ECONOMIC DECISION

ANALYSIS IN CONSTRUCTION

Dr Zahoor

Lecture 5
 Lecture # 5

Gradient Series
Present Value Calculation

Arithmetic and Geometric Gradient Series

Arithmetic Gradient Series
 ARITHMETIC GRADIENT SERIES
 A collection of end-of-period, increasing cash payments
or receipts arranged in a uniformly increasing series.
 Uniform increase in each successive payment is called
the gradient amount, G.
Yr Uniformly Uniform Gradient
Increasing Cash Cash
Series Flow Flow (G)
0
1 Rs 1000 Rs 1000 0
2 Rs 1050 Rs 1000 50
3 Rs 1100 Rs 1000 100
4 Rs 1150 Rs 1000 150
 ARITHMETIC GRADIENT SERIES
Uniform PW: One time
Can be negative
Series period left of 1st
increasing as well Cash Flow
(Annuity)
+
Gradient
Series
PW: Two time
periods left of 1st
Cash Flow

+ F G  1  i  2 ni  1
 n

Not in Tables Arithmetic Gradient PW

 i  Factor

[ ]+  1  i n  ni  1  1   1  i n  ni  1
−𝑛
1 − ( 1+𝑖 )
𝑃= 𝐴 P G    
n 
P G  
  1  i    i 1  i 
𝑖 i 2 2 n
 
Arithmetic Gradient Series is Converted to a uniform Series Using AG = G (A/G, i, n)
 ARITHMETIC GRADIENT SERIES

[ ]
Uniform 1 − ( 1+𝑖 )
−𝑛
Series 𝑃= 𝐴
(Annuity) 𝑖
+
+ +
Arithmetic
Gradient  1  i n  ni  1  1  i n  ni  1  1 
F G   P G    
n 
  1  i  
Series 2 2
 i   i
Can not be
measured using
Tables  1  i n  ni  1
P G  
 i 1  i 
2 n
Arithmetic Gradient Series is Converted to a uniform Series Using 
Arithmetic Gradient Present
AG = G (A/G, i, n) worth factor
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: How much do you have to deposit now in a saving account that earns a 12%
annual interest, if you want to withdraw the annual series as shown in the figure?
$2000
$1750
$1500
$1250
$1000

0
1 2 3 4 5

P =?
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: How much do you have to deposit now in a saving account that earns a 12%
annual interest, if you want to withdraw the annual series as shown in the figure?
$2000
$1750
$1500
$1250
$1000

0
1 2 3 4 5
$1,000(P/F, 12%, 1) = $892.86
$1,250(P/F, 12%, 2) = $996.49
$1,500(P/F, 12%, 3) = $1,067.67
$1,750(P/F, 12%, 4) = $1,112.16
$2,000(P/F, 12%, 5) = $1,134.85
P =?
P=F/(1+i) n $5,204.03
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: How much do you have to deposit now in a saving account that earns a 12%
annual interest, if you want to withdraw the annual series as shown in the figure?

[ ]  1  i n  ni  1
$2000 1 − ( 1+𝑖 )
−𝑛
$1750 𝑃= 𝐴
$1250
$1500 𝑖 + P G  i 2 1  i n 
 
$1000

0
1 2 3 4 5
$1,000(P/F, 12%, 1) = $892.86
$1,250(P/F, 12%, 2) = $996.49 P = PA + PG
$1,500(P/F, 12%, 3) = $1,067.67
$1,750(P/F, 12%, 4) = $1,112.16
P = $1000 (P/A,12%,5)
$2,000(P/F, 12%, 5) = $1,134.85
P =?
P=F/(1+i) n $5,204.03 + 250 (P/G, 12%,5)
EXAMPLES - ARITHMETIC GRADIENT SERIES
Converting a series of payments to a uniform & arithmetic series
Yr Alt. A Alt. B 5000 4500 5000 5000 5000
4000 4000 4000 4000 4000
0 − $15, 000 − $12, 000
1 5, 000 3, 500
2 4, 500 3, 500 500 1000
3 4, 000 3, 500 15000 15000

4 4, 000 3,600 PW= 4000(P/A,8%,5) + 1000(P/A,8%,3)-500(P/G,8%,3)

5 4, 000 3,700 =4000(3.993)+1000(2.577)-500(2.445) =17326

Interest rate is 8% 3600 3700

3500 3500 3500

PW= 3500(P/A,8%,5) + 100(P/G,8%,3) (P/F,8%,2)

