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NE 364 Engineering Economy: Change by A Constant Amount
NE 364 Engineering Economy: Change by A Constant Amount
NE 364
Engineering Economy
Lecture 6
Money-Time Relationships and Equivalence
(Part 4: Gradient Series)
4G
3G
2G
G
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P
Uniform Gradient Cash-flows
Equivalent P is located
one period before the
Gradient starts.
OR
Two periods before the
first positive G
First positive G
The Gradient
starts with zero
P
From Gradient to Annuity
0 1 2 3 4 5 6
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0 1 2 3 4 5 6
P=G(P/G, i%, N)
A=G(A/G, i%, N)
0 1 2 3 4 5 6
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=G(P/G,i%,N)*(F/P,i%,N)
OR
F=A * (F/A, i%,N)
=G(A/G,i%,N)*(F/A,i%,N)
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Example 1
As an example of the straightforward use of the gradient
conversion factors, suppose that certain EOY cash flows
are expected to be $1,000 for the second year, $2,000 for
the third year, and $3,000 for the fourth year and that, if
interest is 15% per year, it is desired to find:
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Example 2
Certain operating savings are expected to be 0 at the end
of the first six months, to be $1,000 at the end of the
second six months, and to increase by $1,000 at the end
of each six-month period thereafter, for a total of four
years. It is desired to find the equivalent uniform amount,
A, at the end of each of the eight six-month periods if the
interest rate is 10% per each six-month period.
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Example 3
As a further example of the use of arithmetic gradient
formulas, suppose that we have cash flows as follows:
Solution
$8,000
$7,000
$1,000
$6,000
$1,000
$5,000
$1,000 This can be G
G=1000
$5,000
0 1 2 3 4
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Solution cont.
The cash-flow can be divided into two cash-flows:
① Annuity
② Gradient
$8,000
$7,000 ② Gradient
$1,000 G=$1,000
$6,000 Starting from EOY1
$1,000 with a zero
$5,000
$1,000 ① Annuity
A=$5,000
$5,000 $5,000 $5,000 $5,000 Starting from EOY1
0 1 2 3 4
Solution cont.
= =
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Solution cont.
AA=$5,000 AG=$1,000*(A/G,15%,4)
Example 4
For another example of the use of arithmetic gradient
formulas, suppose that we have cash-flows that are timed
in exact reverse of the situation depicted in the previous
example.
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Solution
Solution
10