Dedication

To m y so n Jo h n J o s h u a

ENGINEERING
ECONOMY
SECOND EDITION

This booklet/compilation belongs to:

Compiled by:

Rosalito Juda V. Eboa, ME, ExMBA

First Semester
2015 -2016
 Brief Contents
Preface

Preface
Module 1 : Principles of Engineering Economy
Module 2 : Interest and Money-Time Relationships
Module 3 : Annuity
Module 4 : Depreciation and Depletion
As one of the most important subjects in the field of engineering, this
1 booklet is designed to make the learning easier. Concepts are
presented with examples and at the same time students are given
5 various exercises to apply and familiarize some situational problems
and its approaches.
27
The compiler wishes to thank his friends in the teaching industry
40 especially the CTU family for their support and valuable suggestions.

Module 5 : Selections in Present Economy 49

Module 6 : Basic Methods for Making Economic Studies 55

Module 7 : Cost Comparison of Alternative Methods 63

Module 8 : Replacement Studies 71

Module 9 : Break Even Analysis 77

Module 10 : Bond Value Equation 85

Module 11 : Benefit / Cost Ratio 91

Module 12 : The Fundamentals of Accounting 95

To all the users of this booklet

Your comments and suggestions are greatly appreciated in

order to improve the presentations and understanding of each
topic.
 MODULE 1:
PRINCIPLES OF ENGINEERING ECONOMY
Engineering Economy is the analysis and evaluation of the factors that will
affect the economic success of an engineering projects to the end that a
recommendation can be made which will ensure the best use of capital or
simply a collection of techniques that simplify comparisons of alternatives
on an economic basis.
Basic Terminology Used
 Distribution
is the sharing of the output among the resources used in the
production or simply the division of the value of the output (goods)
among the factors (or agent) in the production such as land, labor,
capital and management.
 Demand
is the quantity of a certain commodity that is bought at a certain price
at a given place and time. It is simply the willingness and the ability of
the buyer to pay for a product.

 Consumer goods and services  Supply

are those products or services that are directly used by the people to
satisfy their wants.
Ex. Food, clothing, cars…
 Producer goods and services
are used to produce consumer goods and services or other producer
goods.
Ex. Machine Tools, airplanes, buses, factory buildings
 Necessities
are those products or services that are required to support human life,
needs and activities
 Luxuries
are those products or services that are desired by human and will
purchased only after the required necessities have been satisfied
 Consumption
is the satisfaction of human wants and that the value of goods and
services that a family consumes depends on almost entirely on its
income and wealth.
 Production
is the creation of goods and is a major step in the series of economic
processes that brings goods and services to people.
is the amount of product made available for sale
 Income
is the amount of money that is generated from a variety of sources
including salary (amount of money paid on a regular basis)
 Seller
is an entity which makes product, goods and services available to
buyer or consumer in exchange of monetary consideration
 Buyer
is the basic consuming or demanding unit of a commodity
 Market
Is the area or place where buyer and seller agrees to exchange a well-
defined commodity
 Competition
is the number of rival firms competing to sell similar goods or services
to buyers. Perfect competition occurs when there are many sellers of a
certain goods or services and there are many buyers.
 Monopoly
refers to a single seller and having many buyers (it is simply the
opposite of perfect competition)
Bilateral monopoly exist when there is one seller and one buyer
Monopsony is a situation where a product or services is bought and
used by one customer.

