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2-3 Time Value of Money - Arithmetic Gradient Series

This document discusses arithmetic gradient series, which are cash flows that increase or decrease by a constant amount each period. It provides examples of how to calculate the present worth, annual equivalent, and future worth of an arithmetic gradient series using relevant factors. Specifically, it shows how to separate a series with a base amount from the gradient portion in order to apply the appropriate factors to determine the equivalent uniform series or present/future values.

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Kyzer Gardiola
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© © All Rights Reserved
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Download as PPT, PDF, TXT or read online on Scribd
384 views19 pages

2-3 Time Value of Money - Arithmetic Gradient Series

This document discusses arithmetic gradient series, which are cash flows that increase or decrease by a constant amount each period. It provides examples of how to calculate the present worth, annual equivalent, and future worth of an arithmetic gradient series using relevant factors. Specifically, it shows how to separate a series with a base amount from the gradient portion in order to apply the appropriate factors to determine the equivalent uniform series or present/future values.

Uploaded by

Kyzer Gardiola
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Engineering Economy

[2-3]
Time Value of Money
Arithmetic Gradient Series

Nabil Dmaidi
1

03/21/15

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
Nabil Dmaidi

03/21/15

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
Nabil Dmaidi

03/21/15

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

Nabil Dmaidi
4

03/21/15

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

Nabil Dmaidi
5

03/21/15

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

Nabil Dmaidi
6

03/21/15

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
Nabil Dmaidi
03/21/15
7

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

Nabil Dmaidi
8

03/21/15

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
Nabil Dmaidi
03/21/15
now?
9

Arithmetic (Linear) Gradient Series


Present Worth Factor Example

The idea here is to have


a strict gradient series
Nabil Dmaidi
10

03/21/15

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
Nabil Dmaidi
11

03/21/15

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

Nabil Dmaidi
12

03/21/15

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%?

Nabil Dmaidi
13

03/21/15

Arithmetic (Linear) Gradient Series


Annul Series Factor Example

Nabil Dmaidi
14

03/21/15

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
Nabil Dmaidi
15

03/21/15

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

Nabil Dmaidi
16

03/21/15

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

Nabil Dmaidi
17

03/21/15

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?
Nabil Dmaidi
18

03/21/15

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

Nabil Dmaidi
19

03/21/15

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