FINANCIAL MATHEMATICS - CHAPTER - GRADIENTS

SOLVED EXERCISES

1. A document requires making 12 overdue monthly payments. If the first payment is $6,000 each.
decreases by $800;
a) What will be the value of the last payment?
b) What will be the final value of all of them, assuming a rate of 36% NM (CM)?

0 1 2 3 4 5 6 7 8 9 10 11 12

Value of the installments for each period

Period Payment
1 6,000
2 5.200
3 4.400
4 3.600
5 2.800
6 2,000
7 1.200
8 400
9 (400)
10 1,200
11 (2.000)
12 2.800

Interest Rate
J=ixm
0.36/12 = i
0.03 = i = 3% EM
Final value
P = (A/i)[1-(1+i)-n]+(g/i)[(1-(1+i)-n) / i ) - ( n * ( 1 + i )-n)]
P = (6.000/0.03)[1-(1+0.03)]-12+(-800/0.03)[(1-(1+0.03)-12)/0.03)-(12*(1+0.03)-1218,725.06
S = P (1+i)n
S = 18,725.06(1 + 0.03)12

S = 26,698.06

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CARLOSMARIOMORALESC – NOVEMBER2009
 FINANCIAL MATHEMATICS - CHAPTER - GRADIENTS
SOLUTIONEXERCISES

2. Find the value of $X of the following cash flow, with interest at 30%

180 200 220

160
120 140

80 80 80 100

0 1 2 3 4 5 6 7 8 9 10

The value of X must be equal to: The value of the series valued at 5 plus the value of (1 and 2),
valued at 5
Value in 2 of the base series 80 and arithmetic gradient of 20
P = (80/0.3)[1 - (1 + 0.3)-8]+(20/0.3)[(1-(1+0.3)-8)/0.3)-(8*(1+0.3)-8$363.58

363.58

80 80

0 1 2 3 4 5 6 7 8 9 10

X
The value of (1) and (2) valued at 5
80(1+0.3)4+ 80(1+0.3)3
The value of X will be equal:

X = 80(1 + 0.3)4(80 + 363.58)(1 + 0.3)31,203.02

3. Find the first payment of a linearly increasing gradient of $300, which has 50 payments and is
equivalent to 50 payments that grow by 20%, with the first payment of $1,000, assume a rate of
20%
To find the first payment of the arithmetic series with g=300 and 50 payments; we must first find
the present value of the geometric series with t=20% and an A= 1,000.
P = A ((1+t)n(1+i)-n-1)/(t-i); if t ≠i
Since t = i then we must use
P = An/(1+i); if t = i
P = 1.000*50/(1+0.2) = 41.666
From this present value, the value of A of the arithmetic series can be calculated with a
g=300.
P = (A/i)[1-(1+i)-n]+(g/i)[(1-(1+i)-n) / i ) - ( n * ( 1 + i )-n)]
41.666 = (A/0.2)[1-(1+0.2)]-50]+ (300/0.2) [1-(1+0.2)-50/0,2]-(50(1+0.2)-50)

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CARLOSMARIOMORALESC – NOVEMBER2009
 FINANCIAL MATHEMATICS - CHAPTER - GRADIENTS
SOLVED EXERCISES

A = $6.835

4. With an effective interest rate of 14%, find the final value of the following series:

Period 1 2 3 4 5 6 7 8 9 10 11 12
Value 300 500 700 900 ["1.100","1.300","1.000"] 700 400 100 -200 -500
1300
1100 1000 700
900
700 400
100
300 500

0 1 2 3 4 5 6 7 8 9 10 11 12

-200
-500

The final value will be equal to the sum of the two increasing and decreasing series valued at (12)
The Value S in the increasing series
First we find P and then S
P = (A/i)[1-(1+i)-n+(g/i)[(1-(1+i)-n)/i)-(n*(1+i)-n)]
P = (300/0.14)[1-(1+0.14)-6]+(200/0.14)[(1-(1+0.14)-6) / 0.14) - (6 * (1 + 0.14)-6)]
P = 2,816.81
S12,816.81(1+0.14)1213,571.13
The S Value of the decreasing series
P in 6:
P = (1000/0.14)[1-(1+0.14)-6 ]+(-300/0.14)[(1-(1+0.14)-6)0,14)-(6*(1+0,14)-6)]
P = 1,413.35
S21,413.35(1+0.14)63,102.26
The future value of the two series will be then:
S = S1+ S2= 13.571,13 + 3.102,26 =16.673,39

5. With a rate of 6%, find the present value of the following series using gradients:

Period 1 2 3 4 5 6 7 8 9 10 11
Value 60 60 60 60 72 86.4 103,68 124,42 149,3 + 9,4 179,16 215

The present value P will be equal to the Present Value of the annuity plus the Present Value Series.
geometric + Present value 9.4
Present value of the annuity
P = A (1 - (1 + i)-n)
P = 60(1-(1+0.06)-3160.38

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CARLOSMARIOMORALESC – NOVEMBER2009
 FINANCIAL MATHEMATICS - CHAPTER - GRADIENTS
SOLVED EXERCISES

The geometric series starting from period 3; with a base fee of 60 and a growth rate of 20%; for
to find the present value we proceed as follows:
P is calculated at 3 as follows:
P = 60((1+0.2)9(1+0.06)-9-1)/(0.2-0.06) = 880.31
P at 0 will be equal to:
P = 880,31/(1+0,06)3739.13
The present value of 9.4
P = 9,4/(1+0,06)9= 5.56
Valor Presente = 160,38 + 739,13 + 5,56 = 905,07
6. Find the present value of an infinite series of payments if the first is worth $1,000 and they are growing.
by 10%. Assume an effective rate of 8%
Considering that it is an infinite geometric series, then:
P = A / (i - t) if t < i and ∞ if t > i
Since t > i then P is infinite

What is the present value of an infinite series of monthly payments that increase by $3 each month?
000 and whose first payment is $20,000. Assume an effective monthly rate of 2.5%.
Respuesta:$5´600.000
Considering that it is an infinite arithmetic series, then:
P = (A/i) + (g/i)2)
P = (20,000 / 0.025) + (3,000 / (0.025)2)
P = $5,600,000

8. To keep a rural road in good condition, the landowners in the region want to...
establish a fund to provide for future repairs. These are estimated at one million
pesos for next year; it is also estimated that its cost will increase every year by
18%. Find the value of the fund, assuming an effective annual interest rate of 28%.

Considering that it is an infinite geometric series, then:

P = A/(i-t) if t<i
P = 1,000,000 / (0.28 - 0.18)
P = 10,000,000

A financial entity lends a client $3 million, with an interest rate of 34.8% NM (CM).
The debtor has a period of 15 years to amortize the debt through monthly payments.
Assuming that the first payment is $10,000 and is due at the end of the first month, what should it be?
the percentage of monthly adjustment of the fee, to settle the debt?
Calculation of interest
J=ixm
0,348/12 = i
i = 0.029 = 2.9 EM
To calculate the incremental percentage, we use the Present Value formula.

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CARLOSMARIOMORALESC - NOVEMBER 2009
 FINANCIAL MATHEMATICS - CHAPTER - GRADIENTS
SOLVED EXERCISES

P = A ((1+t)n(1+i)-n -1)/(t-i)
3,000,000 = 10,000((1+t)180(1+0.029)-180-1)/(t-0.029)
300 = ((1+t)180(1+0.029)-180-1)/(t-0.029)
Solving by trial and error: t = 3.47%

10. The management of a restaurant is offered for one year and it is guaranteed that they will purchase
exactly 6,000 lunches per month during that year, which will be payable in a
only counted at a rate of $500 each, but their total value will be settled at the end of the year without
interests, the person estimates that the cost of the supplies for each lunch will be $200.
which must be acquired and paid at the beginning of each month and their value will increase each
a 5%. The monthly labor cost is considered stable at $250,000 and moreover, it
an initial investment of $1 million will be required for the adaptation of the restaurant. Assuming a
interés mensual del 3%. Calcular cuál será el valor de su ganancia:a)en pesos de hoy y b) en
future pesos.
Respuestas: a) $5´719.285 b) $8´154.333

Value of the lunches for the year: 6,000 x 500 x 12 = 36,000,000 payable in month 12
Cost of lunches: 6000x200 = 1,200,000 – Geometric series, increased by 5% payable
anticipated.
Labor cost: 250,000 - annuality 12 months
Inversión Inicial:$1´000.000 36,000,000

0 1 2 3 4 5 6 7 8 9 10 11 12

1,250,000
1,200,000 +250,000
+ 1,000,000

Profit = Income - Costs (in today's currency)

Raw Material Costs - Present Value of Geometric Series
P = A ((1+t)n(1+i)-n-1)/(t-i)
P = 1,250,000 ((1+0.05)11(1+0.03)-11-1)/(0.05-0.03) = 14,724.096.41
To this present value, the value of the raw material from the first month must be added.
P' = 14,724,096.41 + 1,200,000 = 15,924,096.41
Investment Costs: 1,000,000
Labor Costs - present value of the annuity
P = A (1 - (1 + i)-n)i
P = 250,000(1-(1+0.03)-12)/0.03 = 2,488,501.00
Income – Present value of $36,000,000
P = S/(1+i)12= 25´249.675,69

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CARLOSMARIOMORALESC - NOVEMBER 2009
 FINANCIAL MATHEMATICS - CHAPTER - GRADIENTS
SOLVED EXERCISES

Utilidad = 25´249.675,69 - 2´488.501,00 - 1´000.000 - 15´924.096,41

Utilidad = 5´837.078,28

Profit = Revenue - Costs (in future pesos)

Raw Material Costs - Future Value of an Anticipated Geometric Series
S = A ((1+t)n-(1+i)n)/(t-i)
S = (1,200,000 ((1 + 0.05)12-(1+0.03)12)/(0.05-0.03))(1+0.03)
S = 22´871.898,14
Investment - Future value of the investment
S = P(1+i)n= 1,000,000(1+0.03)121,425,760.89
Labor Costs - future value of the annuity
S = A ((1+i)n- 1)/i
S = 250,000((1+0.03)12-1) / 0.03 = 3,548,007.39
Ingresos – Valor futuro: $36´000.000
Utilidad = 36´000.000- 22´871.898,14- 1´425.760,89- 3´548.007,39
Utilidad = 8´154.334,11

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