[1]Set A

1. a) Engineering Economy is the analysis and evaluation of the factors that will affect
the economic success of engineering projects to the end that a recommendation can
be made which will insure the best use of capital.
b) Inelastic demand occurs when a decrease in the selling price produces a less than
proportionate increase in sales.
c) An interest rate is the rate at which interest is paid by a borrower for the use of money
that they borrow from a lender. Specifically, the interest rate (I/m) is a percent of principal (I)
paid at some rate (m). For example, a small company borrows capital from a bank to buy
new assets for their business, and in return the lender receives interest at a predetermined
interest rate for deferring the use of funds and instead lending it to the borrower. Interest
rates are normally expressed as a percentage of the principal for a period of one year
d) Compound interest is the sum of the capital plus the total amount of interest accumulated
in previous periods. Thus compound interest means interest on top of interest. A bank
account, for example, may have its interest compounded every year: in this case, an
account with P1000 initial principal and 20% interest per year would have a balance of
P1200 at the end of the first year, P1440 at the end of the second year, and so on.
e) Discount on a negotiable paper is the difference between the present worth( the amount
received for the paper in cash) and the worth of the paper at some time in the future (the
face value of the paper or principal). Discount is interest paid in advance. Example is that
when you borrowed P5000 from a bank and agreed to pay the loan at the end of 9 months
and the bank discounted the loan and gave you P4000 in cash.
Present worth - the worth of money or commodity at present time. Money may worth
higher or lower depending on the economic stability of nation. The amount of commodities
or services changes due to the supply and demand.

Set B

1. a) Perfect competition occurs in a situation where a commodity or service is supplied

by a number of vendors and there is nothing to prevent additional vendors entering
the market.
Monopoly is the opposite of perfect competition. A perfect monopoly exists when
a unique product or service is available from a single vendor and that vendor can
prevent the entry of all others into the market.
Oligopoly exists when there are so few suppliers of a product or service that action
by one will almost inevitably result in similar action by others.
b) The law of supply and demand may be stated as follows: Under conditions of
perfect competition the price at which a given product will be supplied and purchased
is the price that will result in the supply and demand being equal.
c) Ordinary annuity is one where the payments are made at the end of each period.
d) 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.
e) 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. Example : Pensioner

[2] SET A: Problem

3. Your company bought a machine for P140,000(including other costs). Expected life is 7
years. Scrap value Is P12,000. What is the depreciation change during the 4 th year and the
book value at the end of the 4th year.
a. By Sinking Fund Method, at 8%.
L = 7 years Cl=P12,000
Co=P140,000 n=4 . Find D4 and C4
d= (Co=Cl)/F/A,i%,L) = P14,345.5
D4=s(F/A,i%,n)=P64,641 (Depreciation charge during the 4th year)
C4 = Co-D4 =P75,359 (book value at the end of the 4 th year)
b. By declining balance method
k=1-(Cl/Co)^(1/L) =1-(12,000/140,000)^1/7=0.2960
D4=(Co(1-k)^(n-1))k=(0.2960)(140000)(1-0.2960)^4-1 = P14459
C4=Co(1-k)^n=140,000(1-0.2960)^4=34389
4. Mr Romualdo bought a bond having a face value of P1000 for P970. The bond rate was
14% nominal and interest payments were made to him semiannually for a total of 7 years.

At the end of the seventh year, he sold the bond to a friend at a price that resulted a yield of
16% nominal on his investment. What was the selling price?

PRACTICAL THINKING TOOLS:

1. PMI (Plus, Minus, Interesting)
A crystallization of the open-minded attitude used deliberately. The treatment
of ideas , suggestions, and proposals. Instead of just deciding whether or not you
like an idea, this thinking operation leads you to find the good points (P=Plus), the
bad points(M=Minus) and the interesting points (I =Interesting) about an idea. The
natural reaction to an idea is to like or dislike it, to approve or disapprove; and then
stop further evaluation. Using PMI leads to a deliberate operation of going beyond
natural emotional reaction to an idea, to enlarge the view of a situation.
Principles:
A. PMI is important because without it you may reject a valuable idea that seems
bad at first sight.
B. Without a PMI you are very unlikely to see the disadvantages of an idea that you
like very much.
C. PMI can show that ideas are not just good or bad but can also be interesting if
they lead to other ideas.
D. Without PMI major judgements are based not on the value of the ideas itself but
on your emotions at that time.
E. With a PMI , you decide whether or not you like the idea after you have explored
it instead of before.
Practice examples:
1. All the seats should be taken out of buses
2. Windows should be made of transparent plastic instead of glass.
2. C & S : Consequence and Sequel
C&S is a crystallization of the process of looking ahead to see the
consequences of some action, plan, decision, rule, invention etc. C&S goes beyond
CAF, what may happen after the decision has been made. Immediate consequences
as well as short-term ( 1-5 years), medium-term (5-25 years) and long term
consequences (over 25 years). The intention is to enlarge the view beyond
immediate effect of that action. An action may seem worthwhile if the immediate
effect is good. But if one makes a deliberate effort to look at longer term
consequences, the action may not be worthwhile at all and vice versa.

