This topic explains the various concepts used to calculate future values or present values of a series of cash flows that result from engineering decisions to buy new equipment or replace old equipments.
Single Payment Cashflow
Uniform Periodic Payments
Discounting of uniform series of cash payments
P = R [(1+i)n - 1]/[i 1+i)n ]
P = Present Value
R = Uniform series of periodic payments
i = interest rate
n = number of periods of payments
These time value formulas are expressed in factors
A = P*Single payment future worth factor =P*Spfwf
P = A* Single payment present worth factor = A*Sppwf
S = R* Uniform series future worth factor = R*Usfwf
P = R*Unform series present worth factor = R*Uspwf
Two More Factors
Sinking Fund Deposit Factor
Sfdf = 1/Usfwf
Sinking fund is fund accumulated with periodic payments for incurring a lumpsum expenditure at the end of a long period. Sfdf gives the amount to be deposited at the end of each period for n period to accumulate one dollar at the end n periods.
Capital Recovery Factor
Crf = 1/Uspwf
Capital recovery factor gives the uniform payment to be received by you at the end period of n years to get recover back the investment you made today.
The factor tables are available and factors depend on interest rate i and term n.
Factors for a required rate of return of 10% and 5 years term.
Spfwf - 1.6105
Sppwf - .62092
Usfwf - 6.1051
Uspwf - 3.7908
Sfdf - 0.16380
Crf - 0.26380
Engineering Economics, 4th Edition, James L. Riggs, David D. Bedworth, and Sabah U. Randhawa, McGraw Hill, New York, 1996
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