25/09/2022

ENGINEERING
ECONOMICS
ENGG 404
The Time Value of Money
(continuation)

Kristine Mariel B. Bejasa, REE

Lecturer

GRADIENT SERIES
Gradient series is a series of cash flows where the amounts change every
period. The amount of change is called a gradient.

Types of Gradient Series:

1. Arithmetic Gradient Series is a cash flow series that either increases or

decreases by a constant amount each period. Year one is the base amount and
therefore, not part of the gradient series.

G = constant arithmetic change in cash flows from one period to the

next; G may be positive or negative.

Compiled & Prepared by: Engr. KMBBejasa 1

 25/09/2022

GRADIENT SERIES
ARITHMETIC GRADIENT SERIES:

Finding 𝑃 when given G

Finding 𝐴 when given G

Finding 𝐹 when given G 1 (1 + 𝑖) −1

𝐹 =𝐺 −𝑛
𝑖 𝑖

GRADIENT SERIES
EXAMPLE #1: A local university has initiated a logo-licensing program with a well-
known company. Estimated fees (revenues) are Php 80,000 for the first year with
uniform increases to a total of Php 200,000 by the end of year 9. Determine the
gradient and construct a cash flow diagram that identifies the base amount and the
gradient series.
SOLUTION:

𝑏𝑎𝑠𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 = 𝐶𝐹 = 80,000

Total increase over 9 years:

𝐶𝐹 − 𝐶𝐹 = 200,000 − 80,000 = 120,000

𝐶𝐹 − 𝐶𝐹 120,000
𝐺= = = 𝑷𝒉𝒑𝟏𝟓, 𝟎𝟎𝟎. 𝟎𝟎
𝑛−1 9−1

Compiled & Prepared by: Engr. KMBBejasa 2

 25/09/2022

GRADIENT SERIES
EXAMPLE #2: Calculate the future worth of the following 6-year cash diagram if the
interest rate is 10% compounded annually.

SOLUTION:
(1) Note that this series of cash flows can be broken 1000
1200
1400 1600
into an annuity of P1000 and a gradient of P200 per 1800
2000
year.

𝐹 =𝐹 +𝐹

1 + 0.1 − 1 1 1 + 0.1 − 1
𝐹 = 1000 + 200 −6
0.1 0.1 0.1

𝐹 = 7715.61 + 3431.22 = 𝑷𝒉𝒑𝟏𝟏, 𝟏𝟒𝟔. 𝟖𝟑

GRADIENT SERIES
EXAMPLE #2: Calculate the future worth of the following 6-year cash diagram if the
interest rate is 10% compounded annually.

SOLUTION: 1000
1200
(2) Convert the gradient to an equivalent annuity, add the 1400 1600
1800
value to the 1000 annuity then convert to the future. 2000

1 6
𝐴 = 200 − = 𝑃ℎ𝑝 444.711
0.1 1 + 0.1 −1

𝐴 = 1000 + 444.711 = 𝑃ℎ𝑝 1,444.711

1 + 0.1 − 1
𝐹 = 1,444.711 = 𝑷𝒉𝒑𝟏𝟏, 𝟏𝟒𝟔. 𝟖𝟑
0.1

Compiled & Prepared by: Engr. KMBBejasa 3

 25/09/2022

GRADIENT SERIES
EXAMPLE #2: Calculate the future worth of the following 6-year cash diagram if the
interest rate is 10% compounded annually.

SOLUTION:
(3) Treat each cash flow as an individual, single payment,
find the future value of each individual payment and then 1000
1200
add to get the total future value. 𝐹 = 𝑃 (1 + 𝑖) 1400 1600
1800
(use year 6 as focal point) 2000

𝐹 = 1000 (1.1) = 𝑃ℎ𝑝 1,610.51

𝐹 = 1200 (1.1) = 𝑃ℎ𝑝 1,756.92
𝐹 = 1400 (1.1) = 𝑃ℎ𝑝 1,863.40
𝐹 = 1600 (1.1) = 𝑃ℎ𝑝 1,936.00
𝐹 = 1800 (1.1) = 𝑃ℎ𝑝 1,980.00
𝐹 = 2000 (1.1) = 𝑃ℎ𝑝 2,000.00
𝑭𝑻 =𝑷𝒉𝒑𝟏𝟏, 𝟏𝟒𝟔. 𝟖𝟑

GRADIENT SERIES
EXAMPLE #3: Suppose that a certain EOY (end-of-year) cash flows are expected to
be P1,000 for the second year, P2,000 for the third year, and P3,000 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 1st yr.
(b)Uniform annual equivalent value at the end of each of the four years
SOLUTION:
G=1,000 ; n=4; i=15%

𝑷𝒉𝒑𝟑, 𝟕𝟗𝟎. 𝟎𝟎
1000
2000 3000

Take note that the direct use of 𝑷𝒉𝒑𝟏, 𝟑𝟐𝟔. 𝟑𝟎

gradient conversion factors applies
when there is no cash flow at the end
of period one.