1 2
 Oligopoly Exercise No. 1: Principles of Engineering Economy
refers to few suppliers of goods or services and that action by one 
supplier will inevitably result in similar action by the others. Name: ______________________________________________________
Bilateral oligopoly exist when there are few sellers and few buyers C Course: ____________________________ Date: _________________ SCORE
u
Oligopsony is a situation where a product or services is bought and
t Instruction: Select the correct answer for each of the following questions.
used by few buyers and that the action of one buyer can have a
significant impact on the price and market in general. 1. The Place where buyers and sellers come together.
H
e a. Market c. Recreation
r b. Business d. Buy and Sell Section
The Law of Supply and Demand
e
2. A market whereby there is only one buyer of an item for which there are
“Under conditions of perfect competition, the price at which a given no goods substitute.
product will be supplied and purchased is the price that will result in the a. Monopsony c. Monopoly
supply and demand being equal” b. Oligopoly d. Olygopsony
3. The quantity of a certain commodity that is offered for sale at a certain
price at a given place and time.
SUPPLY UNITS, N SUPPLY
a. Demand c. Stocks
b. Supply d. Goods
4. An association of two or more individuals for the purpose of operating a
business as co-owners for profit.
DEMAND a. Sole Proprietorship c. Partnership
b. Company d. Corporation
5. It is defines to be the capacity of commodity to satisfy human want.
PRICE PRICE
a. Discount c. Necessity
Figure shows the general Figure shows the price b. Luxury d. Utility
price supply relationship supply demand relationship
6. This 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.
a. Perfect Competition c. Monopoly
The Law of Diminishing Returns
b. Oligopoly d. Elastic Demand
“When the use of one of the factors of production is limited, either in 7. These are products or services that are desired by human and will be
increasing cost or by absolute quantity, a point will be reached beyond purchased if money is available after the required necessities have been
which an increase in the variable factors will result in a less that obtained.
proportionate increase in output” a. Utilities c. Luxuries
b. Necessities d. Product of goods or services
8. A condition where only few individuals produce a certain product and
that any action of one will lead to almost the same action of the others.
a. Oligopoly c. Monopoly
b. Semi-monopoly d. Perfect Competition
3
 MODULE 2: Example:
INTEREST AND MONEY-TIME RELATIONSHIPS Determine the interest on Php 700 for the period from Jan 10 to Oct
28, 2008 if the rate of interest is 15%.
Money refers to any medium of exchange that is widely accepted in the
payments of goods or services and/or in settlement of debts. Solution:
Jan 10 – 31 = 21 (excluding Jan 10)
Interest is the amount of money paid for the use of money called capital for a February = 29
certain period of time or the income produced by money which has been March = 31
loaned. April = 30
May = 31
SIMPLE INTEREST June = 30
is the interest to be paid which is proportional to the length of time the July = 31
principal is used. August = 31
September = 30
I  P (n)(i) October = 28 (including Oct 28)
F  P  I   P  P (n)(i) 292 days
F  P [1  n(i)]

where: I = interest I  P (n)(i)

P = Principal or present worth I  700 (292/366)(0.15)  Php 83.77
F = Accumulated amount or future worth
i = rate of interest per interest period Example:
n = number of interest periods Determine the interest due on Php 10,000 loan which was made on
April 01, 2008 and repaid on September 01, 2012 with a rate of
Types of Simple Interest interest is 10% per year using
a. Ordinary Simple Interest (computed based on banker’s year) a. Ordinary Simple Interest
1 banker’s year = 12 months b. Exact Simple Interest
1 month = 30 days
Solution:
b. Exact Simple Interest (computed based on exact number of days) a. Ordinary Simple Interest
1 year = 365 days for ordinary year I  P (n)(i)
= 366 days for leap year
5
I  10,000 (4 )(0.10)   Php 4,416.67
Example: 12
Determine the interest on Php 700 for 8 months and 15 days if the
rate of interest is 15% b. Exact Simple Interest
I  P (n)(i)
Solution:
153
I  P (n)(i) I  10,000 (4 )(0.10)   Php 4,419.18
365
where n = 8(30) + 15 = 255 days
I  700 (255/360)(0.15)  Php 74.38
5 6
Cash Flow Diagram b. Bank Discount Note
is a simple graphical representation of cash flows drawn on a time scale. It is a note where the value is stated on the note corresponds to the
is used to simplify problems having diverse receipts and disbursements maturing amount to which the interest is being calculated and is
deducted in advance. (The amount received by the maker is
proceeds)
= receipt (cash inflow or positive cash flow)
I  A (n)(d) where I = Interest
= disbursement (cash outflow or negative cash inflow) A = Accumulated Acct
n = no of years
d = discount rate
Example:
A loan of Php 1000 at simple interest of 10% will become Php Example:
15,000 after 5 years. Mr Roberts was granted a loan of Php 50,000 by the cooperative
bank with an interest rate of 6% for 180 days on the principal
1500 collected in advance. The bank accepts a promissory note for Php
1000 50,000 non-interest for 180 days. Find the proceeds of the note if it
5 is discounted at once.
0
0 1 2 3 4 1 2 3 5 Solution:
4
I  P (n)(i) where n = 1 period
1000 I  50000(1)(0.06)  Php 3,000
1500
Cash flow diagram Cash flow diagram Proceeds  P - I
(Borrower’s Viewpoint) (Lender’s Viewpoint) Proceeds  50,000 - 3,000  Php 47,000

