SM 300

Engineering Economics
 Arithmetic Gradients
Arithmetic gradients change by the same amount
each period
The cash flow diagram for the PG G starts b/w periods 1 and 2
of an arithmetic gradient is: (not between 0 and 1)
PG = ? This is because cash
flow
year 1inis usually not equal to G
1 2 3 4 n
and is handled separately as a
0
base amount
G
2G
(shown on next slide)
3G
(n-1)G

Note that PG is located Two

Standard factor notation is Periods Ahead of the first
PG = G(P/G,i,n) change that is equal to G
 P/G
Factor

(P/G, i, n) =
 Typical Arithmetic Gradient Cash Flow
PT = ?

i = 10%
0 1 2 3 4
5

Amount in year 1 400

450
is base amount 500
550
600
This diagram = this base amount plus this
gradient
PA = ? PG = ?
i = 10% i = 10%
+
0 1 2 3 4 5 0 1 2 4 5

3
Amount 400 400 400 400 400 50
100
in year PA = 400(P/A,10%,5) P G = 50(P/G,10%,5) 150
200
1
is base PT = PA + PG = 400(P/A,10%,5) + 50(P/G,10%,5)
amount
 Converting Arithmetic Gradient to A
Arithmetic gradient can be converted into equivalent A
value using G(A/G,i,n)
i = 10% i = 10%
0 1 2 3 4 5 0 1 2 3 4 5

G
2G
3G
A=?
4G
General equation when base amount is involved is
A = base amount + G(A/G,i,n)
0 1 2 3 4 5
For decreasing gradients,
change plus sign to minus
4G
3G

G
2G
A = base amount - G(A/G,i,n)
 A/G
Factor

(A/G, i, n) =
 Example: Arithmetic Gradient
The present worth of $400 in year 1 and amounts increasing by
$30 per year through year 5 at an interest rate of 12% per year
is closest to: (A) $1532 (B) $1,634 (C) $1,744 (D) $1,829
Solution:
PT = 400(P/A,12%,5) +
Cash Flow Diagram 30(P/G,12%,5)
= 400(3.6048) + 30(6.3970)
PT = ? = $1,633.83
i = 12%
TheAnswer is (B)could also be
cash flow
0 1 2 3 4 5 Yea
r converted into an A value as
follows:
400
430 A = 400 + 30(A/G,12%,5)
460
490 = 400 + 30(1.7746)
G = $30 520 = $453.24
PT = A(P/A,12%,5)
= $453.24 * 3.605 =
 Geometric Gradients

Geometric Gradients Change by the Same Percentage Each Period

Cash Flow Diagram for Present Worth of Geometric Gradients is as follows:

There are no Tables for Geometric Factors

P=? Use Following Equation:
1 2 3 4 n

0 P=A{1-[(1+g)/(1+i)]n}/(i-g)
A
Where: A=Cash Flow in Period 1
A(1+g)1
A(1+g)2 g=Rate of increase

A(1+g)n-1
If g=i, P=A {n/(1+i)}

Note: If g is negative, change signs in front of both g’s

 Geometric Gradient Example

Example: Find the present worth of $1,000 in year 1 and

amounts increasing by 7% per year through year 10. Use an
interest rate of 12% per year.

(a) $5,670 (b) $7,335 (c) $12,670 (d)$13,550

Solution: P=1000{1-[(1+0.07)/(1+0.12)]10}/(0.12-0.07)
= $7,333
Answer is (b)
 Geometric Gradient Example 2
A coal-fired power plant has upgraded an emission control valve.
The modification costs only
$8000 and is expected to last 6 years with a $200 salvage value.
The maintenance cost is expected to be high at
$1700 the first year, increasing by 11% per year thereafter.
Determine the equivalent present worth of the modification and
maintenance cost at 8% per year.
 Shifted Uniform Series
Shifted uniform series starts at a time other than period 1
The cash flow diagram below is an example of a shifted series
Series starts in period 2, not period 1

A = Given FA = ? Shifted series

usually
require the use
0 1 2 3 4 5 of
multiple factors
PA = ?

Remember:
When using P/A or A/P factor, PA is always one year ahead of first A
When using F/A or A/F factor, FA is in same year as last A
Example Using F/A Factor: Shifted Uniform Series
How much money would be available in year 10 if $8000 is
deposited each year in years 3 through 10 at an interest
rate of 10% per year?
Cash flow diagram is:
FA = ?
i = 10%
0 1 2 3 4 5 6 7 8 9 10 Actual year
0 1 2 3 4 5 6 7 8
Series year
Example Using F/A Factor: Shifted Uniform Series
How much money would be available in year 10 if $8000 is
deposited each year in years 3 through 10 at an interest
rate of 10% per year?
Cash flow diagram is:
FA = ?
i = 10%
0 1 2 3 4 5 6 7 8 9 10 Actual year
0 1 2 3 4 5 6 7 8
Series year
A = $8000

Solution: Re-number diagram to determine n = 8 (number of arrows)

FA = 8000(F/A,10%,8)
= 8000(11.4359)
= $91,487
Shifted Series and Random Single Amounts
For cash flows that include uniform series and randomly
placed single amounts:

Uniform series procedures are applied to the series amounts

Single amount formulas are applied to the one-time cash flows

The resulting values are then combined per the problem statement
Example: Series and Random Single Amounts
Find the present worth in year 0 for the cash flows
shown using an interest rate of 10% per year.
PT = ?
i = 10%
0 1 2 3 4 5 6 7 8 9 10

A = $5000
$2000

PT = ?
i = 10%
Actual year
0 1 2 3 4 5 6 7 8 9 10
8
0 1 2 3 4 5 6 7
Series r
A = $5000
yea
$2000
Solution:

First, re-number cash flow diagram to get n for uniform series: n = 8

 Example: Series and Random Single Amounts
PA
PT = ? i = 10%
0 1 2 3 4 5 7 8 9 10 Actual year
0 1 2 6 5 6 7 8

3 4
Series year
A = $5000

$2000

Use P/A to get PA in year 2: PA = 5000(P/A,10%,8) = 5000(5.3349) =

$26,675
Move PA back to year 0 using P/F: P0 = 26,675(P/F,10%,2) =
26,675(0.8264) = $22,044
Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) =
Now, add P0 and
2000(0.4665) P2000 to get PT i.e. PT = 22,044 + 933 = $22,977
= $933
In short, PT = 5000 × (P/A,10%,8) × (P/F,10%,2) + 2000 ×(P/F,10%,8)
 Example (HW)
A construction firm is considering the purchase of an
air
compressor.

The compressor has the following expected end of

Year 1
year maintenance costs: $800
Year 2 $800
Year 3 $900
Year 4 $1000
Year 5 $1100
Year 6 $1200
` Year 7 $1300
Year 8 $1400

What is the present equivalent maintenance cost if the

interest rate is 12% per year compounded annually?

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