IE 307 Engineering Economy 2015-2016; Summer

Gradient Series and Amortization Schedule

Engr. Justiniano B. Menes Jr.

Gradient Series
Engineering economy problems involve a series of disbursements or receipts that increase or
decrease in each succeeding period by varying amounts. If the change in succeeding periods is constant,
then the series is known as a uniform arithmetic gradient. A geometic gradient series is a sequence
consisting of end-of-period, where each payment increases or decreases by a fixed percentage. Payment
begins at the end of the first period.

Uniform Arithmetic Gradient

A + (n-1)G

n-1 n

A A+G A + 2G A + 3G A + (n-2)G
P F
Cash Flow Diagram of Uniform Arithmetic Gradient
(n-1)G
(n-2)G
3G
A 2G
G

n-1 n + n-1 n

P1 P2
The present worth of the arithmetic gradient series:
P = PA + PG
Where: PA = present worth of the first cash flow diagram which is an ordinary annuity

[ ]
PG = present worth of the second cash flow diagram

PG = G(1+i)-2 + 2G(1+i)-3 + 3G(1+i)-4 + ... + (n-1)G(1+i)-n

PG = G[(1+i)-2 + (1+i)-3 + (1+i)-4 + ... + (n-1)(1+i)-n] Eqt’n 1
Multiplying the equation by (1+i):
PG(1+i) = G[(1+i)-1 + (1+i)-2 + (1+i)-3 + ... + (n-1)(1+i)-(n-1)] Eqt’n 2
Subtract 1 from 2:
PG(1+i) – PG = PGi= G[(1+i)-1 + (1+i)-2 + (1+i)-3 + ... +(1+i)-(n-1) + (1+i)-n - n(1+i)-n]
Solving for the sum:
( )
r = (1+i)-1
( ( ) )

( )

[ ]

Where: G = arithmetic gradient change in the periodic amounts at the end of each period
FG = PG(1+i)n

[ ]
IE 307 Engineering Economy 2015-2016; Summer
Gradient Series and Amortization Schedule
Engr. Justiniano B. Menes Jr.

To obtain the equivalent uniform annual amounts, multiply PG by capital recovery factor:
A = PG(A/P, i%, n)

[ ][ ]

[ ]

Functional symbols and formulas used in dealing with uniform arithmeti gradient:
 (A/G, i%, n) = gradient to equivalent uniform series conversion factor

 (P/G,i%,n) = gradient to present worth conversion factor

[ ]

 (F/G, i%, n) = gradient to future worth conversion factor

[ ]

Exercises:
1. The year-end operating and maintenance costs of a certain machine are estimated to be Php
12,000 the first year to increase by Php 2,500 each year during its 4-year life. If capital is worth
12%, determine the equivalent uniform year-end costs.Php 15,397.13

2. A loan has to be amortized by a group of four year-end payments forming an ascending

arithmetic progression. The initial payments are Php 5,000 and difference between successive
payments is Php 400. But the loan was renegotiated to provide for the payment of equal rather
than uniformly varying sums. If the interest rate of the loan is 15%, what was the annual
payment? Php 5530.51
IE 307 Engineering Economy 2015-2016; Summer
Gradient Series and Amortization Schedule
Engr. Justiniano B. Menes Jr.

3. Find the equivalent annual payment of the following obligations at 20% interest. Php 6,725.77
End of year Payment
1 Php 8,000
2 Php 7,000
3 Php 6,000
4 Php 5,000

4. A contract has been signed to lease a building at P20,000 per year with an annual increase of
P1,500 for 8 years. Payments are to be made at the end of each year, starting one year from
now. The prevailing interest rate is 7%. What lump sum paid today would be equivalent to the 8-
year lease-payment plan? Php 147,609.38

5. Suppose a man receives an initial annual salary of Php 60,000, increasing at the rate of Php
5,000 a year. If money is worth 10%, determine his equivalent uniform salary for a period of 8
years. Php 75,022.39
IE 307 Engineering Economy 2015-2016; Summer
Gradient Series and Amortization Schedule
Engr. Justiniano B. Menes Jr.

Uniform Geometric Gradient

G(1+r)n-1

n-1 n

G G(1 + r) G(1 + r)2 G(1+r)3 G(1+r)n-2

P F
Cash Flow Diagram of Uniform Geometric Gradient

[ ] * + * + * + * +

,[ ] * + * + * + * +-

Multiply equation by: * +

,* + * + * + * + * +-

Let: x =

[ ]

( )( )

( )( )
If r = 1:

( )

( )( )

( )

To obtain the equivalent uniform annual amounts, multiply P by capital recovery factor:

( )( )( )
IE 307 Engineering Economy 2015-2016; Summer
Gradient Series and Amortization Schedule
Engr. Justiniano B. Menes Jr.

