ENGINEERING ECONOMY

GENERAL ENGINEERING

____________________________ ____________________________
- it is the analysis and evaluation of the factors that will affect the - when the use of one of the factors of production is limited, either in
success of engineering projects to the end that a recommendation be increasing cost or by absolute quantity, a point will be reached beyond
made which will ensure the best use of capital. which an increase in the variable factors will result in a less that
proportionate increase in output.
____________________________
- it is an economic or a market situation in which only a single seller or Simple Interest
producer supplies a commodity or a service. - interest on an investment that is calculated once per period, usually
annually, on the amount of the capital alone and not on any interest
____________________________ already earned.
- it is a market situation in which there are so few suppliers of a particular
product that one supplier’s actions significantly impact prices and supply. ____________________________
- a type of simple interest in which interest is calculated as through each
____________________________ month had 30 days.
- it is a market condition in which a product is traded freely by buyers and
sellers in large numbers without any individual transaction affecting the I = Pin
price. F = P + I = P + Pin = P(1 + in)
where:
____________________________ I = simple interest
- it is an economic or market situation in which a single consumer or P = present worth
buyer buys a commodity or a service from suppliers. i = interest per period
n = number of interest period
____________________________
- It is an economic or market situation in which there are many sellers or 1. Determine the ordinary simple interest on P5000 for 9 months and 10
producers that supplies a commodity or a service to very few consumers. days if the rate of interest is 12%.
ans:
____________________________
- it is an economic system based on the private ownership of the means 2. Determine the future worth on the previous problem.
of production and distribution of goods, characterized by a free ans:
competitive market and motivation by profit.
3. If P1000 accumulates to P1500 when invested at a simple interest for
____________________________ 3 years, what is the rate of interest?
- these are tangible things – things that you can touch – that satisfy ans:
human wants.
4. Jojo bought a 2nd hand DVD player and then sold it to Rowace at a
____________________________ profit of 40%. Rowace then sold the DVD player to Kat at a profit of 20%.
- these are activities that people do for themselves or for other people to If Kat paid 2856 more than it cost Jojo, how much did Jojo pay for the
satisfy their wants. unit?
ans:
____________________________
- products or services that are required to support human life and ____________________________
activities, which will be purchased in somewhat the same quantity even - it is a type of simple interest in which interest is calculated on the basis
though the price varies considerably. of a year with 365 days rather than the conventional 360 days.

____________________________ i = r/365 (for ordinary year)

- products or services that are desired by humans and will be purchased = r/366 (for leap year)
if money is available after the required necessities have been obtained. I = Pin
F = P + I = P + Pin = P(1 + in)
____________________________ where:
- the quantity of a certain commodity that is bought at a certain price at a I = simple interest
given place and time. P = present worth
i = interest per period
____________________________ n = number of interest period
- the quantity of a certain commodity that is offered for sale at a certain
price at a given place and time. 5. The exact simple interest of P5000 invested from June 21, 1995 to
December 25, 1995 is P100. What is the rate of interest?
____________________________ ans:
- 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 the demand being equal.
 ENGINEERING ECONOMY
GENERAL ENGINEERING

Single Payment Present Amount Factor

Rate of Discount = (1 + i)-n
- is the discount of one unit of principal per unit time Single Payment Future Amount Factor
= (1 + i)n

where: 11. A loan for P50000 is to be paid in 3 years at the amount og P65000.
i = rate of interest What is the effective rate of money?
d = rate of discount ans:

6. A college freshman borrowed P2000 from a bank for his tuition fee 12. An amount of P1000 becomes P1608.44 after 4 years compounded
and promised to pay the amount for one year. He received only the bimonthly. Find the nominal interest.
amount of P1920 after the bank collected an advance interest of P80. ans:
What was the rate of discount?
ans: 13. How long will it take money to double itself if invested at 5%
compounded annually?
7. Ms. Evilla borrowed money from a bank. She receives from the bank ans:
P1340 and promised to pay P1500 at the end of 9 months. Determine
the corresponding discount rate or often referred to as the banker’s 14. By the condition of a will, the sum of P20000 is left to a girl to be held
discount. in trust fund by her guardian until it amounts to P50000. When will the
ans: girl receive the money if the fund is invested at 8% compounded
quarterly?
Nominal Rate of Interest (r) ans:
- is defined as the basic annual rate of interest.
____________________________
r = im - is defined as a series of equal payments occurring at equal interval of
where: time.
i = interest per period
m = number of interest per periods per year ____________________________
- is a type of annuity where the payments are made at the end of each
Type of payment m period beginning from the 1st period.
annually 1
Semi-annually 2
Quarterly 4
Bi-monthly 6
Monthly 12
Weekly 52
Daily 360 (default)
Uniform Series Compound Amount Factor =
Effective Rate of Interest (ERI)
- is defined as the actual or exact rate of interest earned on the principal uniform series sinking fund factor =
during one-year period.
uniform series capital recovery factor =

uniform series present worth factor =

8. What is the effective rate of interest corresponding to 18%
compounded daily? Take 1 year = 360 days. 15. What annuity is required over 12 years to equate with a future
ans: amount of P20000? Assume I = 6% annually.
ans:
9. What rate of interest compounded annually is the same as the rate of
interest of 8% compounded quarterly? 16. How much money must you invest today in order to withdraw P2000
ans: annually for 10 years if the interest rate is 9%?
ans:
10. Which of these gives the lowest effective rate of interest?
a. 12.35% compounded annually ____________________________
b. 11.90% compounded semi-annually - is a type of annuity where the payments are made at the beginning of
c. 12.20% compounded quarterly each period starting from the 1st period.
d. 11.60% compounded monthly