Principles:
A. Other people may be able to see the consequences of your action more easily
than you can yourself.
B. It is important to know whether the consequences are reversible or not.
C. The immediate consequences may be good and long-term consequences bad or
the other way around.
D. You should look at the consequences not only as they affect you but as they
affect others as well.
E. You should do a full C&S before deciding which consequences you should
consider.
Practice Examples:
1. The world runs out of gas and oil
2. All school examinations are abolished.
3. Planning
Bring together AGO, C&S, CAF, and PMI
Planning is thinking ahead, how you are going to do something, the manner of going
some place or getting something done. The more complicated the thing you are
going to do, the more necessary it is to have a clear plan.
Principles:
A. In planning it is important to know exactly what you want to achieve (AGO).
B. Always have an alternative plan ready in case something goes wrong with the
first plan.
C. The value of the plan depends on the consequences (C&S).
D. Keep the plan as simple and direct as possible.
E. Consider all factors (CAF) very carefully and get as much information as possible
before your plan.
Practice examples:
1. Your plan to prevent people from hijacking aircraft.
2. Your plan to make it easier for people to find the jobs they like.
AGO- Aims, Goals, Objectives
Focus on Purpose : Aim is the general direction. Goal is an ultimate destination.
Objective is a recognizable point of achievement along the way. Without a sense of
purpose, all actions are either reactions to a situation or matters of habit or
imitation.
Principles:
A. If you know exactly what your objectives are, it is easier to achieve them.
B. In the same situation different people may have different objectives.
C. On the way to a final objective, there may be a chain of smaller objectives,
each one following from the previous one.

D. Objectives should be near enough, real enough and possible enough for a
person to really try to reach them
E. There may be many objectives, but some are more important than others.
Practice examples:
1. AGO of politician vs. business executive
2. AGO of school principal
3. In respect to food, AGO of homemaker, cook in restaurant, food manufacturer,
farmer, government.

[2] SET A : Definition

1.DEPRECIATION
-is the decrease in the value of physical property with the passage of time.
a) Purpose 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 result from the use of the property.
b) Types of Depreciation
1. Normal Depreciation
a. physical is due to the lessening of the physical ability of a property to produce
results. Its common causes are wear and deterioration.
b. functional is due to the lessening in the demand for the function which the
property was designed to render. Its common causes are inadequacy, changes in styles,
population center shift, saturation of markets, or more efficient machines are produced.
2. Depreciation due to changes in price levels is almost impossible to predict and
therefore is not considered in economy studies
3. Depletion refers to the decrease in the value of a property due to the gradual
extraction of its contents.
c) Requirements of a depreciation method
1. It should be simple.
2. It should recover capital
3. The book value will be reasonably close to the market value at any time
4. The method should be accepted by the Bureau of Internal Revenue.
d) The Straight line method
-This method assumes that the loss in value is directly proportional to the age of the
property.
d = (Co Cl)/L
Dn = n(Co-Cl)/L
Cn = Co-Dn
e. Sinking fund
-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.
d = (Co Cl)/(F/A, i%,L)
Dn = d(F/A, i%, n)

Cn = Co-Dn
f. Declining balance
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. This method does not apply, if the salvage value
is zero, because k will be equal to one and d1 will be equal to Co.
dn=depreciation during the nth year
dn=(Co(1-k)^n-1)k
Cn= Co(1-k)^n = Co (Cl/Co)^n/L
Cl = Co(1-k)^L
k = 1-(Cn/Co)^1/n = 1-(Cl/Co)^L
2. CAPITAL
a) Equity Capital or ownership funds are those supplied and used by the owners of an
enterprise in the expectation that a profit will be earned.
b) Borrowed funds or capital are those supplied by others on which a fixed rate of interest
must be paid and the debt must be repaid at a specified time.
c. Bond Financing
A bond is a certificate of indebtedness of a corporation usually for a period not less
than ten years and guaranteed by a mortgage on a certain assets of the corporation or its
subsidiaries. Bonds are issued when there is need for more capital such as for expansion of
the plant or the services rendered by the corporation.
The face or par value of a bond is the amount stated on the bond. When the face
value has been repaid, the bond is said to have been retired or redeemed. The bond rate is
the interest rate quoted on the bond.
d. The Corporation is a distinct legal entity, separate from the individuals who own it, and
which can engage in almost any type of business transaction in which a real person could
occupy himself or herself.
Advantages:
1. It enjoys perpetual life without regard to any change in the person of its owners,
the stockholders.
2. The stockholders of the corporation are not liable for the debts of the corporation.
3. It is relatively easier to obtain large amounts of money for expansion, due to its
perpetual life.
4. The ownership in the corporation is readily transferred.
5. Authority is easily delegated by the hiring of managers.
Disadvantages
1. The activities of a corporation is limited to those stated in its charter.
2. It is relatively complicated in formation and administration.
3. There is a greater degree of governmental control as compared to other types of
business organizations.
[2] SET B : Definition
1.

