UNIFORM
ARITHMETIC
GEOMETRIC
DAGO
C QUANO
M E JA RE S
M A S U H AY
E P O ND U L A
N
Arithmetic/Linear Gradient
An arithmetic gradient series is a cash f lo w series that
either increases or decreases by a constant amount each
period.
The amount of change is called the gradient.
Arithmetic/Linear Gradient
When calculating the linear gradient series, we must break
up the cash f lows into two series: a uniform series and a
linear gradient series with a cash flow of zero in period 1
Arithmetic/Linear Gradient
Present value of a linear gradient series: used to calculate the
present value (in period 0) of a linear gradient portion of the
series beginning in period 1 (given G, find P).
Formula:
P =Present Value
F =Future Value
A =Cash Flow in the 1st Year
G =Amount of Change/ Gradient
i =Discount rate
N = Number of Interest period
Arithmetic/Linear Gradient
Future value of a linear gradient series: used to calculate the
value of a linear gradient portion of the series at the end of the
last period in the series (given G, find F).
Formula:
P =Present Value
F =Future Value
A =Cash Flow in the 1st Year
G =Amount of Change/ Gradient
i =Discount rate
N = Number of Interest period
Arithmetic/Linear Gradient
Notes on using the linear gradient series:
• As with the uniform series that calculating the present value of a linear
gradient series places the present value one period before the cash flows
begin; if cash flows begin in period 1, the P will occur in period 0.
• N is the number of interest periods, including the period in which the
gradient’s cash flow is zero.
• G can be positive or negative. If the cash flows are increasing each period,
then G is positive; if they are decreasing, then G is negative.
• A is always equal to the cash flow in the first period.
Arithmetic/Linear Gradient
Cash Flow Diagram
Arithmetic Gradient
Problem 1:
A second hand motorcycle can be purchased by 5 end-of-month
payments. The first payment would be Php5,000 and would increase
by Php500 every payment. Should a buyer opt to pay it at once rather
than by installments, how much would it cost him if money is worth
6% compounded quarterly?
Arithmetic Gradient
Problem 2:
Gary decides to start saving for his newborn twin daughters’ post
secondary education. He can afford to save $1000 in the first year,
$1100 in the second year, $1200 in the third year, and so on,
increasing the amount by $100 each year. The savings account pays
5% interest, compounded annually. How much money will he have in
the account after 18 years?
Geometric Gradient
A geometric gradient series is a cash f lo w series that either
increases or decreases by a constant percentage each period.
The uniform change is called the rate of change.
Geometric Gradient
Formula:
P =Present Value
F =Future Value
A1 =Cash Flow in the 1st Year
G =Constant Rate of Change/ Gradient
i =Discount rate
N = Number of Interest period
Geometric Gradient
Formula:
P =Present Value
F =Future Value
A1 =Cash Flow in the 1st Year
G =Constant Rate of Change/ Gradient
i =Discount rate
N = Number of Interest period
Geometric Gradient
When using the geometric gradient series formulas:
• N is the number of interest periods, including the initial period where the
gradient is equal to zero.
• The discount rate, i, and the gradient, g, must be specified.
• The cash flow is NOT divided into uniform and gradient components. It can be
solved directly using the above formulas.
Geometric Gradient
Cash Flow Diagram
Geometric Gradient
Problem 1:
A farmer hires 5 men to clear his ranch from grasses and bushes
for 5 days. He pays Php 350 for each of them per day. He projects
that in the succeeding years, his expense will decrease by 10% every
year. What will be the present value of these payments for the f irst 10
years if i=5%?
Geometric Gradient
Problem 3:
An Engineer borrowed an amount at a certain bank that can be
paid by four end-of-year installments, of which the f ir st payment of
fails after three years. If the f ir st payment will be Php 100,000 but
increases by 8% every year thereafter, how much did he borrow if
interest rate is also 8%?
Geometric Gradient
Problem 2:
On your 30th birthday, you decide to invest P20,000 (10% of your
annual salary) in a mutual fund earning 10% per year. You will
continue to make annual deposits equal to 10% of your annual salary
until you retire at age 65. You expect your salary to increase by an
average of 5% each year during this time. How much money will you
have accumulated in your mutual fund when you retire?