TIN 302

Engineering Economics
Dr. Dina Rahmayanti, M.Eng
Department of Industrial Engineering
Andalas University
 Ch 5 Gradient series
The contents of this lecture are based on
Newnan, D.G., T.G. Eschenbach, and J.P.
Lavelle (2011). Engineering Economic
Analysis, (12th ed.), Oxford University Press,
Oxford.

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 Contents
• Arithmetic gradient
– Concept
– Derivation
– Arithmetic gradient present worth factor
– Arithmetic gradient uniform series factor
• Geometric Gradient
– Concept
– Geometric gradient present worth factor
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ARITHMETIC GRADIENT

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 Concept
• It frequently happens that the cash flow series
is not of constant amount of A. Instead, there
is a uniformly increasing series as shown:

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 Concept

P = P1 + P2 = 500 (P/A, i, 5) + 250 (P/G, i, 5)

• Note:
 G = the gradient, the amount of change from period to
period. A constant.
 The first cash flow in the arithmetic gradient series is zero.

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Derivation

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 Derivation
• From geometric progression:

n
1a n
a a 
2 n2 n1 k1
1aa a
k1 1a

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Arithmetic gradient future worth formula

• Arithmetic gradient future worth formula

(Note: there is no F/G in the interest table)

F G 
i2

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Arithmetic gradient present worth factor

• Arithmetic gradient present worth factor

P  G 2 n   G(P/ G,i,n)

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Arithmetic gradient uniform series factor

• Arithmetic gradient uniform series factor

n
n

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 Arithmetic gradient
• Example 1:
It is estimated that the maintenance cost on a
new car will be $400 the first year. Each
subsequent year, this cost is expected to
increase by $100. How much you need to set
aside when you bought a new car to pay all
future maintenance costs if you planned to
keep the vehicle for 7 years? Assume interest
is 5% per annum.

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 Arithmetic gradient
• Example 2
Find P, if i = 5% ?

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GEOMETRIC GRADIENT

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 Arithmetic gradient
• Example 3
Find P, if i = 2% ?

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 Concept
• Earlier (arithmetic gradient), the amount of
change from period to period is a constant
(G).
• Geometric gradient → the percentage (rate) of
change is constant from period to period (g).

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 Concept
• Maintenance costs of a car are $100 the first
year and they increase at a uniform rate, g, of
10% per year.
Year Cash flow
1 100 = 100
2 100 + 0.1 (100) = 100 (1 + 0.1)1 = 110
3 100 (1 + 0.1)1+ 0.1 [100 (1 + 0.1)1] = 100 (1 + 0.1)2 = 121
4 100 (1 + 0.1)2+ 0.1 [100 (1 + 0.1)2] = 100 (1 + 0.1)3 = 133.10
5 100 (1 + 0.1)3+ 0.1 [100 (1 + 0.1)3] = 100 (1 + 0.1)4 = 146.41

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Geometric gradient present worth factor

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Geometric gradient present worth factor

• Example 5:
The first-year maintenance cost for a new
automobile is estimated to be $100, and it
increases at a uniform rate of 10% per year.
Using an 8% interest rate, calculate the
present worth of cost of the first 5 years of
maintenance.

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