Arithmetic Gradient Factors (P / G and A / G)

 An arithmetic gradient series is a cash flow series that either increases or

decreases by a constant amount each period.
 The amount of decrease or the increase is called the gradient or G.

 Therefore, it is composed of base amount and gradient part, as shown

in figure (1).

Base (A)
Base + G
Base + 2G
Base + 3G
Base + 4G

Base + (n-2) G
Base + (n-1) G
Fig. (1):Cash flow diagram of an arithmetic gradient series.

 The gradient (G) begins between years 1 and 2.

 The cash flow in period n (CFn) is given as:
CFn = base amount + (n − 1) G Dr. Dhaheer Abd Al- Samad
 Interest Formulas Relating a Uniform Gradient of Cash
flows to Its Annual and Present Worth

- Finding P When Given G:

= +
0
A A A A A A A
A+
PT A+ PA PG
A+
A+
A+
 The total present worth PT of a gradient series must consider the base (A)
and the gradient (G) separately, as shown in the above figure.
 Let PA be the present worth of the base amount (A) starting from the end of
period 1 extending through period n.
 Let (+PG) be the present worth of an increasing gradient and (−PG) be the
present worth of an decreasing gradient.
 Therefore: PT = PA + PG and PT = PA − PG for increasing and decreasing
gradient series, respectively.
Dr. Dhaheer Abd Al- Samad
 The present worth of the gradient series (PG) can be calculated using the
following equation:

 Using the interest Table, the present worth of the gradient series (PG) can be
calculated as follows:
PG = G (PG/G, i %, n)

Dr. Dhaheer Abd Al- Samad

Interest Table:

Dr. Dhaheer Abd Al- Samad

Example (1):
On a certain earthmoving equipment, it is estimated that the maintenance
expense will be as follows:
End of Year Maintenance cost
1 $1,000
2 2,000
3 3,000
4 4,000
What is the equivalent present worth of maintenance cost for the earthmoving
equipment if 6% interest is used?
Solution:
4000 3000

PT = ? 3000 PA = ? 2000
2000 G 1000
1000 1000 1000 1000
1000

= + 0
0 1 2 3 4 0 1 2 3 4

PT = PA + P G
PT = A (P/A, 6%, 4) + G (PG/G, 6%, 4)
= 1,000 * (3.4651) + 1,000 * (4.946) = $ 8411.1 Dr. Dhaheer Abd Al- Samad
- Finding A When Given G:

=
AG

 Let (+AG) be the annual worth of an increasing gradient and (−AG) be the
annual worth of an decreasing gradient.
 The equivalent annual worth AT is the sum of the base amount series annual
worth A and gradient series annual worth AG .
 Therefore: AT = A + AG and AT = A − AG for increasing and decreasing
gradient series, respectively.

Dr. Dhaheer Abd Al- Samad

 The equivalent uniform annual series A for an arithmetic gradient G is
found by multiplying (P/G, i%, n) by (A/P, i%, n):

In equation form:

- Finding F When Given G:

 An F/G factor (arithmetic-gradient future worth factor) can be found by
multiplying P/G and F/P factors. The resulting (F/G, i%, n) is:
FG = G (P/G, i%, n) (F/P, i%, n)
= G (F/G, i%, n)
In equation form:

Dr. Dhaheer Abd Al- Samad

Example 2:
Compute the equivalent annual series in years 1 through 7 for the cash flow
estimates given below when applicable interest rate is 8%.
0 1 2 3 4 5 6 7

50 50 50
70
i = 8% 90
110
Solution: 130

AT = A + AG

= 50 + AG

Dr. Dhaheer Abd Al- Samad

Example 3:
Compute the equivalent annual worth with i = 10 % per year for the cash flow
shown below:
End of Year Cost
1 $24,000
2 18,000
3 12,000
4 6,000

Solution:
i = 10 %

= -

AT = A - AG
AT = 24,000 – 6,000 (A/G, 10%, 4)

= 24,000 – 6,000 (1.3812) = $ 15712.8 Dr. Dhaheer Abd Al- Samad

Example 4:
An earth-moving contractor operates a fleet of trucks, and from his company’s
past experience, he has found that a truck normally has a useful working life
of five years. Each truck has an initial capital cost of $ 60,000 and at the end of
the five years period has a salvage value of 10,000. The cost of maintenance of
each truck amounts to $350 for the first year, and increases by $150 for each
succeeding year. If the current interest rate is 10%, answer the following:
a)What is the equivalent annual cost of owing and maintaining each truck?
b) If the contractor can sell the trucks for $20,500 each at the end of the fourth
year, should he be advised to do so? Explain why.
Solution:
a) Equivalent annual cost A1:
A1 = - 60,000 (A/P, 10%, 5) – 350 – 150 (A/G, 10%, 5) + 10,000 (A/F, 10%, 5)
= (-60,000*0.2638) – 350 – (150*1.8101) + (10,000*0.1638)
= - 15828 – 350 – 271.515 + 1638
= - 14811.515 $

Dr. Dhaheer Abd Al- Samad

b) Equivalent annual cost A2:

A2 = - 60,000 (A/P, 10%, 4) – 350 – 150 (A/G, 10%, 4) + 20,500 (A/F, 10%, 4)
= (- 60,000 * 0.31547) – 350 – (150 * 1.3812) + (20,500 * 0.1638)
= - 18928.2 – 350 – 207.18 + 3357.9
= - 16127.48 $

The contractor should not sell the trucks for 20,500 at the end of the fourth year
because A2 > A1 .

Dr. Dhaheer Abd Al- Samad