Geometric Gradient Series

Factors
Geometric Gradient Series Factors
 It is common for cash flow series, such as operating costs, construction costs, and
revenues, to increase or decrease from period to period by a constant percentage,
for example 5% per year.
 This uniform rate of change defines a geometric gradient series “g” of cash flows.
 g = constant rate of change, in decimal form, by which amounts increase or
decrease from one period to the next.
 The series starts in year 1 at an initial amount A1, which is not considered a base
amount as in the arithmetic gradient.
 Geometric Gradient Series
Factor
 1 +g  
n

1 −  
 1 +i  
Pg = A1  g ≠i
 i −g 
 
 
nA1
Pg = g =i
(1 + i )
It is possible to derive factors for equivalent A and F values;
however, it is easier to determine the Pg amount and then
multiplying by the A/P or F/P factor.
 Example 2.11
 Engineers at Sea World have completed an innovation on
an existing water sports ride to make it more exciting. The
modification costs only $8000 and is expected to last 6
years with a $1300 salvage value. The maintenance cost
is expected to be high at $1700 the first year, increasing
by 11% per year thereafter. Determine the equivalent
percent worth of the modification and maintenance cost by
hand. The interest rate is 8% per year.
  1 + 0.11  6 
Solution 1 −   
  1 + 0 .08   + 1300( P / F ,8%,6)
P =PT
−8000 − 1700
= -8000 – Pg + −1300(
0.08 0.11 P/F
 , 8% , 6 )
 
 
Determination of an Unknown Interest Rate.
 In some cases, the amount of money deposited and the amount of money
received after a specified number of years are known, and it is the interest rate
or rate of return that is unknown.
 when single amounts, uniform series, or a uniform conventional gradient is
involved, the unknown rate i can be determined by direct solution of the time
value of money equations.
 The IRR spreadsheet function is one of the most useful of all those available.
IRR ( first_cell : last_cell )
 RATE function, also very useful, is an alternative to IRR.
RATE ( number_years , A , P , F )
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
1
P=F
(1 + i ) n
1
3000 = 5000
(1 + i ) 5
1
0.600 =
(1 + i ) 5
0.2
 1 
i =  − 1 = 0.1076
 0.6 
i = 10.76%
Determination of unknown number
of years
 NPER ( i% , A , P , F )

Example 2.14
How long will it take for $1000 to double if the interest rate is 5% per year?
1
P=F
(1 + i ) n
P, F, and A Calculation