Arithmetic Gradient Factors

a cash flow series

either increases or decreases by a constant
amount
the amount is the gradient
cash flow at the end of year 1 is a base
amount

Example:
You purchase a used car with a 1-year warranty.
Assume that gasoline and insurance cost is
$1500; that is $1500 is the base amount.
After the first year, you absorb the cost of repair,
is expected to increase each year.
If you estimate that the total costs will increase
by $50 each year, the amount the second year
is $1550, the third $1600, and so on to year n,
when the total costs is 1500 + (n - 1)50

The cash flow diagram :

0

1
$1500

n-1

$1550 $1600
$1650
$1500
$1500+(n-1)50
+(n-2)50

The cash flow in year n

0

2G

3G

4G

n1

5G
(n2)G

(n1)G

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

CFn = base amount + (n-1)G

Example 2.9
A sport apparel company has initiated a logo-licensing
program. It expects to realize a revenue of $80,000
in fees next year from the sale of its logo. Fees are
expected to increase uniformly to a level of
$200,000 in 9 years. Determine the arithmetic
gradient and construct the cash flow diagram.
Solution
The basic amount is $80,000 and the total revenue
increase is
Increase in 9 year = $200,000 - $80,000 = $120,000

increase
Gradient =
n1

120,000
Gradient =$
=$ 15,000 per year
91
$200,000
$185,000
$155,000

$125,000
$110,000
$95,000
$80,000

year

What can we do ?
Three factors can be derived :
the P/G factor for present worth
the A/G factor for annual series
the F/G factor for future worth
use single-payment present worth
(P/F,i,n) to derive arithmetic gradients

The present worth factor for

arithmetic gradient
0

2
G

3
2G

3G

4G

n-1

(n-2)G

assume : base amount can be ignored

(n-1)G

each value is considered a future amount

P = G(P/F,i,2) + 2G(P/F,i,3) + 3G(P/F,i,4) + ...

+ [(n-2)G](P/F,1,n-1) + [(n-1)G](P/F,i,n)

Derive the equation into

n

1 i i n 1
P / G , i , n =
2
n
i 1 i

as an engineering economy relation

P = G(P/G,i,n)

To find the equivalent uniform

annual series (A value)
A = G(P/G,i,n)(A/P,i,n)
= G(A/G,i,n)
In equation form:
n
1
A = G[]
n

1i 1

expressioninbracketisthearithmeticgradient
uniformseriesfactoror(A/G,i,n)

F/G factor or arithmetic-gradient future worth

factor :
F = G(P/G,i,n)(F/P,i,n)
= G(F/G,i,n)
The resulting factor,
n
1
1
i

1
F = G[
- n]
i
i

The total present worth PT

the base amount is the uniform-series

amount A begin in year 1 through year n

the gradient amount must be added (if

increases) or subtracted (if decreases)
The general equation
PT = PA + PG and

PT = PA PG

AT = AA + AG and

AT = AA - AG

Where
PT = Total present worth
PA = base amount
PG = the present worth of the gradient series
AA = the annual base amount
AG = the equivalent annual amount of the gradient
series
AT = Total annual series

Example 2.10
Three contiguous counties in Florida have agreed to
pool tax resources already designated for countymaintained bridge refurbishment. A a recent
meeting, the county engineers estimated that a total
of $500,000 will be deposited at the end of next
year into an account for the repair of old and safetyquestionable bridges throughout the three-county
area. Further, they estimate that the deposits will
increase by $100,000 per year for only 9 years
thereafter, then cease. Determine the equivalent (a)
present worth and (b) annual series amounts if
county funds earn interest at a rate of 5% per year.

