ECO 104

January 30, 2018

 ARITHMETIC AND GEOMETRIC GRADIENT
In certain cases, Engineering Economy problems involve a series of
disbursement or receipts that increase or decrease in each succeeding
period by varying amounts.

A + (n-2)G
A+ (n-1)G
UNIFORM ARITHMETIC GRADIENT

(n-2)G

A+3G
(n-1)G

A+ 2G
A A A A A A 3G

A+G
2G
G A
0 n+ 0 0 n =
1 2 3 4 n-1 1 2 3 4 n-1 1 2 3 4 n-1

P1 F1 P2 F2 P F
In the change in succeeding periods is Gradient (G) = the increase or
constant, then the series is known as a decrease by an equal amount.
uniform arithmetic gradient
It is always starts at zero
 Functional symbols and formulas used
in dealing with UAG are:
(A/G,i%,n) = factor to convert a uniform (F/G,i%,n) = factor to convert a
arithmetic gradient series to an uniform arithmetic
equivalent uniform series gradient series to future
worth
𝟏 𝒏
= - 𝟏+𝒊 𝒏 −𝟏
𝒊 (𝟏+𝒊)𝒏 −𝟏 𝟏
= −𝒏
𝒊 𝒊

(P/G,i%,n) = factor to convert a uniform

arithmetic gradient series to its 𝟏 𝟏+𝒊 𝒏 −𝟏 𝒏
present worth = −
𝒊 𝒊(𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏
F = F1 + F2 = A(F/A, i%, n) + G(F/G, i%, n)

𝑨[ 𝟏+𝒊 𝒏 −𝟏] 𝑮 𝟏+𝒊 𝒏 −𝟏

F= F1 =
𝒊
+ F2 = −𝒏
𝒊 𝒊

P = P1 + P2 = A(P/A, i%, n) + G(P/G, i%, n)

𝑨[ 𝟏+𝒊 𝒏 −𝟏] 𝑮 𝟏+𝒊 𝒏 −𝟏 𝒏

P= P1 = + P2 = −
𝒊(𝟏+𝒊)𝒏 𝒊 𝒊(𝟏+𝒊)𝒏 (𝟏+𝒊)𝒏
 Example 1
You just purchased a new automobile and wish to set aside enough money in a bank
account to pay the maintenance on the car for the first 5 years. You have been told by the
dealer to expect that maintenance will cost P120 the first year
And an additional P30 each year. What sum of money must be deposited now in a bank
account with an interest rate of 5% compounded annually to cover the maintenance
expenses? 120 240
A A A A A=120 90 210
60 180
30 150
120
0 + 0 0
1 2 3 4 5 1 2 3 4 5 = 1 2 3 4 5
𝑷 𝑷
P1 P1 = 𝑨( , 𝒊%, 𝒏) P2 P2 = 𝑮( , 𝒊%, 𝒏) P
𝑨 𝑮

P1 = 𝟏𝟐𝟎(𝟒. 𝟑𝟐𝟗) P2 = 3𝟎(𝟖. 𝟐𝟑𝟕)

P = P1 + P2 = P 𝟕𝟔𝟔. 𝟓𝟗
GEOMETRIC GRADIENT
A geometric gradient is a sequence consisting of end – of – period
payments, where each payment increases or decreases by a fixed
percentage. In a geometric gradient, payment begins at the end of
the first period.

A(1+r)𝑛−2

A(1+r)𝑛−1
A(1+r)²
A(1+r)
𝑨(𝟏−𝒘𝒏 ) 𝟏+𝒓
A P= ,w=1 w=
(𝟏+𝒊 )(𝟏−𝒘) 𝟏+𝒊
0 n
1 2 3 4 n-1

P F If w = 1, that is, r=i ,

𝑨𝒏
P=
𝟏+𝒓
 DEPRECIATION
DEPRECIATION is defined as the decrease in the value of a
property, such as machinery, equipment, building or other
structure, due to the passage of time.

1. Straight Line Method

2. Sinking Fund Method
3. Declining Balance or Matheson Formula
4. Sum of the Years Digit Method (SYD)
 STRAIGHT-LINE METHOD
In this method the loss in value is considered to be directly
proportional to the age of the property. No interest is
assumed to be paid on the amounts set aside in the
depreciation fund.
SYMBOLS:
𝑪𝒐 −𝑪𝒏 n = useful life of the property in years
d=
𝒏 m = age of the property at any time less than or equal to n (m≤n)
d = annual cost of depreciation
𝒎(𝑪𝒐 −𝑪𝒏) Dm = accrued or total depreciation up to m years
Dm = md =
𝒏 Co = original or first cost of the property
Cm = book value of the property at the end of m years

