Engineering Economy

Engineering Economy
  Topic 7 – Annuities

 Topic 8 – Gradient

 Topic 9 – Application of Money Time Relationship

Engineering Economy
 Introduction to Gradient
UNIFORM GRADIENT SERIES OF CASH FLOWS

Arithmetic gradient series is a series of payments in

which each payment is - greater than or -
less than previous -

one by a constant amount (

-

nacada/bawas
constant amount and each payment)
-
-
-

GEOMETRIC SERIES OF CASH FLOWS

Geometric gradient series is series of payments where

e
annual payments increase or decrease over time, by a
= -

constant percentage. (constant interest yung pagtaas/pagbaba Kada payment)

-

rate
-
-
-

Engineering Economy
 Arithmetic Gradient Cash Flow
(n-1)G
(n-2)G
4G
3G
2G
G
0

0 1 2 3 4 n-1

P F

Engineering Economy
 ⑧O
Engineering Economy
 -

Engineering Economy
 Arithmetic Gradient Formula
(n-2)G
(n-1)G
4G
3G
2G
s ! G

FORMULA
-- P 0
0
1 2 3 4 n-1
F

P = G ( P/G, i%, n)
T
𝑃=
0[
=
00
- ]

F = G ( F/G, i%, n)
T
𝐹= O[ =
O
−𝑛]

A = G ( A/G, i%, n) O
𝐴=𝐺[ - ]
Engineering Economy
Parang F
 Sample Problem - Arithmetic
The cash flow associated with a strip mining operation is
expected to be $200,000 in year 1, $180,000 in year 2, and
amounts decreasing by $20,000 per year through 8. At an
interest rate of 12% per year, the equivalent annual cash
flow is nearest to:
Solution:
AT = A1 + AG
= 200,000 - 20,000 (A/G, 12%, 8) 𝐴=𝐺[ - ]
= 200,000 - 20,000 (2.9131)
= $142,737.12

Engineering Economy
 Sample Problem - Arithmetic
The cash flow associated with a strip mining operation is
expected to be $200,000 in year 1, $180,000 in year 2, and
amounts- decreasing by $20,000 per year through 8. At an
interest rate of 12% per year, the equivalent annual cash
-
-

flow is nearest to: At Ans =

+ AGs

First Payment
Solution:
-
I

AT = A1 + AG
= 200,000 - 20,000 (A/G, 12%, 8) 𝐴=𝐺[ - ]
200006
= 200,000 - 20,000 (2.9131)
1
180000 = $142,737.12
I poor1111
f
12345678
At =

Aus-AGS
G
i
=

=
$2 0
0
000

12
=
200 . 000 -

20000
[1
A+ $141
.

737
12
=
, .

Engineering Economy
 Geometric Gradient Cash Flow
AN =A1(1+f )N - 1

A3 =A1(1+f )2
A2 =A1(1+f )
A1

0 1 2 3 4 N
End of Period
P

Engineering Economy
 Geometric Gradient
A
Formula
P 1

( P / A, icr , n) if i cr  0
_
1 f
⑤ i f
icr  
nA
↑ir ent 1 f P 1

if icr  0
1 f
i  effectice interest rate
AN =A1(1+f )N - 1

f  rate of increase

A3 =A1(1+f )2
A2 =A1(1+f )
A1

0 1 2 3 4 N
End of Period
P
Engineering Economy
 Sample Problem - Geometric
A mechanical contractor has four employees
whose combined salaries through the end of this year are
$250,000.
To
If he expects to give an average raise of 5% -

each year, calculate the present value of the employee’s

ic =
-

0
salaries over the next 5 years. 12-005
.

It 0 05
Pj Y
.

Let i = 12% per year.

=

_
P =

<500 (1)
$985 =
,
01. The

A1 T

i f P ( P / A, icr , n) if i cr  0
icr   1 f


Solution: 1 f
_
0.12  0.05
250,000
icr   0.06667 P  1  0.05 ( P / A,0.06667,5)
1  0.05
250,000 1  (1  0.06667) 5 
P    $985,003.90
1  0.05  0.06667 
Engineering Economy
 Practice Problem
1.Find the value of each of the following:
a. (A/G, 14.5%,23)
b. (P/G, 12%,10)
c. (F/G,7.8%,21)
a
(t - a in ] -

los- -1) =27

( (+ - 700)
-
+
b) p =

+ ,
=25409

(( 00 2)
+

+
+
c) F 20522
-

Engineering Economy
 Practice Problem
1.Find the value of each of the following:
a. (A/G, 14.5%,23)
b. (P/G, 12%,10)
c. (F/G,7.8%,21)

