ENGINEERING ECONOMY- LEC 5

Uniform Arithmetic Gradient

In certain cases, economic analysis problems involve receipts or disbursements that increase or decrease by uniform amount each period. For example, maintenance and repair expenses on specific equipment or property increase by relatively constant amount each period. This is know as uniform arithmetic gradient. Suppose that the maintenance expense on certain machine is Php 1000 at the end of first year and increasing at a constant rate of Php 500 each year for the next four years.
3000 2500 2000 1500 1000

This cash flow may be resolved into two components

Uniform Arithmetic Gradient

3000 2500 2000 1500 1000 A A A A A 0 1 2 3 4 5 G 2G 4G 3G

1 P

=
PA

+
2 3 4 5

PG

G is known as the uniform gradient amount P = PA + PG , PA = (A(P/A, i%,n) = A

PG = G(1+i)-2 + 2G(1+i)-3 + 3G(1+i)-4 + + (n-1)(G(1+i)-(n-1) PG P/G, i%, n PG = G(P/G,i%,n) This factor is called the gradient to present worth conversion factor

Example
A loan was to be amortized by a group of four end-of-year payments forming an ascending arithmetic progression. The initial payment was to be Php 5,000 and the difference between successive payment was to be Php 400. But the loan was renegotiated to provide for the payments of equal rather than uniformly varying sums. If the interest rate of the loan was 15%, what was the annual payment?
1200 800 400

6200 5800 5400 5000 5000 5000 5000 5000 0 1 P

=
PA

+
1 2 3 4

PG

Example
1200 800 400 A 0 A A A

=
1 2 3 4

PG

PA

Let A = the equivalent annual payment A = Php 5,000 P/A, i%, n P/A, 15%, 4 = 2.8550 G = Php 400 n=4 I = 15%

Example
P/G, i%, n

P/G, 15%, 4

P/G, 15%, 4 = 3.7865 P = PA + PG = 5000(2.8550) + 400(3.7865) = Php 15,789

A(P/A, 15%, 4) = 15,789 A = 15,789/ 2.8550 = Php 5,530.51 (ans)