A more convenient notation is using convenience rate (iCR):

( )

,* + * + * + * + * +-

[ ]

[ ]

Exercises:
1. Annual maintenance costs for a machine are Php 1,500 this year and are estimated to increase
10% each year every year. What is the present worth of the maintenance costs for six years if i
is:
a. 8% Php 8,728.79
b. 10% Php 8,181.82
c. 12% Php 7,685.40

2. Ronald makes year-end deposits of Php 500, the first year increasing the next years deposit by
10% until the end of the 10th year. John makes equal year end deposits of Php 700 each year for
10 years. If interest on both funds is 12% compounded annually, who will be able to save more
at the end of ten years?
IE 307 Engineering Economy 2015-2016; Summer
Gradient Series and Amortization Schedule
Engr. Justiniano B. Menes Jr.

3. A company owes Php 80,000 which includes the interest, to be paid one year from now. To
provide for the repayment of this debt, the company deposits Php 2,000 at the beginning of the
first month, Php 3,000 at the beginning of the second month, increasing the deposits in each
succeeding by 50% until the beginning of the 12th month. These amounts earn interest at the
rate of 9% compounded monthly. Will the total amount in the fund at the end of 12 months be
sufficient to repay the debt? If not, how much more is needed?

Continuous Compounding in Annuity

For annuity with interest rate that is compounded continuously, the formulas will be:

( )

( )

Sample problem:
1. A present loan of Php 12,000 is t be repaid by equal payments every 6 months over the
next 8 years. If the interest rate is 7% compounded continuously. What is the amount of
each payment? Php 996.84

Continuous Compounding and Continuous Cash flows

Continuous flow of funds means a series of cash flows occuring at infinitesimally short
intervals of time, this corresponds to an annuity having an inifnite number of short periods. In
such case, the interest is normally compounded continuously. Thus, the formulas for
continuous compounding continuos cash flows are:
̅( )

̅( )

Sample Problems:
1. What will be the future equivalent amount of the end of five years of a uniform
continuous cash flow at the rate of Php 500 per year for the five years with interest rate
of 8% compounded continuously? Php 3,073.90
IE 307 Engineering Economy 2015-2016; Summer
Gradient Series and Amortization Schedule
Engr. Justiniano B. Menes Jr.

2. What is the present equivalent of the following continuous fund flows situations?
a. Php 1,000,000 per year for 4 years at 10% compounded continuously
b. Php 500 per quarter for 6.75 years at 20% compounded continuously

Amortization
Amortization is any method of repaying a debt, the principal and interest included,
usually by a series of equal payments at equal interval of time. Amortization schedule is a table
showing the payments thrpughout the total interest period.

Typical content of an Amortizaiton Schedule

Principal at the Principal at
Interest per Periodic Payments to
Period Beginning of each the end of
Period Payment the Principal
Period each Period
1 P Pi X X – Pi = Y P–Y
2 P-Y (P-Y)i ...
3 N N

Sample problem:
1. A debt of Php 5,000 with interest at 12% compounded semi-annually is to be amortized
by equal semiannual payments over the next 3 years, the first due in 6 months. Find the
semiannual payment and construct an amortization schedule. Php 1,016.82

Principal at the Principal at

Interest per Periodic Payments to
Period Beginning of each the end of
Period Payment the Principal
Period each Period
IE 307 Engineering Economy 2015-2016; Summer
Gradient Series and Amortization Schedule
Engr. Justiniano B. Menes Jr.

2. A loan of Php 100,000 must be repaid by a uniform amount every year for 10 years at
10% interest per year. Determine the amount of periodic payment and contruct the
amortization schedule. Php 16,274.54

Principal at the Principal at

Interest per Periodic Payments to
Period Beginning of each the end of
Period Payment the Principal
Period each Period

3. A loan of Php 10,000 must be repaid by monthly payments for 1 year at 12% interest
rate compounded monthly. However, the borrower missed the first four payments. He
has to repay the loan, the principal and the interest included by making his first
payment a the end of the 5th month increasing it by 12% per month. What are the
ampount of each payment? Construct the amortization schedule.

Principal at the Principal at

Interest per Periodic Payments to
Period Beginning of each the end of
Period Payment the Principal
Period each Period