UNIVERSITY OF SOUTHERN MINDANAO
ENGINEERING ECONOMY
EngSci 19
Capitalized Cost
• One of the most important applications of
perpetuity is in capitalized cost. The
capitalized cost of any property is the sum
of the first cost and the present worth of
all costs of replacement, operation and
maintenance for a long time or forever.
EngSci 19 – Engineering Economy 2
Capitalized Cost
Case 1: No replacement, only maintenance and or
operation every period.
Capitalized Cost = First Cost + Present worth of
perpetual operation and or maintenance
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Example 1:
Determine the capitalized cost of a
structure that requires an initial
investment of ₱1,500,000 and an
annual maintenance of ₱150,000.
Interest is 15%.
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Capitalized Cost
Case 2: Replacement only, no
maintenance and or operation.
Capitalized Cost = First Cost + Present
worth of perpetual replacement
EngSci 19 – Engineering Economy 5
Example 1:
A new engine was installed by a
textile plant at a cost of ₱300,000 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
₱30,000. Determine its capitalized cost
if interest is 18% compounded annually.
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Capitalized Cost
Case 3: Replacement, maintenance and or
operation every period.
Capitalized Cost = First Cost + Present worth
of cost of perpetual operation and or
maintenance + Present worth of cost of
perpetual replacement
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Example 1:
Determine the capitalized cost of a
research laboratory which requires
₱5,000,000 for original construction;
₱100,000 at the end of every year for the first
6 years and then ₱120,000 each year
thereafter for operating expenses, and
₱500,000 every 5 years for replacement of
equipment with interest at 12% per annum.
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Amortization
• 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.
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Example 1:
A debt of ₱5,000 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 an amortization schedule.
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Amortization Schedule
Outstanding
Interest due at Principal
Principal at
Period the end of Payment Repaid at End
the Beginning
Period of Period
of Period
1 ₱5000.00 ₱300.00 ₱1016.82 ₱716.82
2 ₱4283.18 ₱256.99 ₱1016.82 ₱759.83
3 ₱3523.35 ₱211.40 ₱1016.82 ₱805.42
4 ₱2717.93 ₱163.08 ₱1016.82 ₱853.74
5 ₱1864.19 ₱111.85 ₱1016.82 ₱904.97
6 ₱959.22 ₱57.55 ₱1016.82 ₱959.27
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Example 2:
A debt of ₱10,000 with interest at the
rate of 20% compounded 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 semiannual
payment and construct an amortization
schedule.
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Uniform Arithmetic Gradient
In certain cases, economic analysis
problems involve 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.
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Present Worth of Uniform
Arithmetic Gradient
𝑃 = 𝑃𝐴 + 𝑃𝐺
𝐺 1+𝑖 𝑛 −1 1
Where: 𝑃𝐺 = −𝑛
𝑖 𝑖 1+𝑖 𝑛
G = is the gradient amount
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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 ₱5,000 and the difference
between successive payments was to be ₱400.
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?
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Example 2:
Find the equivalent annual payment of the
following obligations at 20% interest.
End of Year Payment
1 ₱8000
2 ₱7000
3 ₱6000
4 ₱5000
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