LECTURE 7

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Engineering Economy

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[2-3]
Time Value of Money
Arithmetic Gradient Series

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Arithmetic (Linear) Gradient Series
• An arithmetic gradient is a cash flow series that either increases or
decreases by a constant amount

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• The cash flow, whether income or disbursement, changes by the
same arithmetic amount each period

• The amount of the increase or decrease is the gradient (G)

• For example, if an engineer predicts that the cost of maintaining a

machine will increase by $500 per year until the machine is retired,
a gradient series is involved and the amount of the gradient is $500
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 Arithmetic (Linear) Gradient Series

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• The diagram is of an arithmetic gradient series with a base
amount of $1,500 and a gradient of $50

• The origin of the series is at the end of the first period

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• G is the constant arithmetic change in the magnitude of receipts
or disbursements from one time period to the next
 Arithmetic (Linear) Gradient Series
Example
• A company expects a revenue of $80,000 in fees next year. Fees are
expected to increase uniformly to a level of $200,000 in nine years

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• Determine the arithmetic gradient and construct the cash flow
diagram

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 Arithmetic (Linear) Gradient Series
Example

• The cash flow in year n (CFn) may be calculated as:

CFn = base amount + (n-1)G
• The base amount (generally A1) is $80,000 and the total

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revenue increase in 9 years = 200,000 – 80,000 = 120,000

• G = increase/(n-1) = 120,000/(9-1) = $15,000

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 Strict Linear Gradient Series
• The strict linear gradient series has the origin at the end of the first
period with a zero value

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• The gradient G can be either positive or negative. If G > 0, the series
is referred to as an increasing gradient series. If G < 0, it is a
decreasing gradient series

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 Arithmetic (Linear) Gradient Series
Analysis
Three factors will be considered for arithmetic gradient strict series:
• P/G factor for present worth: G(P/G,i,n)
Convert an arithmetic gradient G (without the base amount) for n years into a
present worth at year 0

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• A/G factor for annual series: G(A/G,i,n)
Convert an arithmetic gradient G (without the base amount) for n years into an
equivalent uniform series of A value

• F/G factor for future worth: G(F/G,i,n)

Convert an arithmetic gradient G (without the base amount) for n years into an
equivalent future value at year n

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 Arithmetic (Linear) Gradient Series
Present Worth Factor – P/G Factor
The Present worth factor (P/G) can be expressed in the following
form:
P = G(P/G,i,n) gradient series

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present-worth factor

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 Arithmetic (Linear) Gradient Series
Present Worth Factor – Example
• A textile mill has just purchased a lift truck that has a useful life of five
years. The engineer estimates that maintenance costs for the truck
during the first year will be $1,000

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• As the truck ages, maintenance costs are expected to increase at a
rate of $250 per year over the remaining life

• Assume that the maintenance costs occur at the end of each year. The
firm wants to set up a maintenance account that earns 12% annual
interest. All future maintenance expenses will be paid out of this
account. How much does the firm have to deposit in the account now?

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Arithmetic (Linear) Gradient Series
Present Worth Factor – Example

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The idea here is to have
a strict gradient series
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 Arithmetic (Linear) Gradient Series
Present Worth Factor – Example
• We have: A1=$1,000; G=$250; i=12%; and n=5 years. Find P

• The cash flow can be broken into two components where the first is

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an equal uniform payment series (A1) and the second is a strict
linear gradient series (G)

• P = P1 + P2
P = A1(P/A,12%,5) + G(P/G,12%,5) =
$1,000(3.6048) + $250(6.397) = $5,204

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 Example 2

• A cash flow of $5,000 in year 1 and

amounts decreasing by $400 per year thru year

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5. Assume the interest rate is 12% per year.

• Draw a cash flow diagram of the project

• Calculate present worth of the project 

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 Arithmetic (Linear) Gradient Series
Annul Series Factor – Example
• You want to deposit $1,000 in your saving account at the end
of the first year and increase this amount by $300 for each of

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the next five years

• Then what should be the size of an annual uniform deposit

that yields an equal balance with the above by the end of six
years if the interest rate is 10%?

