BES 221- Engineering Economics

TOPIC 5: UNIFORM ARITHMETIC AND GEOMETRIC GRADIENT

Problem No. 1
Given the cash flow diagram as shown. If interest rate is 10%, determine the following:
a. Equivalent total present worth
b. Equivalent total future worth
c. Equivalent uniform payment for the uniform gradient only
Problem No. 2
An amortization of a debt is in a form of a gradient series as shown. What is the equivalent present
worth of the debt if interest is 5%? Determine also the future amount of the amortization as well as the
equivalent uniform periodic payment.

Problem No. 3
Basketball superstar Vince Carter, playing for Toronto Raptors is earning an average annual salary
of $5,000,000 for 10 years. Chicago Bulls ball club would like to acquire his services as a replacement of
the retired Michael Jordan, offered him an initial annual salary of $3,000,000 but is increasing at the
rate of $400,000 annually. If he can still play in the NBA for 10 years and money is worth 10%, is the
offer of Chicago Bulls matched that of Toronto Raptors?

Problem No. 4
What is the present worth of the given cash flow diagram if interest rate is 10%? Determine also
its equivalent future worth.
Problem No. 5
Two sisters, Joan and Jocelyn decided to save money in funds that earns 14% compounded annually
but on different ways. Joan decided to save by making an end-of-year deposit of ₱ 1,000 o the first year,
₱ 1,100 on the second year, ₱ 1,210 on the third year and so on increasing the next year’s deposit by 10%
of the deposit in the preceding year until the end of the 10 th year. Jocelyn decided to save by just making
an equal deposit of ₱ 1,400 annually for 10 years. Who has more savings at the end of 10 years?

Problem No. 6
Engr. Hermo, believing that life begins at 40, decided to retire and start enjoying life at age 40.
He wishes to have upon his retirement the sum of ₱ 5,000,000. On his 21st birthday, he deposited a certain
amount and increased his deposit by 15% each year until he will be 40. If the money is deposited in a super
savings account which earns 15% interest compounded annually, how much was his initial deposit?

Problem No. 7
A newly acquired equipment requires an annual maintenance cost of ₱ 10,000. If the annual
maintenance cost is increased by 20% each year for 10 years, what is the estimated present worth of the
maintenance costs if money is worth 15%?

EXERCISE SET
(From Past Board Examinations)

1. Suppose an engineer receives an initial annual salary of ₱ 24,000 increasing at the rate of ₱ 1,200
a year. If money is worth 12%, determine his equivalent annual salary for a period of 10 years.
(Ans. ₱ 28,301.58)
2. The year-end operating and maintenance costs of a certain machine are estimated to be ₱ 4,800
the first year and to increase by ₱ 800 each year thereafter during its eight-year life. If capital
is worth 15%, determine the equivalent uniform year-end costs.
(Ans. ₱ 7,025.06)
3. For the following arithmetic gradient series, with interest at 10%, find:
a. The present worth (Ans. ₱ 7,747.34)
b. The value at the end of year 6 (Ans. ₱ 13,724.88)
c. The value at the end of year 10, assuming no further deposits after the sixth year
(Ans. ₱ 20,094.60)
d. The equivalent uniform series for 6 years (Ans. ₱ 1,778.85)

End of Year Deposits

1 ₱ 0
2 800
3 1,600
4 2,400
5 3,200
6 4,000
4. A company owes ₱ 80,000, which includes the interest, to be paid one year from now. To provide
for the repayment of this debt, the company deposits ₱ 2,000 at the beginning of the first month,
₱ 4,000 at the beginning of the second month, increasing the deposits in each succeeding month by
₱ 2,000 until the beginning of the eighth month. These amounts earn interest at the rate of 9%
compounded monthly. Will the total amount in the fund at the end of 12 months be sufficient to
repay the debt? If not, how much more is needed?
(Ans. Additional amount= ₱ 28,301.58)
5. A parcel of land in a downtown area, suitable for a parking lot, can be leased for a period of 10
years. Initial development costs for clearing, paving and constructing a small office shed on the lot
is estimated to be ₱ 150,000. If the net annual revenue for the first year is ₱ 22,000 and increased
by 10% per year thereafter until the 10 th year, and the improvements revert to the owner of the
land at the end of 10 years, what is the rate of return on the investment? (Ans. 16.16%)