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. This is known as a uniform arithmetic gradient.
Suppose that the maintenance expense on a certain machine is
P1,OOO at the end of the first year and increasing at a constant rate of
P5OO each year for the next four years.
 G is known as the uniform gradient amount:

P = PA + PG Where: PA = A(P/A, i%, n)

and PG = G + 2G + 3G….(n - 1)G

PG = G(P/G, i%. n) =
 P/G, i%, n = [ - n][]. This s called the gradient
to present worth conversion factor. Thus,

P = A[] + [ - n][]
 EXAMPLES
1. A loan was to be amortized by a group of four end-of-a-year
payments forming an ascending progression. The initial payment was to
be P5,OOO and the difference between successive payments was to be
P4OO. 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? Ans. A’ = P5,53O.5O3
2. Find the equivalent annual payment of the following obligation at 2O
% interest. Ans. A’ = P6,725.782
End of Year Payment
1 P8,OOO
2 7,OOO
3 6,OOO
4 5,OOO
 ASSIGNMENT/SEATWORK
1. Suppose a man receives an initial annual salary of P6O,OOO,
increasing at the rate of P5,OOO a year. If money is worth 1O%,
determine his equivalent uniform salary for a period of 8 years.

2. The year-end operating and maintenance costs of a certain machine

are estimated to be P12,OOO the first year and to increase by
P2,5OO each year during its 4 year life. If capital is worth 12%,
determine the equivalent uniform year-end costs?
 DEPRECIATION
Depreciation is the decrease in the value of physical property
with the passage of time.
DEFINITION OF VALUE
Value – in a commercial sense, is the present worth of all future
profits that are to be received through ownership of a particular
property.
Market Value of a property – is the amount which a willing buyer
will pay to a willing seller for the property where each has equal
advantage and is under no compulsion to buy or sell.
The utility or use value of a property is what the property is
worth to the owner as an operating unit.
 Fair value - is the value which is usually determined by a
disinterested third party in order to establish a price that is fair to both
seller and buyer.
Book value – sometimes called depreciated book value, is the
worth of a property as shown on the accounting records of an
enterprise.
Salvage or resale value – is the price that can be obtained from
the sale of the property after it has been used.
Scrap value – is the amount the property would sell for if
disposed off as junk.
 Purposes of Depreciation:
1. To provide for the recovery of capital which has been invested in
physical property.
2. To enable the cost of depreciation to be charged to the cost of
producing products or services that results from the use of the
property.
Types of Depreciation:
1. Normal depreciation
[a] physical – is due to the lessening of the physical
ability of a property to produce results
[b] functional
 2. Depreciation due to changes in price level- it is almost
impossible to predict and therefore is not considered in economic
studies.
3. Depletion – refers to the decrease in the value of
property due to gradual extraction of its content.

Physical And Economic Life

Physical Life of a property is the length of time during which the
property may be operated at a profit.
 DEPRECIATION METHODS
Symbols used on the different depreciation method:
L = useful life of the property in years
CO = original cost
CL = the value at the end of the life, the scrap value (including
gain or loss due to removal)
d = annual cost of depreciation
Cn = the book value at the end of n years
Dn = depreciation up to age n years
 Straight line method
This method assumes that the loss in value is directly
proportional to the age of the property.

d=

Dn = n()

Cn =
 EXAMPLE
1. An electronic balance costs P9O,OOO and has an estimated salvage
value of P8,OOO at the end of its 1O years lifetime. What would be the
book value after 3 years, using the straight line method in solving for
the depreciation? Ans. Cn = P65,4OO
2. A certain company makes it a policy that for any new piece of
equipment the annual depreciation cost should not exceed 1O% of the
original cost at any time with no salvage value or scrap value.
Determine the length of service life necessary if the depreciation
method used is straight line method. Ans. L = 1O years
 SINKING FUND METHOD
This method assumes that a sinking fund is established in which
funds will accumulate for replacement. The total depreciation that has
taken place up to any given time is assumed to be equal to the
accumulated amount in the sinking fund at that time.
Dn Co – CL

O 1 2 3 n L

d d dd d
 d=

Dn = d []

Cn = Co - Dn
 EXAMPLES
1. A broadcasting corporation purchased an equipment for P53,OOO and paid
P1,5OO for freight and delivery charges to the job site. The equipment has normal
life of 1O years with a trade in value of P5,OOO against the purchase of a new
equipment at the end of the life. [a] Determine the annual depreciation cost by the
straight line method.[b] Determine the annual depreciation cost by the sinking fund
method. Assume interest at 6 1/2% compounded annually. Ans. [a] d = P4,95O [b] d
= P3,668.182
2. A firm bought an equipment for P56,OOO. Other expenses including installation
amounted to P4,OOO. The equipment is expected to have a life of 16 years with a
salvage value of 1O% of the original cost. Determine the book value at the end of
12 years by [a] the straight line method and [b] sinking fund method at 12%
interest. Ans. [a] C12 = P19,5OO,
[b]C12 = P29,518.381
 SEATWORK/ASSIGNMENT
1. A machine shop purchased 12 years ago a milling machine for P68,OOO. A
straight line depreciation reserve had been provided on a 25 year life of the
machine. The owner of the machine shop desires to replace the old milling machine
with a modern unit of many advantages costing P11O,OOO. It can sell the old unit
for P25,OOO. How much new capital will be required for the purchase?
2. Power to a remote transmitting station is provided by a Diesel-electric generator
unit. The original cost of the unit is P66,OOO. It costs P2,5OO to ship the unit to the
job site. An additional cost of P3,5OO was incurred for installation. [a] Determine
the annual depreciation cost by the straight line method, if the unit has an expected
life of 11 years. The salvage value of the unit at the end of its life was estimated at
P5,5OO. [b] Determine the annual depreciation cost by the sinking fund method.
Assume that the annual charge of depreciation was deposited in a fund drawing
compound interest at the rate of 5%.
 DECLINING BALANCE METHOD
In this method, sometimes called the constant percentage
method or the Matheson Formula, it is assumed that the annual cost of
depreciation is a fixed percentage of the salvage value at the beginning
of the year. The ratio of the depreciation in any year to the book value
at the beginning of that year is constant throughout the life of the
property and is designated by k [the rate of depreciation].

Co C1 C3 Cn-1 Cn CL-1 CL
O 1 2 3 n-1 n L-1 L

d1 d2 d3 dn dL
 dn = depreciation during the nth year
Year Book value at the Depreciation during the year Book value at the end of the year
beginning of year

1 Co d₁ = K Co
2 Co(1-k.) d₂ = K C₁

3 Co d₃ = K C₂

n Co dn = K

L Co =K
 k=1- =1-
This method does not apply, if the salvage value is zero, because
k will be equal to one and, will be equal to
 Example
1. A certain type of machine loses 1O% of its value each year. The
machine costs P2,OOO.OO originally. Make out a schedule showing the
yearly depreciation, the total depreciation and the book value at the
end of each year for 5 years.
year Book value at Depreciation Total Book value at
the beginning during the year Depreciation at end of year
of year 1O% end of year
1 P2,000.00 P200. 00 P200. 00 P1,8OO.OO

2 1,8OO.OO 18O.OO 38O.OO 1,62O.OO

3 1,62O.OO 162.OO 542.OO 1,458.OO

4 1,458.OO 145.8O 687.8O 1,312.2O

5 1,312.2O 131.22 819.12 1,18O.98