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18. Gradient

The document discusses the concept of arithmetic and geometric gradient cash flow series in engineering economics, focusing on how costs can increase or decrease by a constant amount or percentage over time. It provides examples and formulas for calculating present worth and annual series amounts based on given gradients and base amounts. Additionally, it includes problems to illustrate the application of these concepts in real-world scenarios.

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Arthur Luis
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© © All Rights Reserved
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Download as PPTX, PDF, TXT or read online on Scribd
6 views

18. Gradient

The document discusses the concept of arithmetic and geometric gradient cash flow series in engineering economics, focusing on how costs can increase or decrease by a constant amount or percentage over time. It provides examples and formulas for calculating present worth and annual series amounts based on given gradients and base amounts. Additionally, it includes problems to illustrate the application of these concepts in real-world scenarios.

Uploaded by

Arthur Luis
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Engineering

Economics
CET 0216
PAMANTASAN NG LUNGSOD NG MAYNILA
(University of the City of Manila)

COLLEGE OF ENGINEERING AND TECHNOLOGY


CIVIL ENGINEERING DEPARTMENT
GIEZEL MARIE M. ARCEO, CE, MSCM
Gradient
Gradient
• Assume a manufacturing engineer predicts that the cost of maintaining a robot will
increase by $5000 per year until the machine is retired. The cash flow series of
maintenance costs involves a constant gradient, which is $5000 per year.

• The amount of change is called the gradient.

0 1 2 3 4 n 0 1 2 3 4 n

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

P
Gradient
• An arithmetic gradient series is a cash flow series that either increases or
decreases by a constant amount each period.
0 1 2 3 4 n

A A+G A + 2G A + 3G A + (n - 1)G
• G = constant arithmetic change in
cash flows from one time period to
the next; G may be positive or
negative.
Cash flow (year n), = A + (n – 1)G

Base amount, A

Constant increase, G
Gradient 0 1 2 3 4… 7

• For example, if you purchase a


used car with a 1-year warranty,
you might expect to pay the
gasoline and insurance costs during A A+G A + 2G A + 3G A + (n - 1)G
the first year of operation. Assume
these cost $2500; that is, $2500 is 0 1 2 3 4… 7
the base amount. After the first
year, you absorb the cost of repairs,
which can be expected to increase
each year. If you estimate that total
costs will increase by $200 each
year, the amount the second year is 2500 2500+200 2500+2(200) 2500+3(200) 2500 + (7 - 1)200
$2700, the third $2900, and so on
to year n, when the total cost is 0 1 2 3 4… 7
2500 + Cash
(n −flow (year n), = A + (n – 1)G
1)200.
Base amount, A = $2,500

Constant increase, G = $200


2500 2700 2900 3100 3700
Gradient
• An arithmetic gradient series is a cash flow series that either increases or
decreases by a constant amount each period.
0 1 2 3 4 n

= ±
= Total Present worth
A A+G A + 2G A + 3G A + (n - 1)G
= present worth of the uniform series only
= present worth of the gradient series only
± = + or − sign is used for an increasing (+G) or decreasing (−G) gradient

= ±
= equivalent total annual worth
= annual worth of the uniform series only
= annual worth of the gradient series only
± = + or − sign is used for an increasing (+G) or decreasing (−G) gradient
Recall formulas :

F/P → = P

P=
P/F→

P/A → P= F/A → F=

A= A=
A/P → A/F →
Gradient
• An arithmetic gradient series is a cash flow series that either increases or
decreases by a constant amount each period.
P/G P/G factor = arithmetic gradient present
= ± worth factor
= + ] P/G = ]

P/G A/P A/G factor = arithmetic gradient uniform


= ± A/G series factor
= +G ] A/G = ]

F/G F/G factor = arithmetic gradient future


= ±
worth factor
= + n] F/G = n ]
Gradient
• If the base amount is ignored, a generalized arithmetic (increasing) gradient cash
flow diagram is as shown below. Note that the gradient begins between years 1
and 2. This is called a conventional gradient.

0 1 2 3 4… n

G 2G 3G (n - 1)G

• Remember: The conventional arithmetic gradient starts in year 2, and P is located in


year 0.
Gradient
Problem #
1A local university has initiated a logo-licensing program with the clothier Holister, Inc.
Estimated fees (revenues) are $80,000 for the first year with uniform increases to a
total of $200,000 by the end of year 9. Determine the gradient and construct a cash
flow diagram that identifies the base amount and the gradient series.

Given : Solution :

• A (base amount) = 80,000 = A + (n – 1)G


• = 200,000
= 80000 + (9 – 1) G
200,000 = 80000 + (8) G
Required : G = $15,000

• G=?
Gradient
Problem #
2Neighboring parishes in Louisiana have agreed to pool road tax resources already
designated for bridge refurbishment. At a recent meeting, the 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 area. Further, they
estimated that the deposits will increase by $100,000 per year for only 9 years
thereafter, then cease. Determine the equivalent (a) present worth, and (b) annual
series amounts, if public funds earn at a rate of 5% per year.
Given :

• A (base amount) = 500,000


• G = 100,000
• 9 years
• = 5% per year

Required :

=?
b. = ?
Gradient
Problem #
2

Solution :

= + ]

= + ]

= $7,026,072.252
Gradient
Problem #
2

Solution :

= +G ]

= + 100,000 ]

= $909,908.5007 per year


Gradient
• It is common for annual revenues and annual costs such as maintenance,
operations, and labor to go up or down by a constant percentage, for example, +5%
or −3% per year. This change occurs every year on top of a starting amount in the
first year of the project.
• A geometric gradient series is a cash flow series that either increases or
decreases by a constant percentage each period. The uniform change is called the
rate of change.
0 1 2 3 4 n

• g = constant rate of change, in decimal


form, by which cash flow values increase
or decrease from one period to the next.
A𝟏 The gradient g can be + or −.

(1+g) • = initial cash flow in period 1 of the


A𝟏 (1+g ) 2 geometric series
• = present worth of the entire
3
A𝟏 (1+g ) geometric gradient series,
including the initial amount
A𝟏 ¿
• Note that the initial cash flow is not considered separately when working with geometric
Gradient
• A geometric gradient series is a cash flow series that either increases or
decreases by a constant percentage each period. The uniform change is called the
rate of change.

Present worth of Geometric gradient, : if g Geometric gradient series present


worth factor
= ] P/A = ]

Present worth of Geometric gradient, : if g


= P/A =
Gradient
Problem #
3A coal-fired power plant has upgraded an emission control valve. The modification
costs only $8000 and is expected to last 6 years with a $200 salvage value. The
maintenance cost is expected to be high at $1700 the first year, increasing by 11% per
year thereafter. Determine the equivalent present worth of the modification and
maintenance cost by hand and by spreadsheet at 8% per year.

Given :

• = 8,000
• SV = 200
• 6 years
• = 1,700
• g = 11%
• = 8% per year

Required :

=?
Gradient
Problem #
3
Given :

• = 8,000
• SV = 200
• 6 years Solution :
• = 1,700
• g = 11% = FC + SV
• = 8% per year
= FC + SV (P/F)
Required :
= 8,000 ]
=?
= 8,000 ]

= $17,999.0777
Gradient
Problem #
4Determine the present worth of a maintenance contract that has a cost of $30,000 in
year 1 and annual increases of 6% per year for 10 years. Use an interest rate of 6% per
year.
Given : Solution :

• = 30,000 g
• g = 6%
• 10 years
=
• = 6% per year
=

= $283,018.8679

Required :

=?

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