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Lesson 5

This lesson discusses arithmetic and geometric gradients, which are cash flows that change by a uniform amount or percentage each period. It defines arithmetic gradients as cash flows that increase or decrease by a constant amount each period. Geometric gradients are cash flows that increase or decrease by a fixed percentage each period. The lesson provides formulas for calculating the present and future worth of both uniform arithmetic and geometric gradients. It includes an example problem demonstrating how to use the formulas to analyze non-uniform cash flows.

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Noelle Reese Alfaro
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158 views8 pages

Lesson 5

This lesson discusses arithmetic and geometric gradients, which are cash flows that change by a uniform amount or percentage each period. It defines arithmetic gradients as cash flows that increase or decrease by a constant amount each period. Geometric gradients are cash flows that increase or decrease by a fixed percentage each period. The lesson provides formulas for calculating the present and future worth of both uniform arithmetic and geometric gradients. It includes an example problem demonstrating how to use the formulas to analyze non-uniform cash flows.

Uploaded by

Noelle Reese Alfaro
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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LESSON 5: ARITHMETIC AND GEOMETRIC GRADIENTS

Lesson Rationale:
This lesson contains the arithmetic and geometric gradients and cash flows and explains their purpose and the procedures for
incorporating gradients into engineering economic analysis. In certain cases, Engineering Economy problems involve a series of
disbursements or receipts that increase or decrease in each succeeding period by varying amounts.

Lesson Outcomes:
At the end of the lesson, you are expected to:
1. Familiarize the basic definition of arithmetic and geometric gradients;
2. Understand the cash flow of arithmetic and geometric gradients;
3. Apply and analyze different formulas to the sample problems

TOPIC 1: Arithmetic Gradients

5.1 What is an arithmetic gradient?


If the change in succeeding periods is constant, then the series is known as a uniform arithmetic gradient. These series of
disbursements or receipts increase or decrease in each succeeding period by a constant amount.
Arithmetic gradients also defined as the process for calculating the future worth of arithmetic gradients are presented along
with example problems and a case study demonstrating using the future worth gradient factor (F/G). The procedure for determining the
present worth of arithmetic gradients using the present worth gradient factor (P/G) is presented along with the process for solving for
decreasing values of uniform gradients series and increasing and decreasing gradients.

5.2 Uniform Arithmetic Gradient Cash Flow and Formulas

Figure 5.2.1 Equivalent Cash Flow Diagram for Uniform Arithmetic Gradient

The second diagram in the right member of Figure 5.2.1 illustrated a uniform arithmetic gradient. Note that at the end of the
first period G=0. The relations between present values and accumulated amounts are:
In conformity with present practice the following symbols will be used:
A= uniform periodic amount equivalent to the arithmetic gradient series
G= arithmetic gradient change in the periodic amounts at the end of each period
P= present worth of the uniform gradient
F= future worth or accumulated amount of the uniform gradient at the end of n periods
i= interest rate per period
n= number of periods

The functional symbols and formulas used in dealing with uniform arithmetic gradients are:

Table 5.2.1 Formulas dealing with Uniform Arithmetic Gradients

Present Worth (P) 𝑮 𝟏 − (𝟏 + 𝒊)−𝒏 𝒏


𝐏= [ − ]
𝒊 𝒊 (𝟏 + 𝒊)𝒏
Future Worth (F) 𝑮 (𝟏 + 𝒊)𝒏 − 𝟏
𝐅= [ − 𝒏]
𝒊 𝒊
Equivalent Periodic Amount (A) 𝟏 𝒏
𝐀 = 𝐆[ − ]
𝒊 (𝟏 + 𝒊)𝒏 − 𝟏
Factor to convert a uniform arithmetic gradient 𝑨 𝟏 𝒏
series to an equivalent uniform series ( , 𝒊%, 𝒏) = −
𝑮 𝒊 ( 𝟏 + 𝒊)𝒏 − 𝟏
Factor to convert a uniform arithmetic gradient 𝑷 𝟏 𝟏 − (𝟏 + 𝒊)−𝒏 𝒏
series to its present worth ( , 𝒊%, 𝒏) = [ − ]
𝑮 𝒊 𝒊 (𝟏 + 𝒊)𝒏

Factor to convert a uniform arithmetic gradient 𝑭 𝟏 (𝟏 + 𝒊)𝒏 − 𝟏


series to its future worth ( , 𝒊%, 𝒏) = [ − 𝒏]
𝑮 𝒊 𝒊
TOPIC 2: Geometric Gradients

5.3 What is a geometric gradient?


A geometric gradient series is a sequence consisting of end-of-period payments, where each payment increases or decreases
by a fixed percentage. In a geometric gradient, payment begins at the end of the first period.
Suppose that there is a series of "n" payments uniformly spaced, but differing from one period to the next by a constant
multiple. The change or "gradient" multiple from one period to the next is denoted "G" There will, of course, also be an interest rate “i”
that applies.

5.4 Uniform Geometric Gradient Cash Flow and Formulas

Table 5.2.2 Formulas dealing with Uniform Geometric Gradients

 When x ≠ or < 1
𝑮 𝟏 − 𝒙𝒏
𝐏= [ ]
(𝟏 + 𝒊) 𝟏 − 𝒙
Present Worth (P)
 When x=1
𝑮𝒏
𝐏=
(𝟏 + 𝒊)
 When x ≠ or < 1
𝟏 − 𝒙𝒏
𝐅 = 𝐆(𝟏 + 𝒊)𝐧−𝟏 [ ]
𝟏−𝒙
Future Worth (F)
 When x=1
𝐅 = 𝐆𝐧(𝟏 + 𝒊)𝐧−𝟏
PRACTICE PROBLEM!

1. Compute the value of P and F in figure a.


Answers: P=₱774.73, F=₱1,372.50

2. Annual maintenance costs for a machine are ₱1,500 this year and are estimated to increase 10% each year every year. What
is the present worth of the maintenance costs six years if (a) i=8%, (b) i=10%, and (c) i=12%
Answers: a. P=₱8,729.4 b. P=₱8,181.82 c. P=₱7,682.87

3. The year-end operating and maintenance costs of a certain machine are estimated to be ₱12,000 the first year and to
increase by ₱2,500 each year during its 4th year life. If capital worth 12 %, determine the equivalent uniform year end costs.
Answer: AT=₱15,397.13

4. Suppose a man receives an initial annual salary of ₱60,000, increasing at the rate of ₱5,000 a year. If money is worth 10%,
determine his equivalent uniform salary for period of 8 years.
Answers: AT=₱75,022.39

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