Hence increase in production that will generate an income
of RM 35,000 per year.
Evaluate the investment based on future worth (FW) method with

an expected MARR of 10%per year using a proper cash flow
diagram.
(10 marks)


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CHAPTER 4

The Time Value of Money

Copyright ©2012 by Pearson Education, Inc.

SERIES PRESENT WORTH SINKING FUND FACTOR

Copyright ©2012 by Pearson Education, Inc.

There are interest factors for a series of end-of-

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

how much can be withdrawn at the

Copyright ©2012 by Pearson Education, Inc.

A student bought RM1000 worth of home furniture. If

Copyright ©2012 by Pearson Education, Inc.

A student bought RM1000 worth of home furniture. If

If the furniture can be sold at the end of 10 years for

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

Finding the present amount from a series of end-of-period

How much would is needed today to provide an annual

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

Finding A when given F.

Copyright ©2012 by Pearson Education, Inc.

Finding A when given F.

Copyright ©2012 by Pearson Education, Inc.

Finding A when given P.

If you had $500,000 today in an account earning

Copyright ©2012 by Pearson Education, Inc.

ª Solution Ex 1.6 ª Based on Formulas

RM250,000 to purchase an equipment é 0.08(1+ 0.08 )6 ù

interest rate of 8% per year and is to = RM 54,075

ª Cash Flow Diagram A = P (A/P, i, n)

Engineering Economy, Fifteenth Edition

Copyright ©2012 by Pearson Education, Inc.

Copyright ©2012 by Pearson Education, Inc.

Q3(a) The XYZ Company is planning to increase their production process

Evaluate the investment based on future worth (FW) method with

Copyright ©2012 by Pearson Education, Inc.

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