A

N 1

( N 1)G
A

( N 2)G

How to recognize the pattern?

The pattern :
A, A + G , A + 2G , A + 3G ,......, A + ( N 1)G
N , is the duration of the series

2 3

0 1

2G

0 1 2 3

1
N

i (1 + i )N 1

Periods

Used to find A, Given G

A = G[ A / G , i , N ]

A=G

2 3 4

General Case

0 1

Gradient series: A pattern of receipts or disbursements

(expenditure) for a series that has a uniform linear
(arithmetic or constant) or geometric increase in each
time period
( N 1)G
A
2G 3G
G

2 3

N 1

A G A 2G

A man has purchased a new car. He wishes to

set a side enough money in a bank account to
pay the maintenance on the car for the first
five years. It has been estimated that the
maintenance cost of a car is as shown. Assume
the maintenance costs occur at the end of each
year and that the bank pays 5% interest . How
much should the car owner deposit in the bank
now?

The pattern :
A, A G , A 2G , A 3G ,......, A ( N 1)G
N , is the duration of the series

0 1

Another Form

0 1 2

G = $0.25M

Solution

Revenue

End of Year

$1M

G = $200

$1.50M

$1.75M

$2.00M

Note: The first G begins at Period 2.

$1.25M

P = $4.2123M + $1.9833M
P = $6.1956M

P = $1M (4.2123) + $0.25M (1.8833) * (4.2123)

P = [A(P / A,6%,5)] + [G( A / G,6%,5)]* (P / A,6%,5)

yrs.

$1M

= [A(F / A,10%,5)] [$G ( A / G,10%,5)]* (F / A,10%,5)

= 1200(6.105) $200(1.8100)(6.1050)
= $7,326.00 $2,210.01
= $5,115.99

0 1 2

Find P & F of the given cash flow. Given i = 6%.

F
F
F
F

Solution

$1200

Find Future Worth F. Given: i = 10%, N = 5 yrs.

$1000

3 4

G = $100 / yr

F = $8.291M " OK"

5 6

10

F = $1M (5.6370) + $0.25M (1.8833) * (5.6370)

F = $5.6370M + $2.6540
F = $8.291M
To check : Use Present worth from above :
F = [P(F / P,6%,5 yrs )] = $6.1956(1.3382)

" #$

F = [A(F / A,6%,5)] + [G ( A / G,6%,5)]* (F / A,6%,5)

10

0 12

( P / F ,6%,1)

( P / A,6%,5)

10

10

0 12

10

OR
F = [$1000 + $100( A / G,6%,5)](F / A,6%,5)* (F / P,6%,4)
F = $8457.23

F = [P(F / P,6%,10)] = $4722.47(1.79085)

F = $8457.23

0 2

P = ($1000 + $100(1.88363) )(4.21236 )(0.94340 )

P = $4722.47

10

10

P = ($1000 + $100( A / G ,6%,5) )(P / A,6%,5)(P / F ,6%,1)

0 2

Solution

10

0 1

$100

2 3

G = $100 / yr

*&
'
#$

&

'
+
'
).

'
,

A(1 + g )1

A(1 + g ) N 1

A(1 + g ) 0

:
:
N

Amount

End of Yr.

g % / yr

A (1 + g ) N 1
(1 + i ) N

A (1 + g ) 0
(1 + i )1
A (1 + g )1
(1 + i ) 2

Present Worth

A = 100 + 100(A/G, 6%, 4)= 100+ 100(1.427)

=$242.70

Solution

%
'
'

12

k =1

(1 + g ) k 1

1
(1 + i) N
1
(1 + i) k

( NA) ( NA)
=
(1 + i) (1 + g )

1 (1 + g ) N (1 + i ) N
ig
5

0 1 2

P = $4,383
If i = 8%, g = 10%. P = $4,804
NA
If i = g = 10%
= 5($1000) / 1.1 = $4,545
(1 + i )

1 (1.08) (1 + 0.1)
P = $1000
0.1 0.08

P = A

for i g

Calculate P. Given A=$1000, i=10%, g=8%, N=5

P=

1
k =1 (1 + i )

g%

(1 + i) k 1
= A
for i = g P = A
k
k =1 (1 + i )