Engineering Economy
 2. Compute for the present value
150
100
G 5)
50 =

0 P
=

G(P/a ,
0 .
1
, 4)
-
- [11 -]
⑨
I
2
Y ↑
i= 10% 0 . 1

P = 218 .
al
-

Engineering Economy
 2. Compute for the present value
150
100
50
0

i= 10%

Engineering Economy
 Practice Problem 200
150
100
3. Compute the 50
value of the
amount of F 0 1 2 3 4
i= 10%
G =
56

F
G(F( 5)
=
0 . 1
,
,

=
(note :
If you use F/G or P/G alone to find the total P or G,

F
=

552 55
.

always include year zero sa totan n)

T

Engineering Economy
 Practice Problem 200
150
100
3. Compute the 50
value of the
amount of F 0 1 2 3 4
i= 10%

Engineering Economy
 P F
4Determine the equivalent present worth, future worth
-
A
and uniform annual worth of the following cash flow
diagram. The interest rate is 15% per year
compounded semiannually.

0 1 2 3 4 7 EOY

2000
2500
3000
3500

5000

Engineering Economy
 4Determine the equivalent present worth, future worth
and uniform annual worth of the following cash flow
diagram. The interest rate is 15% per year
compounded semiannually.
0 1 2 3 4 7 EOY

2000
2500
3000
3500

5000

Engineering Economy
 4Determine the equivalent present worth, future worth
and uniform annual worth of the following cash flow
diagram. The interest rate is 15% per year
0 1 2 3 4 7 EOY
compounded semiannually.
3 U S .

2000

I
POTAL =?

F7 =? 2500
Ar7 =
?

A ,
=
2000
3000 G S
[1 %5)
.

155625
leftar = + =

1 =
0 .
G =
200

PTOTAL =
Pus + Pas
3500
=[PA ,
0 .
155425 , 77 +
5/ *
/ ,
0 .
155625 , 77
=

2000/CH0155/H G555 -

From :
Fuso 5000
PTOTAL 15 155 69557
7)
P(F/p
=
=
155625
.

,
0 Pota,
T
,
.

,
(* If nakuha mo na
yung
it to
you can just use
nalang
Al -z =

p(A/p ,
0 1556257)
.

,
=
13 ,
155 .

69557(1 + 0 .

155625)7 get Fz)

=
13155 .

69557/1-1 %5562 257) = 3 ,

215 . 640709
T
Fz =
36 , 210 . 32

Engineering Economy
Engineering Economy
 4. Suppose a man receives an initial annual salary of
$60,000,E increasing at the rate of $5,000 a year. If
#

I
money is worth 10%, determine his equivalent uniform
70 000
salary for the period of 8 years. 95000

(sinvention)
↑
!
65000 1
Yes
11
60 000 M Take mote of
this

+ Y us

N
012345678

i =
0 . 10 (n = 8
yrs)

A, =
$60 ,
000

G =
$5 , 000

ATOTAL =?

ATOTAL Aus AGs

=

= 60 , 000 + G( *
/ ,
0 1
.

, 8)
=
60 , 000 +
5000 EDO-1 DON'T FORGET !

Am =

$75 ,
022 . 39
T

(Note :
Aus is always A , (v)

Engineering Economy
 4. Suppose a man receives an initial annual salary of
$60,000, increasing at the rate of $5,000 a year. If
money is worth 10%, determine his equivalent uniform
salary for the period of 8 years.

Engineering Economy
 Refer to the cash flow diagram below, solve for the unknown
quantity the following that makes the equivalent value of cash
outflows equal to the equivalent value of the cash inflow, F.
a) If F = $10,000, G = $600, and N = 6, then i = ?
b) b. If F = $10,000, G = $600, and i = 5% per period, then N =
?
c) c. If G = $1,000, N = 12, and i = 10% per period, then F = ?
d) d. If F = $8,000, N = 6, and i = 10% per period, then G = ?
a) (F/G ,
i , G)

-(x i) b)
+ -1
F =
-

00(( i) -
+
10000 =

i =

b) (7/G ,
0 .
05
,
n)

Engineering Economy
 Suppose that the parents of a young child decide to make annual
deposits into a savings account, with the first deposit being
made on the child’s fifth birthday and the last deposit being
made on the 15th birthday. Then, starting on the child’s 18th
birthday, the withdrawals as shown will be made. If the effective
annual interest rate is 8% during this period of time, what are
the annual deposits in years 5 through 15?

Engineering Economy
 5. An increasing annual uniform series begins at
--

the end of second year and ends after fifteenth

year. What is the value of gradientO
G that makes -

the gradient series equivalent to a uniform flow

Po -

↑ of payments
=
of Php
↑
900 per year for seven years
"
at 12% per year compounded
i annually? ( &

* TIP :
If mga ganding
equate

C345415
cases mo
,

0 I =
01234567 lang sil both it)

G =
?
! i
A

=
=

0
#900(n
.

