A CASE STUDY IN ENGINEERING ECONOMY

PALAY BUYING AND RICE SELLING

IN PARTIAL FULFILMENT OF COURSE

ENGINEERING ECONOMY

ONZA, JOSHUA Q.
BACHELOR OF SCIENCE IN
ELECTRICAL ENGINEERING

2017
ONZA, JOSHUA Q.
BSEE-III

I am planning to invest P7,200,000 on a Palay buy and sell

business. Expecting 20% rate of return in 10 years. Investing
requires to consider the following factor:
Type A
Land P1,500,000
Building P700,000
Truck (Second Hand) P400,000
Maintenance/year
(Includes fuel,tires,brake fluids etc.) P150,000
Equipment
(Includes weighing scales and sacks) P22,500
Labor/Year
(280 Working Days): Self P350/day x 280 = P98,000
Bodega watcher P250/day x 280 = P70,000
Driver P300/day x 280 = P84,000
3 Helper P300/day x 280 = P252,000
Initial Investment = P3,276,500

As time goes by the value of the building will depreciate at 25%

rate. The equipment truck and equipment will also depreciated at
15 % rate. The average number of sacks of palays bought per year
can reach up to 4000 sacks. It weighs 50 kilos per sack and in
every kilo of palay is bought at a price of P17. The milling cost
P2/kilo of rice and 4000 sacks can prodice 2500 sacks of rice
that weighs 50kg each. The averace price of a commercial rice is
P2,050 per 50 kilos. The truck, equipment, and the building is
under 2% insurance. The business requires to pay a 3% income tax.
 700,000−( .25 ) (700,000)
Building depreciation = F = P20,225
, 20 % , 10
A
Insurance = (P700,000 + P400,000 + P22,500)x 0.02 = P22,450
400,000−( .15 ) (400,000)
Truck depreciate = F = P13,100
, 20 % ,10
A
22500−( .15 ) (22,500)
Equipment depreciate = F = P736
, 20 % , 10
A
Electric Bill/Year = P4,800
Palay buying =(4000)(50)(P17)= P3,400,000
Rice milling =(2500)(50)(P2) = P250,000
Initial annual cost = P3,711,311

Rice selling(Commercial rice) = (2500)(P2050) = P5,125,000

Darak/year = 37500 x P7 = P262,500
Annual Income = P5,387,500
Annual Cost = Initial annual cost + Annual Income x 0.03
= P3,711,311 + (P5,387,500 x 0.03)
Annual Cost = P3,872,936

CAPITALIZED COST = P3,276,500 + P3,872,936

CAPITALIZED COST = P7,149,436 = P7,200,000

Annual Profit = Annual Income – Annual cost

= P5,387,500 - P3,872,936

Annual Profit = P1,514,564

P 1,514,564
Rate of Return = x 100
P7,200,000
Rate of Return = 21.03% > 20% The investment is justified.

On the other study where the bodega is rented in a different

place. The truck and the equipment are brand new. Moving the
place of the bodega affects the number of sack of palay that can
be bought from farmers. It will also affects the sales. Taxes and
insurance is the same as the first study. The rent payments
includes the electric bill.

Type B
Bodega(1500sq.m rented/year) P900,000
Truck (Brand new) P1,000,000
Maintenance/year
(Includes fuel,tires,brake fluids etc.) P90,000
Equipment
(Includes weighing scales and sacks) P30,000
Labor/Year
(280 Working Days): Self P350/day x 280 = P98,000
Bodega watcher P250/day x 280 = P70,000
Driver P300/day x 280 = P84,000
3 Helper P300/day x 280 = P252,000
Initial Investment = P2,524,000

Insurance = (P1,000,000 + P30,000)x 0.02 = P20,600

1,000,000−( .15 ) (1,000,000)
Truck depreciate = F = P32,744
, 20 % , 10
A
30,000−( .15 ) (30,000)
Equipment depreciate = F = P982
, 20 % , 10
A
Palay buying =(3000)(50)(P17)= P2,975,000
Rice milling =(1800)(50)(P2) = P180,000
Initial annual cost = P3,209,326
Rice selling(Commercial rice) = (1800)(P2050) = P3,895,000
Darak/year = 42,500kg x P7 = P297,500
Annual Income = P4,192,500

Annual Cost = Initial annual cost + Annual Income x 0.03

= P3,209,326 + (P4,192,500 x 0.03)
Annual Cost = P3,335,101

Annual Profit = Annual Income – Annual cost

= P4,192,500 - P3,335,101

Annual Profit = P857,399

P 857,399
Rate of Return = x 100
P 7,200,000

Rate of Return = 11.91% < 20% The investment is not justified.

Based on the shown rate of return I should invest in Type A,

build my own bodega with low cost of truck and equipment.

By the annual cost method in the first year of this business

Type A has Annual Cost = P3,872,936 and Type B has Annual Cost =
P3,335,101 we can say that Type B is much economical that Type A.
If we consider the years after the first year of operation Type A
investment has the same annual cost, Annual Cost = P3,872,936 but
in Type B investment we need to include the rent of the bodega
every year so the annual cost will change to, Type B Annual Cost
= P4,255,101 so in this case I can conclude that Type A
investment is more economical than Type B.

Annual savings = P4,225,101 – P3,872,936

Annual savings = P352,165