a) 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.
b) 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.
c) book value sometimes called depreciated book value is the worth of a property as shown
in the accounting records of an enterprise.
d)Salvage value or resale value is the price that can be obtained from the sale of the
property after it has been used.
e. Scrap Value is the amount the property would sell for if disposed off as junk.
2.
a) Individual ownership or sole proprietorship is the simplest form of business organization,
wherein person uses his or her own capital to establish a business and is the sole owner.
Advantages of the individual ownership:
1. It is easy to organize
2. The owner has full control of the enterprise.
3. The owner is entitled to whatever benefits and profits that accrue from the business.
4. It is easy to dissolve.
Disadvantages of the Individual Ownership
1. The amount of equity capital which can be accumulated is limited.
2. The organization ceases upon the death of the owner
3. It is difficult to obtain borrowed capital, owing to the uncertainty of the life of the
organization.
4. The liability of the owner for his debts is unlimited.
Partnership is an association of two or more persons for the purpose of engaging in a
business for
profit.
Advantages:
1. More capital may be obtained by the partners pooling their resources together.
2. It is bound by few legal requirements as to its accounts, procedures, tax forms and other
items of operation.
3. Dissolution of the partnership may take place at any time by mere agreement of the
partners.
4. It provides an easy method whereby two or more persons of differing talents may enter
into business, each carrying those burdens that he can best handle.
Disadvantages:
1. The amount of capital that can be accumulated is definitely limited.
2. The life of the partnership is determined by the life of the individual partners. When any
partner dies, the partnership automatically ends.
3. There are many serious disagreement among the individual partners.
4. Each partner is liable for the debts of the partnership.
b) Stock ownership is the practice of companies in giving their staff members shares In their
company as part of the salary. It also means owning a stock in a company investment.
c) Common stock represents ordinary ownership without special guarantees of return.
Common stockholders have certain legal rights, among which are the following:
1. Vote at stockholders meeting.

2.
3.
4.
5.
6.
7.

Elect directors and delegates to them power to conduct the affairs of the business.
Sell or dissolve the corporation
Make and amend the by laws of the corporation
Subject to government approval, amend or change the character or capital structure.
Participate in the profits.
Inspect the books of the corporation.

d) Preferred Stock
Preferred stockholders are guaranteed a definite dividend on their stocks. In case the
corporation is dissolved, the assets must be used to satisfy the claims of the preferred
stockholders before those of the holders of the common stock. Preferred stockholders
usually have the right to vote in meetings but not always.
e. Bond Financing
A bond is a certificate of indebtedness of a corporation usually for a period not less
than ten years and guaranteed by a mortgage on a certain assets of the corporation or its
subsidiaries. Bonds are issued when there is need for more capital such as for expansion of
the plant or the services rendered by the corporation.
The face or par value of a bond is the amount stated on the bond. When the face
value has been repaid, the bond is said to have been retired or redeemed. The bond rate is
the interest rate quoted on the bond.
f) Declining balance
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. This method does not apply, if the salvage value
is zero, because k will be equal to one and d1 will be equal to Co.
dn=depreciation during the nth year
dn=(Co(1-k)^n-1)k
Cn= Co(1-k)^n = Co (Cl/Co)^n/L
Cl = Co(1-k)^L
k = 1-(Cn/Co)^1/n = 1-(Cl/Co)^L
g) sum of the years digits (SYD)
Let dn= depreciation charge during the nth year
dn= (depreciation factor)(total depreciation)
dn = (reverse digit(Co-Cl)/(Sum of digits)
For example, for a property whose life is 5 years.
Year 1 2
3
4
5
Year in reverse order 5
4
3
2
1
Depreciation factor 5/15 4/15 3/15 2/15 1/15
Depreciation during the year (5/15)(Co-Cl) (4/15)(Co-Cl) (3/15)(Co-Cl)

[2]SET B: Problem
3. Co = P100,000

L = 5 years
Cl = P10,000
n=3
a) By double declining method
dn = (2/L)(Co)(1-2/L) ^n-1 = (2/5)(100,000)(1-2/5)^2 = P14,400
Cn = Co(1-2/L)^n = 100,000(1-2/5)^3 = P21,600
b) By Sum of the years digits (SYD)
Co Cl = 90,000
Year
1
2
3
4
Year in reversed order
5
4
3
1
Depreciation during the year
Book value at end of year
(5/15)(90,000)=30,000
100,000-30,000 = 70,000
(4/15)(90,000)=24,000
70,000-24,000 = 46,000
(3/15)(90,000)=18,000
46,000-18,000 = 28,000