PROMISSORY NOTES DISCOUNT

is a written promise of a person or business (as maker) to pay another is the difference between the present worth and the future worth.
person or business (payee) within a specified period of time.
D  A -P
Types of Notes D  A(n)(d)
a. Simple Interest Note
d  1 - (1  i )-1
is a note where the value is stated on the note (face value) which
corresponds to the principal amount, the total amount to be d where D = discount
i
repaid (maturity value of the note), and the date to which the 1-d A = Accumulated Amount
amount is due (maturity date) P = principal
n = no of years
I  P (n)(i) where I = Interest d = discount rate
P = principal i = interest rate
n = no of years
I = interest rate

7 8
Example: Exercise No. 2: Simple Interest
On July 11, 2011, Engr J Villa received Php 60,000 from a credit 
cooperative and promised to pay Php 68,000 on Dec 20, 2011. If the Name: ______________________________________________________
interest was decided in advance, what was the discount rate? C
Course: ____________________________ Date: _________________ SCORE
u
t
Solution: Instruction: Answer the following problems and show the complete solution.
D  A -P
H
D  68,000 - 60,000  Php 8,000 1. A businessman deposited P 15, 000 in the bank for 5 years. How much
e
r can be withdrawn if the interest is charged at 12% per year simple
Solving for the discount rate, d e interest?
a. P 20,000 c. P 24,000
d  D /A(n) b. P 22,000 d. P 26,000
d  8000 /6800 0(192/360)  0.2206 or 22.06%
2. Dr. Malabago borrows P 100,000 from a loan firm with a rate of simple
interest of 15%, but the interest was deducted from the loan at the time
the money was borrowed. At the end of one year he has to pay back P
100,000. What is the actual rate of interest?
a. 14.35% c. 16.20%
b. 15.35% d. 17.65%
3. Engr. Elmundo borrows P 64,000 from a loan association. In repaying
this debt he has to pay P 4,000 at the end of every 3 months on the
principal and a simple interest of 16% on the principal outstanding at
that time. Determine the total amount he has paid after paying all his
debt.
a. P 85,760 c. P 88,250
b. P 87,500 d. P 90,267
4. Determine the exact simple interest on P 12, 000 for the period from
January 16 to November 26, 2004 if the rate of interest is 24%.
a. P 2,476.80 c. P 2,639.30
b. P 2,529.30 d. P 2,789.50

5. A loan of P 25,000 is made for a period of 18 months, at a simple interest

rate of 16% what future amount is due at the end of the loan period?
a. P 28,000 c. P 34,000
b. P 31,000 d. P 37,000

6. Dr. Grant borrowed money from his friend with simple interest of 12 %,
find the present worth of P 50,000 which is due at the end of 9 months.
a. P 45,871.56 c. P 47,178.36
b. P 46,290.37 d. P 48,290.36
 7. For a loan of P 40,000, Chrysler will receive P 33,000. If the discount rate 14. Find the discount interest rate if P 18,500 is present value of P 19,300
 charged is 9%, when is the loan value?  due after 350 days.
a. 1.45 years c. 1.72 years a. 4.26% c. 6.35%
C b. 1.58 years d. 1.94 years C b. 5.25% d. 7.13%
u u
t 8. Engr. Miraballes borrowed money from the cooperative. he received t 15. Chrysdave wishes to have P 15,000 payable in two years. What sum
from the cooperative P 18,420 and promise to repay p 20,000 at the end should be borrowed now if the discount rate is 18%?
H of 10 months. Determine the simple rate of interest. H a. P 9,600 c. P12,300
e e
a. 10.29% c. 14.25% b. P10,380 d. P14,200
r r
b. 12.38% d. 16.36%
e e 16. A bill for motorboat specifies the cost as P1,200 at the end of 100 days
9. Engr. Tongol borrowed money from a loan shark. He receives from the but offers a 4% discount for cash in 30 days. What is the highest rate,
loan shark an amount of P 134,200 and promise to repay P 150,000 at simple interest at which the buyer can afford to borrow money in order
the end of 1 year and 9 months. What is the simple interest rate? to take advantage of the discount?
a. 5.27% c. 7.25% a. 18.40 % c. 20.90 %
b. 6.73% d. 8.19% b. 19.60 % d. 21.40 %