= 3500(3.993) +100(2.445)(0.8573)
12000
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: Our firm has purchased a photocopy machine that will require increasing
service/maintenance costs over the next 6 years. In 1st year it is $100 and G = $50. If
this payment is to be made through a bank investment that offers interest at the rate of
4% annual interest. How much should we deposit to withdraw service costs each year.
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: Our firm has purchased a photocopy machine that will require increasing
service/maintenance costs over the next 6 years. In 1st year it is $100 and G = $50. If
this payment is to be made through a bank investment that offers interest at the rate of
4% annual interest. How much should we deposit to withdraw service costs each year.
$350
$300
$250
$200
$150
$100
0
1 2 3 4 5 6

P =?
 EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: Our firm has purchased a photocopy machine that will require increasing
service/maintenance costs over the next 6 years. In 1st year it is $100 and G = $50. If
this payment is to be made through a bank investment that offers interest at the rate of
4% annual interest. How much should we deposit to withdraw service costs each year.
$250 $350
$200 $300
$150 $250
$100 $200
$50 $150
$0 $100
0 0
1 2 3 4 1 2 3 4 5 6
5
P =?
PG =?

P = PA + PG = $100 [P/A,4%,6] + $50 [P/G,4%,6]

EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: The Present Worth of cash flow diagram given below at interest rate of
12%:
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: The Present Worth of cash flow diagram given below at interest rate of
12%:

20 20 20 20

5
10
15
20 (P/A,12%,4) - 5(P/G,12%,4) =
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: Select correct Present Worth among following options, if the amount is
$400 in year 1, and increases by $30/year through year 5 at an interest rate of
12% per year: (a) $1532 (b) $1,634 (c) $1,744 (d) $1,829
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: Select correct Present Worth among following options, if the amount is
$400 in year 1, and increases by $30/year through year 5 at an interest rate of
12% per year: (a) $1532 (b) $1,634 (c) $1,744 (d) $1,829

P=? i=12%
P = PA + PG = $400[P/A,12%,5] + $30[P/G,12%,5]
1 2 3 4 5 Year
0 =$400(3.6048)+$30(6.3970) = $1634
400
430
460
490
G = 30 520
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: Select correct Present Worth among following options, if the amount is
$400 in year 1, and increases by $30/year through year 5 at an interest rate of
12% per year: (a) $1532 (b) $1,634 (c) $1,744 (d) $1,829

P=? i=12%
P = PA + PG = $400[P/A,12%,5] + $30[P/G,12%,5]
1 2 3 4 5 Year
0 =$400(3.6048)+$30(6.3970) = $1634
400
430 What if we are asked to convert the arithmetic
460
490
G = 30 520 gradient series to uniform series
EXAMPLES - ARITHMETIC GRADIENT SERIES
Example: Select correct Present Worth among following options, if the amount is
$400 in year 1, and increases by $30/year through year 5 at an interest rate of
12% per year: (a) $1532 (b) $1,634 (c) $1,744 (d) $1,829

P=? i=12%
P = PA + PG = $400[P/A,12%,5] + $30[P/G,12%,5]
1 2 3 4 5 Year
0 =$400(3.6048)+$30(6.3970) = $1634
400
430 What if we are asked to convert the arithmetic
460
490
G = 30 520 gradient series to uniform series
Arithmetic Gradient Series is Converted to a AG = G(A/G,i,n) = 30(1.7746) = $53.28
Uniform Series using
&
AG = G(A/G, i, n) A = 400+53.28 = $453.28
Check  P = 453.28(P/A,12%,5) = 453.28*3.6048 = $1634
 EXAMPLES - ARITHMETIC GRADIENT SERIES
Practice Question:- GatorCo is considering buying device A or B. Each device can
reduce costs. Each device has a useful life of 5 years, and no salvage value. Device
A saves $300 a year, device B saves $400 the first year, but savings in later years
decrease by $50 a year. Interest is 7%. Which device should they choose?
 EXAMPLES - ARITHMETIC GRADIENT SERIES
Practice Question:- GatorCo is considering buying device A or B. Each device can
reduce costs. Each device has a useful life of 5 years, and no salvage value. Device
A saves $300 a year, device B saves $400 the first year, but savings in later years
decrease by $50 a year. Interest is 7%. Which device should they choose?

