Scribd
Upload
11 views10 pages

Arithmetic & Geometric Gradient Engecon Lecture

Uploaded by

happiplushie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
11 views10 pages

Arithmetic & Geometric Gradient Engecon Lecture

Uploaded by

happiplushie
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 10

ARITHMETIC & GEOMETRIC

GRADIENT
An arithmetic gradient series is a cash flow series that either increases or decreases by a
constant amount each period. The amount of change is called the gradient (G). The diagram starts
at the end of the first period with zero value.
 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.
 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
EXAMPLE1: 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
SOLUTION: 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)
= 120,000/8
= $15,000
EXAMPLE2: You want to deposit $1,000 in your savings 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%?

+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
EXAMPLE2: You want to deposit $1,000 in your savings 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%?

Solution 2: An alternative way to solve this question is by finding the present worth of all the payments
and then converting P to a uniform series of A.
YEAR F P
0 0 0
1 1,000.00 909.09
2 1,300.00 1,074.38
3 1,600.00 1,202.10
4 1,900.00 1,297.73
5 2,200.00 1,366.03
6 2,500.00 1,411.18
TOTAL - 7260.51

A/P 0.2296074
A 1,667.07
EXAMPLE 3: Deposits are made to an account as indicated in the table which bears interest at the rate of 10%
compounded annually. How much will there be in the account at the end of the sixth year?

You might also like