5
2

4. A bond issue of P200,000 in 10 year bonds, in P1,000 units, paying 16% nominal
interest in semiannual payments, must be retired by the use of a sinking fund that
earns 12% compounded semiannually. What is the total semiannual expense?
Solution:
F = 200,000 r= 16%/2 = 8%
i=12%/2 = 6 n=10(2)=20
A= (P200,000)/(F/A,6%,20)=P200,000/36.7856=P5,437
I=Fr=(P200,000)(0.08)=P16,000
Total Semiannual expense = P5,437 + P16,000 = P21,437
PRACTICAL THINKING TOOLS
1. CAF(Consider All Factors)
Related to action, decisions, planning, judgment, and conclusions. Deliberate
operation directing attention from the obvious factors to looking around for all the
factors. Also factors affecting oneself, others and society in general. CAF differs
from PMI in that PMI is a reaction to an idea whereas CAF is an exploration of a
situation before coming up with an idea.
Principles:
A. CAF is useful before choosing, deciding or planning.
B. It is better to consider all the factors first and then pick out the ones that matter
most.
C. You may have to ask someone else to tell you whether you have left out some
important factors.
D. If you have left out an important factor your answer may seem right but will later
turn out to be wrong.

E. If you do a CAF on someone elses thinking you may be able to tell the person
what has been left out.
Practice examples:
1. A young couple is undecided whether to get married at once or wait. What factors
should they be considering?
2. The sugar industry is demanding protection from foreign imports which are
coming into the country at a lower price and taking over the market, what factors
should the government consider in this matter.
2. AGO- Aims, Goals, Objectives
Focus on Purpose : Aim is the general direction. Goal is an ultimate destination.
Objective is a recognizable point of achievement along the way. Without a sense of
purpose, all actions are either reactions to a situation or matters of habit or
imitation.
Principles:
A. If you know exactly what your objectives are, it is easier to achieve them.
B. In the same situation different people may have different objectives.
C. On the way to a final objective, there may be a chain of smaller objectives,
each one following from the previous one.
D. Objectives should be near enough, real enough and possible enough for a
person to really try to reach them
E. There may be many objectives, but some are more important than others.
Practice examples:
1. AGO of politician vs. business executive
2. AGO of school principal
3. In respect to food, AGO of homemaker, cook in restaurant, food manufacturer,
farmer, government.

3. DECISIONS
Bring together in particular FIP and APC and also the other tools in a more general
way. CAF, AGO, FIP, C&S, APC and also the PMI. This helps to increase knowledge of
the situation so that the decision either makes itself, or is at least easier to make
because the alternatives are more numerous and the consequences better defined.
The final considerations are the personal values of the decision maker.
Principles:
A. You should always be able to tell yourself the real reason behind any decision you
make.
B. It is important to know whether the decision can be reversed or not after it has
been made.
C. Not making a decision is really a decision to do nothing.
D. Decision are very difficult to make if you are not prepared to give up something
in order to gain something.

E. In making a decision, you should consider all factors(CAF), look at the

consequences (C&S), be very clear about objectives (AG0), and assess the
priorities(FIP). And fill all the possible alternatives(APC). When you have done this, a
decision may be much easier.
Practice Examples:
1. How do people decide to spend their money?
2. A young woman has two boys, one of them is quite and hardworking. The other is
the better looking and more fun but rather unreliable. Both want to marry her. She
has to decide.
[3] Set A-B:
SET A
a

SCIENCE, a term derived from Latin word scientia, is a systematized body of

knowledge based on facts and events of life arranged according to order. It is a
system of gaining knowledge based on a scientific method which has the following
steps: unbiased observations, formulation of hypothesis, gathering of data,
systematic experimentation, analysis of data and conclusion. It aims to give better
understanding of current phenomena and a better ability to infer future events. It
expresses general truths and principles to explain how things work.

ENGINEERING is an applied science. It aims to solve problems to improve the status

quo. It can also be defined as the optimal conversion of the natural resources to
products that will make for optimum and safe utilizations of humans. It solves
problems not just by explaining but by actually designing and manufacturing
products, engines and devices which will last for a long time and under a
specification of safety.

PRESENT ECONOMY PROBLEMS

There are many cases in engineering economy studies where
interest is not a factor, these studies are frequently called present economy
problems. Such studies usually involve the selection between alternative
designs, materials, or methods.