Cm = Co - Dm Cn = book value at the end of life, n years, (salvage or scrap value, as

the case may be)
 SINKING FUND METHOD
In this method, it is assumed that a sinking fund is established in
which funds will accumulate for replacement purposes and will bear
interest. The total depreciation which has occurred up to any given
time is assumed to equal the amount in the sinking fund at that time.
SYMBOLS:
𝑪𝒐 −𝑪𝒏 n = useful life of the property in years
d= 𝑭
( ,𝒊%,𝒏) m = age of the property at any time less than or equal to n (m≤n)
𝑨
d = annual cost of depreciation
𝑭
( ,𝒊%,𝒎) Dm = accrued or total depreciation up to m years
𝑨
Dm = (Co-Cn) 𝑭
(𝑨,𝒊%,𝒏) Co = original or first cost of the property
Cm = book value of the property at the end of m years

Cm = Co - Dm Cn = book value at the end of life, n years, (salvage or scrap value, as

the case may be)
 DECLINING BALANCE or MATHESON
This method assumes that the annual cost of depreciation is a fixed
percentage of the book value at the beginning of the year.

SYMBOLS:
𝒎 𝑪𝒎 𝒏 𝑪𝒏
k=𝟏− =𝟏− n = useful life of the property in years
𝑪𝒐 𝑪𝒐
m = age of the property at any time less than or equal to n (m≤n)
dm = 𝒌𝑪𝒎−𝟏 d = annual cost of depreciation
dm = kCo(1−𝒌)𝒎−𝟏 Dm = accrued or total depreciation up to m years
Co = original or first cost of the property
Cm = Co (1−k)𝒎 Cm = book value of the property at the end of m years
Cn = book value at the end of life, n years, (salvage or scrap value, as
the case may be)
Cn = Co (1−k)𝒏 k = ratio of the depreciation in any one year to the book value
throughout the life of the property.
 SUM OF THE YEARS DIGITS METHOD
dn = depreciation during the nth year

𝒓𝒆𝒗𝒆𝒓𝒔𝒆 𝒅𝒊𝒈𝒊𝒕𝒔
dn = 𝑪𝒐 − 𝑪𝒏 n = 5 , sum of years = 15
𝒔𝒖𝒎 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔
𝒏
Sum of years = (n+1) Depreciation of 2nd year
𝟐
𝟓+𝟒
D2 = 𝐂𝐨 − 𝐂𝐧
𝟏𝟓
Cm = 𝑪𝒐 − 𝑫𝒎

For any year m, m<n, the annual depreciation charge is

𝟐(𝒏−𝒎+𝟏)
dm = 𝑪𝒐 − 𝑪𝒏
𝒏(𝒏+𝟏)
A civil engineer bought a crane for erecting tall buildings. It
was invoiced from Japan CIF (cost, insurance, freight)
Manila at P250,000. Brokerage, bank, arrastre fees,
custom’s duties, permits, etc. total P120,000. At the end of
10 years, he expects to sell it for P50,000. Prepare a
depreciation schedule for each of the following methods:
(a) Straight-line formula, (b) sinking fund formula at 12%,
(c) Matheson formula, and (d) SYD Method
 Co = P250,000 + P120,000 = P370,000
Co-Cn = P320,000
Cn = P50,000 ; n = 10
STRAIGHT-LINE
Year Book Value At Depreciation (d) Book Value At End Of
FORMULA Beginning of Year (Co) Year (Cm)
1 P 370,000 P 32,000 P 320,000
𝐶𝑜 −𝐶𝑛
d= = P32,000 2 P 320,000 P 32,000 P 306,000
𝑛
3 P 306,000 P 32,000 P 274,000
D6 = 𝑑𝑚 = P32,000(6) 4 P 274,000 P 32,000 P 242,000
5 P 242,000 P 32,000 P 210,000
D6 = 𝑃192,000
6 P 210,000 P 32,000 P 178,000
C6 = Co-Dm = 7 P 178,000 P 32,000 P 146,000
𝑷𝟏𝟕𝟖, 𝟎𝟎𝟎 8 P 146,000 P 32,000 P 114,000
9 P 114,000 P 32,000 P 82,000
10 P 82,000 P 32,000 P 50,000
 Co = P250,000 + P120,000 = P370,000
Co-Cn = P320,000
Cn = P50,000 ; n = 10 ; i = 12%
SINKING FUND
Year Book Value At TOTAL Depreciation Book Value At End Of
FORMULA Beginning of Year (Co) (Dm) Year (Cm)

