CV 4252

Gradient Series Factors

Lecture 4
 In Last Lecture……
To find Given Factor Formula

Single-Payment Present
P F (P/F, i%, n) P = F(P/F, i%, n)
Worth Factor

Single-Payment Compound
F P (F/P, i%, n) F = P(F/P, i%, n)
Amount Factor

Uniform-Series
P A (P/A, i%, n) P = A(P/A, i%, n)
Present Worth Factor

Capital Recovery Factor

A P (A/P, i%, n) A = P(A/P, i%, n)

Sinking Fund Factor

A F (A/F, i%, n) A = F(A/F, i%, n)

Uniform-Series
F A (F/A, i%, n) F = A(F/A, i%, n)
Compound Amount Factor

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 Interpolation
„ What if i or n is not in interest tables?
1. Use factor formulas to compute
OR
2. Linearly interpolate tabulated values
„ Note: Values obtained from interpolation only
approximation

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 Example
„ Determine value of A/P factor for i=7.6% and n=15,
i.e. (A/P, 7.6%, 15)
Values of A/P at

i=7% Æ (A/P, 7%,15) = 0.10979

i=8% Æ (A/P, 8%,15) = 0.11683

By linear interpolation,
7.6 – 7.0
(A/P,7.6%,15) = 0.10979 + (0.11683 – 0.10979)
8.0 – 7.0
= 0.114014
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 Example
Approximation
A/P by linear interpolation

0.11683
0.114014

0.10979 Exact A/P

7.6 – 7.0 i
(0.11683 – 0.10979) 7% 8%
8.0 – 7.0
7.6%
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 Arithmetic Gradient Factors
„ Gradient
„ Amount of increase or decrease
„ Constant for arithmetic series
„ Arithmetic gradient cash flow
„ Cash flow series that increases/decreases by a constant
amount
„ Example:
„ Cost of maintaining my car is expected to increase by
$200 per year ÆGradient = $200

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 Arithmetic Gradient Factors
„ Base amount
„ Cash flow at end of first year
„ Example:
„ You pay your car’s insurance, fuel costs and repair cost
of $2,000 during the first and subsequent years
Æ base amount = $2,000
„ Repair cost is expected to increase by $100 every year
Æ gradient = $100

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 Arithmetic Gradient Factors
1 2 3 4 n-1 n

$2,000
$2,100
$2,200
$2,300
„ G = gradient $2,000
+ (n -2)100 $2,000
„ Cash flow in year n: CFn + (n -1)100

CFn = base amount +(n – 1)G

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 Example
„ A NTU fresh graduate is searching for a job. He
expects to earn an annual salary of $40,000 in his
first year.
„ He also expects that his annual salary to increase
uniformly to a level of $60,000 in his fifth year of the
job.
„ Find the arithmetic gradient and construct the cash
flow diagram.

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 Example
Base amount = $40,000
increase in income
Gradient =
n −1
60,000 − 40,000
=
5 −1
20,000
= = 5,000 per year
4
$55,000 $60,000
$50,000
$45,000
$40,000

Year
0 1 2 3 4 5

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 Arithmetic Gradient Factors
Consists of 2 parts
1 2 3 4 n-1 n
0 base amount

gradient
gradient
+ base amount
Arithmetic gradient series
without base amount Uniform series amount
1 2 3 4 n-1 n 1 2 3 4 n-1 n
0 0
G
2G
3G

(n-2)G
A = base amount
(n-1)G
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 Arithmetic Gradient
Present Worth
„ Find present worth PG (not including base amount)
at year 0 arithmetic gradient G for n years

PG = ?

i = given
1 2 3 4 n-1 n
0

G = given

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 Arithmetic Gradient
Present Worth
Let PG = present worth of arithmetic gradient
series w/o base amount

„ Consider each value for gradient series as F for year 2 to n:

⎡ 1 2 n-2 n-1 ⎤
PGP=G ⎢ 2
+ 3
+ ... + n-1
+ n ⎥
----- (1)
⎣ (1+i) (1+i) (1+i) (1+i) ⎦
Year 2 Year 3 Year n

„ Multiply both sides by (1 + i)1

⎡ 1 2 n-2 n-1 ⎤
PGP(1+i)1 =G ⎢ + + + + ----- (2)
(1+i) n-2 (1+i) n-1 ⎥⎦
1 2
...
⎣ (1+i) (1+i)

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 Arithmetic Gradient
Present Worth
„ By subtracting (1) from (2) and simplify,

⎡ 1 1 1 1 ⎤ ⎡ n ⎤
iPG = G ⎢ + + ... + + n⎥
− G⎢ n⎥ ---- (3)
⎣ (1 + i )1
(1 + i ) 2
(1 + i ) n −1
(1 + i ) ⎦ ⎣ (1 + i ) ⎦

