Beruflich Dokumente
Kultur Dokumente
Presented by
Maj Zahoor
Lecture 5a
Learning Objectives
2
Arithmetic Gradient series
Definition: A collection of end-of-period, increasing cash
payments or receipts arranged in a uniformly increasing series.
The uniform increase in each successive payment is called the
gradient amount, G.
4
Examples
5
Arithmetic Gradient
A1+n-2G
Assume the
following:
A1+2G
A1+G
0 1 2 3 n-1 N
8
8
Example: Linear Gradient
9
9
Arithmetic Gradient combined with a
Uniform Series
Decompose the cash flows into a uniform series
and a pure gradient. Then add or subtract the
Present Value of the gradient to the Present
Value of the Uniform series
10
Example – Present value calculation for
a gradient series
$2,000
$1,750
$1,250 $1,500
$1,000
0
1 2 3 4 5
11
Method 1:
P1 $1,000( P / A,12%,5)
$3,604.80
P2 $250( P / G,12%,5)
$1,599.20
P $3,604.08 $1,599.20
$5,204
12
Method 2:
$2,000
$1,750
$1,250 $1,500
$1,000
0
1 2 3 4 5
$1,000(P/F, 12%, 1) = $892.86
$1,250(P/F, 12%, 2) = $996.49
$1,500(P/F, 12%, 3) = $1,067.67
$1,750(P/F, 12%, 4) = $1,112.16
P =? $2,000(P/F, 12%, 5) = $1,134.85
P=F/(1+i) n $5,204.03
13
Arithmetic Gradient Uniform Series Factor
AG = G(A/G, i, n)
14
Arithmetic Gradient series
1 i ni 1
n
F G 2
i
Can not be measured using Tables
15
Arithmetic Gradient series (contin.)
Recall the single payment present-worth expression:
1
P F n
1 i
Substitute the gradient expression for F:
1 i n ni 1 1
P G
i 2
1 i n
1 i n ni 1
P G
i 1 i
2 n
\ arithmetic gradient
present-worth factor
Example:
P=? i=12%
P=400(P/A,12%,5) + 30(P/G,12%,5)
1 2 3 4 5 Year
0
=400(3.6048) + 30(6.3970)
400 = $1,633.83
430
460
G = 30 490 Answer is (b)
520
A = 400 + 30(A/G,12%,5)
= 400 + 30(1.7746) = 400 + 53.238
=$453.24 19
Points to Remember
Money has a time value because it can
earn more money over time.
Economic equivalence exists between
individual cash flows and/or patterns of
cash flows that have the same value.
Even though the amounts and timing of
the cash flows may differ, the appropriate
interest rate makes them equal.
The purpose of developing various
interest formulas was to facilitate the
economic equivalence computation.
20
Learning Objectives
21
Arithmetic & Geometric Gradient Series
An arithmetic (linear) gradient
changes by a fixed amount for each
time period.
A GEOMETRIC gradient changes by a
fixed percentage for each time period.
22
Geometric Gradient Series
g 0
23
Geometric Gradients: Derivation
24
Geometric Gradient Series
Geometric Gradients Change by the Same Percentage Each Period
0
A P=A{1-[(1+g)/(1+i)]n}/(i-g)
A(1+g)1
Where: A=Cash Flow in Period 1
A(1+g)2
g=Rate of increase
A(1+g)n-1
If g=i, P=An/(1+i)
A1(1+g)N-1
A1(1+g)
A1 P=A{1-[(1+g)/(1+i)]n}/(i-g)
0
1 2 3 N-1 N
g>0
P Find P, given A, g, i, N
26
Gradient Example:
Example: Find the present worth of $1,000 in year 1 and
amounts increasing by 7% per year through year 10.
Use an interest rate of 12% per year.
27
Gradient Example:
Example: Find the present worth of $1,000 in year 1 and
amounts increasing by 7% per year through year 10.
Use an interest rate of 12% per year.
Solution:P=1000[1-{(1+0.07)/(1+0.12)}10]/(0.12-0.07)
= $7,333
P=A{1-[(1+g)/(1+i)]n}/(i-g)
Answer is (b) Where: A=Cash Flow in Period 1
g=Rate of increase
28
Example:
Airplane ticket price will increase 8%
in each of the next four years. The
cost at the end of the first year will be
$180. How much should be put away
now to cover a students travel home
at the end of each year for the next
four years? Assume i = 5%.
29
Solution:
1 (1 g ) n (1 i) n
P A
ig
30
Check
As a check we can also solve this problem without
using the geometric gradient
Year Ticket
1 A1 = = 180
2 A2 = 180 + 8%(180) = 194.40
3 A3 = 194.40 + 8% (194.50) = 209.95
4 A4 = 209.95 + 8% (209.95) = 226.75
P = 180(P/F,5%,1) + 194.40(P/F,5%,2) +
209.95(P/F,5%,3) + 226.75(P/F,5%,4)
=$715.66
There are no tables for the geometric gradient.
31
Future worth Factor
Since F =P(1+i)
Multiplying (P/A,g,i,n) by (1+i) will give F
1 (1 g) (1 i) n n
F P(1 i) A
n
(1 i)
n
ig
(1 i) n (1 g) n
F A
ig 1 (1 g ) n (1 i) n
P A
i g 32
Example
A graduating CE is going to make $35,000/yr
with Granite Construction. A total of 10% of
the CE salary will be placed in the mutual fund
of their choice. The CE can count on a 3%
salary increase with the standard of living
increases for the next 30 years of employment.
If the CE is aggressive and places their
retirement in a stock index fund that will
average 12% over the course of their career,
what can the CE expect at retirement?
(1 i) n (1 g ) n
F A
i g 33
Solution:
A = 35,000 x 0.1 = 3,500
i = 12%
g = 3%
n = 30
(1 i ) n (1 g ) n
F A
i g
(1.12) 30 (1.03) 30
3500 3500 305.92 $1,070,714
0.09
34
1,580
1,440 1,510
1,370
Rs.1,300
0
P =? 1 2 3 4 5
Is it an arithmetic gradient or
geometric gradient example?
Arithmetic gradient
35
PRACTICE - 1
Estimate the amount required to be invested
now in ‘Army Welfare Trust’ at an annual
interest rate of 8%,
for the university education of your younger
brother after 12 years. You would require Rs.
113,200 at the end of 12th year. The required
amount would increase by Rs. 11,500 each
year for the next 3 consecutive years.
[Solve it using only the arithmetic gradient method]
36
PRACTICE – 1 a
Estimate the amount required to be invested
now in ‘Army Welfare Trust’ at an interest rate
of 8% compounded half yearly,
for the university education of your younger
brother after 12 years. You would require Rs.
113,200 at the end of 12th year. The required
amount would increase by Rs. 11,500 each
year for the next 3 consecutive years.
[Solve it using only the arithmetic gradient method]
37