𝑪𝒐 −𝑪𝒏 𝟑𝟐𝟎,𝟎𝟎𝟎 1 P 370,000 P 18,234.93 P 351,765.07

d= 𝑭 = 𝟏.𝟏𝟐𝟏𝟎 −𝟏 2 P 370,000 P 38,658.05 P 331,341.94
(𝑨,𝒊%,𝒏)
𝟎.𝟏𝟐
3 P 370,000 P 61,531.96 P 308,468.04
𝟑𝟐𝟎,𝟎𝟎𝟎
=
𝟏𝟕.𝟓𝟒𝟗
= P18,234.93 4 P 370,000 P 87,150.72 P 282,849.28
𝑭 5 P 370,000 P 115,843.74 P 254,156.26
Dm = 𝑑( , 𝒊%, 𝒎)
𝑨 6 P 370,000 P 147,979.92 P 222,020.08
𝟏.𝟏𝟐𝟏 −𝟏 7 P 370,000 P 183,972.45 P 186,027.55
D1 =P18,234.93 ( )
𝟎.𝟏𝟐
8 P 370,000 P 224,284.07 P 145,715.93
= P18,234.93
9 P 370,000 P 269,433.10 P 100,566.90
C1 = Co-Dm =
𝑷𝟑𝟓𝟏, 𝟕𝟔𝟓. 𝟎𝟕 10 P 370,000 P 320,000 P 50,000
 Co = P250,000 + P120,000 = P370,000
Cn = P50,000 ; n = 10
MATHESON
Year Book Value At Depreciation during Book Value At End Of
FORMULA Beginning of Year (Co) the year (d) Year (Cm)
1 P 370,000 P 67,114.45 P 302,885.55
𝑛 𝐶𝑛 2 P 302,885.55 P 54,940.53 P 247,945.02
k=1− =
𝐶𝑜 3 P 247,945.02 P 44,974.85 P 202,970.17
0.1814 4 P 202,970.17 P 36,816.84 P 166,153.33
d =𝒌𝑪𝒎−𝟏 = 5 P 166,153.33 P 30,138.62 P 136,014.71
0.1814 (370,000) = 6 P 136,014.71 P 24,671.76 P 111,342.95
67,114.45 7 P 111,342.95 P 20,196.54 P 91,146.41
8 P 91,146.41 P 16,533.08 P 74,613.33
C6 = Co(1 − 𝑘)𝑚
9 P 74,613.33 P 13,534.14 P 61,079.19
=𝑷𝟏𝟏𝟏, 𝟑𝟒𝟐. 𝟗𝟓
10 P 61,079.19 P 11,079.18 P 50,000
 SUM OF THE YEARS DIGITS METHOD
dn = depreciation during the nth year

𝒓𝒆𝒗𝒆𝒓𝒔𝒆 𝒅𝒊𝒈𝒊𝒕𝒔
dn = 𝑪𝒐 − 𝑪𝒏 n = 5 , sum of years = 15
𝒔𝒖𝒎 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔
𝒏
Sum of years = (n+1) Depreciation of 2nd year
𝟐
𝟓+𝟒
D2 = 𝐂𝐨 − 𝐂𝐧
𝟏𝟓
Cm = 𝑪𝒐 − 𝑫𝒎

For any year m, m<n, the annual depreciation charge is

𝟐(𝒏−𝒎+𝟏)
dm = 𝑪𝒐 − 𝑪𝒏
𝒏(𝒏+𝟏)
 Co = P250,000 + P120,000 = P370,000
Cn = P50,000 ; n = 10
Ye Book Value At Depreciation during the Book Value At
SYD METHOD ar Beginning of year (d) End Of Year
Year (Co) (Cm)
1 P 370,000 10/55
𝑛(𝑛 + 1)
෍ 𝑦𝑒𝑎𝑟𝑠 = = 55 2 9/55
2
3 8/55
4 7/55
5 6/55
6 5/55
7 4/55
8 3/55
9 2/55
10 1/55
SEATWORK 2 JAN.30,2018
1. A machine cost P1,800,000. It has a salvage value of P300,000 at the end of
5 years. If money is worth 6% annually, using the types of depreciation
Determine the depreciation at the 3rd year
Determine the book value after 3 years
2. A certain company makes it the policy that for any new place of equipment
the annual depreciation cost should not exceed 10% of the original cost at any
time with no salvage value. Determine the length of service life necessary if
the depreciation method is (a) straight line method (b) sinking fund method at
8% (c) SYD method
MIDTERM SEATWORK 1
1. A shop makes an offer to you. You will not pay a maintenance costs on your
new loader for three years. You expect that the cost of P1400 after the fourth
year with an increase in maintenance costs of P200 per year thereafter. If you
expect that the life of this machine is 10 years, how much should you set
aside in an account with an interest rate of 4% compounded yearly to cover
the future maintenance costs?
2. The year-end operating and maintenance costs of a certain machine are
estimated to be P12,000 the first year and to increase by P2,500 each year
during its 4 year life. If capital is worth 12%, determine the equivalent
uniform year-end costs.
3. For the cash flow shown in Fig., find the values of P and F if i=12% per year.

1464.1
1000
1100
1210
1331
o
0
1 2 3 4 5 6 7 8
P F