ME 291

Engineering
Economy

ME-291 Engineering
Economy
Lecture 6

A/F and F/A, P/G and A/G

Faculty of Mechanical Engineering

Ghulam Ishaq Khan Institute, Topi, Swabi
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 Sinking Fund Factor and Uniform-Series
Compound Amount Factor (A/F and F/A)

 i (1 + i ) n 
A = P n 
 (1 + i ) − 1 

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If we substitute the value of P in this relation, we will get a
relation between the A and F
 1 

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P = F n
 (1 + i ) 
We will get
 1   i (1 + i ) n 
A = F n  n 
 (1 + i )   (1 + i ) − 1
Simplifying, we get
 i   (1 + i ) n − 1
A = F n  F = A 
 (1 + i ) − 1   i 
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 Example 2.5

• Formasa Plastics has major fabrication plants in Texas and

Hong Kong. The president wants to know the equivalent

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future worth of a $1 million capital investment each year for
8 years, starting 1 year from now. Formasa capital earns at
a rate of 14% per year.

Economy
Solution
F=?
A = $ 1,000,000
n=8
i = 0.14 (14%)
F = 1000 (F/A, 14%, 8)

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 ME-291 Engineering
Economy
Solution:
The cash flow diagram shows the annual payments
starting at the end of year 1 and ending in the year the
future worth is desired. Cash flows are indicated in
$1000 units. The F value in 8 years is

F = l000(F/A,14%,8) = 1000( 13.23218) = $13,232.80 =

13.232 million 8 years from now/

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 Example 2.6

• How much money must Carol deposit every year starting 1

year from now at 5.5% per year in order to accumulate

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$6,000 seven years from now?

Solution

Economy
A=?
F = $6,000
i = 5%
A = $6000 (A/F, 5.5%, 7)

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 ME-291 Engineering
Economy
Solution
The cash How diagram from Carol's
perspective fits the A/F factor.
A= $6000 (A/F,5.5%,7) = 6000(0.12096) =
$725.76 per year
The A/F factor Value 0f 0.12096 was
computed using the A/F factor formula

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 Use of Tables for Interest rates i

• To simplify routine engineering economy calculations, tables

of factor values have been prepared for interest rates from

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0.25 to 50% and time period from 1 to large n values.
• For a given factor, interest rate, and time, the correct factor
value is found at the intersection of the factor name and n.

Economy
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 ME-291 Engineering
Economy
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 Interpolation in Interest Tables

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Economy
Suppose we have an interest factor of 0.14238 for 7% and an
interest factor of 0.14903 for 8% and we want to find out the
value of interest factor for 7.3% then,

7. 3 − 7 X − 0.14238
= X = 0.14437
8 − 7 0.14903 − 0.14238
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 Arithmetic Gradient Factor (P/G and
A/G)

• An arithmetic gradient factor is a cash flow series that

either increases or decreases by a constant amount.

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• The cash flow changes by the same arithmetic
amount each period.
• The amount of the increase or decrease is the

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gradient.
• If a manufacturing engineer predicts that the cost of
maintaining a robot will increase by $500 per year
until the machine is retired, a gradient series is
involved and the amount of the gradient is $ 500.
• G = constant arithmetic change in the magnitude of
receipts or disbursements from one period to the next;
G may be positive or negative.

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 Example 2.9

• A sports apparel company has initiated a logo-licensing

program. it expects to realize a revenue of $80,000 in fees

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next year from the sale of its logo. Fees are expected to
increase uniformly to a level of $200,000 in 9 years.
Determine the arithmetic gradient and construct the cash

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flow diagram.
Solution
increase In 9 years = 200,000-80,000 = 120,000
Gradient = (increase)/(n-1)
Gradient = (120,000)/(9-1) = $15,000 per year

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 Arithmetic Gradient Factor G

G  (1 + i ) n − 1 n 
P=  n
− n
i  i (1 + i ) (1 + i ) 

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1  (1 + i ) n − 1 n 

Economy
( P / G , i , n) =  n
− 
i  i (1 + i ) (1 + i ) n 

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 Arithmetic-Gradient Uniform-Series
Factor

For A/G we know that

A  i (1 + i ) n 

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= n 
P  (1 + i ) − 1
P 1  (1 + i ) n − 1 n 

Economy
=  n
− n
G i  i (1 + i ) (1 + i ) 
Multiplying the two we get

A 1 n 
= − 
G  i (1 + i ) n − 1
The term in bracket is called the arithmetic-gradient uniform-
series factor
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 Arithmetic-gradient future worth
factor (F/G)

• This factor can be derived by multiplying the

P/G and F/P factors.

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F  1  (1 + i ) n − 1 
=   − n 
G  i  i

Economy


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 Total Present Worth PT

The total present worth PT for a gradient series must consider

the base and the gradient separately. Thus, for cash flow

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series involving conventional gradients:
• The base amount is the uniform-series amount A that
begins in year 1 and extends through year n. its present

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worth is represented by PA.
• For an increasing gradient, the gradient amount must be
added to the uniform series amount. The present worth is
PG.
• For a decreasing gradient, the gradient amount must be
subtracted from the uniform-series amount. The present
worth is –PG.

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 PT

So the general equation for calculating the present worth of

conventional arithmetic gradients are

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PT = P A + P G
Or
PT = P A – P G

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Similarly, the equivalent total annual series are
A T = A A + AG
Or
AT = A A – A G
Where AA is the annual base amount and AG is the annual
amount of the gradient series.

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 Example 2.10

• Three counties in Florida have agreed to pool tax resources

already designated for county-maintained bridge

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refurbishment. At a recent meeting, the county engineers
estimated that a total of $500,000 will be deposited at the
end of next year into an account for the repair of old and
safety-questionable bridges throughout the three-county

Economy
area. Further, they estimate that the deposit will increase by
$100,000 per year only 9 years thereafter, then cease.
Determine the equivalent (a) present worth and (b) annual
series amount if county funds earn interest at a rate of 5%
per year.

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 ME-291 Engineering
Economy
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 ME-291 Engineering
Economy
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