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CTC 475 Review

Uniform Series
Find F given A
Find P given A
Find A given F
Find A given P
Rules:
1. P occurs one period before the first A
2. F occurs at the same time as the last A
3. n equals the number of A cash flows




CTC 475
Gradient Series and
Geometric Series
Objectives
Know how to recognize and solve
gradient series problems
Know how to recognize and solve
geometric series problems

Gradient Series
Cash flows start at
zero and vary by a
constant amount G





EOY Cash Flow
1 $0
2 $200
3 $400
4 $600
5 $800
Gradient Series Tools

Find P given G
Find A given G
Converts gradient to uniform
There is no find F given G
Find P/G and then multiply by F/P or
Find A/G and then multiply by F/A






Gradient Series Rules
(differs from uniform/geometric)


P occurs 2 periods before the first G


n = the number of cash flows +1





Find A given G
EOY Cash Flow
0 0
1 0
2 G
3 2G
4 3G
5 4G
EOY Cash Flow
0 0
1 A
2 A
3 A
4 A
5 A
Find P given G
How much must be deposited in an
account today at i=10% per year
compounded yearly to withdraw
$100, $200, $300, and $400 at
years 2, 3, 4, and 5, respectively?

P=G(P/G
10,5
)=100(6.862)=$686
Find P given G
How much must be deposited in an
account today at i=10% per year
compounded yearly to withdraw $1000,
$1100, $1200, $1300 and $1400 at years
1, 2, 3, 4, and 5, respectively?

This is not a pure gradient (doesnt start
at $0) ; however, we could rewrite this
cash flow to be a gradient series with
G=$100 added to a uniform series with
A=$1000
Gradient + Uniform
EOY Cash Flow
0 0
1 0
2 G=$100
3 G=$200
4 G=$300
5 G=$400
EOY Cash Flow
0 0
1 A=$1000
2 A=$1000
3 A=$1000
4 A=$1000
5 A=$1000
Combinations

Uniform + a gradient series (like
previous example)
Uniform a gradient series
UniformGradient
What deposit must be made into an
account paying 8% per yr. if the
following withdrawals are made:
$800, $700, $600, $500, $400 at
years 1, 2, 3, 4, and 5 years
respectively.

P=800(P/A
8,5
)-100(P/G
8,5
)

Example
What must be deposited into an account
paying 6% per yr in order to withdraw
$500 one year after the initial deposit and
each subsequent withdrawal being $100
greater than the previous withdrawal? 10
withdrawals are planned.
P=$500(P/A6,10)+$100(P/G6,10)
P=$3,680+$2,960
P=$6,640

Example
An employee deposits $300 into an
account paying 6% per year and increases
the deposits by $100 per year for 4 more
years. How much is in the account
immediately after the 5
th
deposit?
Convert gradient to uniform
A=100(A/G6,5)=$188
Add above to uniform
A=$188+$300=$488
Find F given A
F=$488(F/A6,5)=$2,753

Geometric Series
Cash flows differ by a constant percentage
j. The first cash flow is A
1

Notes:
j can be positive or negative
geometric series are usually easy to
identify because there are 2 rates; the
growth rate of the account (i) and the
growth rate of the cash flows (j)


Tools

Find P given A
1
, i, and j

Find F given A
1
, i, and j
Geometric Series Rules


P occurs 1 period before the first A
1


n = the number of cash flows





Geometric Series Equations
(i=j)
P=(n*A
1
) /(1+i)


F=n*A
1
*(1+i)
n-1
Geometric Series Equations
(i not equal to j)

P=A
1
*[(1-((1+j)
n
*(1+i)
-n
))/(i-j)]


F=A
1
*[((1+i)
n
-(1+j)
n
)/(i-j)]
Geometric Series Example
How much must be deposited in an
account in order to have 30 annual
withdrawals, with the size of the
withdrawal increasing by 3% and the
account paying 5%? The first withdrawal
is to be $40,000?


P=A
1
*[(1-(1+j)
n
*(1+i)
-n
)/(i-j)]
A
1
=$40,000; i=.05; j=.03; n=30
P=$876,772
Geometric Series Example
An individual deposits $2000 into an
account paying 6% yearly. The size of the
deposit is increased 5% per year each
year. How much will be in the fund
immediately after the 40
th
deposit?

F=A
1
*[((1+i)
n
-(1+j)
n
)/(i-j)]
A
1
=$2,000; i=.06; j=.05; n=40
F=$649,146
Next lecture
Changing interest
rates
Multiple
compounding
periods in a year
Effective interest
rates