Solution
(a) PT = $500,000(P/A,5%,10) + $100,000
(P/G,5%,10)
= $500,000(7.7217) + $100,000(31.652)
= $7,026,050
(b) AT = $500,000 + $100,000(A/G,5%,10)
= $500,000 + $100,000(4.0991)
= $909,910 per year
and AT occurs from year 1 through year
10

Geometric Gradient Series

Factors
In cash flows for :

operating cost
construction cost
revenues

The cash flow decrease or increase

follow a constant percentage
g = constant rate of change, in decimal form,
increase or decrease from one period to the
next
no base amount

Pg= ?
0

i, g = given
2

The cash flow diagram of increasing geometric

gradient series and present worth g

The cash flow diagram for decreasing gradient

series and present worth
Pg = ?

A1(1+g)
A1 (1+g)
A1

A1(1+i)

n
3

A1(1+i)

n-1

to calculate Pg in period t = 0
geometric gradient series starting in period 1
amount A1;increasing by a constant rate of g
Thus, the engineering economy relation and
factor formulas are
Pg = A1(P/A,g,i,n)
n

1 g
1

1 i
P / A , g , i , n =
i g

gi

n
P / A , g , i , n =
1 i

g=i

Example 2.11
Engineers at Sea World, a division of Busch
Garden, Inc., have completed an innovation
on an existing water sports ride to make it
more exciting. The modification cost only
$8000 and its expected to last 6 years with a
$1300 salvage value for the solenoid
mechanism. The maintenance cost is
expected to be high at $1700 the first year,
increasing by 11% per year thereafter.
Determine the equivalent present worth of
the modification and maintenance cost by
hand. The interest rate is 8% per year.

Solution by hand
The cash flow diagram
PT =?
Pg =?
0

i = 8%
g = 11%

$1300

$1700
$1700(1.11)

$8000
3

$1700(1.11)

$1700(1.11)

Calculate the total PT is

PT = $-8000 Pg + $1300 (P/F,8%,6)
= $-8000 - $1700{(1(1.11/1.08) )/(0.08 -0.11)}
+ $1300(P/F,8%,6)
= $-8000 - $1700(5.9559) + $819.26
= $-17,305.85
6

Determination of an Unknown
Interest Rate
single amounts
uniform series
uniform conventional gradient

non-uniform payments
other factors involved

direct
solution

solve by
trial-and-error

Example 2.12
If Laurel can make an investment in a friend's
business of $3000 now in order to receive
$5000 five years from now, determine the
rate of return. If Laurel can receive 7% per
year interest on a certificate of deposit,
which investment should be made?
Solution
Since only single payment amounts are
involved, i can be determined directly from
the P/F factor

P = F(P/F,i,n) = F[1/(1+i) ]
$3000 = $5000[1/(1+i) ]
0.600 = 1/(1+i)
i = (1/0.6) 1 = 0.1076
or i = 10.76%
5

0.2

Alternatively,the interest rate can be found by

setting up the standard notation P/F relation,
solving for the factor value, and interpolating
in the tables.
P = F(P/F,i,n)
3000 = 5000(P/F,i,5)
(P/F,i,5) = 3000/5000 = 0.60

From the interest tables, a P/F factor of 0.600

for n=5 lies between 10 and 11%. Interpolate
between these two values to obtain i =
10,76%
Since 10.76% is greater than the 7% available
from a certificate of deposit, Laurel should
make the business investment.

Example 2.13
Professional Engineers,Inc., requires that $500
per year be placed into a sinking fund
account to cover any unexpected major
rework on field equipment. In one case, $500
was deposited for 15 years and covered a
rework costing $10,000 in year 15. What rate
of return did this practice provide to the
company ?

Solution
The cash flow diagram:

F = $10,000

i=?
0

9 10 11 12 13 14

15

A = $500

Either the A/F or F/A factor can be used.

Using A/F,
A = F(A/F,i,n)
500 = 10,000(A/F,i,15)
(A/F,i,15) = 0.0500
By interpolation, (interest Tables 8 & 9, n=15
years) i = 3.98%

Determination of Unknown
Number of Years
Necessary to
provide a stated rate of return
determine specified amount available from
an investment