Interest Formulas

(Gradient Series)

Engineering Costing and Evaluation

Two Types of Gradient
Series A1+7G
 Linear Gradient

A1
A

+2
1 +G

G
A
1

 G – Constant $ amount
0 1 2 3 4 5 6 7 8

 Geometric Gradient
A1 (1  g )7

 g – Constant %

A1
(1
+g
A1

)
0 1 2 3 4 5 6 7 8
A Strict Linear Gradient Series
Linear Gradient-Series Present
Worth Factor
Two Types of Linear Gradient Series as Composites of a
Uniform Series of N Payments of A1 and a Gradient Series of
Increments of a Constant amount G
Example 2.16 – Creating a Graduated Loan
Repayment with a Linear Gradient Series
An Excel Worksheet to Determine
the Size of the Gradient Amount

A B C D E F G H I
1 Example 2.16
2
3 Input: Output:
By changing cell
4 Interest Rate (%) 10 Gradient (G ) $628.67
5 Borrowing (B ) $10,000 Present Worth (P ) $10,000.00
Set cell
6
7
8 Period Repayment Series Present Worth =SUM(E12:E16)
9 (n ) A1 G Total
10
11 0
12 1 $1,500.00 $0.00 $1,500.00 $1,363.64
13 2 $1,500.00 $628.67 $2,128.67 $1,759.23
=D13*(1+$B$4)^(-A13)
14 3 $1,500.00 $1,257.34 $2,757.34 $2,071.63
15 4 $1,500.00 $1,886.01 $3,386.01 $2,312.69
16 5 $1,500.00 $2,514.69 $4,014.69 $2,492.80
17
18
19 =B16+C16
=$E$4*(A16-1)
20
21
Example 2.17 – Equivalent
Cash Value
Equivalent Present Value of
Annual Payment Option at
4.5%

P  [$175, 000  $189, 000( P / A, 4.5%, 25)

$7, 000( P / G, 4.5%, 25)]( P / F , 4.5%,1)
 $3,818,363
Excel Spreadsheet Presentation of
the Linear Gradient Series
A B C D E
1 Example 2.16: Cash Value Calculation
2
3
4 Winning Jackpot $ 7,000,000.00
5 Interest Rate (%) 4.50%
6 Base Amount $ 189,000.00
7 Gradient Amount $ 7,000.00
8
9 Payment Payment Schedule Annual Payment Dsicounting Present
10 Number as % of Jackpot before Taxes Factor (4.5%) Cash Value
11
12 1 2.50% $ 175,000 0.95694 $ 167,464
13 2 2.70% $ 189,000 0.91573 $ 173,073
14 3 2.80% $ 196,000 0.87630 $ 171,754
15 4 2.90% $ 203,000 0.83856 $ 170,228
16 5 3.00% $ 210,000 0.80245 $ 168,515
17 6 3.10% $ 217,000 0.76790 $ 166,633
18 7 3.20% $ 224,000 0.73483 $ 164,602
19 8 3.30% $ 231,000 0.70319 $ 162,436
20 9 3.40% $ 238,000 0.67290 $ 160,151
21 10 3.50% $ 245,000 0.64393 $ 157,762
22 11 3.60% $ 252,000 0.61620 $ 155,282
23 12 3.70% $ 259,000 0.58966 $ 152,723
24 13 3.80% $ 266,000 0.56427 $ 150,096
25 14 3.90% $ 273,000 0.53997 $ 147,413
26 15 4.00% $ 280,000 0.51672 $ 144,682
27 16 4.10% $ 287,000 0.49447 $ 141,913
28 17 4.20% $ 294,000 0.47318 $ 139,114
29 18 4.30% $ 301,000 0.45280 $ 136,293
30 19 4.40% $ 308,000 0.43330 $ 133,457
31 20 4.50% $ 315,000 0.41464 $ 130,613
32 21 4.60% $ 322,000 0.39679 $ 127,766
33 22 4.70% $ 329,000 0.37970 $ 124,922
34 23 4.80% $ 336,000 0.36335 $ 122,086
35 24 4.90% $ 343,000 0.34770 $ 119,262
36 25 5.00% $ 350,000 0.33273 $ 116,456
37 26 5.10% $ 357,000 0.31840 $ 113,670
38
39 Total $ 7,000,000 $ 3,818,363
40
41
42 =B36+0.001 =(1+$C$5)^(-A37)
43 =$C$4*B37 =SUM(E12:E37)
44
45
=C37*D37
46
Geometric Gradient
Series
Example: Find P, Given
A1, g, i, N
$7
,7
57