10. Oliver buys a DVD from a Muslim trader P 2,250 at the end of 60 days. 17. What simple interest rate is equivalent the simple discount rate of 6% in
Oliver wishes to pay immediately and the Muslim trader offers to discounting an amount of P1,000 due at the end of 3 months?
compute the cash price on the assumption that money is worth 6% a. 6.09 % c. 9.02 %
simple interest. What is the cash price? b. 6.50 % d. 9.57 %
a. P2,190.00 c. P 2,230.30
b. P2,227.72 d. P 2,235.20 18. A loan was made 3 years and 4 months ago at 6% simple interest. The
principal amount of the loan has just been repaid along with P 800 of
11. A simple interest note for p 50,000 with interest at 16% per annum was interest. Compute the principal amount of the original loan.
signed on January 12, 2006 and due on April 25, 2006. find the maturity a. P 5,000 c. P 3800
value. b. P 4000 d. P 2500
a. P 52,288.89 c. P 55,255.19
b. P 54,289.45 d. P 57,289.20 19. A bank loan of P2,000 was made at 8% simple interest. How long would
it take in years for the amount of the loan and interest to equal P
12. Dr. Durango borrowed P 10,000 from Engr. Ruiz who charged a discount 3,280.00?
rate of 15.16% for five years. How much interest will be collected in a. 5 c. 7
advance from the loan? b. 6 d. 8
a. P 10,267.78 c. P 14,892.39
b. P 12,751.83 d. P 16,289.36 20. Find the discount if P 2,000 is discounted for 6 months at 8% simple
discount.
13. Dr. Mabango is borrowing P 30,000 from a bank which charges a a. P 76.92 c. P 80.00
discount rate of 12% for 3 years. How much would he receive from the b. P 77.66 d. P 88.40
bank?
a. P 18,200 c. P 20,100
b. P 19,200 d. P 22,100
COMPOUND INTEREST Example:
is the interest earned by the principal which is added to the principal to If P 1.00 is invested at a nominal rate of 15% compounded quarterly ,
earned an interest in the succeeding period. what is the effective rate of interest

From F = P + I or A = P + P(i)(n) Solution:

F3 m
 r
End of first year ie   1   -1
I3  m
F2 F1  P  P(i)  F1  P (1  i)
4
i2  0.15 
F1 End of second year ie   1   -1  ie  15.86 %
 4 
P i1
F2  F1  F1(i)  F2  F1 (1  i)
Example:
F2  P ( 1  i)2 In how many years is required for P 8,000 to increase by P 12,000 if
0 1 2 3 the interest is at 8% compounded semi-annually
In General:
F  P (1  i)n Solution:
nm
 i 
F  P 1  
For any number of compounding mode  m
nm 2n
 i   0.08 
F  P 1   20000  8000  1  
 m 2 


TYPES OF RATE OF INTEREST n  11.68 years

a. Nominal Rate of Interest
specifies the rate of interest and a number of interest periods in
one year
Example: (Ch.E. 1989 Board Exam)
where i = rate of interest per interest period A Mechanical Engineer wished to accumulate a total of P 100,000 in
r
i  r = nominal rate of interest a savings account at the end of 15 years. If the bank pays only 4%
m compounded quarterly, what should be the initial deposit?
m = mode of compounding

Solution:
b. Effective Rate of Interest nm
is the actual or exact rate of interest on the principal during one  i 
F  P 1  
year  m
15(4)
m  0.04 
 r 100,000  P  1  
ie  1   -1  4 
 m
P  Php 55,044.96

13 14
 Exercise No. 3: Compound Interest
Example: (M.E. 1977 Board Exam) 
By the condition of a will, the sum of P 25,000 is left to a girl to be Name: ______________________________________________________
held in trust by her guardian until it amounts to P 50,000. When will C
Course: ____________________________ Date: _________________ SCORE
the girl receive the money if the fund is invested at 8% compounded u
quarterly? t
Instruction: Answer the following problems and show the complete solution.

