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2450 (2-3) Time Value of Money - Arithmetic Gradient Series

This document discusses arithmetic gradient series in engineering economy. It defines an arithmetic gradient series as a cash flow that increases or decreases by a constant amount each period. It provides examples of an increasing and decreasing gradient series. It also introduces three factors for analyzing arithmetic gradient series: the present worth factor P/G, which converts a gradient to present worth; the annual series factor A/G, which converts a gradient to an equivalent uniform annual series; and the future worth factor F/G, which converts a gradient to future worth. Examples are provided to illustrate each of these factors.

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April Tejada
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202 views19 pages

2450 (2-3) Time Value of Money - Arithmetic Gradient Series

This document discusses arithmetic gradient series in engineering economy. It defines an arithmetic gradient series as a cash flow that increases or decreases by a constant amount each period. It provides examples of an increasing and decreasing gradient series. It also introduces three factors for analyzing arithmetic gradient series: the present worth factor P/G, which converts a gradient to present worth; the annual series factor A/G, which converts a gradient to an equivalent uniform annual series; and the future worth factor F/G, which converts a gradient to future worth. Examples are provided to illustrate each of these factors.

Uploaded by

April Tejada
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Engineering Economy

[2-3] Time Value of Money


Arithmetic Gradient Series

Instructor: Eng. Tamer Haddad


1 Engineering Economy Fall 2008 [2-3] Time Value of Money Mohammad N. Almasri, PhD An-Najah National University

Arithmetic (Linear) Gradient Series


An arithmetic gradient is a cash flow series that either increases or decreases by a constant amount The cash flow, whether income or disbursement, changes by the same arithmetic amount each period

The amount of the increase or decrease is the gradient (G)


For example, if an engineer predicts that the cost of maintaining a machine will increase by $500 per year until the machine is retired, a gradient series is involved and the amount of the gradient is $500
2 Engineering Economy Fall 2008 [2-3] Time Value of Money Mohammad N. Almasri, PhD An-Najah National University

Arithmetic (Linear) Gradient Series

The diagram is of an arithmetic gradient series with a base amount of $1,500 and a gradient of $50 The origin of the series is at the end of the first period G is the constant arithmetic change in the magnitude of receipts or disbursements from one time period to the next
3 Engineering Economy Fall 2008 [2-3] Time Value of Money Mohammad N. Almasri, PhD An-Najah National University

Strict Linear Gradient Series


The strict linear gradient series has the origin at the end of the first period with a zero value

The gradient G can be either positive or negative. If G > 0, the series is referred to as an increasing gradient series. If G < 0, it is a decreasing gradient series

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Example
A company expects a revenue of $80,000 in fees next year. Fees are expected to increase uniformly to a level of $200,000 in nine years Determine the arithmetic gradient and construct the cash flow diagram

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Example
The cash flow in year n (CFn) may be calculated as: CFn = base amount + (n-1)G The base amount (generally A1) is $80,000 and the total revenue increase in 9 years = 200,000 80,000 = 120,000 G = increase/(n-1) = 120,000/(9-1) = $15,000

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Analysis
Three factors will be considered for arithmetic gradient strict series: P/G factor for present worth: G(P/G,i,n) Convert an arithmetic gradient G (without the base amount) for n years into a present worth at year 0 A/G factor for annual series: G(A/G,i,n) Convert an arithmetic gradient G (without the base amount) for n years into an equivalent uniform series of A value F/G factor for future worth: G(F/G,i,n) Convert an arithmetic gradient G (without the base amount) for n years into an equivalent future value at year n
7 Engineering Economy Fall 2008 [2-3] Time Value of Money Mohammad N. Almasri, PhD An-Najah National University

Arithmetic (Linear) Gradient Series


Present Worth Factor P/G Factor
The Present worth factor (P/G) can be expressed in the following form: gradient series P = G(P/G,i,n) present-worth factor

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Present Worth Factor Example
A textile mill has just purchased a lift truck that has a useful life of five years. The engineer estimates that maintenance costs for the truck during the first year will be $1,000 As the truck ages, maintenance costs are expected to increase at a rate of $250 per year over the remaining life Assume that the maintenance costs occur at the end of each year. The firm wants to set up a maintenance account that earns 12% annual interest. All future maintenance expenses will be paid out of this account. How much does the firm have to deposit in the account now?
9 Engineering Economy Fall 2008 [2-3] Time Value of Money Mohammad N. Almasri, PhD An-Najah National University

Arithmetic (Linear) Gradient Series


Present Worth Factor Example

The idea here is to have a strict gradient series

10

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Present Worth Factor Example
We have: A1=$1,000; G=$250; i=12%; and n=5 years. Find P

The cash flow can be broken into two components where the first is an equal uniform payment series (A1) and the second is a strict linear gradient series (G)
P = P1 + P2 P = A1(P/A,12%,5) + G(P/G,12%,5) = $1,000(3.6048) + $250(6.397) = $5,204

11

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Annul Series Factor A/G Factor
The equivalent uniform annual series (A value) for an arithmetic gradient G is found by the following formula: A = G(A/G,i,n)

Arithmetic-gradient uniform-series factor

12

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Annul Series Factor Example
You want to deposit $1,000 in your saving account at the end of the first year and increase this amount by $300 for each of the next five years Then what should be the size of an annual uniform deposit that yields an equal balance with the above by the end of six years if the interest rate is 10%?

13

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Annul Series Factor Example

14

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Annul Series Factor Example
We have: A1=$1,000; G=$300; i=10%, and n=6. Find A We have to separate the constant portion of $1,000 from the series leaving the gradient series of 0; 0; 300; 600; .; 1,500 To find the equal payment series beginning at the end of year 1 and ending at year 6 we consider: A = $1,000 + $300(A/G,10%,6) = $1,000 + $300(2.2236) = $1,667.08

15

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Annul Series Factor Example
An alternative way to solve this question is by finding the present worth of all the payments and then to convert P to a uniform series of A

16

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Future Worth Factor F/G Factor
The future worth factor (F/G) can be expressed in the following form: F = G(F/G,i,n)
Arithmetic-gradient future worth factor

17

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Future Worth Factor Example
Suppose that you make a series of annual deposits into a bank account that pays 10% interest. The initial deposit at the end of the first year is $1,200

The deposit amounts decline by $200 in each of the next four years
How much would you have immediately after the fifth deposit?

18

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

Arithmetic (Linear) Gradient Series


Future Worth Factor Example
F = F1 F2 F = A1(F/A,10%,5) $200(F/G,10%,5) = $1,200(6.105) $200(11.051) = $5,115

19

Engineering Economy Fall 2008 [2-3] Time Value of Money

Mohammad N. Almasri, PhD

An-Najah National University

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