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    Annuity and Gradients Part II: Prepared By: Hazel A. Caparas, CIE, Assoc. ASEAN Eng

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    EvesonGentoleo
    This document provides information on annuities and gradients, including: - Arithmetic and geometric gradients can be used to model cash flows that increase or decrease at uniform rates over time. - Formulas are provided to calculate the present value (P), future value (F), and equivalent uniform annual cash flow (A) given the initial cash flow amount (G) and interest rate (i) for both arithmetic and geometric gradients. - Several examples demonstrate how to use the formulas to solve problems involving maintenance costs, revenue declines, and warranty expenses that change at uniform rates over multiple periods.

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    Annuity and Gradients Part II: Prepared By: Hazel A. Caparas, CIE, Assoc. ASEAN Eng

    Uploaded by

    EvesonGentoleo
    179 views19 pages
    This document provides information on annuities and gradients, including: - Arithmetic and geometric gradients can be used to model cash flows that increase or decrease at uniform rates over time. - Formulas are provided to calculate the present value (P), future value (F), and equivalent uniform annual cash flow (A) given the initial cash flow amount (G) and interest rate (i) for both arithmetic and geometric gradients. - Several examples demonstrate how to use the formulas to solve problems involving maintenance costs, revenue declines, and warranty expenses that change at uniform rates over multiple periods.

    Original Description:

    etgrghth

    Original Title

    4.0 Gradient

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    This document provides information on annuities and gradients, including: - Arithmetic and geometric gradients can be used to model cash flows that increase or decrease at uniform rates over time. - Formulas are provided to calculate the present value (P), future value (F), and equivalent uniform annual cash flow (A) given the initial cash flow amount (G) and interest rate (i) for both arithmetic and geometric gradients. - Several examples demonstrate how to use the formulas to solve problems involving maintenance costs, revenue declines, and warranty expenses that change at uniform rates over multiple periods.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    179 views19 pages

    Annuity and Gradients Part II: Prepared By: Hazel A. Caparas, CIE, Assoc. ASEAN Eng

    Uploaded by

    EvesonGentoleo
    This document provides information on annuities and gradients, including: - Arithmetic and geometric gradients can be used to model cash flows that increase or decrease at uniform rates over time. - Formulas are provided to calculate the present value (P), future value (F), and equivalent uniform annual cash flow (A) given the initial cash flow amount (G) and interest rate (i) for both arithmetic and geometric gradients. - Several examples demonstrate how to use the formulas to solve problems involving maintenance costs, revenue declines, and warranty expenses that change at uniform rates over multiple periods.

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    Annuity and

    Gradients Part II
    Prepared by:
    Hazel A. Caparas, CIE, Assoc. ASEAN Eng.

    Learning Objectives:
    At the end of this module, the student
    should be able to:

    Solve problems modelled by the


    uniform series compound interest
    formula
    Use
    arithmetic
    and
    geometric
    gradients to solve appropriately
    modelled problems
    Apply nominal and effective interest
    rates

    Arithmetic Gradient

    Cash flow of this form may be resolved


    into two components:
    A + 4G
    A + 2G A + 3G
    A +G

    A
    0

    5 =

    A
    1

    A
    2

    A
    3

    A
    4

    5
    4G

    3G
    2G
    G
    0
    0

    Arithmetic Gradient
    Solving for F given G,
    G (1 + i)n 1
    F=
    n
    i
    i
    Solving for P given G,
    G (1 + i)n 1
    1
    P=
    n
    i
    i
    (1 + i)n
    (1 + i)n in 1
    P= G
    i2 (1 + i)n

    Arithmetic Gradient
    Solving for A given G,
    (1 + i)n in 1
    A= G
    i(1 + i)n i
    The term inside the bracket is the
    arithmetic gradient uniform series factor.

    Example 1
    Andrew has purchased a new car. He
    wishes to set aside enough money in a bank
    account to pay the maintenance for the
    first 5 years. It has been estimated that the
    maintenance cost of a car is as follows:
    Year Maintenance Cost
    1
    $120
    2
    150
    3
    180
    4
    210
    5
    240

    Example 1 (cont.)
    Assume the maintenance costs occur at the
    end of each year and that the bank pays
    5% interest. How much should Andrew
    deposit in the bank now?

    Solution Example 1
    240
    210
    180
    150
    120

    P = A(P/A, 5%, 5) + G(P/G, 5%, 5)


    P = 120(P/A, 5%, 5) + 30(P/G, 5%, 5)
    = 519 + 247

    = $766.00

    Example 2
    On a certain piece of machinery, it is
    estimated that the maintenance expense
    will be as follows:
    Year Maintenance
    1
    $100
    2
    200
    3
    300
    4
    400

    What is the equivalent uniform annual


    maintenance cost for the machinery if 6%
    interest is used?

    Solution Example 2:
    0

    100
    200
    300
    400

    A = 100 + 100(A/G, 6%, 4)


    = $242.70
    The equivalent uniform annual
    maintenance cost is $242.70.

    Example 3*
    Demand for a new product will decline as
    competitors enter the market. If interest is
    10% what is an equivalent uniform value?
    Year Revenue
    1
    $24, 000
    2
    18, 000
    3
    12, 000
    4
    6, 000

    Solution Example 3:
    $24,000

    18,000

    12,000

    6,000
    0

    The gradient or change in each year is

    -$6000
    A = 24000 6000(A/G, 10%, 4)

    = $15, 714.00

    Example 4*
    A cars warranty is 3 years. Upon expiration,
    annual maintenance starts at $150 and
    then climbs $25 per year until the car is sold
    at the end of Year 7. Use a 10% interest rate
    and find the present worth of these
    expenses.
    0

    150
    175
    200
    225

    Solution Example 4:
    P

    P'

    150

    P = 150(P/A, 10%, 4) +

    25(P/G, 10%, 4)
    = $584.95
    P = 584.95(P/F, 10%, 3)

    = $439.47

    175
    200
    225

    Geometric Gradient
    Situations where the period-by-period
    change is a uniform rate, g.
    Year
    1
    2
    3
    4
    5

    Cash Flow
    $100.00
    110.00
    121.00
    133.10
    146.41

    100.00
    100 + 10%(100)
    110 + 10%(110)
    121 + 10%(121)
    133.10 + 10%(133.10)
    0

    100
    110
    121
    133.10
    146.41

    Geometric Gradient
    Solving for P given A and g,

    1 (1 + g)n (1 + i)n
    P= A
    ig
    Where
    g = uniform rate of cash flow
    increase/decrease from period to period,
    that is, the geometric gradient
    A= value of cash flow at any year n

    Example 11:
    The first-year maintenance cost for a new
    car is estimated to be $100, and its
    increases at a uniform rate of 10% per year.
    Using an 8% interest rate, calculate the
    present worth of the cost of the first 5 years
    of maintenance.

    Solution Example 11:

    1 (1 + g)n (1 + i)n
    P=A
    ig
    P = 100

    1 1.10 5 1.08 5
    0.02

    P = $480.42
    The present worth of cost of maintenance
    for the first 5 years is $480.42.

    End

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