Lecture 8

OTHER CASH FLOWS:

UNIFORM GRADIENT, GEOMETRIC GRADIENT, PERPETUITY
 Notice that the first uniform gradient
Uniform Gradient cash flow, G, occurs at the end of
period two.

The figure below shows a cash-flow diagram of a sequence of end-of-period cash

flows increasing by a constant amount, G, in each period. The G is known as the
uniform gradient amount. Note that the timing of cash flows on which the derived
formulas and tabled values are based is as follows:

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Finding P when Given G

Gradient to
Present
Equivalent
Conversion
Factor
Finding A when Given G
Gradient to
uniform
series
conversion
factor

Finding F when Given G

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Computations: Finding G

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 OR

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Example 2

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The first uniform
gradient cash flow,
G, occurs at the end
of period two.

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Geometric Gradient
Some economic equivalence
problems involve projected
cash-flow patterns that are
changing at an average rate,
ƒ , each period. A fixed
amount of a commodity that
inflates in price at a constant
rate each year is a typical
situation that can be modeled
with a geometric sequence of
cash flows. The resultant
EOY cash-flow pattern is
referred to as a geometric
gradient series.

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Geometric Gradient
Notice that the initial cash flow in
this series, A1, occurs at the end of
period one and that
Ak = (Ak-1)(1 + f ), 2 ≤ k ≤ N.

The Nth term in this geometric

sequence is
AN = A1(1 + f)N−1, and the common
ratio throughout the sequence is
(Ak − Ak−1)/Ak−1 = ƒ .

Be sure to notice that ƒ can be

positive or negative.

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Derivation of Formula

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Geometric Gradient

OR

Once we know the present equivalent of a geometric

gradient series, we can easily compute the equivalent
uniform series or future amount using the basic interest
factors (A/P, i%,N) and (F/P, i%,N).

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Example

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Determine the P, A, and F
equivalent values.

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Example 2

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Perpetuity
• One special variation of the present worth method involves
determining the present worth of all revenues and/or expenses over
an infinite length of time. This is known as the capitalized worth (CW)
method.

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Perpetuity
• The CW of a perpetual series of end-of-period uniform payments, A,
with interest i% per period, is:

• From the interest formulas, we know that,

• and as N becomes large,

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Example
Suppose that a firm wishes to endow an advanced manufacturing
processes laboratory at a university. The endowment principal will
earn interest that averages 8% per year, which will be sufficient to
cover all expenditures incurred in the establishment and maintenance
of the laboratory for an indefinitely long period of time. Cash
requirements of the laboratory are estimated to be $100,000 now to
establish it, $30,000 per year indefinitely, and $20,000 at the end of
every fourth year (forever) for equipment replacement.

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Example
Suppose that a firm wishes to endow an advanced manufacturing processes laboratory at a university. The endowment principal will earn
interest that averages 8% per year, which will be sufficient to cover all expenditures incurred in the establishment and maintenance of the
laboratory for an indefinitely long period of time. Cash requirements of the laboratory are estimated to be $100,000 now to establish it,
$30,000 per year indefinitely, and $20,000 at the end of every fourth year (forever) for equipment replacement.

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 Lecture 8
OTHER CASH FLOWS:
UNIFORM GRADIENT, GEOMETRIC GRADIENT, PERPETUITY