RATE OF RETURN (ROR) METHOD

The rate of return on the capital invested is given by the
formula,

Rate of return=

net annual profit

capital invested

Rate of return is a measure of effectiveness of an investment of

capital. It is a financial efficiency. When this method is used, it is necessary to
decide whether the computed rate of return is sufficient to justify the investment.
The advantage of this method is that it is easily understood by management and
investors. The applications of the rate of return method is controlled by the
following conditions. A single investment of capital at the beginning of the first

year of the project life and identical revenue and cost data for each year. The
capital invested is the total amount of capital investment required to finance the
project, whether equity or borrowed.
e

PRESENT WORTH (PW) METHOD

This pattern for economy studies is based on the concept of present worth. If the
present worth. If the present worth of the net cash flows is equal to, or greater
than, zero, the project is justified economically. The present worth method is
flexible and can be used for any type of economy study. It is used extensively in
making economy studies in the public works field, where long-lived structures are
involved.
SET B
f

SCIENCE, a term derived from Latin word scientia, is a systematized body of

knowledge based on facts and events of life arranged according to order. It is a
system of gaining knowledge based on a scientific method which has the following
steps: unbiased observations, formulation of hypothesis, gathering of data,
systematic experimentation, analysis of data and conclusion. It aims to give better
understanding of current phenomena and a better ability to infer future events. It
expresses general truths and principles to explain how things work.

ENGINEERING is an applied science. It aims to solve problems to improve the status

quo. It can also be defined as the optimal conversion of the natural resources to
products that will make for optimum and safe utilizations of humans. It solves
problems not just by explaining but by actually designing and manufacturing
products, engines and devices which will last for a long time and under a
specification of safety.

ANNUAL WORTH. In this method, interest on the original investment (sometimes

called minimum required profit) is included as the cost. If the excess of annual cash
inflows over annual cash out flows is not less than zero the proposed investment is
justified is valid. This method is covered by the same limitations as the rate of
return pattern a single initial investment of capital and uniform revenue and cost
throughout the life of investment.

FUTURE WORTH. The future worth method for economy studies is exactly
comparable to the present worth method except that all cash inflows and outflows
are compounded forward to a reference point in time called the future. If the future
worth of the net cash flows is equal to, or greater than, zero, the project is justified
economically.

PAYBACK PERIOD. The payback period is commonly defined as the length of time
required to recover the first cost of an investment from the net cash flow produced by
that investment for an interest rate of zero
Payout period (years) =

Investment salvage value

Net annual cash flow

h.) ECONOMICS is the social science that deals with the production, distribution, and
consumption of goods and services and with the theory and management of economies or
economic systems. It is also the theories, principles, and models that deal with how
the market process works. It attempts to explain how wealth is created and distributed
in communities, how people allocate resources that are scarce and have many
alternative uses, and other such matters that arise in dealing with human wants and
their satisfaction.
[4] SET A-Definition
1.
a)Capitalized Method
The capitalized cost method is a variation of the present worth cost pattern. This
method is used for alternatives having long lives. To use the method, determine the
capitalized cost of all the alternatives and choose that one with the least capitalized cost.
b) Annual cost method
To apply this method, the annual cost of the alternatives including interest on
investment is determined. The alternative with the least annual cost is chosen. This pattern,
like the rate of return on additional investment pattern, applies only to alternatives which
has a uniform cost data for each year and a single investment of capital at the beginning of
the first year of the project life.
c) Equivalent Uniform Annual Cost Method
In this method, all cash flows(irregular or uniform) must be converted to an
equivalent uniform annual cost, that is, a year-end amount which is the same each year. The
alternative with the least equivalent uniform annual cost is preferred. When the EUAC
method is used, the equivalent uniform annual cost of the alternatives must be calculated
for one life cycle only. This method is flexible and can be used for any type of alternative
selection problems. The method is a modification of the annual cost pattern.
d. Variable cost
Variable costs are those costs which vary with output or any change in the
activities of an enterprise. Unlike fixed costs, which remain constant regardless of output,
variable costs are a direct function of production volume, rising whenever production
expands and falling whenever it contracts. Examples of common variable costs include raw
materials, packaging, and labor directly involved in a company's manufacturing process. For
example, a firm pays for raw materials. When activity is decreased, less raw material is
used, and so the spending for raw materials falls. When activity is increased, more raw
material is used and spending therefore rises. Note that the changes in expenses happen
with little or no need for managerial intervention. These costs are variable costs.
e) Marginal cost
Marginal cost is the additional cost of producing one more unit of a product. That
is, it is the cost of producing one more unit of a good. If producing additional vehicles
requires, for example, building a new factory, the marginal cost of those extra vehicles
includes the cost of the new factory.