A
(1 + g ) N
for i g P =
1
ig
(1 + i) N

From the above, it can be shown that :

P = A

P / F , i, N =

14

13

0 1

2 3

$ #4

1 (1 .11 / 1 .08 ) 6
+ 1300 ( P / F ,8 %, 6 )
0 .08 0 .11
= 8000 1700 (5 .95559 ) + 819 .26 = $ 17 ,305 .85

PT = 8000 1700

1 (1 + g ) N (1 + i ) N
P g = A
ig

/"0

Engineers at La Ronde, the large amusement park in

Montreal, are considering innovation on the existing
Monster roller coaster to make it more exciting. The
modification costs only $8000 and expected to last 6
years with a $1300 salvage value for the solenoid
mechanisms. The maintenance cost expected to be
high at $1700 at the first year, increasing by 11% per
year thereafter. Determine the equivalent present worth
of modification and maintenance cost. The interest rate
is 8% per year. (Blanky, Tarquin and Iverson)

"

3.

2.

1.

0 1 2

g = 8%

Suppose that an oil well is expected to produce 100,000 barrels of oil

during its first year in production. However, its subsequent production
(yield) is expected to decrease by 10% over the previous years
production. The oil well has a proven reserve of 1,000,000 barrels.
Suppose that the price of oil is expected to be $60 per barrel for the next
several years. What would be the present worth of the anticipated revenue
stream at an interest rate of 12% compounded annually over the next
seven years?
Suppose that the price of oil is expected to start at $60 per barrel during
the first year, but to increase at the rate of 5% over the previous years
price. What would be the present worth of the anticipated revenue stream
at an interest rate of 12% compounded annually over the next seven
years?
Consider part (b) again. After three years production, you decide to sell
the oil well. Assume that the wells remaining useful life is four more
years. What would be a fair price?

P = $3282

"0 $

1 (1 0.08) 5 (1 + 0.1) 5
P = $1000
0.1 (0.08)

Solution

18

17

F P i , N Compound Amount Factor

P Fi , N Present Worth Factor
F Ai , N Compound Amount Factor (U. Series)
A F i , N Sinking Fund Factor (U. Series)
A P i , N Capital Recovery Factor (U. Series)
P Ai , N Series Present Worth Factor

PF
F P
A F
FA
PA
A P

19

$
)
.

'

2:4

7 8 (
) &

+
+ -

' 9

:
"

6
,
$.

)' 9

$300

5%
1

6%

$ 8 8 3 .9 3( F / P , 4 % ,1) + $ 4 0 0 = $ 1, 3 1 9 .2 9
n = 5:
$ 1, 3 1 9 .2 9 ( F / P , 4 % ,1) = $ 1, 3 7 2 .0 6

n = 3:
$ 8 3 3 .9 0 ( F / P , 6 % ,1) = $ 8 8 3 .9 3
n = 4:

$ 3 0 0 ( F / P , 5 % ,1) = $ 3 1 5
n = 2:
$ 3 1 5 ( F / P , 6 % ,1) + $ 5 0 0 = $ 8 3 3 .9 0

n = 1:

Solution

Find the balance at the end of year 5.

$500

6%

4%

$400

4%

F=?

$100

i = 10%

9 10

12

13

14

15

Missing payment

11

$100

P=?

$100

i = 10%

i = 10%

9 10

9 10

11 12 13

$100
14 15

Pretend that we have the 10th

payment

14 15

Add this cash flow to

offset the change

11 12 13

$100

P = $722.05

P + $100( P / F ,10%,10) = $100( P / A,10%,15)

P + $38.55 = $760.61

P=?

Strategy Modify the Cash Flow Series to Have a Standard Pattern

P=?

i = 10%
7

10 11 12

13 14

Payment is made every other year

$10,000

0
C

2
5

3
7

4
9

10 11 12 13 14

C = $10,000( A / P,21%,7)
= $2,850.67

i = 21%

Idea: Since the cash flows occur every other year, let's find out the equivalent
compound interest rate that covers the two-year period.
How: If interest is compounded 10% annually, the equivalent interest rate for twoyear period is 21%.
(1+0.10)(1+0.10) = 1.21

Approach: Modify the Interest Rate

1 2

$10,000