Solution: H
e 1. If the sum of P 120,000 is deposited in an account earning interest at the
nm rate of 9% compounded quarterly, what will it become at the end of 8
 i  r
F  P 1   years?
 m e
a. P 242,529.36 c. P 246,390.29
4n
 0.08  b. P 244,572.36 d. P 248,280.37
50000  25000  1  
 4 
2. At a certain interest rate compounded quarterly, P 10,000 will amount to
n  8.75 years
P 45,000 in 15 years. What is the amount at the end of 10 years?
a. P 27,251.71 c. P 29,190.27
b. P 28,290.10 d. P 30,178.20

3. A sum of P 10,000 is invested now and left for eight years, at which time
the principal is withdrawn. The interest has accrued is left another eight
years. If the annual interest rate is 5% what will be the withdrawal
amount at the end of the 16th year?
a. P 4,774.55 c. P 7,054.19
b. P14,774.55 d. P10,774.55

4. Find the present value of instalment payments of P 10,000 now, P

20,000 at the end of first year, P 30,000 at the end of the second year, P
40,000 at the end of third year and P 50,000 at the end of the fourth year,
if money is worth 10% compounded annually.
a. P 102,298.50 c. P 112,390.20
b. P 108,256.39 d. P 117,178.50

5. Roy borrowed a certain amount on June 2000 from Roland. Two years
later, Roy borrowed again from Roland an amount of P 5,000. Roy paid P
1,000 on June 2003 and discharged his balance by paying P 7,500 on
June 2005. What was the amount borrowed by Roy on June 2000 if the
interest rate is 8% compounded annually?
a. P 793.83 c. P 4,286.69
b. P 5,104.37 d. P 1,611.51
 6. If the P 5,000 shall accumulate for 10 years at 8% compounded 13. Find the difference between simple interest and compound interest on a
 quarterly, find the compounded interest at the end of 10 years.  savings deposit of P 50,000 at 10% per annum for 3 years.
a. P 5,629.25 c. P 6,040.20 a. P 1,550.00 c. P 2,551.29
C C
b. P 6,520.30 d. P 7,120.30 b. P 2,039.00 d. P 2,689.20
u u
t t
7. By the condition of a will, the sum of P 20,000 is left to a girl to be held in 14. How many years are required for P 10,000 to increase P 20,000 if
H trust fund by her guardian until it amounts to P 50,000. When will the invested at 9% per year compounded quarterly?
H
e girl receive the money if the fund is invested at 8% compounded a. 7.87 years c. 8.04 years
e
r quarterly? r
b. 7.90 years d. 8.39 years
e a. 10.25 years c. 12.38 years e
b. 11.57 years d. 14.35 years 15. What sum of money invested 6 years ago will amount to P 125,000 today
if it was invested at 5.75%?
8. P 1,500.00 was deposited in a bank account, 20 years ago. Today it is a. P 89,377.41 c. P 91,268.39
worth P 3,000.00 interest is paid semi-annually. Determine the interest b. P 90,178.27 d. P 93,290.28
rate paid on this account.
a. 2.5% c. 3.5%
b. 3.0% d. 4.0%

9. What is the present worth of two P 100 payments at the end of the third
year and fourth year? The annual interest rate is 8%.
a. P 73.50 c. P 152.88
b. P 79.38 d. P 215.28

10. Fifteen years ago P 1,000.00 was deposited in a bank account, and today
it is worth P 2,370.00. The bank pays interest semi-annually. What was
the interest rate paid in this account?
a. 5.84% c. 6.89%
b. 6.35% d. 7.25%

11. A firm borrows P 2,000 for 6 years at 8%. At the end of 6 years, it renews
the loan for the amount due plus P 2,000 more for 2 years at 8%. What is
the lump sum due?
a. P 3,701.86 c. P 6,034.66
b. P 2,332.80 d. P 3,260.34

12. A company invests P 10,000 today to be repaid in 5 years in one lump

sum at 12% compounded annually. How much profit in present day
pesos is realized?
a. P 17,623.42 c. P 12, 026.39
b. P 15,278.39 d. P 7,623.40
EQUATION VALUE Example:
is obtained by setting the sum of the values of a certain comparison / Compare the accumulated amounts after 5 years of Php 1,000
data to a single date point (known as the time reference). invested at a rate of 10% per year compounded (a) annually, (b)
semi-annually, (c) quarterly, (d) monthly, (e) daily, and (f)
Example: continuously.
A man bought a lot worth Php 1,000,000 if paid in cash. On an
instalment basis, he paid a downpayment of Php 200,000; Php
300,000 at the end of one year; Php 400,000 at the end of three Solution:
years and a final payment at the end of five years. What was the final
payment if the interest was 20%? Using the formula: F  P ( 1  i)n
Solution:
a) F  1000( 1  0.10)5  1,610.51
800,000 Ref point
10
 0.10 
b) F  1000  1    1,628.89
 2 
1 2 3 4 5 20
 0.10 
c) F  1000  1    1,638.62
0  4 
300.000 60
 0.10 
d) F  1000  1    1,645.31
400.000  12 
1825
D  0.10 
e) F  1000  1    1,648.61
 365 
Using the ref point (today), the equation value is: f) F  1000 e 0.10(50  1,648.72

