Arithmethic Progression, Bonds,

Capitalized Cost
 Uniform Arithmethic Gradient Payment

• In certain cases, economic analysis problems involve receipts or

disbursements that increase or decrease by a uniform amount each period.
 Example

• A loan was to be amortized by a group of four end year payments forming

an ascending arithmethic progression the initial payment was to be 5000
Php and the difference between successive payments was to be 400 Php.
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

• A= 5000
• G= 400
• P= PA + PG
• P=A/i [ 1-(1+i)^-N] + G/i [(1+i)^N-1/i – (N)](1+i)^-N
• P =5000/.15 [ 1-(1+.15)^-4]+400/.15[(1+.15)^4 -1 / .15 – (4)](1+.15)^-4
• P + 15789.47
• Or using the focal date at (0)
• P= 5000(1.15)^-1 + 5400(1.15)^-2 +5800(1.15)^-3 + 6200 (1.15)^-4
• P = 15789.47
• P= A/i [ 1-(1+i ) ^N]
• Substituting Values A = 5530.80
 Financing With Bonds

• Bond is a certificate of indebtedness usually to mature in not less than 10

years
 Example

• A company is issued 50 units of bond with face value of 1000 PHP each to
mature in 10 years at a bond rate of 8% per year If money worth 10% per
year and mass expenses is 2 % of the value dept
• A) the bond value for 1 unit for 50 units
• B) the total annual expenses of the company to retire the bond
 Solution

• A) P = FT/ i [1-(1+i ) ^N ] + C ( 1 + i )^-N

• Substituting Values
• P= 822.7/unit
• B) F= A/i [(1+i ) ^N -1 ]
• A= P(i)/ [(1+i ) ^N -1 ]
• Substuting Values
Capitalized Cost
 Example

• A research laboratory constructed at 500M PHP, taxes, insurance and other

misc. expenses is 2% of the cost. The laboratory facilities is expected to last
20 years and be replaced at 800M PHP . Operation and maintenance
expenses are as follows
• 10 M each years for the first 10 years
• 20M each year for the next 5 years
• 50 M each year there after
• If money worth 8% compute the capitalized cost of the research laboratory
• Solution:
• CC = FC + P+ X
• Where X = S/ [ (1+i )^L – 1 ]
• Therefore
• FC = 500M + .02 (500M)
• FC= 510M
• But P = ?
• P= 10M/.08 [1-(1.08)^-10 + 20M/.08[1-(1.08)^-15] (1.08)^-10 + 50M/.08(1.08)^-15
• CC =510 M + 333,735,677.9 + 800M/(1.08)^20-1
• CC = 1,062,257,766.00
 Example 2

• 2) Calculate the capitalized cost of a project that has an initial cost of P3,
000,000 and an additional cost of P100, 000 at the end of every 10 yrs. The
annual operating costs will be P100, 000 at the end of every year for the first
4 years and P160, 000 thereafter. In addition, there is expected to be
recurring major rework cost of P300, 000 every 13 yrs. Assume i =15%.
• Initial Cost (IC) = P3, 000,000
• Additional Cost (AC) = P1, 000,000
• n= 10 yrs.
• Operating Cost (MC)
• PA = P 100,000 for the first 4 yrs.
• PF =P160, 000
• thereafter
• Rework Cost (CR) = P300, 000 n=13 yrs.