A/F and F/A, P/G and A/G

Sinking Fund Factor and Uniform-Series
Compound Amount Factor (A/F and F/A)
]
]
]

− +
+
·
1 ) 1 (
) 1 (
n
n
i
i i
P A
If we substitute the value of P in this relation, we will get a
relation between the A and F
]
]
]

+
·
n
i
F P
) 1 (
1
We will get
]
]
]

− +
+
]
]
]

+
·
1 ) 1 (
) 1 (
) 1 (
1
n
n
n
i
i i
i
F A
]
]
]

− +
·
1 ) 1 (
n
i
i
F A
Simplifying, we get
]
]
]

− +
·
i
i
A F
n
1 ) 1 (
Example 2.5
 Formasa Plastics has major fabrication plants in Texas and Hong Kong. The president
wants to know the equivalent future worth of a $1 million capital investment each year
for 8 years, starting 1 year from now. Formasa capital earns at a rate of 14% per year.
Solution
F = ?
A = $ 1,000,000
n = 8
i = 0.14 (14%)
F = 1000 (F/A, 14%, 8)
Example 2.6
 How much money must Carol deposit every year starting 1 year from now at
5.5% per year in order to accumulate $6,000 seven years from now?
Solution
A = ?
F = $6,000
i = 5%
A = $6000 (A/F, 5.5%, 7)
Interpolation in Interest Tables
Suppose we have an interest factor of 0.14238 for 7% and an
interest factor of 0.14903 for 8% and we want to find out the
value of interest factor for 7.3% than,
14238 . 0 14903 . 0
14238 . 0
7 8
7 3 . 7


·

− X
X = 0.14437
Arithmetic Gradient Factor (P/G and A/G)

An arithmetic gradient factor is a cash flow
series that either increases or decreases by a
constant amount.

The cash flow changes by the same arithmetic
amount each period.

The amount of the increase or decrease is the
gradient.

If a manufacturing engineer predicts that the cost of
maintaining a robot will increase by $500 per year
until the machine is retired, a gradient series is
involved and the amount of the gradient is $500.

G = constant arithmetic change in the magnitude of
receipts or disbursements from one period to the
next; G may be positive or negative.
Example 2.9
 A sports apparel company has initiated a logo-licensing program. it expects to
realize a revenue of $80,000 in fees next year from the sale of its logo. Fees are
expected to increase uniformly to a level of $200,000 in 9 years. Determine the
arithmetic gradient and construct the cash flow diagram.
Solution
increase In 9 years = 200,000-80,000 = 120,000
Gradient = (increase)/(n-1)
Gradient = (120,000)/(9-1) = $15,000 per year
Arithmetic Gradient Factor G
]
]
]

+

+
− +
·
n n
n
i
n
i i
i
i
G
P
) 1 ( ) 1 (
1 ) 1 (
]
]
]

+

+
− +
·
n n
n
i
n
i i
i
i
n i G P
) 1 ( ) 1 (
1 ) 1 ( 1
) , , / (
Arithmetic-Gradient Uniform-Series
Factor
For A/G we know that
]
]
]

− +
+
·
1 ) 1 (
) 1 (
n
n
i
i i
P
A
]
]
]

+

+
− +
·
n n
n
i
n
i i
i
i G
P
) 1 ( ) 1 (
1 ) 1 ( 1
Multiplying the two we get
]
]
]

− +
− ·
1 ) 1 (
1
n
i
n
i G
A
The term in bracket is called the arithmetic-gradient uniform-
series factor
Arithmetic-gradient future worth
factor (F/G)
 This factor can be derived by multiplying the P/G and F/P
factors.
]
]
]

,
`

.
|

− +

,
`

.
|
· n
i
i
i G
F
n
1 ) 1 ( 1
Total Present Worth P
T
The total present worth P
T
for a gradient series must consider the base and
the gradient separately. Thus, for cash flow series involving conventional
gradients:

The base amount is the uniform-series amount A that begins in year 1
and extends through year n. its present worth is represented by P
A
.

For an increasing gradient, the gradient amount must be added to the
uniform series amount. The present worth is P
G
.

For a decreasing gradient, the gradient amount must be subtracted from
the uniform-series amount. The present worth is –P
G
.
P
T
So the general equation for calculating the present worth of conventional arithmetic
gradients are
P
T
= P
A
+ P
G
And
P
T
= P
A
– P
G
Similarly, the equivalent total annual series are
A
T
= A
A
+ A
G
And
A
T
= A
A
– A
G
Where A
A
is the annual base amount and A
G
is the annual amount of the gradient series.
Example 2.10
 Three counties in Florida have agreed to pool tax resources already designated for
county-maintained bridge refurbishment. At a recent meeting, the county engineers
estimated that a total of $500,000 will be deposited at the end of next year into an
account for the repair of old and safety-questionable bridges throughout the three-county
area. Further, they estimate that the deposit will increase by $100,000 per year only 9
years thereafter, then cease. Determine the equivalent (a) present worth and (b) annual
series amount if county funds earn interest at a rate of 5% per year.