ENGINEERING ECONOMY

PROBLEM SET 2

Directions: (1) Solve the following as systematically as possible. Show your complete solutions including the
necessary cash flow diagram.

(2) Box your final answers. Unboxed answers will be considered incorrect. Use two (2) decimal place.

(3) Score will be evaluated into two (2) bases: 70% content and 30% engineering lettering

1. Jheof, 23 years old, had just graduated from his Masters Degree program. He accepts a
good job and desires to establish his own retirement fund. At the end of each year
thereafter he plans to deposit Php2,000 in the fund at 15% annual interest. How old will
he be when the fund has an accumulated value of Php1M?

2. Mr. Reyes borrows Php600,000 at 12% compounded annually, agreeing to pay the loan in
15 equal payments. How much of the original principal is still unpaid after he has made
the eight payments?

3. It is estimated that a certain piece of equipment can save $6,000 per year in labor and
material cost. The equipment has an expected life of 5 years and no salvage value. If the
company must earn a 20% annual return on such investments, how much could be
justified now for the purchase of this piece of equipment?

4. As rental for a building, the owner receives two offers:

a) Php50,000 a year for eight years, the rental for each year being paid at the
start of each year;
b) Php30,000 the first year, Php40,000 the second year, Php50,000 the third year,
and Php60,000 for the next 5 years with all rentals paid at the beginning of each year.
If money is worth 12%, which is the better offer?

5. A debt of Php400,000, whose interest rate is 15% compounded semiannually is to be

discharged by a series of 10 semiannual payments, the first payment to be made 6
months after consummation of the loan. The first 6 payments will be Php6,000 each,
while the remaining 4 payments will be equal and of such amount that the final payment
will liquidate the debt. What is the amount of the last 4 payments?

6. A lathe for machine shop costs Php60,000 of paid in cash. On the installment plan, a
purchase should pay Php20,000 down payment and quarterly installments, the first due
at the end of the first year after purchase. If money is worth 15% compounded
quarterly, determine the quarterly installment.

7. To maintain a bridge, Php5,000 will be required at the end of 3 years and Php4,000
annually thereafter. If money is worth 8%, determine the capitalized cost of all future
maintenance.

8. It cost Php50,000 at the end of each year to maintain a section of Kennon road in Baguio
City. If money is worth 10%, how much would it pay to spend immediately to reduce the
annual cost to Php10,000?

9. What lumpsum of money must be deposited into a bank account at the present time so
that $500 per month can be withdrawn for 5 years, with the first withdrawal scheduled
for 6 years from today? The interest rate is 1% per month.

10. A man bought an equipment costing Php60,000 payable in 12 quarterly payments, each
installment payable at the beginning of each period. The rate of interest is 24%
compounded quarterly. What is the amount of each payment?