Compiled & Prepared by: Engr. KMBBejasa 4

 25/09/2022

GRADIENT SERIES
2. Geometric Gradient Series is a cash flow series that either increases or
decreases by a constant percentage each period. The uniform change is called
the rate of change.
Year 1= A
Year 2 = A(1+f)
Year 3 = A(1+f)2 Years 0 1 2 3
.... n
Year 4 = A(1+f)3
Year n = A(1+f)n-1
A A(1+f)
A(1+f) 2
A(1+f) n-1
𝐴 1 − (1 + 𝑖 )
𝑃 =
(1 + 𝑓) 𝑖

Where: 𝐴 = 𝑡ℎ𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑡ℎ𝑒 𝑓𝑖𝑟𝑠𝑡 𝑐𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 𝑖𝑛 𝑡ℎ𝑒 𝑠𝑒𝑟𝑖𝑒𝑠

𝑓 = 𝑓𝑖𝑥𝑒𝑑 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑜𝑟 𝑑𝑒𝑐𝑟𝑒𝑎𝑠𝑒
𝑖 = −1

GRADIENT SERIES
EXAMPLE #4: Determine the present worth of the following series.
P

SOLUTION:

1+𝑖
𝑖 = −1
1+𝑓
100 110 121 133.10
146.41
𝐴 = 100 ; 𝑓 = 10%; 𝑖 = 12%; 𝑛 = 5

𝐴 1 − (1 + 𝑖 )
𝑃 =
(1 + 𝑓) 𝑖

𝑷𝒉𝒑𝟒𝟑𝟎. 𝟕𝟒

10

Compiled & Prepared by: Engr. KMBBejasa 5

 25/09/2022

AMORTIZATION
• Amortization is any mode of paying debt, the principal, and the interest
included, usually by a series of uniform amounts every period.
• It is used to reflect the decreasing value of intangibles, such as loans,
mortgages, patents, trademarks, and goodwill.

AMORTIZATION SCHEDULE
is a table showing payments throughout the total interest period.

Period (A) (B) (C) (D) = (C)-(B)

Outstanding Interest due at Payment Principal repaid
Principal at the end of at the end of
beginning of period period
period

11

AMORTIZATION
EXAMPLE #5: A debt of P5000 with interest at 12% compounded semi-annually is to
be amortized by equal payments over the next 3 years, the first due in 6 months. Find
the semi-annual payment and construct an amortization schedule.
SOLUTION: Solve for the ordinary annuity, A
0.06(1.06)
𝐴 = 5000 = 𝑃ℎ𝑝1,016.813
(1.06) −1

Period (A) (B) = (A)(0.06) (C) (D) = (C)-(B)

Outstanding Principal Interest due at the Payment Principal repaid at the end of
at beginning of period end of period period
1 P 5,000.000 P 300.00 P 1,016.813 P 716.813
2 4,283.187 256.99 1,016.813 759.822
3 3,523.365 211.40 1,016.813 805.411
4 2,717.954 163.08 1,016.813 853.736
5 1,864.218 111.85 1,016.813 904.959
6 959.258 57.55 1,016.813 959.258
TOTALS 0 1,100.87 6,100.879 5,000.00

12

Compiled & Prepared by: Engr. KMBBejasa 6

 25/09/2022

AMORTIZATION
EXAMPLE #6: A debt of P10,000 with interest at 20% compounded semi-annually is
to be amortized by 5 equal payments at the end of each 6 months, the first payment
is to be made after 3 years. Find the semi-annual payment and construct an
amortization schedule.
SOLUTION: Solve for the deferred annuity, A
Period (A) (B) = (A)(0.10) (C) (D) = (C)-(B)
Outstanding Principal Interest due at the end Payment Principal repaid at the end of
at beginning of period of period period
1 10,000
2
3
4
5
6 A
7 A
8 A
9 A
10 A
TOTALS 11242.41 21242.50 16105.19

13

References:
• Sullivan, William, et al.(2014), Engineering Economy 16th
Edition, Pearson Education, Inc.

• Blank, Leland T.(2014).Basic of Engineering Economy, 2nd

edition, Mc Graw-Hill, New York

• Sta. Maria, Hipolito B. (2000),Engineering Economy Third

Edition

THANK YOU!
CONTACT INFORMATION
[email protected]

21

Compiled & Prepared by: Engr. KMBBejasa 7