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NE 364
Engineering Economy
Lecture 6
Money-Time Relationships and Equivalence
(Part 4: Gradient Series)
4G
3G
2G
G
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Change by a Constant Amount
In uniform gradient, the cash-flow changes by a
constant amount each period.
The table below shows such a gradient.
End of Period Cash Flows
1 0
2 G
3 2G
: :
N (N-1)G
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P
Uniform Gradient Cash-flows
Equivalent P is located
one period before the
Gradient starts.
OR
Two periods before the
first positive G
First positive G
The Gradient
starts with zero
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P
From Gradient to Annuity
0 1 2 3 4 5 6
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From Gradient to Annuity
P
0 1 2 3 4 5 6
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From Gradient to Annuity
P
P=G(P/G, i%, N)
A=G(A/G, i%, N)
0 1 2 3 4 5 6
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We can also find A or F
equivalent to a uniform
gradient series.
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Finding F when given G
F=P * (F/P, i%,N)
=G(P/G,i%,N)*(F/P,i%,N)
OR
F=A * (F/A, i%,N)
=G(A/G,i%,N)*(F/A,i%,N)
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Example 1
As an example of the straightforward use of the gradient
conversion factors, suppose that certain EOY cash flows
are expected to be $1,000 for the second year, $2,000 for
the third year, and $3,000 for the fourth year and that, if
interest is 15% per year, it is desired to find:
a. present equivalent value at the beginning of the first
year
b. uniform annual equivalent value at the end of each of
the four years.
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Example 2
Certain operating savings are expected to be 0 at the end
of the first six months, to be $1,000 at the end of the
second six months, and to increase by $1,000 at the end
of each six-month period thereafter, for a total of four
years. It is desired to find the equivalent uniform amount,
A, at the end of each of the eight six-month periods if the
interest rate is 10% per each six-month period.
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Example 3
As a further example of the use of arithmetic gradient
formulas, suppose that we have cash flows as follows:
Also, assume that we wish to calculate their present
equivalent at i=15% per years, using gradient conversion
factors.
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Solution
$8,000
$7,000
$1,000
$6,000
$1,000
$5,000
$1,000 This can be G
G=1000
$5,000
0 1 2 3 4
This cannot be G because it does not repeat in
the next periods
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Solution cont.
The cash-flow can be divided into two cash-flows:
① Annuity
② Gradient
$8,000
$7,000 ② Gradient
$1,000 G=$1,000
$6,000 Starting from EOY1
$1,000 with a zero
$5,000
$1,000 ① Annuity
A=$5,000
$5,000 $5,000 $5,000 $5,000 Starting from EOY1
0 1 2 3 4
This cannot be G because it does not repeat in
the next periods
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Solution cont.
= =
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Solution cont.
AA=$5,000 AG=$1,000*(A/G,15%,4)
AT = AA+AG = $5,000 + $1,000*(A/G,15%,4) = $6,326.30
PT= AT * (P/A, 15%,4) = $18,061 ✔
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Example 4
For another example of the use of arithmetic gradient
formulas, suppose that we have cash-flows that are timed
in exact reverse of the situation depicted in the previous
example.
Calculate the present equivalent at i=15% per year, using
arithmetic gradient interest factors.
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Solution
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Solution
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