AMORTIZATION

DELA ROSA, JASON G.

 AMORTIZATION

• Amortization is any method of paying a

debt, the principal and interest included,
usually by a series of equal payments at
equal interval of time.

• Formula:
𝑷 𝑷 𝑷(𝒊)
•A = 𝑷 = [𝟏− 𝟏+𝒊 −𝒏] =
, 𝒊%,𝒏 [𝟏− 𝟏+𝒊 −𝒏 ]
𝑨 𝒊
EXAMPLE 1:
A DEBT OF P5,000 WITH INTEREST AT 12% COMPOUNDED SEMIANUALLY IS TO BE
AMORTIZED BY EQUAL SEMI-ANNUAL PAYMENTS OVER THE NEXT 3 YEARS, THE FIRST
DUE IN 6 MONTHS. FIND THE SEMI-ANNUAL PAYMENT AND CONSTRUCT AN
AMORTIZATION SCHEDULE

• Solution
EXAMPLE 1:
A DEBT OF P5,000 WITH INTEREST AT 12% COMPOUNDED SEMIANUALLY IS TO BE
AMORTIZED BY EQUAL SEMI-ANNUAL PAYMENTS OVER THE NEXT 3 YEARS, THE FIRST
DUE IN 6 MONTHS. FIND THE SEMI-ANNUAL PAYMENT AND CONSTRUCT AN
AMORTIZATION SCHEDULE

𝑷
P = P5,000 A = [𝟏− 𝟏+𝒊 −𝒏]
𝒊
𝟓,𝟎𝟎𝟎(.𝟎𝟔)
r = 12% A=
[1−(1.06)−6 ]
300
t = 3 years A=
.295039
12%
i=
2
= 6% A = P 1,016.82
n = 3(2) = 6 periods
 AMORTIZATION SCHEDULE

Outstanding Interest due at Principal repaid

Period Principal at end of period Payment at end of period
beginning of I=Pxixn
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 1,016.82 959.22
Totals 1,100.87 6,100.92 5,000.5
EXAMPLE 2
A DEBT OF P10,000 WITH INTEREST AT 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 SEMI-ANNUAL PAYMENTS
AND CONSTRUCT THE AMORTIZATION SCHEDULE

• Solution
EXAMPLE 2
A DEBT OF P10,000 WITH INTEREST AT 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 SEMI-ANNUAL PAYMENTS
AND CONSTRUCT THE AMORTIZATION SCHEDULE

Solution
P = P10,000 A=
𝑷 𝒊
[𝟏− 𝟏+𝒊 −𝒏 ]
(𝟏 + 𝒊)𝒏
.𝟏𝟎
r = 20% A = 𝟏𝟎, 𝟎𝟎𝟎(
[𝟏− 𝟏+.𝟏𝟎 −𝟓 ]
)(𝟏+. 𝟏𝟎)𝟓
𝟐𝟎%
i= = 𝟏𝟎% A =10,000(.2638)(1.6105)
𝟐
n = 5 periods A = 4,248.50
 AMORTIZATION SCHEDULE

Outstanding Interest due at Principal repaid

Period principal at end of period Payment at end of period
beginning of I=Pxixn
period
1 10,000 1,000
2 11,100 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 4,248.50 2,637.99
7 13,467.11 1,346.71 4,248.50 2,901.79
8 10,565.32 1,056.53 4,248.50 3,191.97
9 7,373.35 737.34 4,248.50 3,511.16
10 3,862.19 386.22 4,248.50 3,862.28
Total 11,242.41 21,242.50 16,105.19
CONSIDER A LOAN OF P20,000 WITH AN INTEREST RATE OF 10% COMPOUNDED SEMI-
ANNUALLY, WITH PAYMENTS MADE FOR THREE YEARS. AMORTIZE THIS LOAN OVER THE
THREE YEARS AND CONSTRUCT AN AMORTIZATION SCHEDULE

20,000(.05)
• P = 20,000 A=
1−(1.05)−6
• r = 10% A = 20,000(.19701)
10%
• i= = 5% A = P3,940.35
2
• n = 3 x 2 = 6 periods
 Outstanding Interest due at Principal repaid
Period Principal at end of period Payment at end of period
beginning of I=Pxixn
period
1 20,000 1,000 3,940.35 2,940.35
2 17,059.65 852.98 3,940.35 3,087.37
3 13,972.28 698.61 3,940.35 3,241.74
4 10,730.54 536.53 3,940.35 3,403.82
5 7,326.72 366.34 3,940.35 3,574.01
6 3,752.71 187.64 3,940.35 3,752.71
Totals 3,642.10 23,642.10 20,000
 UNIFORM ARITHMETIC GRADIENT

• In certain cases, economic analysis problems

involves receipts or disbursements that increase or
decrease by a uniform amount each period. For
example, maintenance and repair expenses on
specific equipment or property may increase by a
relatively constant amount each period. This is
known as a uniform arithmetic gradient.
UNIFORM ARITHMETIC GRADIENT

• Suppose that the maintenance expense on a

certain machine is P1,000 at the end of first year
and increasing at a constant rate of P500 for the
next four years.
UNIFORM ARITHMETIC GRADIENT

• Formula:
P = 𝑃𝐴 + 𝑃𝐺
where
𝑃𝐴 = A(P/A, i%, n)
𝑃𝐺 =G(1 + 𝑖)−2 +2𝐺(1 + 𝑖)−3 + 3𝐺(1 + 𝑖)−4 … . . +(𝑛 − 1)𝐺(1 + 𝑖)−(𝑛−1)
𝐺 (1+𝑖)𝑛 −1 1
𝑃𝐺 = − 𝑛
𝑖 𝑖 (1+𝑖)𝑛
𝑃𝐺 = G(P/G, i%, n)
1 (1+𝑖)𝑛 −1 1
P/G, i%, n = − 𝑛 , this factor is called the
𝑖 𝑖 (1+𝑖)𝑛
gradient to present worth conversion factor. Thus,
P = A(P/A, i%, n) + G(P/G, i%, n)
EXAMPLE 1
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 P5,000 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 15%, WHAT WAS THE ANNUAL PAYMENT?
 SOLUTION (C0NT.)

A = P5,000 G = P400 n=4 i = 15%

1−(1.15)−4
(P/A, 15%, 4) = .15
= 2.8550

1 (1.15)4 −1 1
(P/G, 15%, 4) = − 4 = 3.7865
.15 .15 (1.15)4

P = A(P/A, i%, n) + G(P/G, i%, n)

P = 5,000(2.8550)+400(3.7865)

P = P15,789.60
𝑃 15,789.60
A=𝑃 =
,15%,4 2.8550
𝐴

A = P5,530.51
EXAMPLE 2
FIND THE EQUIVALENT ANNUAL PAYMENT OF THE FOLLOWING OBLIGATIONS AT 20%
INTEREST.

End of Year Payment

1 8,000
2 7,000
3 6,000
4 5,000
 SOLUTION (CONT.)
A = P8,000 G = P1,000 n=4 i = 20%
1−(1.20)−4
(P/A, 20%, 4) = = 2.5887
.20

1 (1.20)4 −1 1
(P/G, 20%, 4) = − 4 = 3.2986
.20 .20 (1.20)4

P = A(P/A, i%, n) - G(P/G, i%, n)

P = 8,000(2.5887) - 1000(3.2986)

P = P17,411

𝑃 17,411
A=𝑃 = 2.5887
,20%,4
𝐴

A = P6,725.77