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Capitalized Cost P
PG =A 1 , g%, i %,n
Capitalized Cost of any property is the sum of the first cost and the present worth A
of all costs of replacement, operation and maintenance for a long time or forever.

Case 1: No replacement, only maintenance and or operation every period.

Capitalized Cost = First Cost + Present Worth of Perpetual Operation and Maintenance
Case 2: Replacement Only, no maintenance and or operation.
Capitalized Cost = First Cost + Present Worth of Perpetual Replacement
Case 3: Replacement, Maintenance and or operation every period.
Capitalized Cost = First Cost + Present Worth of Perpetual Operation and Maintenance +
Present Worth of Perpetual Replacement
Amortization
Amortization is any method of repaying a debt, the principal and interest
included, usually by a series of equal payment at equal interval of time.
Uniform 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.
Sample Problems
1. Determine the capitalized cost of a structure that requires an initial
investment of P1,500,000 and an annual maintenance of P150,000.
Interest is 15%. Ans. P2,500,000
2. A new engine was installed by a textile plant at a cost of P300,000 and
projected to have a useful life of 15 years. At the end of its useful life, it
is estimated to have a salvage value of P30,000. Determine its
capitalized cost if interest is 18% compounded annually. Ans. P326,604
3. Determine the capitalized cost of a research laboratory which requires
P5,000,000 for original construction; P100,000 at the end of every year
for the first 6 years and then P120,000 each year thereafter for operating
expenses, and P500,000 every 5 years for replacement of equipment
with interest at 12% per annum. Ans. P6,753,650
4. A debt of P5000 with interest at 12% compounded semiannually is to be
amortized by equal semiannual payments over the next 3 years, the first
due in 6 months. Find the semiannual payment and construct

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amortization schedule? Ans. P1016.82
n
G ( 1+i ) −1 1
P= −n 5. A debt of P10,000 with interest at the rate of 20% compounded
i i ( 1+i )n
semiannually 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
PG =G ( GP , i% ,n) semiannual payment and construct an amortization schedule. Ans.
P4248.50

Geometric Gradient Series
A geometric gradient series is a cash flow series that either increases or
decreases by a constant percentage each period. The uniform change is called
the rate of change.
6. A loan was to be amortized by a group of four end-of-year payments
forming an ascending arithmetic progression. The initial payment was to
be P5000 and the difference between successive payments was to be
P400. But the loan was renegotiated to provide for the payment of equal
rather than uniformly varying sums. If the interest rate of the loan was

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15%, what was the annual payment? Ans. P5530.51

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n
1+ g
1− 7. Find the equivalent annual payment of the following obligations at 20%
1+i interest (EOY 1 – P8000; EOY 2 – P7000; EOY – P6000; EOY – P
PG =A 1
i−g 5000? Ans. P6725.77

8. A coal-fi red power plant has upgraded an emission control valve. The
modification costs only $8000 and is expected to last 6 years with a
$200 salvage value. The maintenance cost is expected to be high at
$1700 the first year, increasing by 11% per year thereafter. Determine
the equivalent present worth of the modification and maintenance cost at
8% per year. Ans. $-17999