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Cash Flow Gradients in Economic Appraisal

This document discusses arithmetic gradients in cash flows for economic appraisal projects. An arithmetic gradient is a cash flow series where the amount changes by a fixed amount each period. It can be treated as a base amount from the first cash flow plus a gradient amount starting the following year. The present worth and annual worth of the gradient part is calculated separately using formulas provided. The present/annual worth of the gradient is then added to the present/annual worth of the uniform cash flow series to obtain the overall present/annual worth. The exams for this class will cover calculations for arithmetic gradients but not geometric gradients.

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12 views3 pages

Cash Flow Gradients in Economic Appraisal

This document discusses arithmetic gradients in cash flows for economic appraisal projects. An arithmetic gradient is a cash flow series where the amount changes by a fixed amount each period. It can be treated as a base amount from the first cash flow plus a gradient amount starting the following year. The present worth and annual worth of the gradient part is calculated separately using formulas provided. The present/annual worth of the gradient is then added to the present/annual worth of the uniform cash flow series to obtain the overall present/annual worth. The exams for this class will cover calculations for arithmetic gradients but not geometric gradients.

Uploaded by

Muzzy Vora
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

CPE 522 Economic Appraisal of Chemical & Petroleum Projects

02 Gradients in Cash Flows notes


- 1 -
CPE 522
ECONOMIC APPRAISAL OF CHEMICAL &
PETROLEUM PROJECTS
Arithmetic Gradient Series

An arithmetic gradient is a series in which the amount changes by
a fixed amount each interest period.

Can be considered as a single base amount equal to the first CF
in the series, plus a gradient amount starting the following year.





We need to treat the base amount as a uniform series and add to
it the series formed by the gradient amount.

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

(+)
(-)
A -----------------A +G(n-1)-----------------
CPE 522 Economic Appraisal of Chemical & Petroleum Projects
02 Gradients in Cash Flows notes
- 2 -

To calculate PW (Present Worth) of the GRADIENT part:

) , , / (
) 1 (
1 ) 1 (
) 1 ( ) 1 (
1 ) 1 ( 1
) , , / (
) 1 ( ) 1 (
1 ) 1 (
2
n i G P G P
i i
in i
i
n
i i
i
i
n i G P
i
n
i i
i
i
G
P
G
n
n
n n
n
n n
n
G
=
+
+
=

+
+
=

+
+
=




To calculate AW (with an equivalent uniform series) of the
GRADIENT part, calculate the PW and then multiply by the A/P
Factor:



) , , / (
1 ) 1 (
1
1 ) 1 (
) 1 (
) 1 ( ) 1 (
1 ) 1 (
) , , / )( , , / (
n i G A G
i
n
i
G
i
i i
i
n
i i
i
i
G
n i P A n i G P G A
n
n
n
n n
n
G
=

+
=

+
+

+
+
=
=

CPE 522 Economic Appraisal of Chemical & Petroleum Projects
02 Gradients in Cash Flows notes
- 3 -
Then add the PW or AW of the uniform series:
Remember
1. the gradient may be increasing OR decreasing so be careful
of the sign
2. the gradient series begins one year AFTER the uniform
series so PW refers to two periods before the gradient
starts


P
T
= P
A
P
G


A
T
= A
A
A
G



Our exams will cover arithmetic gradients. You will not be
required to deal with geometric gradients in this class (though
maybe in the real world see Blank & Tarquin, p. 39-40, 44-45).

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