 Given:
g = 5%
i = 7%

$5
$5

,2 5
,00
N = 10 years

0
0
0
A1 = $5,000 1 2 3 4 5 6 7 8 9 10
 Find: P

1  (1  0.05)10 (1  0.07)10 
P  $5,000  
 0.07  0.05 
 $42,988 P
Example 2.18 Required Cost-of-Living
Adjustment calculation
Three-Step Procedure
 Step 1: Find the equivalent amount of total benefits paid over
25 years.

P = $50,000(P/A, 7%, 25) = $582,679

 Step 2: Find the equivalent amount of total cost of living with

inflation
P = $50,000(P/A1, 5%, 7%, 25) = $940,167

 Step 3: Determine the additional savings required

P = $940,167 - $582,679 = $357,488
An Excel Worksheet to Illustrate the
Process of Calculating the Savings
Required for Retirement
A B C D E F G
2 Geometric-Gradient Series (Present Worth Factor)
3 Inputs Output
4 (g ) Geometric (%) 5 (P ) Present Worth ($) 940,167.22
5 (i ) Interest (%) 7
6 (N ) Interest periods 25 Compute Reset Plot (i)

7 (A 1) Initial Amount ($) 50000

10 Period Cash Flow Cash Balance Cash Flow Diagram Zoom

11 0 ($940,167) ($940,167)
12 1 $50,000 ($955,979)
13 2 $52,500 ($970,397)
14 3 $55,125 ($983,200)
15 4 $57,881 ($994,143)
16 5 $60,775 ($1,002,958)
17 6 $63,814 ($1,009,351)
18 7 $67,005 ($1,013,000)
19 8 $70,355 ($1,013,555)
N
20 9 $73,873 ($1,010,632)
21 10 $77,566 ($1,003,809) Cash Balance Chart Zoom
22 11 $81,445 ($992,631) $ 0
23 12 $85,517 ($976,599)

1
3
5
7
9
11

15
17
19

23
25
13

21
-200000
24 13 $89,793 ($955,168)
25 14 $94,282 ($927,747) -400000
26 15 $98,997 ($893,693)
-600000
27 16 $103,946 ($852,305)
28 17 $109,144 ($802,822) -800000

29 18 $114,601 ($744,419) -1000000

30 19 $120,331 ($676,197)
-1200000 N
31 20 $126,348 ($597,184)
32 21 $132,665 ($506,322) Cell B12: =$C$7
33 22 $139,298 ($402,466) Cell B13: =B12*(1+$C$4%)
34 23 $146,263 ($284,376) Cell C13: =C12*(1+$C$5%)+B13
35 24 $153,576 ($150,706) Cell G4: =$C$7*((1-(1+$C$4%)^($C$6)
36 25 $161,255 ($0) *(1+$C$5%)^(-$C$6))/($C$5%-$C$4%))
Practice Problems

Using (P/G, i, N) or (P/A1,g,i,N)

Problem 1
$2,000
$1,750
$1,250 $1,500
$1,000

0
1 2 3 4 5

How much do you have to deposit

now in a savings account that
earns a 12% annual interest, if
P =? you want to withdraw the annual
series as shown in the figure?
Solution:

P1  $1,000( P / A,12%,5)
 $3,604.80

P2  $250( P / G,12%,5)
 $1,599.20

P  $3,604.08  $1,599.20
 $5,204
Problem 2
 Your starting salary as a mechanical
engineer is expected to be $55,000. A total
of 10% of your salary each year will be
placed in the mutual fund of your choice.
You can also count on a 5% salary
increase for the next 30 years of
employment. If the mutual fund will
average 9% annual return over the course
of your career, what can you expect at
retirement?