$300 $300 $300 $300 $300

1 2 3 4 5
Device A:
$400
$350 $300 $250
$200

1 2 3 4 5

Device B:
 EXAMPLES - ARITHMETIC GRADIENT SERIES
Practice Question:- GatorCo is considering buying device A or B. Each device can
reduce costs. Each device has a useful life of 5 years, and no salvage value. Device
A saves $300 a year, device B saves $400 the first year, but savings in later years
decrease by $50 a year. Interest is 7%. Which device should they choose?

$300 $300 $300 $300 $300

1 2 3 4 5
Device A: The Present Worth = 300 (P/A,7%,5) = 300 (4.1000) = $1230
$400
$350 $300 $250
$200

1 2 3 4 5

Device B:
 EXAMPLES - ARITHMETIC GRADIENT SERIES
Practice Question:- GatorCo is considering buying device A or B. Each device can
reduce costs. Each device has a useful life of 5 years, and no salvage value. Device
A saves $300 a year, device B saves $400 the first year, but savings in later years
decrease by $50 a year. Interest is 7%. Which device should they choose?

$300 $300 $300 $300 $300

1 2 3 4 5
Device A: The Present Worth = 300 (P/A,7%,5) = 300 (4.1000) = $1230
$400
$350 $400 $400 $400 $400 $400
$300 $250 1 2 3 4 5
$200
 - $50 $100 $150 $200
1 2 3 4 5 1 2 3 4 5

Device B:
 EXAMPLES - ARITHMETIC GRADIENT SERIES
Practice Question:- GatorCo is considering buying device A or B. Each device can
reduce costs. Each device has a useful life of 5 years, and no salvage value. Device
A saves $300 a year, device B saves $400 the first year, but savings in later years
decrease by $50 a year. Interest is 7%. Which device should they choose?

$300 $300 $300 $300 $300

1 2 3 4 5
Device A: The Present Worth = 300 (P/A,7%,5) = 300 (4.1000) = $1230
$400
$350 $300 $250 $400 $400 $400 $400 $400
1 2 3 4 5
$200
 - $50 $100 $150 $200
1 2 3 4 5 1 2 3 4 5

Device B: The Present Worth =

400 (P/A,7%,5) - 50 (P/G,7%,5) = 400(4.1000) - 50 (7.647) = $1257.65
Geometric Gradient Series
 GEOMETRIC GRADIENT SERIES
Yr Gradient Calculation Constant Rate
A series in which each term after the first is (inc) Series of Change (g)
found by multiplying the previous one by a 0
1 Rs 1000 (A) 0
fixed, non-zero number called the common
2 Rs 1050 1000(1+0.05) 5%
ratio. Represented mathematically as:- 1050(1+0.05)
3 Rs 1102.5 5%
or 1000(1.05)2
S=A1+A1(1+g) + A1(1+g)2+A1(1+g)3+…
n
4 Rs 1157.6 1000(1.05)3 5%
 1  (1  g ) (1  i )
n
 For negative series
P  A  change the sign
 i g  before “g”

If g=i, P=An / (1+i)

A1= A=Starting Cash Flow
g = Constant Rate of Change
n = Number of Years
i = Interest Rate Per Period
 GEOMETRIC GRADIENT SERIES
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

P = 1000[1-{(1+0.07)10(1+0.12)-10] / (0.12-0.07) = $7333 (Option B)

 GEOMETRIC GRADIENT SERIES
Example: Airplane ticket price is expected to increase by 8% in each of the next
four years. The cost at the end of the first year will be $180. How much should
be invested now at 5% interest rate to cover this cost for next four years?
GEOMETRIC GRADIENT SERIES-PRESENT WORTH
Example: A graduating Engr invested $100,000. His net revenue in the 1st
year was $25,000. Each year, thereafter, his revenue decreased 10%/yr. If
the current market interest rate is 12%, find the present worth of his
investment over a period of 10 years?

PW = 25000 [ 1 - (1-0.10)10 x (1+0.12)-10 ] / [0.12-(-0.10)]

PW of investment = $ 100878.963

Net PV = -100,000 + 25000 [ 1 - (1-0.10) 10 x (1+0.12)-10 ] / [0.12-(-0.1)]

P = $ 878.963
 GEOMETRIC GRADIENT SERIES-FUTURE WORTH
Example: A graduating Engr is going to make $35,000/yr. He plans to
place 10% of his salary in a mutual fund scheme. He can count on a 3%
salary increase/year for his next 30 years of employment. If the mutual
funds, on average, offers 12% over the course of his career, what can he
expect at retirement?
A = 35,000 x 0.1 = $3,500
i = 12%, g = 3%, n= 30