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Online Quiz 2:
o Starts tonight, Friday May 26 at 11:00 PM
o Ends, Friday June 2 at 11:59 PM
o Chapters 3
o Chapter 3 including non-uniform annuities, bonds and mortgages; there
will also be a small number of 'review-type' questions from Chapter 2.
2
Learning Objectives
3
Arithmetic Gradient
Therefore:
o P = A(P/A, i%, n) + G(P/G, i%, n)
4
Arithmetic Gradient, contd.
arithmetic gradient present worth factor:
1 + 1
, , =
2 1 +
1
, , =
1+ 1
5
Arithmetic Gradient, contd.
6
Arithmetic Gradient, contd.
7
Arithmetic Gradient, contd.
8
Arithmetic Gradient, contd.
Problem 1
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?
Solution
Method 1: First find annuity value of prize and then find present value of
annuity.
9
Arithmetic Gradient, contd.
Problem 1
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?
Solution
Method 2: Find P1 with A' = 0, G = 1000 and N = 21. Then find P0.
10
Reality and the Assumed Uniformity
of A, G, and g
Although the future reality may not exactly follow the
uniformity of our series and gradient equations, we may
use these formulas because:
1. It is easier to start with simple models
2. Convenient for modelling the future with approximate
constraints and bounds
3. Not enough is known about the future and so it is
approximated through uniform series and gradients
11
Geometric Gradient
12
Geometric Gradient, contd.
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)N1 are at the
end of periods 1, 2, 3, ..., N respectively
g is growth rate, positive/negative percentage change
Can model inflation/deflation using geometric series
Geometric Gradient to PW Conversion:(P/A, g, i, N)
13
Geometric Gradient, contd.
need
need what
what is is called
called a a growth
growth adjusted
adjusted interestinterest rate:
rate:
1
1
ii 1
1 1
1
g
g
ii
1 so that
1 i
1 so that
1
1 gg 1
1 ii 1 i
used
used as
as follows:
follows: (P / A, g, i , N ) ((1 1
N
ii ))N 1
1 1 1
(P / A, g, i , N ) g
ii ((1
1 i )
i
)N
N 1
1 g
,N)
(P/A,i
(P/A,i ,N)
1
(( 1 g)
g)
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
i = positive P A
A
4. g = i > 0:
P N
N
1
1 g
g
14
Geometric Gradient, contd.
o Where: i g
1 1 + (1 + )
= 1
o Where: i = g
= 1 (1 + )1
16
Geometric Gradient, contd.
Problem 3
17
Present Worth Perpetuities (N)
(1 i )N 1
P lim A(P / A, i , N ) A lim
N N i (1 i )N
A
i
18
Present Worth Perpetuities (N)
Problem 4
A $500 000 gift was bequeathed to a city for the construction and continued
maintenance of a small music hall. Annual maintenance for a hall is estimated at
$15 000.
In addition, $25 000 will be needed every 10 years for painting and major
repairs.
How much will be left for the initial construction costs after funds are allocated
for perpetual upkeep? Interest is 6% per annum.
19
Compound Interest Factors Summary
20
Compound Interest Factors Summary
21
Questions Period
22