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 Arithmetic (Linear) Gradient Series
Annul Series Factor – A/G Factor
The equivalent uniform annual series (A value) for an arithmetic
gradient G is found by the following formula:
A = G(A/G,i,n) 

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Arithmetic-gradient
uniform-series factor

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Arithmetic (Linear) Gradient Series
Annul Series Factor – Example

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 Arithmetic (Linear) Gradient Series
Annul Series Factor – Example
• We have: A1=$1,000; G=$300; i=10%, and n=6. Find A

• We have to separate the constant portion of $1,000 from the series

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leaving the gradient series of 0; 0; 300; 600; ….; 1,500

• To find the equal payment series beginning at the end of year 1 and
ending at year 6 we consider:

A = $1,000 + $300(A/G,10%,6) =
$1,000 + $300(2.2236) = $1,667.08

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Arithmetic (Linear) Gradient Series
Annul Series Factor – Example
An alternative way to
solve this question is by
finding the present

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worth of all the
payments and then to
convert P to a uniform
series of A

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 Arithmetic (Linear) Gradient Series
Future Worth Factor – Example
• Suppose that you make a series of annual deposits into a bank
account that pays 10% interest. The initial deposit at the end of the
first year is $1,200

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• The deposit amounts decline by $200 in each of the next four years

• How much would you have immediately after the fifth deposit?

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 Arithmetic (Linear) Gradient Series
Future Worth Factor – F/G Factor
The future worth factor (F/G) can be expressed in the following
form:
F = G(F/G,i,n)

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Arithmetic (Linear) Gradient Series
Future Worth Factor – Example
F = F1 – F2
F = A1(F/A,10%,5) – $200(F/G,10%,5) =

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$1,200(6.105) – $200(11.051) = $5,115

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Engineering Economy

05/10/2023
[2-4]
Time Value of Money
Geometric Gradient Series

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 Geometric Gradient Series
• In geometric gradient series, cash flow increases or decreases
from period to period by a constant percentage

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• This uniform rate of change defines a geometric gradient
series of cash flows

• We will use the term g which is the constant rate of change by

which amounts increase or decrease from one period to the
next

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Geometric Gradient Series

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Present Worth of Geometric Gradient series

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 Geometric Gradient Series
• We need to find the value of the present worth at time = 0 based on
geometric gradient series cash flows starting by the end of period 1
by an amount A1 and increasing by a constant rate of g each period

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• P = A1(P/A,g,i,n)

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 Geometric Gradient Series
Example
• Engineers at a specific company need to make some modifications
to an existing machine

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• The modification costs only $8,000 and is expected to last 6 years
with a $1,300 salvage value

• The maintenance cost is expected to be high at $1,700 the first year,

increasing by 11% per year thereafter

• Determine the equivalent present worth of the modification and

maintenance cost. The interest rate is 8% per year
• Draw cash flow diagram

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Geometric Gradient Series
Example

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 Geometric Gradient Series
Example
• The present worth value is comprised of three components:
 The present modification cost = $8,000
 The present value of the future salvage value

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 The present value of all the maintenance values throughout the 6 years
and these are represented by the geometric gradient series
• PT = –8,000 + 1,300(P/F,8%,6) – Pg

• Pg = A1(P/A,g,i,n) 

• PT = – 8,000 + 819.26 – 1,700×5.9559 = $ –17,305.85

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 Unknown Recovery Period n
Unknown recovery period problems involve solving for n,
given i and 2 other values (P, F, or A)

Procedure: Set up equation with all symbols involved and solve for n

A contractor purchased equipment for $60,000 that provided income of $8,000

per year. At an interest rate of 10% per year, the length of time required to recover
the investment was closest to:
(a) 10 years (b) 12 years (c) 15 years (d) 18 years

2-30
 Unknown Recovery Period n
Unknown recovery period problems involve solving for n,
given i and 2 other values (P, F, or A)
(Like interest rate problems, they usually require a trial & error solution or interpolation in interest tables)

Procedure: Set up equation with all symbols involved and solve for n

A contractor purchased equipment for $60,000 that provided income of $8,000

per year. At an interest rate of 10% per year, the length of time required to recover
the investment was closest to:
(a) 10 years (b) 12 years (c) 15 years (d) 18 years

Solution: Can use either the P/A or A/P factor.

Using P/A:
8000(P/A,10%,n) = 60,000

(P/A,10%,n) = 7.5
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 Unknown Recovery Period n
Unknown recovery period problems involve solving for n,
given i and 2 other values (P, F, or A)
(Like interest rate problems, they usually require a trial & error solution or interpolation in interest tables)

Procedure: Set up equation with all symbols involved and solve for n

A contractor purchased equipment for $60,000 that provided income of $8,000

per year. At an interest rate of 10% per year, the length of time required to recover
the investment was closest to:
(a) 10 years (b) 12 years (c) 15 years (d) 18 years

Solution: Can use either the P/A or A/P factor. Using A/P:
8000(P/A,10%,n) = 60,000
(P/A,10%,n) = 7.5
From A/P column in i = 10% interest tables, n is between 14 and 15 years Answer is (c)