Recall from Lecture-3 for P/A,

⎡ 1 1 1 1 ⎤ ⎡ (1 + i ) − 1⎤ n
P = A⎢ + + ... + + n⎥
⇒ PG = A⎢ n ⎥
⎢⎣ (1 + i )
1
(1 + i ) 2
(1 + i ) n −1
(1 + i ) ⎥⎦ ⎣ i (1 + i ) ⎦
⎡ (1 + i )n − 1⎤
= G⎢ n ⎥
---- (4)
⎢⎣ i(1 + i ) ⎥⎦
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 Arithmetic Gradient
Present Worth
„ Combining (3) and (4):

G ⎡ (1 + i ) − 1 n ⎤
n
PG = ⎢ − n⎥
i ⎣ i (1 + i )n
(1 + i ) ⎦

„ PG/G: Arithmetic-gradient present worth factor

PG 1 ⎡ (1 + i ) − 1 n ⎤
n
= ⎢ − n⎥
G i ⎣ i (1 + i ) n
(1 + i ) ⎦
„ Conversion factor: converts arithmetic gradient G
(excluding base amount) for n years into PG at year 0
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 Arithmetic Gradient
Present Worth
„ Total Present Worth PT

PT = PA + PG

Arithmetic gradient series

without base amount + Uniform series amount
1 2 3 4 n-1 n 1 2 3 4 n-1 n
0 0
G
2G
3G

PG (n-2)G
(n-1)G PA A = base amount

Present worth of Uniform-

series A (from Lecture 3)
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 Arithmetic Gradient
Uniform Series
„ Find uniform annual series worth AG (not including
base amount) for arithmetic gradient G for n years

AG = ?
i given

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

(n-2)G
(n-1)G

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 Arithmetic Gradient
Uniform Series
„ We find AG/G by
Equivalent to
AG PG AG capital recovery factor A/P
= ×
G G PG in Lecture 3

„ Arithmetic gradient uniform-series factor AG/G

AG ⎡1 n ⎤
=⎢ − ⎥
G ⎣ i (1 + i )n − 1⎦
„ Conversion factor: convert G (excluding base amount)
for n years into uniform annual series AG.
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 Arithmetic Gradient
Uniform Series
Arithmetic gradient series
without base amount + Uniform series amount

1 2 3 4 n-1 n 1 2 3 4 n-1 n
0 0
G
2G
3G
AG (n-2)G
(n-1)G
AA AA = base amount

„ Total uniform annual series AT

AT = AA + AG

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 Arithmetic Gradient
Future Worth
„ Similarly we find FG/G by
Equivalent to
FG PG FG Single-payment compound
= × amount factor F/P
G G PG in Lecture 3

„ Arithmetic gradient future worth factor FG/G

FG ⎡⎛ 1 ⎞⎛ (1 + i ) − 1 ⎞⎤
n
= ⎢⎜ ⎟⎜⎜ − n ⎟⎟⎥
G ⎢⎣⎝ i ⎠⎝ i ⎠⎥⎦

„ Conversion factor: converts arithmetic gradient G

(excluding base amount) for n years into future worth FG
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 Arithmetic Gradient
Future Worth

Arithmetic gradient series

without base amount
+ Uniform series amount
1 2 3 4 n-1 n 1 2 3 4 n-1 n
0 0
G
2G
3G

FG (n-2)G
(n-1)G
FA A = base amount

„ Total future worth

FT = FA + FG

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 Example
„ A company decides to deposit $100,000 into a charity
fund at the end of next year
„ They plan to increase the deposit by $50,000 per year
for the subsequent 9 years
„ If the company’s MARR is at 5%, find the equivalent
present worth and annual series amount.
„ MARR is minimum attractive rate of return, which is a reasonable
rate of return (refer to Ch.1.9)

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 Example
1 2 3 4 5 6 7 8 9 10

Base Amount = $100,000

Gradient = $50,000

PT = PA+PG
= 100,000(P/A, 5%, 10) + 50,000(P/G, 5%, 10)
= 100,000(7.7217) + 50,000(31.652)
= $2,354,770
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 Example
AT = AA+AG
= 100,000 + 50,000(A/G, 5%, 10)
= 100,000 + 50,000(4.0991)
= $304,955

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 Summary
Textbook: Section 2.4 to 2.5
To find Given Factor Formula

Arithmetic Gradient PG G (P/G, i%, n) PG = G(P/G, i%, n)

Present Worth
Arithmetic Gradient AG G (A/G, i%, n) AG = G(A/G, i%, n)
Uniform Series
Arithmetic Gradient FG G (F/G, i%, n) FG = G(F/G, i%, n)
Future Worth

PT = PA + PG AT = AA + AG FT = FA + FG
Total Present Worth Total Uniform Total Future Worth
Annual Series
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