Compound Interest
17. Mr. Ayala borrows P100,000 at 10% effective annual interest. He
must pay back the loan over 30 years with uniform monthly payments
due on the first day of each month. What does Mr. Ayala pay each
month?
Continuously Compounding ans:
 ENGINEERING ECONOMY
GENERAL ENGINEERING

____________________________ ____________________________
- is the type of annuity where the first payment is made later than the first - is the decrease in the value of physical property due to passage of
or is made several periods after the beginning of the annuity. time.

d = annual depreciation
C0 = first cost
18. A person buys a piece of lot for P100,000 down payment and 10 BV = book value before life expectancy (L)
deferred semi-annual payments of P8,000 each, starting three years n = years before life expectancy (L)
from now. What is the present value of the investment if the rate of SV = salvage value
interest is 12% compounded semi-annually? Dn = total depreciation after year n
ans: dn = depreciation charge on year n

____________________________ ____________________________
- is a series of disbursements or receipts that increases or decreases in
each succeeding period by constant amount.

19. The Texas Highway Department expects the cost of maintenance for
a particular piece of heavy equipment to be P5000 in year 1, P5500 in
year 2 and amounts increasing by P500 through year 10. At an interest
rate of 10% per year, the present worth of the maintenance cost is
ans:
Uniform Geometric Gradient
- is a series consisting of end-of-period payments, where each payment
increases or decreases by a fixed percentage
20. The first year maintenance cost for a new automobile is estimated to
be P10,000 and it increases at a uniform rate of 10% per year. Using an
8% interest rate, calculate the present worth of cost of the first 5 years of
maintenance.
ans:
____________________________
- refers to the present worth of a property that is assumed to last forever.
The capitalized cost of any property is the “sum of the first cost and
the present costs of perpetual replacement, operation and
maintenance”.
=
23. An engineer bought a machine for P500,000. Other expenses
including installation amounted to P30,000. At the end of its estimated
useful life of 10 years, the salvage value will be 10% of the first cost.
Using straight line method of depreciation
a) what is the annual depreciation?
ans:
b) what is the book value after 5 years?
ans:
24. A printing equipment costs P 73,500 has a life expectancy of 8 yrs.
and has a salvage value of P 3500 at the end of its life. The book value
at the end of “x” years is equal to P 38,500. Using straight line method of
depreciation, solve for the value of “x”.
ans: 4 years
____________________________

Case 1: No replacement, only maintenance

25. A broadcasting corporation purchased equipment for P53,000 and

Case 2: No maintenance, only replacement
Case 3: With maintenance and replacement
+ a) Determine the annual depreciation.
21. At 6%, find the capitalized cost of a bridge whose cost is P250M and
life is 20 years, if the bridge must be partially rebuilt at a cost of P100M
at the end of each 20 years.
ans:
paid P1,500 for freight and delivery charges to the job site. The
equipment has a normal life of 10 years with a trade-in value of P5,000
against the purchase of new equipment at the end of the life. Using
sinking fund method, (assume annual interest of 6%)
ans:
b) Determine the total depreciation after 5 years.
ans:
____________________________

22. An equipment is purchased for P50,000. If the annual maintenance

cost is P1500, determine the capitalized cost of perpetual service with an
interest rate of 6%.
ans:
 ENGINEERING ECONOMY
GENERAL ENGINEERING

30. A man wants to make 14% nominal interest compounded semi-

26. A VOM has a current selling price of P400. If the selling price is
expected to decline at a rate of 10% per annum due to obsolence,
a) what will be its selling price after 5 years?
ans:
b) what will be the salvage value if the life expectancy is 10 years?
ans:
annually on a bond investment. How much should he be willing to pay
now for a 12%, P10,000- bond that will mature in 10 years and pays
interest semi-annually?
ans:

27. A machine worth P250,000 has an estimated life of 15 years with a

book value of P30,000 at the end of the period.
a) Determine the rate of depreciation.
ans:
b) Determine the book value after 10 years.
ans:
c) Determine the depreciation charge during the 10th year.
ans:

____________________________

28. An asset has a 1st cost of P22,000, an estimated life of 30 years.

Using the double declining balance method,
a) Determine the book value after 6 years.
ans:
b) Determine the depreciation charge during the 6th year.
ans:
c) What is the salvage value?
ans:

____________________________
=

29. An asset is purchased for P120,000. Its estimated economic life is 10

years, after which it will be sold for P12,000. Using SOYD
a) find the depreciation charge during the 3rd year.
ans:
b) find the total depreciation after 3 years
ans:
____________________________
- is a certificate of indebtedness of a corporation usually for a period not
less than ten years and guaranteed by a mortgage on certain assets of
the corporation or its subsidiaries

where:
F = face, or par, value
C = redemption or disposal price (often equal to F)
r = bond rate per period
n = number of periods before redemption
i = investment rate per period
P= value of the bond n periods before redemption