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 Any Issue(s)
Summary of Important Points
In P/A and A/P factors, P is one period ahead of first A

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In F/A and A/F factors, F is in same period as last A

To find untabulated factor values, best way is to use formula or spreadsheet

For arithmetic gradients, gradient G starts between periods 1 and 2

Arithmetic gradients have 2 parts, base amount (year 1) and gradient amount

For geometric gradients, gradient g starts been periods 1 and 2

In geometric gradient formula, A1 is amount in period 1
To find unknown i or n, set up equation involving all terms and solve for i or n
 Chapter 3
Combining Factors
and Spreadsheet
Functions

Lecture slides to accompany

Engineering Economy
7th edition

Leland Blank
Anthony Tarquin
 LEARNING OUTCOMES

1. Shifted uniform series

2. Shifted series and single
cash flows
3. Shifted gradients
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 Shifted Uniform Series
A shifted uniform series starts at a time other than period 1
The cash flow diagram below is an example of a shifted series
Series starts in period 2, not period 1

A= FA = ? Shifted series
Given usually
require the use of
0 1 2 3 4 5 multiple factors
PA = ?

Remember: When using P/A or A/P factor, PA is always one year ahead
of first A
When using F/A or A/F factor, FA is in same year as last A
 Example Using P/A Factor: Shifted Uniform
Series
The present worth of the cash flow shown below at i = 10% is:
(a) $25,304 (b) $29,562 (c) $34,462 (d) $37,908

P0 = ?
P1 = ? i = 10%

0 1 2 3 4 5 6
Actual year
0 1 2 3 4 5 Series year

A = $10,000
Solution: (1) Use P/A factor with n = 5 (for 5 arrows) to get P1 in year 1
(2) Use P/F factor with n = 1 to move P1 back for P0 in year 0

P0 = P1(P/F,10%,1) = A(P/A,10%,5)(P/F,10%,1) = 10,000(3.7908)

(0.9091) = $34,462
Answer is (c)
How much money would be available in year 10 if $8000 is deposited each year in
years 3 through 10 at an interest rate of 10% per year?
Example Using F/A Factor: Shifted Uniform
Series

Cash flow diagram is:

FA = ?
i = 10%
Actual year
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8 Series year
A = $8000

Solution: Re-number diagram to determine n = 8 (number of arrows)

FA = 8000(F/A,10%,8)
= 8000(11.4359)
= $91,487
Shifted Series and Random Single Amounts
For cash flows that include uniform series and randomly placed single amounts:

Uniform series procedures are applied to the series amounts

Single amount formulas are applied to the one-time cash flows

The resulting values are then combined per the problem statement

The following slides illustrate the procedure

Example: Series and Random Single Amounts
Find the present worth in year 0 for the cash flows
shown using an interest rate of 10% per year.
PT = ?
i = 10%
0 1 2 3 4 5 6 7 8 9 10

A = $5000
$2000

PT = ?
i = 10%
Actual year
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8
Series year
A = $5000
$2000
Solution:

First, re-number cash flow diagram to get n for uniform series: n = 8

 Example: Series and Random Single Amounts
PA
PT = ? i = 10%
0 1 2 3 4 5 6 7 8 9 10 Actual year
0 1 2 3 4 5 6 7 8
Series year
A = $5000 $2000

Use P/A to get PA in year 2: PA = 5000(P/A,10%,8) = 5000(5.3349) = $26,675

Move PA back to year 0 using P/F: P0 = 26,675(P/F,10%,2) = 26,675(0.8264) = $22,044

Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933

Now, add P0 and P2000 to get PT: PT = 22,044 + 933 = $22,977

Example Worked a Different Way
(Using F/A instead of P/A for uniform series)

The same re-numbered diagram from the previous slide is used

PT = ? FA = ?
i = 10%
0 1 2 3 4 5 6 7 8 9 10
0 1 2 3 4 5 6 7 8

A = $5000
$2000

Solution: Use F/A to get FA in actual year 10: FA = 5000(F/A,10%,8) = 5000(11.4359) = $57,180
Move FA back to year 0 using P/F: P0 = 57,180(P/F,10%,10) = 57,180(0.3855) = $22,043
Move $2000 single amount back to year 0: P2000 = 2000(P/F,10%,8) = 2000(0.4665) = $933
Now, add two P values to get PT: PT = 22,043 + 933 = $22,976 Same as before

