Amortization Meanings

The word amortization is derived from the French “amortir”, which can be translated as “to redeem”. According to digopaul, the term amortization with the same content is also common. In principle, there are different meanings for the term amortization – the most important thing is the context in which it is used. Because the term is used in economics as well as in law and in the field of energy technology.

  • Even within economics, the term amortization has different meanings, whereby it basically denotes a return flow of investment capital.
  • Amortization in business is either the repayment of a debt or the process that makes an investment profitable.
  • The energetic amortization or the energy payback time describes the period of time that a power plant needs to generate the amount of energy that is estimated for the construction, maintenance and disposal of the system.
  • In law, amortization represents, for example, the depreciation of intangible goods (fiscal law) or the withdrawal of shares (company law).

Payback in economics

In the business world, too, amortization can mean different things. Amortization ultimately always means the return flow of investment amounts, but these can be viewed both from the perspective of financing and from the perspective of profitability. The first point of view is then the repayment of a loan and in the second case the profitability of an investment.

Amortization as repayment

In finance, amortization refers to the planned or unscheduled repayment of a long-term debt in contractually stipulated installments or, in general, the cancellation of burdens. This can be, for example, an investment loan or a construction loan. While the repayment of the loan increases the lender’s liquidity, it places a liquidity burden on the debtor. This should be taken into account when determining the monthly rate. In principle, of course, the following applies: the lower the rate, the longer the loan term and the higher the interest burden.

The amortization as the return on investment

In business administration, amortization is also the process in which the income generated from an investment helps to cover the original acquisition costs. A system is considered amortized when the revenue generated corresponds to the previous costs. Only then is it possible for a company to make a profit with the investment. Experts refer to the period of time required for this as the amortization period. It can be determined using the static or dynamic amortization calculation. Financial analysts use the concept in order to be able to choose the most profitable from various options.

The difference between static and dynamic amortization calculation

The main difference between the two ways of determining the amortization period is that the static amortization calculation does not take the interest into account, whereas the dynamic amortization calculation includes the interest expense.

With the static method, the amortization period corresponds to the quotient of the acquisition costs and the annual profits. Simply put: If an entrepreneur buys a machine for one million euros and this generates an annual income of 200,000 euros, the purchase will pay for itself after five years. The dynamic method, on the other hand, is a cumulative method. With this you add up the returns adjusted for the depreciation and imputed interest year after year until they reach the level of the investment amount.

The amortization in energy technology

The energetic amortization describes the time that a corresponding system needs to produce as much energy as is likely to be used for the construction, operation and disposal of the system. The variable is also known as the energy payback time or energy payback period. Since coal and petroleum power plants continuously require fuel, such systems do not succeed in increasing their use of energy again. It looks completely different with regenerative energies. For example, a solar thermal power plant in North Africa generated more electricity after just a few months than its construction required.

The harvest factor is closely related to the energy payback time. This variable indicates how often a power plant uses the energy required for its construction again over its useful life. In most cases, the specialist literature only takes into account the energy used to build and maintain the power plant. This makes it possible to compare different types of systems with one another without taking the fuels into account.

Payback in law

The term amortization is also used in various areas of law. In connection with fiscal law, amortization refers to the depreciation of intangible assets. In copyright law, on the other hand, there is an interest in amortization in order to keep investments that have already been made profitable by exploiting a work. In German company law, amortization also represents the withdrawal of shares. However, the legislature only allows such an approach on condition that a contractual agreement exists in this regard.