f) Increment cost
Increment costs are those that arise as the result of a change in operations or
policy. A very simple example would be a factory making widgets where it takes one
employee an hour to make a widget. As a simple figure, the incremental cost of a widget
would be the wages for the employee for an hour plus the cost of the materials needed to
produce a widget.
g) Sunk Cost
Sunk Cost represents money which has been spent or capital which has been
invested and which cannot be recovered due to certain reasons. For example, if a firm sinks
$1 million on an enterprise software installation, that cost is "sunk" because it was a onetime thing and cannot be recovered once expended.
SET A-Problem
A company is considering two types of equipment for its manufacturing plant. Pertinent data
are as follows:
Type A
Type B
First cost
P200,000
P300,000
Annual Operating cost
P32,000
24,000
Annual labor cost
P50,000
32,000
Insurance and property taxes
3%
3%
0.03(First cost)
0.03(First Cost)
= P6,000
=P9,000
Payroll taxes
4%
4%
0.04(Annual labor cost)
=P2,000
=P1,280
Estimated life
10 yrs
10 yrs
If the minimum required rate of return is 15%, which equipment should be selected?
1
a.) By ROR on additional investment method
Type A
Annual Costs:
Depreciation = First Cost/(F/A,15%,10) = 200,000/20.3037 = P9,850
Operation = P32,000
Labor = P50,000
Payroll taxes = 0.04(Annual labor cost) = 50000(0.04) = 2,000
Taxes & Insurance = 0.03(First cost) = (P200,000)(0.03) = P6,000
Total Annual Cost = P99,850
Type B
Annual Costs:
Depreciation = First Cost/(F/A,15%,10) = 300,000/20.3037 = P14,776
Operation = P24,000
Labor = P32,000
Payroll taxes = 0.04(Annual labor cost) = 32000(0.04) = P1,280

Taxes & Insurance = 0.03(First cost) = (P300,000)(0.03) = P9,000

Total Annual Cost = P81, 056
Annual Savings = P99,850 P81,056 = P18,794
Additional Investment = P300,000 P200,000 = P100,000
Rate of Return on Additional Investment = P18,794(100)/P100,000= 18.79 > 15%
Type B should be selected.

b.) Present Worth Cost Method

Type A
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll
taxes+ Insurance and property taxes
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
0.04(Annual labor cost) + 0.03(First cost) = P90,000
PWCa = First cost + Annual cost(P/A, 15%,10) = P200,000 + (90,000)(5.0188) = P651,692

Type B
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll
taxes+ Insurance and property taxes
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
0.04(Annual labor cost) + 0.03(First cost) = P66,280
PWCb = First Cost + Annual cost (P/A, 15%, 10) = 300,000 + (66,280)(5.0188) = P632,646
Since PWCb < PWCa for the same period of time, type B should be selected.
2.
Given:
11,000 units/year
P13/unit
Equipment cost:P 120,000
Other equipment: P2,000
Labor cost: P5/unit
Material cost: P4/unit
Taxes and insurance : 3%
Overhead cost: 20%
Operating and maintenance: P9,000
Capital cost: 16%
Solution:
Annual revenue = 11,000 units/yr (P13/unit)

Annual revenue = P143,000

Annual cost:
Other equipment: P2,000
Labor cost: P5/unit(11,000units/yr) = P55,000
Material cost: P4/unit(11,000units/yr)= P44,000
Taxes and insurance : 0.03(equipment cost)= 0.03(120,000)=P3,600
Overhead cost: 0.2(labor cost) =0.2(55,000)= P11,000
Operating and maintenance: P9,000
Capital cost: 0.16(equipment cost)=0.16(120,000)=P19200
Depreciation = equipment cost/ (F/A, 16%,5) = P17,500
Annual cost = P161,300
Annual Revenue Annual Cost = -P18,300
Therefore, this opportunity should not be accepted!
[4] SET B: Definition
a. Rate of Return on additional investment method
The formula for the rate of return on additional investment is,
Rate of return on additional investment = annual net savings/additional investment
If the rate of return on additional investment is satisfactory, then, the alternative requiring a
bigger investment is more economical and should be chosen.
b. Annual Cost Method
To apply this method, determine the annual cost of each alternative including the interest
on capital/investment. Choose the alternative which has a least annual cost. This pattern,
like the rate of return on additional investment pattern is applicable only to alternatives
which has a uniform cost data for each year and a single investment of capital at the
beginning of the first year of the project life.
c. Capitalized Method
The capitalized cost method is a variation of the present worth cost pattern. This method
is used for alternatives having long lives. To use the method, determine the capitalized cost
of all the alternatives and choose that one with the least capitalized cost.
d. Payback(Payout) Period Method
To use this method, the payback period of each alternative is computed. The alternative
with the shortest payback period is adopted. This method is seldom used.
e. Fixed costs
Fixed costs are those costs which remain constant, whether or not a given change in
operations or policy is adopted. Unlike variable costs, fixed costs are not zero when
production is zero. Good examples of fixed costs would be insurance, rent, periodic load
payments, interest paid, fixed permanent employee salaries. Total fixed costs remain
unchanged as volume increases, while fixed costs per unit decline. For example, if a bicycle

business had total fixed costs of $1,000 and only produced one bike, then the full $1,000 in
fixed costs must be applied to that bike. On the other hand, if the same business produced
10 bikes, then the fixed costs per unit decline to $100.
f. Variable Costs
Variable costs are those costs which vary with output or any change in the activities of an
enterprise. Unlike fixed costs, which remain constant regardless of output, variable costs
are a direct function of production volume, rising whenever production expands and falling
whenever it contracts. Examples of common variable costs include raw materials,
packaging, and labor directly involved in a company's manufacturing process. For example,
a firm pays for raw materials. When activity is decreased, less raw material is used, and so
the spending for raw materials falls. When activity is increased, more raw material is used
and spending therefore rises. Note that the changes in expenses happen with little or no
need for managerial intervention. These costs are variable costs.
g. Marginal costs
Marginal cost is the additional cost of producing one more unit of a product. That is, it is
the cost of producing one more unit of a good. If producing additional vehicles requires, for
example, building a new factory, the marginal cost of those extra vehicles includes the cost
of the new factory.

