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    Engineering Economy Course Student 4

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    Baesl 2000
    The document discusses arithmetic gradient series, which are cash flow series that increase or decrease by a constant amount each period. It defines the gradient (G) as the amount of the constant increase or decrease. It provides examples of calculating the present worth, annual series equivalent, and future worth for arithmetic gradient series cash flows using the P/G, A/G, and F/G factors respectively. These factors allow converting a gradient series to an equivalent present worth, uniform annual series, or future worth.

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    Engineering Economy Course Student 4

    Uploaded by

    Baesl 2000
    208 views27 pages
    The document discusses arithmetic gradient series, which are cash flow series that increase or decrease by a constant amount each period. It defines the gradient (G) as the amount of the constant increase or decrease. It provides examples of calculating the present worth, annual series equivalent, and future worth for arithmetic gradient series cash flows using the P/G, A/G, and F/G factors respectively. These factors allow converting a gradient series to an equivalent present worth, uniform annual series, or future worth.

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    Engineering Economy course Student 4

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    The document discusses arithmetic gradient series, which are cash flow series that increase or decrease by a constant amount each period. It defines the gradient (G) as the amount of the constant increase or decrease. It provides examples of calculating the present worth, annual series equivalent, and future worth for arithmetic gradient series cash flows using the P/G, A/G, and F/G factors respectively. These factors allow converting a gradient series to an equivalent present worth, uniform annual series, or future worth.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    208 views27 pages

    Engineering Economy Course Student 4

    Uploaded by

    Baesl 2000
    The document discusses arithmetic gradient series, which are cash flow series that increase or decrease by a constant amount each period. It defines the gradient (G) as the amount of the constant increase or decrease. It provides examples of calculating the present worth, annual series equivalent, and future worth for arithmetic gradient series cash flows using the P/G, A/G, and F/G factors respectively. These factors allow converting a gradient series to an equivalent present worth, uniform annual series, or future worth.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
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    The key takeaways are that an arithmetic gradient series involves cash flows that increase or decrease by a constant amount each period, and arithmetic gradient series can be analyzed using present worth, annual series, and future worth factors.

    An arithmetic gradient series is a cash flow series that either increases or decreases by a constant amount each period. The gradient, G, is the amount the cash flow changes by each period.

    The three factors considered for an arithmetic gradient strict series are the P/G factor to convert to present worth, the A/G factor to convert to an annual series, and the F/G factor to convert to a future value.

    Engineering Economy

    Lect. # 4

    Time Value of Money

    Arithmetic Gradient Series

    1
    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 $50 per year until the machine is retired, a
    gradient series is involved and the amount of the gradient is $50

    2
    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
    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

    4
    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

    5
    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)
    = 120,000/8
    = $15,000

    6
    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
    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 present-


    P = G (P/G,i,n) worth factor

    8
    9
    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?

    10
    Arithmetic (Linear) Gradient Series, Present Worth Factor - Example

    The idea here is to have a strict


    gradient series

    11
    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

    12
    Arithmetic (Linear) Gradient Series, Annual 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

    13
    Arithmetic (Linear) Gradient Series, Annual 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%?

    14
    Arithmetic (Linear) Gradient Series, Annual Series Factor - Example

    15
    Arithmetic (Linear) Gradient Series, Annual 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

    16
    Arithmetic (Linear) Gradient Series, Annual 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

    17
    Arithmetic (Linear) Gradient Series, Future Worth Factor – F/G Factor

    The future worth factor (F/G) can be expressed in the following form:

    Arithmetic-gradient
    F = G(F/G,i,n)
    future worth factor

    18
    Arithmetic (Linear) Gradient Series, Future Worth Factor - F/G Factor

     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?

    19
    Arithmetic (Linear) Gradient Series, Future Worth Factor - F/G Factor

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

    20

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