ENGINEERING ECONOMY

AMORTIZATION
 ENGINEERING ECONOMY
AMORTIZATION
Is any method of repaying a debt, the principal and interest included, usually by a series of equal
payments at equal interval of time.
Sample Problem 1
A debt of P10,000 with interest at the rate of 20% compounded semi-annually is to be amortized
by 5 equal payments at the end of each 6 months, the first payment is to be made after 3 years.
Find the semiannual payment and construct an amortization schedule.
Cash Flow Diagram:
End of End of End of End of End of
1st Year 2nd Year 3rd Year 4th Year 5th Year

10,000

0 1 2 3 4 5 6 7 8 9 10
A= 4,248.48
A A A A A

A= 4,248.48
 ENGINEERING ECONOMY
A= 4,248.48
(1) (2) (3) (4)

Period Outstanding Principal at the Interest Due at the End of Payment Principal Repaid at the End of
Beginning of Period Period Period
[(1) above + (2)above] (2) = (1)*(i) (3) = A (4)=(3)-(2)
1 10,000 1,000

2 11,000 1,100

3 12,100 1,210

4 13,310 1,331

5 14,641 1,464.10

6 16,105.10 1,610.51 4,248.48 2,637.97

7 13,467.13 1,346.71 4,248.48 2,901.77

8 10,565.36 1,056.53 4,248.48 3,191.95

9 7,373.41 737.34 4,248.48 3,511.14

10 3,862.27 386.22 4,248.48 3,862.27

11,242.4 21,242.4 16,105.10

100,000

0 1 2 3 4 5 6 7 8 9 10

A A A A A A A A A A
A= 16,274.54
 ENGINEERING ECONOMY
A= 16,274.54 i=10% or 0.1

(1) (2) (3) (4)

Period Outstanding Principal at the Interest Due at the End of Payment Principal Repaid at the End of
Beginning of Period Period Period
[(1) above - (4)above] (2) = (1)*(i) (3) = A (4)=(3)-(2)
1 100,000 10,000 16,274.54 6,274.54
2 93,725.46 9,372.55 16,274.54 6,901.99
3 86,823.47 8,682.35 16,274.54 7,592.19
4 79,231.27 7,923.13 16,274.54 8,351.41
5 70,879.86 7,087.99 16,274.54 9,186.55
6 61,693.31 6,169.33 16,274.54 10,105.21

7 51,588.10 5,158.81 16,274.54 11,115.73

8 40,472.37 4,047.24 16,274.54 12,227.30

9 28,245.06 2,824.51 16,274.54 13,450.02

10 14,795.04 1,479.50 16,274.54 14,795.04

62,745.41 162,745.40 100,000

ARITHMETIC GRADIENT
 ENGINEERING ECONOMY
ARITHMETIC GRADIENT
An Arithmetic Gradient series is a cash flow series that either increases or decreases by a
constant amount each period. The amount of change is called the gradient.
Let’s assume you purchase a used car with 1-year warranty, you might expect to pay the gasoline
and insurance costs during the first year of operation. Assume these cost P5,000; that is P5,000 is
the base amount. After the first year, you absorb the cost of repairs, which can be expected to
increase each year. If you estimate that total costs will increase by P200 each year, the amount
will become, This cash flow diagram can be resolved into two components;

0 1 2 3 n-1 n 0 1 2 3 5 6

5K 5K
5.2K n=6 5.2K
5.4K 5.4K
G=200
5K 5.8K
+ (n-2) 200 5K Where G is the constant arithmetic change in cash flows 6.0K
+ (n-1) 200 from one time period to the next; G may be positive or
negative.
 ENGINEERING ECONOMY
ARITHMETIC GRADIENT
This cash flow diagram can be resolved into two
components;

0 1 2 3 n-1 n

5K
5.2K
5.4K
5K+ (n-2)G
5K + (n-1)G

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

A A A A A
G
PA A = 5,000 PG G = 200 2G

(n-2)G
SOLVING FOR P (n-1)G

P = PA+ PG
 ENGINEERING ECONOMY
ARITHMETIC GRADIENT
SOLVING FOR P WHEN G IS GIVEN:

SINCE G IS COMMON, LET’S FACTOR OUT G FROM THE RIGHT SIDE EQUATION

1
MULTIPLYING BOTH SIDES OF EQUATION BY (1+i);

2
SUBTRACT EQUATION 1 FROM EQUATION 2;
 ENGINEERING ECONOMY

Sample Problem 1
A certain company expects the cost of maintenance for a particular piece of heavy equipment to be
15,000 in year 1 , 25,000 in year 2, and amounts increasing by 10,000 through year 8. At an
interest rate of 10% per year, determine the present worth of the maintenance cost.

85k
75k
65k
55k
45k
35k
25k
15k

0 1 2 3 4 5 6 7 8
 ENGINEERING ECONOMY

Sample Problem 2
The maintenance of a certain printing machine is expected to be P1,600 at the end of the first year
and it is expected to increase P800 each year for the following 7 years What is the equivalent
annual maintenance cost of the machine assuming rate interest to be 6% for the 8-year period?
7200 5600
6400 4800
5600 4000
4800 3200
4000 2400
3200 1600
2400 800
1600
1600 1600 1600 1600 1600 1600 1600 1600

0 1 2 3 4 5 6 7 8 0 1 2 3 4 5 6 7 8
 ENGINEERING ECONOMY

Sample Problem 2
The maintenance of a certain printing machine is expected to be P1,600 at the end of the first year
and it is expected to increase P800 each year for the following 7 years What is the equivalent
annual maintenance cost of the machine assuming rate interest to be 6% for the 8-year period?
5600
PG = 15,873.26454 4800
4000
3200
2400
1600
A2 A2 A2 A2 A2 A2 A2 A2
800

0 1 2 3 4 5 6 7 8
1600 1600 1600 1600 1600 1600 1600 1600
A1 A1 A1 A1 A1 A1 A1 A1
A=A1 + A2
0 1 2 3 4 5 6 7 8

A A A A A A A A

0 1 2 3 5 6
4 7 8
A=1,600+2,556.17
A=4,156.17
 ENGINEERING ECONOMY

Sample Problem 3
Find the equivalent annual payment of the following obligations at 20% interest.
End of Year Payment
1 P8,000
2 P7,000
3 P6,000
4 P5,000

0 1 2 3 4

5k
PG = -3,298.611111
6k
7k
8k A = A1+ A2

A = 8,000 + (-1,274.217586)

A = A1+ A2
A1=8,000