CPE 522 Economic Appraisal of Chemical & Petroleum Projects

02 Gradients in Cash Flows notes

- 1 -
CPE 522
ECONOMIC APPRAISAL OF CHEMICAL &
PETROLEUM PROJECTS
Arithmetic Gradient Series

An arithmetic gradient is a series in which the amount changes by
a fixed amount each interest period.

Can be considered as a single base amount equal to the first CF
in the series, plus a gradient amount starting the following year.





We need to treat the base amount as a uniform series and add to
it the series formed by the gradient amount.

0 1 2 3 4 n-2 n-1 n

(+)
(-)
A -----------------A +G(n-1)-----------------
CPE 522 Economic Appraisal of Chemical & Petroleum Projects
02 Gradients in Cash Flows notes
- 2 -

To calculate PW (Present Worth) of the GRADIENT part:

) , , / (
) 1 (
1 ) 1 (
) 1 ( ) 1 (
1 ) 1 ( 1
) , , / (
) 1 ( ) 1 (
1 ) 1 (
2
n i G P G P
i i
in i
i
n
i i
i
i
n i G P
i
n
i i
i
i
G
P
G
n
n
n n
n
n n
n
G
=
+
+
=

+
+
=

+
+
=




To calculate AW (with an equivalent uniform series) of the
GRADIENT part, calculate the PW and then multiply by the A/P
Factor:



) , , / (
1 ) 1 (
1
1 ) 1 (
) 1 (
) 1 ( ) 1 (
1 ) 1 (
) , , / )( , , / (
n i G A G
i
n
i
G
i
i i
i
n
i i
i
i
G
n i P A n i G P G A
n
n
n
n n
n
G
=

+
=

+
+

+
+
=
=

CPE 522 Economic Appraisal of Chemical & Petroleum Projects
02 Gradients in Cash Flows notes
- 3 -
Then add the PW or AW of the uniform series:
Remember
1. the gradient may be increasing OR decreasing so be careful
of the sign
2. the gradient series begins one year AFTER the uniform
series so PW refers to two periods before the gradient
starts


P
T
= P
A
P
G


A
T
= A
A
A
G



Our exams will cover arithmetic gradients. You will not be
required to deal with geometric gradients in this class (though
maybe in the real world see Blank & Tarquin, p. 39-40, 44-45).