As shown, there are usually multiple ways to work equivalency problems

 Example: Series and Random Amounts
Convert the cash flows shown below (black arrows) into
an equivalent annual worth A in years 1 through 8 (red arrows)
at i = 10% per year.
A=?
0 1 2 3 4 5 6 7 8 i = 10%
0 1 2 3 4 5

A = $3000
$1000

Approaches: 1. Convert all cash flows into P in year 0 and use A/P with n = 8
2. Find F in year 8 and use A/F with n = 8
Solution: Solve for F: F = 3000(F/A,10%,5) + 1000(F/P,10%,1)
= 3000(6.1051) + 1000(1.1000)
= $19,415
Find A: A = 19,415(A/F,10%,8)
= 19,415(0.08744)
= $1698
 Shifted Arithmetic Gradients

Shifted gradient begins at a time other than between periods 1 and 2

Present worth PG is located 2 periods before gradient starts

Must use multiple factors to find PT in actual year 0

To find equivalent A series, find PT at actual time 0 and apply (A/P,i,n)

John Deere expects the cost of a tractor part to increase by $5 per year beginning 4
years from now. If the cost in years 1-3 is $60, determine the present worth in year 0
of the cost through year 10 at an interest rate of 12% per year.
 Example: Shifted Arithmetic
Gradient
John Deere expects the cost of a tractor part to increase by $5 per year beginning 4
years from now. If the cost in years 1-3 is $60, determine the present worth in year 0
of the cost through year 10 at an interest rate of 12% per year.
i = 12%
PT = ? Actual years
0 1 2 3 4 5 10
0 1 2 3 8 Gradient years
60 60 60
65
70
G=5 95
Solution: First find P2 for G = $5 and base amount ($60) in actual year 2

P2 = 60(P/A,12%,8) + 5(P/G,12%,8) = $370.41

P0 = P2(P/F,12%,2) = $295.29
Next, move P2 back to year 0

Next, find PA for the $60 amounts of years 1 and 2 PA = 60(P/A,12%,2) = $101.41

Finally, add P0 and PA to get PT in year 0 PT = P0 + PA = $396.70

 Shifted Geometric
Gradients
Shifted gradient begins at a time other than between periods 1 and 2

Equation yields Pg for all cash flows (base amount A1 is included)

Equation (i ≠ g): Pg = A 1{1 - [(1+g)/(1+i)]n/(i-g)}

For negative gradient, change signs on both g values

There are no tables for geometric gradient factors

 Example: Shifted Geometric
Gradient
Weirton Steel signed a 5-year contract to purchase water treatment chemicals
from a local distributor for $7000 per year. When the contract ends, the cost of
the chemicals is expected to increase by 12% per year for the next 8 years. If
an initial investment in storage tanks is $35,000, determine the equivalent
present worth in year 0 of all of the cash flows at i = 15% per year.
 Example: Shifted Geometric
Gradient

Gradient starts between actual years 5 and 6; these are gradient years 1 and 2.
Pg is located in gradient year 0, which is actual year 4
Pg = 7000{1-[(1+0.12)/(1+0.15)]9/(0.15-0.12)} = $49,401
Move Pg and other cash flows to year 0 to calculate PT
PT = 35,000 + 7000(P/A,15%,4) + 49,401(P/F,15%,4) = $83,232
 Negative Shifted Gradients
For negative arithmetic gradients, change sign on G term from + to -

General equation for determining P: P = present worth of base amount - PG

Changed from + to -

For negative geometric gradients, change signs on both g values

Changed from + to -

Pg = A1{1-[(1-g)/(1+i)]n/(i+g)}
Changed from - to +

All other procedures are the same as for positive gradients

 Example: Negative Shifted Arithmetic
Gradient
For the cash flows shown, find the future worth in year 7 at i = 10% per year
F=?
PG = ? i = 10%
0 1 2 3 4 5 6 7
Actual years
0 1 2 3 4 5 6 Gradient years
450
500
550
600
650
700

G = $-50
Solution: Gradient G first occurs between actual years 2 and 3; these are gradient years 1 and 2
PG is located in gradient year 0 (actual year 1); base amount of $700 is in gradient years 1-6

PG = 700(P/A,10%,6) – 50(P/G,10%,6) = 700(4.3553) – 50(9.6842) = $2565

F = PG(F/P,10%,6) = 2565(1.7716) = $4544

Summary of Important Points
P for shifted uniform series is one period ahead of first A;
n is equal to number of A values

F for shifted uniform series is in same period as last A;

n is equal to number of A values

For gradients, first change equal to G or g occurs

between gradient years 1 and 2

For negative arithmetic gradients, change sign on G from + to -

For negative geometric gradients, change sign on g from + to -