Engineering Economy

Gradient
Uniform Arithmetic Gradient
 An arithmetic gradient series is a cash flow series that either
increases or decreases by a constant amount each period.
 The amount of change is called the gradient
 In certain cases, economic analysis problems involve receipts
or disbursements that increase or decrease by a uniform
amount each period.
 For example, maintenance and repair expenses on specific
equipment or property may increase by relatively constant
amount each period.
 Uniform Arithmetic Gradient
 Illustrative example:
 A manufacturing engineer predicts that the cost of maintaining
a robot will increase by $200 per year until the machine is
retired. The cash flow series of maintenance costs involves a
constant gradient, which is $200 per year

The Cash flow could be divided into two cash flows, the Annuity (BaseValue) and the Gradient)
Uniform Arithmetic Gradient
 Present Worth equivalent of Arithmetic Gradient

G 2G 3G (n  2)G (n  1)G
P    ...  ( n 1)
 .......eqn(1)
(1  i) (1  i) (1  i)
2 3 4
(1  i) (1  i) n

Factor out G and Multiply (1+i)

1 2 3 (n  2) (n  1)
P(1  i)  G(    ...  ( n2)
 ( n 1)
.......eqn(2)
(1  i) (1  i) (1  i)
2 3
(1  i) (1  i)
 Uniform Arithmetic Gradient
Subtract equation 1 from equation 2
1 1 1 1 1 n
Pi  G(    ...  ( n 1)
  )  .......eqn(3)
(1  i) (1  i) (1  i)
2 3
(1  i) (1  i) (1  i)
n n

The term inside the parenthesis except the last term constitute a geometric progression.
The sum of geometric progression can be computed as…
1 1 1
a1  ; a2  ; r 
(1  i) (1  i) 2 (1  i)

a1(1  r n ) 1  (1  i)  n
S ;S  ....eqn(4)
(1  r ) i
Substituting equation 4 to equation 3 yields:
G 1  (1  i)  n n 
P   
i  i (1  i) n 
Uniform Arithmetic Gradient
 Future Worth equivalent of gradient:
 Just convert the Present worth by multiplying the factor
(1+i)^n
n
G 1  (1  i ) n
P  (( ( ))
i i (1  i ) n

F  P(1  i ) n

G  (1  i )  1  n
F   n
i  i 
Uniform Arithmetic Gradient
 Annuity Equivalent of a Gradient
 To solve for the equivalent annuity of a gradient, we need to
equate their present worth equivalent and solve A in terms of G.
 PW(G)= PW(A)

G 1  (1  i)  n n  A  (1  i) n  1
  n
  n 
i  i (1  i)  i  (1  i) 
Simplify the equation will result to:

1 n 
A  G  
 i (1  i)  1
n
Example: Arithmetic Gradient
 Find the present worth of all the cash disbursement using
gradient interest formulas if money is worth 15% per
annum. Annual cash disbursements increases by 1000 every
year thereafter until the end of the fourth year. The first cash
disbursement amounts to 5000.

 Given:
 Gradient - 1000
 First payment – 5000
 Period – 4
 Required: find PW
Example: Arithmetic Gradient
 Find the present worth of all the cash disbursement using
gradient interest formulas if money is worth 15% per
annum. Annual cash disbursements increases by 1000 every
year thereafter until the end of the fourth year. The first cash
disbursement amounts to 5000.
 Possible methods to use:
 Divide the cash flow into two ( annuity cash flow and Gradient
cash flow), then sum the PW of each cash flow
 Convert the Gradient cash flow into its equivalent annuity then
add to the base annuity. Solve for the PW of the total annuity.
 Ans:18,061
Example: Arithmetic Gradient
 Find the equivalent annual payment of the following
obligations at 20% interest.
End of Year Payment
1 8,000
2 7,000
3 6,000
4 5,000

 Solution:
 The series of payments could be converted to a combination of
annuity and gradient. (positive annuity and negative gradient)
 The PW of both these cash flows will be subtracted, then the
resulting PW will converted to A using (A/P,i%,n)
 Ans: 6,725.77