12/yr
=
=
yrs)

Po' =
po"
(P/G 0 .

12 15) =
(P(A ,
0 .
1
, 7)

900/-CIOT
, ,

⑳) =

G =
F129 09 .

Engineering Economy
 5. An increasing annual uniform series begins at
the end of second year and ends after fifteenth
year. What is the value of gradient G that makes
the gradient series equivalent to a uniform flow
- -

of payments of Php 900 per year for seven years

at 12% per year compounded annually?

Engineering Economy
 6. Dr. Anderson plans to make a series of gradient type
withdrawals from her savings account over a 10-year period
beginning at the end of the 2nd year. What equal annual
withdrawals from year 1 to year 10 would be equivalent to
withdrawal of P1,000 at the end of the 2nd year, P2000 at the
end of 3rd year……..P9000 at the end of 10th year, if the bank
pays 9% per year compounded annually?

Engineering Economy
 6. Dr. Anderson plans to make a series of gradient type
withdrawals from her savings account over a 10-year period
-

beginning at the end of the 2nd year. What equal annual

-

withdrawals from year 1 to year 10 would be equivalent to

withdrawal of P1,000 at the end of the 2nd year, P2000 at the
end of 3rd year……..P9000 at the end of 10th year, if the bank
pays 9% per year compounded annually?

Engineering Economy
 7. Land is purchased for $25,000. It is agreed that
land will be paid for every year over a five year period
with annual payments and using a 12% annual
compound interest rate. Each payment is to be $2000
greater than the previous payment. Determine the size
-

of the last payment.

5000
112345

H AtoTAL Aus AG
=
+ .
S

( A
/p ,
0 . 12 ,
5) =
Aus + ( *
/G ,
0 . 12
,
5)
20nor
+
6000 At 8000 =?
15000[ 5) =

=+ 1000 in
i
=>
=
0 . 12 $3 , 386 .
054294

2000
=

Payment A + 8000
=

Last

=
3 ,
384 . 054299 + 8000 =
$11 , 386 .

05

Engineering Economy
 7. Land is purchased for- $25,000. Is it is agreed that
land will be paid for every a over a five year period with
annual payments and using a - 12% annual compound
interest rate. Each payment is to be $2000 greater than
-

the previous payment. Determine the size of the last

payment.

Engineering Economy
 8. A company borrows P25,000 at an interest rate of
15% compounded monthly with the agreement that the
loan will be repaid for 8 annual payments. The
repayment scheme will be such that each payment will
be P600 larger than the preceding one, with the first
payment to be made 3 years after the loan is negotiated.
#25 , 600 Pc =
F2
Determine the amount of the third payment?
1

·
?
A =

Fa =
p(7/p ,
0 16075 .

, 27
=
25000(1 + 0 .

16075)
=
#33 , 683 .
77626 =
Pa

* TOTAL =
An . s + AGS

(A/p ,
0 .
16075
,
8) =
Ans + G
( *
/6 ,
0 .
16075 , 8)
33683 776260 16075
I ] 2000 1075 111007st0-17
.

Ans +
-

.
=

3 + 0 10075)
-

1
.

-
.

Ans #6 , 132
39
=

Engineering Economy
At 4200
 8. A company borrows P25,000 at an interest rate of
15% compounded monthly with the agreement that the
loan will be repaid for 8 annual payments. The
repayment scheme will be such that each payment will
be P600 larger than the preceding one, with the first
payment to be made 3 years after the loan is negotiated.
Determine the amount of the third payment?

Engineering Economy
 9. A company must make a license payment for a process that they
have adopted for a new plant. The payment will begin at P10,000, -

and the first payment is expected to be made 3 years from the

present when the plant is completed and in production. Payment
will be made every three months thereafter, and the license
payments are expected to increase by P500 each quarter. What
single present amount is equivalent to the series of license
payments made in 8-years if the interest rate is 8% compounded
Po =?
monthly?
↑
I
PL75E
1 2 is

o
o 4
III 111 II

P2 . 75
=
PROTA
=

Pus + PGs
=

A(P/A ,
0 . 02013 ,
92) +
& %, 0 .
02013 ,
32)
=

10000/1-CIt-3(Geom))
(n =
8 years =
32 gtrs)
P2 75 =
=Tes
[1 208]
.

let/at
-
-
=
+

02013/atr-
=
0 .

Po =
F2zs (P/F ,
0 .

02013
,
11)
-
"
=

-
(1 + 0 .

