Engineering Economy

Unit 2: Time and Money

Relationship D
Prepared by:
Hannah Jillian M. Oleta
Industrial Engineering Department
 ESM 3043

How Well Did You Understand?

1. Suppose that annual income from a rental property is expected to start at ₱65,000 per year and
decrease at a uniform amount of ₱2,500 each year after the first year for the 15-year expected life
of the property. The investment cost is ₱400,000, and interest is 9% per year. Is this a good
investment? Assume that the investment occurs at time zero (now) and that the annual income is
first received at end of year one.

A = ₱65,000

i = 0.09 per year

G=Decrease of ₱2500.00 per year

1−(1+0.09)−15 2500 1−(1+ 0.09)−15

P=65000 [
0.09
−
0.09 ]
0.09
−
[ 15
(1+0.09)15 ]
P=523944.7479−109517.1614

P= ₱ 414,427.59
The investment was good as the present value of the property amounts to ₱ 414,427.59 which is higher than what
the investor paid.

2. You owe your best friend ₱2,000. Because you are short on cash, you offer to repay the loan over
12 months under the following condition. The first payment will be ₱100 at the end of month one.
The second payment will be ₱100 + G at the end of month two. At the end of month three, you will
repay ₱100 + 2G. This pattern of increasing G amounts will continue for all remaining months.
a. What is the value of G if the interest rate is 0.5% per month?
b. What is the equivalent uniform monthly payment?
c. Repeat part (a) when the first payment is ₱150 (i.e., determine G).

P = ₱2,000 i = 0.005 per year

G=?

A = ₱100

1−(1+0.005)−12 −12
G 1−(1+0.005)
2000=100 [ 0.005
+]0.005 [
0.005
−
12
(1+0.005)12 ]
2000=1161.893207+G(63.21359816)

G= ₱ 13.26
1−( 1+ 0.005 )−12
2000=A [ 0.005 ]
A=₱ 172.13

1−(1+0.005)−12 −12
G 1−(1+0.005)
2000=150 [
0.005
+
0.005 ]
0.005
−
[ 12
(1+0.005)12 ]
2000=1742.83981+G(63.21359816)

G= ₱ 4.07

3. Suppose that the parents of a young child decide to make annual deposits into a savings account,
with the first deposit being made on the child’s fifth birthday and the last deposit being made on the
15th birthday. Then, starting on the child’s 18th birthday, the withdrawals as shown will be made. If
the effective annual interest rate is 8% during this period of time, what are the annual deposits in
years 5 through 15? Use a uniform gradient amount (G) in your solution.
 A=₱ 172.13

1−(1+ 0.0 8)−4 20,000 1−( 1+ 0.0 8)−4

P17=100000 [
0.0 8
+
0.08 ]
0.0 8
−
[ 4
(1+0.0 8)4 ]
P17=331212.684+ 93001.85721
P17=₱ 4 2 4 ,214 .5 4

P1 5=₱ 424,214.54(1+0.08)−2

( 1+0.0 8 )11 −1
P15=₱ 363,695. 59= A [
0.0 8 ]
A=₱ 21,849.50

4. A retail outlet is being designed in a mall in Baguio. For this outlet, the installed fiberglass insu lation
to protect against heat loss in the cold season and heat gain in the warmer season will cost an
estimated ₱100,000. The annual savings in energy due to the insulation will be ₱18,000 at end of
year one in the 10-year life of the outlet, and these savings will increase by 12% each year
thereafter. If the annual interest rate is 15%, is the cost of the proposed amount of insulation
justified?

A = ₱18,000

i = 0.15 per year

g = 0.12 per year

1−(1+0.12)10 (1+0.15)−10
P=18000 [ 0. 15−0.12 ]
P= ₱ 139,369.09

Yes, the proposed amount of insulation is justified as the present value of the savings caused by the outlet is
₱ 139,369.09 which is higher than the proposed amount of ₱100,000.

5. Start saving for retirement immediately! Even a modest amount will add up in a hurry. Jay decides
to follow this advice and puts away 1% of his annual salary of ₱500,000 per year. This equates to
₱5,000 on his 21 st birthday, and his salary will increase by 2% (on average) every year thereafter
until Jay turns 60 years old. What is the worth of Jay’s account at age 60 when the annual interest
rate of his account is 4% per year?
 A = ₱5,000

21st birthday
60th birthday

i = 0.04 per year

g = 0.02 per year

(1+0. 04)40 −(1+0. 02) 4 0

F 60=5000 [ 0. 04−0.02 ]
F 60=₱ 648,245.24