[4 ]SET B-Problem
A company is considering two types of equipment for its manufacturing plant. Pertinent data
are as follows:
Type A
Type B
First cost
P200,000
P300,000
Annual Operating cost
P32,000
24,000
Annual labor cost
P50,000
32,000
Insurance and property taxes
3%
3%
0.03(First cost)
0.03(First Cost)
= P6,000
=P9,000
Payroll taxes
4%
4%
0.04(Annual labor cost)
=P2,000
=P1,280
Estimated life
10 yrs
10 yrs
If the minimum required rate of return is 15%, which equipment should be selected?
1. a. ) By equivalent Uniform Annual Cost Method
Type A
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
Payroll taxes+ Insurance and property taxes
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
0.04(Annual labor cost) + 0.03(First cost) = P90,000
EUACa = First cost (A/P,15%,10) + Annual cost = (200,000)(0.1993) + 90,000 = P129,860

Type B
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
Payroll taxes+ Insurance and property taxes
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
0.04(Annual labor cost) + 0.03(First cost) = P66,280
EUACb = First cost (A/P,15%,10) + Annual cost = P300,000(0.1993) + 66,280 = P126,070
Since EUACb < EUACa, type B is more economical.
1.b.) Present Worth Cost Method
Type A
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll
taxes+ Insurance and property taxes
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
0.04(Annual labor cost) + 0.03(First cost) = P90,000
PWCa = First cost + Annual cost(P/A, 15%,10) = P200,000 + (90,000)(5.0188) = P651,692

Type B
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll
taxes+ Insurance and property taxes
Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost +
0.04(Annual labor cost) + 0.03(First cost) = P66,280
PWCb = First Cost + Annual cost (P/A, 15%, 10) = 300,000 + (66,280)(5.0188) = P632,646
Since PWCb < PWCa for the same period of time, type B should be selected.
2.
Given:
11,000 units/year
P13/unit
Equipment cost:P 120,000
Other equipment: P2,000
Labor cost: P5/unit
Material cost: P4/unit
Taxes and insurance : 3%
Overhead cost: 20%
Operating and maintenance: P9,000
Capital cost: 16%
Solution:
Annual revenue = 11,000 units/yr (P13/unit)
Annual revenue = P143,000
Annual cost:

Other equipment: P2,000

Labor cost: P5/unit(11,000units/yr) = P55,000
Material cost: P4/unit(11,000units/yr)= P44,000
Taxes and insurance : 0.03(equipment cost)= 0.03(120,000)=P3,600
Overhead cost: 0.2(labor cost) =0.2(55,000)= P11,000
Operating and maintenance: P9,000
Capital cost: 0.16(equipment cost)=0.16(120,000)=P19200
Depreciation = equipment cost/ (F/A, 16%,5) = P17,500
Annual cost = P161,300
Annual Revenue Annual Cost = -P18,300
Therefore, this opportunity should not be accepted!
[5] SET A

2. Two electric motors are being considered to power an industrial hoist. Each is
capable of providing 100 hp. Pertinent data for each motor are as follows:
Motor A
Investment = P25,000
Electrical efficiency = 84%
Maintenance per year = 400
Life, years = 10
Motor B
Investment = P32,000
Electrical efficiency = 88%
Maintenance per year = 600
Life, years = 10
Money is worth 20%. If the expected usage of the hoist is 700 hours per year, what
would be the cost of electrical power have to be before Motor A is favored over
motor B?
Solution:
Let x = cost of electrical power for both motors to be equally economical
Motor A
Annual Costs:
Depreciation = (Investment)/(F/A, 20%, 10) = P963
Power = (100)(0.746)(700)(x)/0.84 = 62,167x
maintenance = 400
Interest on capital = Investment(0.20) = 5,000
Total annual cost = P6,363 + 62,167x
Motor B

Annual Costs:
Depreciation = (Investment)/(F/A, 20%, 10) = PP1,232
Power = (100)(0.746)(700)(x)/0.88 = 56,341x
maintenance = 600
Interest on capital = Investment(0.20) = 6,400
Total annual cost = P8232 + 59341x
P6363 + P62167x = 8232 + 592341x
X= P0.6614 per kwh
Motor A will be more economical for electrical power cost less than P0.6614 per
kwh.
3. Motor rebuild:
Investment = 50,000
Maintenance = 15,000
Life = 5 years
New motor
Investment = 150,000
Maintenance = 12,000
Life = 10
Rebuild
Depreciation = (50,000)/(F/A, 16%,5) = P7,270
Maintenance = P15,000
Interest on investment (50,000)(0.16) = P8,000
Total : 30,270
New motor:
Depreciation = (150,000)/(F/A, 16%,10) = P7,035
Maintenance = P12,000
Interest on Investment (150,000)(0.16) = P24,000
Total: P43,035
Thus, rebuild the old motor.
4. First cost = 220,000,000
Interest =6 %
Annual operation and maintenance cost = P11,000,000
Annual income/benefit = 26,000,000
Life = 60 years
a) By EUAC Method