02013)

Pr

Engineering Economy
 9. A company must make a license payment for a process that they
have adopted for a new plant. The payment will begin at P10,000,
and the first payment is expected to be made 3 years from the
present when the plant is completed and in production. Payment
will be made every three months thereafter, and the license
payments are expected to increase by P500 each quarter. What
single present amount is equivalent to the series of license
payments made in 8-years if the interest rate is 8% compounded
monthly?

Engineering Economy
 O
10. Mr. Smith borrows
bi-monthly, he pays a -
P45,000 at e
10% compounded-

7 year period with semiannual

-

- -
-

payments. Each successive payment P200 -

-
less than
each of the previous payments. If the first payment
starts the 2nd year how much was the first payment?
-

45000
The last payment?
Po =

P1 F1
=

.
5 .
5
A
↑

↓ I

I
S

·
&

#1 .
5
=
Po (F/p ,
0 . 0084 ,
3)
=
45000/1 + 0 .
05084)3
manual pans F15 = 52 ,
217 . 94487
=
Pi . 5

%1
lett/semiannual (1 0 17 05084/semiannual Arth Ans + AGs
=
.

=
+ = 0 .

(A/p ,
0 . 05084
, 14) =
Aus + ( * /6 ,
0 .
05084 , 14)
52 217
,
.

94487/ODE ] =

Ans-aofoto up
Aus Finpayment
Aus-2400 =
Engineering Economy
 10. Mr. Smith borrows P45,000 at 10% compounded
bi-monthly, he pays a 7 year period with semiannual
payments. Each successive payment P200 less than
each of the previous payments. If the first payment
starts the 2nd year how much was the first payment?
The last payment?

Engineering Economy
 11. A marine equipment manufacturer is considering
replacing its wired pendant controllers on its heavy-
duty cranes with new portable IR keypad controllers.
The company expects to achieve cost savings of $4,000
the first year and amounts increasing by $850 each year
for the next 4 years. At an interest rate of 12%/yr
compounded bi-monthly, what is the total present
worth of the savings?

Engineering Economy
 12. An e-commerce company spent $85,000 on a
website to start its business. Expenses were
$50,000 the first year, increasing by $10,000 each
year. Income was $50,000 the first year,
increasing by $40,000 each year. What rate of
return did the company make in its first 5 years?

Engineering Economy
 Practice Problem - Geometric
1. Annual maintenance cost for the machine are 1,500
this year and estimated to increase 10% each year
every year. What is the present worth of the
maintenance cost for 6 years if i= 8%

Engineering Economy
 Practice Problem - Geometric
2. On Domingo’s 23rd birthday you decide to invest
$4,500 (10% of your annual salary) in a mutual fund
earning 7% per year. You will continue to make
annual deposits equal to 10% of your annual salary
until you retire at age 62 (40 years after you started
your job). You expect your salary to increase by an
average of 4% each year during this time. How
much money will you have accumulated in your
mutual fund when you retire?

Engineering Economy
 2. Suppose that the salary for a recent graduate is
expected to increase by 12% per year from a base of
P32,000 over the next five years. If the interest rate is
expected to be 10% per year compounded annually
find the present worth of the said earnings.

Engineering Economy
 Practice Problem - Geometric
3. Tuition costs are expected to inflate at the rate of 8%
per year. The first year’s tuition is due one year from now
and will be $10,000. To cover tuition cost for 4 years, a
fund is to be set up today in an account that will earn
interest at the rate of 5% per year, compounded annually.
How much must be deposited into the fund today in order
to pay the 4 years of tuition expenses?

Engineering Economy
 3. Suppose that a shallow oil well is expected to
produce 12,000 barrels of oil during its first year at
P21 per barrel. If its yield is expected to decrease by
10% per year over the next seven years, what is the
present worth of the anticipated gross revenue? The
interest rate is 17% per year compounded annually.

Engineering Economy
 4. In a geometric sequence of annual cash flows
starting at end of year zero, the value of A0 is
P1,304.35. The value of the last term in the series, A10,
is P5,276.82. What is the equivalent value of A1-10 ? Let
i= 20% per year compounded annually?

Engineering Economy
 5. An End of Year (EOY) geometric gradient lasts for 10
years, whose initial value at EOY three is $5,000 and f
= 6.04% per year thereafter. Find the equivalent
uniform gradient amount (G) over the same time
period (beginning in year 1 and ending in year 12) if
the initial value of the uniform gradient at EOY is
$4,000. The interest rate is 8% nominal,
compounded semiannually.
What is the P for the geometric gradient?
What is the P of the uniform (arithmetic) gradient?
What is the value of G

Engineering Economy