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07 Gradient Series

This document discusses linear and geometric gradient series. It provides examples of calculating present value, future value, and equivalent payment for gradient cash flows that increase or decrease at a constant rate over time. It also discusses converting between gradient and equivalent uniform series.

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7 views

07 Gradient Series

This document discusses linear and geometric gradient series. It provides examples of calculating present value, future value, and equivalent payment for gradient cash flows that increase or decrease at a constant rate over time. It also discusses converting between gradient and equivalent uniform series.

Uploaded by

slnyzclr
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Gradient Series

Lecture No. 8
Chapter 3
Contemporary Engineering Economics
Copyright © 2016

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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Linear Gradient Series

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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Linear Gradient Series
An Increasing Linear Strict Gradient Series

!!! Most
problems do
not
correspond
to this form

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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Linear Gradient Series
• Gradient Series as a Composite Series of a Uniform Series
of N Payments of A1 and the Gradient Series of Increments
of Constant Amount G

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Example 1: Find P, given A1, G, N, and i
Maintanence cost of a machine is $1,000 during the first year.
As the machine ages, maintanence cost is expected to increase
at a rate of $250 per year over the remaining life time. Life
time of machine is 5 years. You want to open a maintanence
cost account today that earns 12% annual interest. How much
should you deposit now?

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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Example 2: Find F, given A1, G, N, and i
Given: A1 = $1,200, G = -$200, N = 5 years,
and i = 10% per year

Find: F

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Gradient-to-Equal-Payment Series
Conversion Factor, (A/G, i, N)

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Example 3: Find A, given A1, G, i, and N

John and Barbara open two savings accounts. John puts $1,000
at the end of year 1 and increase this amount by $300 for each
of the next 5 years. Barbara simply deposits the same amount
each year. What should Barbara deposit so that the accounts will
have the same balance?

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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Geometric Gradient Series
Cash flows that
increase or decrease
over time by a constant
percentage (g%) (e.g.
construction costs)
(g>0 or g<0)

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Example 4: Find P, given A1, g, i, and N
A manufacturer uses a compressor that runs 70% of time for 250
workdays and 24 hours. It requires 260 kW of electricity at a rate
of $0.05/kWh. The company has two options:
Option 1: Operate with current system (running costs will
increase by 7% per year for the next 5 years).
Option 2: Replace the old machine with a new one that costs
$28,570. The new machine uses 23% less power.

Which option to choose (i=12%)?

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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Solution

 1  (1  0.07)5 (1  0.12)5 
POld  $54,600  
 0.12  0.07 
 $222,937
PNew  $54,600(1  0.23)(P / A,12%,5)
 $42,042(3.6048)
 $151,552

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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Example 5: Find A1, given F, g, i and N
 Given:
o F = $1,000,000,
o g = 6%,
o i = 8%, and
o N = 20

 Find: A1

Contemporary Engineering Economics, 6e, GE Copyright © 2016, Pearson Education, Ltd.


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