Scribd
Upload
293 views19 pages

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

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.

Uploaded by

EvesonGentoleo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
293 views19 pages

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

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.

Uploaded by

EvesonGentoleo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 19

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

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy