Topics Today

• Conversion for Arithmetic Gradient Series

• Conversion for Geometric Gradient Series
• Quiz Review
• Project Review

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 Series and Arithmetic Series
• A series is the sum of the terms of a
sequence.
• The sum of an arithmetic progression (an
arithmetic series, difference between one
and the previous term is a constant)
sn  a  (a  d )  (a  2d )  (a  3d )  ...  (a  (n  1)d )

• Can we find a formula so we don’t have to

add up every arithmetic series we come
across?

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 Sum of terms of a finite AP
S n  a  (a  d )  (a  2d )  ...  [a  (n  2)d ]  [a  (n  1)d ]
S n  a  (a  d )  (a  2d )  ...  (a  nd  2d )  (a  nd  d )
S n  (a  nd  d )  (a  nd  2d )  ...  (a  2d )  (a  d )  a
2 S n  a  (2a  nd )  (2a  nd )  ...  (2a  nd )  (2a  nd )  a
There are (n) 2a terms  2a  n  2an;
There are (n - 1) nd terms  nd  (n - 1)  nd (n - 1) ; Therefore,
2Sn  2an  nd (n  1)
2 S n  n[2a  (n  1)d ]
n
S n  [2a  (n  1)d ]
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 Arithmetic Gradient Series
• A series of N receipts or disbursements that increase
by a constant amount from period to period.
• Cash flows: 0G, 1G, 2G, ..., (N–1)G at the end of
periods 1, 2, ..., N
• Cash flows for arithmetic gradient with base annuity:
A', A’+G, A'+2G, ..., A'+(N–1)G at the end of
periods 1, 2, ..., N where A’ is the amount of the base
annuity

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Arithmetic Gradient to Uniform Series
• Finds A, given G, i and N
• The future amount can be “converted” to an
equivalent annuity. The factor is:
1 N
( A / G, i , N )  
i (1  i )N  1
• The annuity equivalent (not future value!)
to an arithmetic gradient series is A =
G(A/G, i, N)

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Arithmetic Gradient to Uniform Series
• The annuity equivalent to an arithmetic
gradient series is A = G(A/G, i, N)
• If there is a base cash flow A', the base
annuity A' must be included to give the
overall annuity:
Atotal = A' + G(A/G, i, N)
• Note that A' is the amount in the first year
and G is the uniform increment starting in
year 2.
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Arithmetic Gradient Series with
Base Annuity

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 Example 3-8
• A lottery prize pays $1000 at the end
of the first year, $2000 the second,
$3000 the third, etc., for 20 years. If
there is only one prize in the lottery,
10 000 tickets are sold, and you can
invest your money elsewhere at 15%
interest, how much is each ticket
worth, on average?

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Example 3-8: Answer
• Method 1: First find annuity value of prize
and then find present value of annuity.
A' = 1000, G = 1000, i = 0.15, N = 20
A = A' + G(A/G, i, N) = 1000 + 1000(A/G,
15%, 20)
= 1000 + 1000(5.3651) = 6365.10

• Now find present value of annuity:

P = A (P/A, i, N) where A = 6365.10, i =
15%, N = 20
P = 6365.10(P/A, 15, 20)
= 6365.10(6.2593) = 39 841.07

• Since 10 000 tickets are to be sold, on

average each ticket is worth (39
841.07)/10,000 = $3.98. 9
Arithmetic Gradient Conversion Factor
(to Uniform Series)

• The arithmetic gradient conversion factor (to

uniform series) is used when it is necessary
to convert a gradient series into a uniform
series of equal payments.

• Example: What would be the equal annual

series, A, that would have the same net
present value at 20% interest per year to a
five year gradient series that started at $1000
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and increased $150 every year thereafter?
Arithmetic Gradient Conversion Factor
(to Uniform Series)
1 2 3 4 5 1 2 3 4 5

$1000

$1150
A A A A A
$1300
$1450

(1  i ) n  (1  ni ) $1600
A  Ag  G
i[(1  i ) n  1]
(1  0.20)5  (1  5 * 0.20)
 $1,000  $150
0.20[(1  0.20)5  1]
 $1,246
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Arithmetic Gradient Conversion Factor
(to Present Value)

• This factor converts a series of cash

amounts increasing by a gradient value,
G, each period to an equivalent present
value at i interest per period.
• Example: A machine will require $1000
in maintenance the first year of its 5
year operating life, and the cost will
increase by $150 each year. What is the
present worth of this series of
maintenance costs if the firm’s minimum
attractive rate of return is 20%? 12
Arithmetic Gradient Conversion Factor
(to Present Value)
$1600
$1450
$1300
$1150
$1000
1 2 3 4 5

P
(1  i ) n  1 1  (1  ni )(1  i )  n
PA G
i (1  i ) n
i2
(1  0.20)5  1 1  (1  5 * 0.20)(1  0.20) 5
 $1,000  $150
0.20(1  0.20) 5
(0.20) 2
 $3,727
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 Geometric Gradient Series
• A series of cash flows that increase or decrease
by a constant proportion each period
• Cash flows: A, A(1+g), A(1+g)2, …, A(1+g)N–1
at the end of periods 1, 2, 3, ..., N
• g is the growth rate, positive or negative
percentage change
• Can model inflation and deflation using
geometric series
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 Geometric Series
• The sum of the consecutive terms of a
geometric sequence or progression is
called a geometric series.
• For example:
Sn  a  ak  ak 2  ak 3  ....  ak n 2  ak n 1
Is a finite geometric series with quotient
k.
• What is the sum of the n terms of a finite
geometric series
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 Sum of terms of a finite GP
Sn  a  ak  ak 2  ....  ak n  2  ak n 1
kSn  ak  ak 2  ....  ak n  2  ak n 1  ak n
Sn  kSn  a  0  0  .....  0  0  ak n
Sn (1  k )  a (1  k n )
(1  k n )
Sn  a
(1  k )

• Where a is the first term of the geometric progression,

k is the geometric ratio, and n is the number of terms
in the progression.
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 Geometric Gradient to
Present Worth
• The present worth of a geometric series is:
A A(1  g ) A(1  g )N 1
P  
(1  i ) (1  i )2
(1  i )N
• Where A is the base amount and g is the
growth rate.
• Before we may get the factor, we need what
is called a growth adjusted interest rate:
1 i 1 1 g
i   1 so that 
1 g 1 i  1 i
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 Geometric Gradient to Present Worth
Factor: (P/A, g, i, N)
(1  i  )N  1 1 
(P / A, g, i , N )   
  N 1 g
i (1  i )  
(P/A,i ,N)

( 1  g)
Four cases:
(1) i > g > 0: i° is positive  use tables or formula
(2) g < 0: i° is positive  use tables or formula
(3) g > i > 0: i° is negative  Must use formula
(4) g = i > 0: i° = 0   A 
P  N 
1 g 

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 Compound Interest Factors
Discrete Cash Flow, Discrete Compounding

To Find Given Name of Factor Factor

Compound Amount
F P Factor (single payment) (1  i) n
Present Worth Factor
P F (single payment) (1  i )  n

Compound Amount (1  i ) n  1
F A Factor (uniform series) i
i
A F Sinking Fund Factor (1  i ) n  1

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Compound Interest Factors
Discrete Cash Flow, Discrete Compounding

To Find Given Name of Factor Factor

i (1  i ) n
A P Capital Recovery Factor (1  i ) n  1
(1  i) n  1
Present Worth Factor
P A (uniform series) i (1  i) n
Arithmetic Gradient
(1  i ) n  (1  ni )
Conversion Factor (to
A G uniform series) i[(1  i ) n  1]
Arithmetic Gradient
Conversion Factor (to 1  (1  ni)(1  i )  n
P G present value) i2
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 Compound Interest Factors
Discrete Cash Flow, Continuous Compounding

To Find Given Name of Factor Factor

Compound Amount
F P Factor (single payment) e rn
Present Worth Factor
P F (single payment) e  rn

Compound Amount e rn  1
F A Factor (uniform series) er 1
er 1
A F Sinking Fund Factor e rn  1

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 Compound Interest Factors
Discrete Cash Flow, Continuous Compounding

To Find Given Name of Factor Factor

e rn (e r  1)
A P Capital Recovery Factor e rn  1
e rn  1
Present Worth Factor
P A (uniform series) e rn (e r  1)
Arithmetic Gradient 1 n
Conversion Factor (to  rn
A G uniform series)
e 1 e 1
r

Arithmetic Gradient
Conversion Factor (to e rn  1  n(e r  1)
P G present value) e rn (e r  1) 2
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 Compound Interest Factors
Continuous Uniform Cash Flow, Continuous Compounding

To Find Given Name of Factor Factor

Sinking Fund Factor
r
(continuous, uniform
C F payments) e rn  1
Capital Recovery Factor
re rn
(continuous, uniform
C P payments) e rn  1
Compound Amount
e rn  1
Factor (continuous,
F C uniform payments) r
Present Worth Factor
e rn  1
(continuous, uniform
P C payments) re rn
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 Quiz---When and Where
• Quiz: Tuesday, Sept. 27, 2005
• 11:30 - 12:20 (Quiz: 30 minutes)
• Tutorial: Wednesday, Sept. 28, 2005
• ELL 168 Group 1
• (Students with Last Name A-M)
• ELL 061 Group 2
• (Students with Last Name N-Z)

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 Quiz---Who will be there

• U, U, U, U, and U!!!!
• CraigTipping [email protected]
• Group 1 (Last NameA-M) ELL 168
• LeYang [email protected]
• Group 2 (Last Name N-Z) ELL 061

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 Quiz---Problems, Solutions

• Do not argue with your TA!

• Question? Problems? TAWei
• Solutions will be given on Tutorial
• Bring: Blank Letter Paper, Pen, Formula
Sheet, Calculator, Student Card
• Write: Name, Student No. and Email

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 Quiz---Based on Chapter 1.2.3.

• Important: Wei’s Slides

• Even More Important: Examples in Slides
• 1 Formula Sheet is a good idea
• 5 Questions for 1800 seconds.
• Wei used 180 seconds (relax)

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Quiz---Important Points

• Simple Interests
• Compound Interests
• Future Value
• Present Value
• Key: Compound Interest
• Key: Understand the Question

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Quiz---Books in Library!!!

Engineering Economics in Canada, 3/E

Niall M. Fraser, University of Waterloo

Elizabeth M. Jewkes, University of Waterloo
Irwin Bernhardt, University of Waterloo
May Tajima, University of Waterloo

Economics: Canada in the Global Environment

by Michael Parkin and Robin Bade.

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Calculator Talk

• No programmable
• No economic function
• Simple the best
• Trust your ability
• Trust your teaching group

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• Questions?

• (Sorry I forget the problems)

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 Project----Time Table
• Find your group: Mid-October
• Select Topic: End of October
• Survey finished: End of October
• Project: November (3 Weeks)
• Project Report Due: Final Quiz

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Project----Requirements

• Group: 3-6 Students

• Topic: Practical, Small
• Report: On Time, Original
• Marks: 1 make to 1 report
• Report: 25 marks out of 100

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 Project Topic----What to do

• You Find it
• Practical
• Example: Run a Pizza Shop
• Example: Run a Store for computer renting
• Example: Survey on the Tuition Increase
• Example: Why ??? Company failed…..
• Team Work

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 Project----Recourse
• Not your teaching group
• No spoon feed: Independent work
• Example: Government Web
• Example: Library, Database, Google
• Example: Economics Faculty
• Example: Newspaper, TV
• Example: Friends
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 Summary
• Conversion for Arithmetic Gradient Series
• Conversion for Geometric Gradient Series
• Quiz: My slides and the examples in slides
• Project: Good Idea, be open, independent

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