CAPITALIZED COST

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General Engineering
 CAPITALIZED COST
One application of perpetuity is in capitalized cost.

The capitalized cost of any property is the sum of the first cost of the
property and the present worth of all costs of replacement, operation, and
maintenance for a long time or forever.

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 CAPITALIZED COST

Perpetual replacement @ k periods

Let S = amount needed to replace a property every k periods
X = amount of principal invested at rate i% the interest on which will
amount to S every k periods

X = S / [(1+i)k – 1]

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 REPLACEMENT COST
X = S / [(1+i)k – 1]
X

k 2k 3k 4k n ∞

S S S S

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General Engineering
 CAPITALIZED COST
Example
Determine the capitalized cost of a project which requires 5 million pesos for original construction;
P100,000 at the end of every year for the first 6 years and P120,000 each year thereafter for
operating expenses; and P500,000 every 5 years for replacement of equipment. Rate of interest is
12% compounded annually.

CC = P5,000,000 + (100,000/0.12)[1 – 1.12-6 ] +

(120,000/0.12)(1.12-6) + 500,000/[1.125 – 1]

CC = P6,573,646

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 Engineering Economy
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General Engineering
 AMORTIZATION

Any method of repaying a debt, the principal and

interest included, usually by a series of equal
payments at equal interval of time.

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 AMORTIZATION
Example
A debt of P5,000 with interest of 12% c.s.a. is to be amortized by equal payments over 3
years, the first payment is due after 6 months. What is the semi-annual payment and
construct an amortization schedule or table.

A = [P i ][ 1/{1- (1+i)-n}]
= [5,000x.12/2][1/{1-(1+ .12/2)-6}]

A = P1,016.82

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 AMORTIZATION SCHEDULE
Period Principal- Interest Amortizatio Principal
Beginning due at End n Payment Repaid –
of Period of Period End of
(6% / Period
period)
1 5,000 300 1,016.82 716.82
2 4,283.18 256.99 1,016.82 759.83
3 3,523.35 211.40 1,016.82 805.42
4 2,717.93 163.08 1,016.82 853.74
5 1,864.19 111.85 1,016.82 904.97
6 959.22 57.55 1,016.82 959.27
TOTAL 1,100.87 6,100.92 5,000.05
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 AMORTIZATION
Example
A brand new car worth P800,000 was bought with 20% down payment. Balance is to be
paid in 24 equal monthly payments with 12% interest c. m. What is the monthly
amortization payment payable at the end of every month.

A = [P i ][ 1/{1- (1+i)-n}]
= [640,000x.12/12][1/{1-(1+ .12/12)-24}]

A = P30,127

Engineering Economy
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General Engineering
 UNIFORM ARITHMETIC GRADIENT

Engineering Economy
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 UNIFORM ARITHMETIC GRADIENT

Any method of payment, where the receipts or disbursements

are increased or decreased by a uniform amount each period.
Examples are maintenance and repair expenses on a specific
equipment or property may increase by a relatively constant
amount each period.

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 ARITHMETIC GRADIENT
P = PA + PG
=[A/i ][ 1- (1+i)-n] + (G/i)( [ {(1+i)n – 1 }/i ] – n) (1+i)-n

P
1 2 3 n-1 n

1k 2k 3k 4k 5k

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 ARITHMETIC GRADIENT
Example
A loan is to be amortized by 4 end-of-year payments forming an ascending arithmetic progression.
Initial payment is P5,000 and the difference between successive payments is P400. If the interest
rate is 15% c.a, what should be the equivalent uniform annual payment of the loan?

P = PA + PG where A = 5,000 and G = 400

=[5,000/.15][ 1- (1.15)-4] + (400/.15) ([{(1.15)4 – 1}/0.15] – 4) (1.15)-4

P = 15,789.47 = [A/0.15][1 – 1.15-4]

A’ = 5,531

Engineering Economy
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 ARITHMETIC GRADIENT
Example
Find the equivalent annual payment of the following payments at 20% c.a.
Y1 = 8,000; Y2 = 7,000; Y3 = 6,000 and Y4 = 5000 Y5 = 4000

P = PA + PG where A = 8,000 and G = -1000

=[8,000/.2][ 1- (1.2)-5] + (-1000/.2)([{(1.2)5 – 1}/0.2] – 5)(1.2)-5

P = 19,018.787 = [A/0.20][1 – 1.20-5]

A’ = 6,359.49 = 6,360

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