Annual benefit = 26,000,000

EUAC = 220,000,000(A/P,6%,60) + 11,000,000
EUAC = 24,618,000
B/C = (benefit)/(EUAC) = 1.06 > 1
Therefore, this is ok!
b.) By Present Worth Method
PWbenefit = 26,000,000 (P/A, 6%, 60)
PWbenefit = 4202 x10^5
PWcost = 220,000,000 + 11,000,000(P/A, 6%,60)
PWcost = 3,978x10^5
B/C = (PWbenefit)/(PWcost) = 1.06 > 1.0
therefore , this is ok!

[5] SET B

1.
a) Rental or lease possibilities
-It is possible to rent identical or comparable asset or property, thus freeing
capital for other and more profitable use.
B) Physical impairment
The existing asset is completely or partially worn out and will no longer
function satisfactorily without extensive repairs.
c. Inadequacy
The existing asset does not have sufficient capacity to meet the present
demands that is placed on it.
d. Break-even analysis
In engineering economy, many situations are encountered where the cost of
two or more alternatives may be affected by a common variable. Break-even point
is the value of the variable for which the costs for the alternatives will be equal.
C1= f1(x) and C2=f2(x)
Where: C1 = certain specified total cost applicable to alternative 1 . C2 = certain
specified total cost applicable to alternative 2. X= a common independent variable
affecting alternative 1 and 2.

The break even point is where C1 and C2 are equal , f1(x)=f2(x) which may be
solved for x, the break even point.
Break-even chart is a graphical representation of break-even analysis. The break
even point is the quantity of production at which the income is equal to total cost. It
is the intersection of the income line and the total cost line on the break even chart.
When two alternatives are to be compared, the break-even point is the intersection
of the total cost line for each alternative on the break even chart.
[5] Set B:

2. Old Motor (Rebuild)

First cost = 60,000
Life = 6 years
Annual operation and maintenance = 14,000
New Motor
First cost = 170,000
Life = 11 years
Annual operation and maintenance = 11,000
Money worth = 15%
Solution:
By ROR on additional investment
Old Motor
Depreciation = (First cost)/(F/A,15%, 6) = P6,854
Annual operation and maintenance = 14,000
Total : P20,854
New Motor
Depreciation = (First cost)/(F/A,15%,11) = 6,982
Annual operation and maintenance = 11,000
Total: P17,982
Annual Savings = Old New = 20,854 17982 = 2,872
Additional annual investment = 170,000 60,000 = 110,000
ROR on additional investment = (2,872/110,000) x 100 = 2.61% < 15%
Therefore, the old motor should be rebuilt.

3. A local factory assembling calculators produces 400 units per month and sells
them at P1,800 each. Dividends are 8% on the 8,000 shares with a par value of
P250 each. The fixed operating cost per month is P25,000. Other costs are P1,000
per unit. Determine the break-even point. If only 200 units were produced per
month, determine the profit or loss.
Solution :
Income : 1.800 per unit
Fixed costs = P25,000 per month
Variable costs = P1,000 per unit
Dividend = 8% per year
Par value = 250 each
shares = 8000
Let x = number of calculators per month to break even
Income = 1,800x
Total cost = P25,000 + P1,000x
To break even,
Income = Total cost
1,800x = 25,000 + 1,000x
X = 31.25 or 32 units
Dividend = (par value)(dividend percent)(share)/12months = (250)(0.08)(8000)/12
= P13,333 per month
For 200 units:
Income = Total cost + Dividend +Profit /loss
P1,800(200) = P25,000 + (1,000)(200) + 13,333 + Profit/loss
Profit = P121,667 per month
4. First cost = 220,000,000
Interest =6 %
Annual operation and maintenance cost = P11,000,000
Annual income/benefit = 26,000,000
Life = 60 years

a) By EUAC Method
Annual benefit = 26,000,000
EUAC = 220,000,000(A/P,6%,60) + 11,000,000
EUAC = 24,618,000
B/C = (benefit)/(EUAC) = 1.06 > 1
Therefore, this is ok!
b.) By Present Worth Method
PWbenefit = 26,000,000 (P/A, 6%, 60)
PWbenefit = 4202 x10^5
PWcost = 220,000,000 + 11,000,000(P/A, 6%,60)
PWcost = 3,978x10^5
B/C = (PWbenefit)/(PWcost) = 1.06 > 1.0
therefore , this is ok!