Geometric Gradient Series

Dr. Hassan Ashraf

Assistant Professor_ Civil Engineering Department _ CU Islamabad
_ Wah Campus
 Geometric Gradient Series
Earlier, we saw that the arithmetic gradient is applicable where the period-by-period change
in a cash receipt or payment is a constant amount. There are other situations where the
period-by-period change is a uniform rate, g. Often geometric gradients can be traced to
population levels or other levels of activity where changes over time are best modeled as a
percentage of the previous year. The percentage or rate is constant over time, rather than
the amount of the change as in the arithmetic gradient.

Year Cash Flow

1 100 100
2 100 + 10% (100) = 100 ( 1+0.1)^1 110
3 110 + 10% (110) = 100 (1+0.10)^2 121
4 121 + 10% (121) = 100 (1+0.1)^3 133.1
5 133.1 + 10% (133.1) = 100 ( 1+0.1)^4 146.41

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 2
 Geometric Gradient Series

From the table, we can see that the maintenance cost in any year is

$100 ( 1+g )^ n-1

Stated in a more general form

An = A1 (1+g) ^ n-1

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 3
 Geometric Gradient Series
Where g = uniform rate of cash flow increase/decrease from period to period, that is, the
geometric gradient

A1 = value of cash flow at Year 1 ( $100 in the above table)

An = value of cash flow at any year n

We can find the present worth of geometric gradient series using

P = A1 /(1+g) ( P/A, g’, N)

Where g’ = [(i-g)/(1+g)]

Incase where i = g

P = [ A1/ (1+i)] N , as g’ =0

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 4
 Example No.1
Suppose that your retirement benefits during your first year of retirement are $50,000.
Assume that this amount is just enough to meet your cost of living during the first year.
However, your cost of living is expected to increase at an annual rate of 5% due to inflation.
Suppose you do not expect to receive any cost-of-living adjustment in your retirement
pension. Then, some of your future cost of living has to come from savings other than
retirement pension. If your savings account earns 7% interest a year, how much should you
set aside in order to meet this future increase in the cost of living over 25 years?

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 5
 Example No.1
A1 = 50,000 , g = 5%, i = 7% per year, and N = 25 years

P = $50,000 ( P/A, 7%,25)

= $ 582,679

g’ = ( 0.07 – 0.05) / (1+0.05) = 0.019048 = 1.904% , take it as 2% as we cannot find 1.9% in

the interest tables.

P = 50,000/(1+0.05) (P/A,2%,25)

= 47,619 ( 19.523 )

= 929, 666.67

The required additional savings to meet the future increase in cost of living will be

= 929,666.67 – 582,679 = 346,987.67

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 6
 Example No.2
You want to supplement your retirement income through IRA contributions. You have 15 years
left until retirement and you are going to make 15 equal annual deposits into your IRA until
you retire with the first deposit being made at the end of year 1. You need to save enough so
that you can make 10 annual withdrawals that will begin at the end of year 16. The first
withdrawal will be $10,000, and each subsequent withdrawal will increase at a rate of 4% over
the previous year's withdrawal in line with expected increase in cost-of-living. Your last
withdrawal will be at the end of year 25. What is the amount of the equal annual deposit
amount ( C) for the first 15 years? Assume the interest rate is 8% compounded annually
before and after you retire.

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 7
 Example No.2
First, we will compute the accumulated balance at the end of 15 years.

F15 = C ( F/A, 8%,15) = $ 27.152 C

Now , lets find out the Present worth of geometric gradient series at year 15

First we need to find

g’ = i-g / 1+g = 0.08-0.04/1+0.04 = 0.0384 = 3.84% , les round off the value as 4% in order to
facilitate ourselves in finding out the interest values from interest tables,

P = A1/( 1+g) ( P/A,4%, 10)

= 9615.38 ( 8.111) = 77,990.384

Equating the two values of

27.152 C = 77,990.384

C = $ 2872.36

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 8
 Example No.3
Jimmy Carpenter, a self-employed individual, is opening a retirement account at a bank. His
goal is to accumulate $1,000,000 in the account by the time he retires from work in 20 years’
time. A local bank is willing to open a retirement account that pays 8% interest compounded
annually throughout the 20 years. Jimmy expects that his annual income will increase 6%
yearly during his working career. He wishes to start with a deposit at the end of year 1 and
increase the deposit at a rate of 6% each year thereafter. What should be the size of his first
deposit ? The first deposit will occur at the end of year 1, and subsequent deposits will be
made at the end of each year. The last deposit will be made at the end of year 20.

F = $ 1,000,000 , g = 6% per year , I =8% per year , and N =20 years

F = A1 ( P/A1, 6%, 8%,20) ( F/P , 8% ,20)

g’ = i-g / 1+g = 0.08- 0.06 / 1+ 0.06 = 0.02/1.06 = 0.0189 =1.89% = 2% approx.

F = A1 (P/A1, 2%,20) ( 4.661)

1,000,000 = A1 (16.351) (4.661)

1,000,000/76.212 = 13,121.29

A1= 13,121.29
Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 9
 Thank You

Dr. Hassan Ashraf _ Civil Engineering Department_ CU Islamabad _ Wah Campus _ 26_02_2019 10