300,000 400,000 D
800,000   
1 3
(1  0.20) (1  0.20) (1  0.20)5 Example:
A nominal interest of 3% compounded continuously is given on the
account. What is the accumulated amount on Php 10,000 after 10
D  Php 792,560.00 years?

Solution:
CONTINUOUS COMPOUNDING AND DISCRETE PAYMENTS
In discrete compounding, the interest is compounded at the end of each F  P e r(n)
finite – length period such as month, quarter or a year. It is assumed F  10,000 e 0.03(10)
that cash payment is done once a year but the compounding is F  Php 13,489.59
continuous throughout the year.

F  P e r(n)
19 20
Example: Exercise No. 4: Continuous Compounding / Equation
Find the present value of Php 23,500 due in 6 years and 3 months if  Value / Nominal & Effective Interest Rates
money is worth 7.4% compounded continuously
C Name: ______________________________________________________ SCORE
Solution: u
Course: ____________________________ Date: _________________
t
F  P er(n)
23500  P e0.074(6.25) H Instruction: Answer the following problems and show the complete solution.
P  Php 14,798.19 e
r 1. How many years are required for P 10,000 to increase P 20,000 if
e invested at 9% per year compounded continuously?
a. 7.7 years c. 8.04 years
b. 7.90 years d. 8.39 years

2. If Php 40,800 is invested at 14% compounded continuously for 8 years

and 8 months, what is its maturity value?
a. P 130,149.28 c. P 134,290.11
b. P 132,690.29 d. P P 136,222.33

3. Find the compound amount if P 82,000 is invested for 3 years if money is

invested at 5.8% compounded continuously.
a. P 91,290.22 c. P 95,100.45
b. P 93,444.55 d. P 97,584.56

4. Find the accumulated value of P 8,500 at the end of 5 years if money is

invested at 5.5% compounded continuously.
a. P 11,190.51 c. P 13,289.88
b. P 12,123.44 d. P 14,256.36
5. How much be invested today to realize P 55,400 in three years and 10
months if money is worth 9.9% compounded continuously?
a. P 37,904.87 c. P 39,288.22
b. P 38,290.33 d. P 39,897.34

6. The nominal interest rate is 4%. How much is my P 10,000.00 worth in

10 years in a continuously compounded account?
a. P 13,498.60 c. P 13,650.20
b. P 13,620.10 d. P 14,918.25

7. If the nominal interest rate is 3%, how much is P 5,000 worth in 10 years
in a continuously compounded account?
a. P 5,750 c. P 6,750
b. P 6,350 d. P 7,500
21
 8. Find the present value of P 25,000 due in 5 years if money is worth 8%  Exercise No. 5: Money – Time Relationship
converted continuously.
C a. P 16,758.28 c. P 18,467.44 C
Name: ______________________________________________________
u b. P 17,389.33 d. P 19,390.33 u Course: ____________________________ Date: _________________ SCORE
t t
9. What sum of money invested 5 years ago will amount to P 130,000 today Instruction: Select the correct answer for each of the following questions.
H if it was invested at 6% converted continuously? H
e a. P 92,190 c. P 96,306 e 1. The paper currency issued by the Central Bank which forms part of the
r b. P 94,278 d. P 98,207 r country’s money supply.
e e a. T-bills c. Check
10. How much be invested today to realize P 60,000 in 3 years if money is b. Bank note d. Coupon
worth 10% compounded continuously?
a. P 44,449 c. P 49,290 2. An index of short term paying ability is called
b. P 45,890 d. P 52,190 a. receivable turn-over c. current ratio
b. profit margin ratio d. acid test ratio
11. Determine the compound interest due at the end of 10 years if P 50,000
is invested at 8% compounded continuously. 3. We may classify an interest rate, which specifies the actual rate of
a. P 61,277 c. P 67,300 interest on the principal for one year as
b. P 65,222 d. P 69,267 a. nominal rate c. exact interest rate
b. rate of return d. effective rate
12. What is the effective rate corresponding to 18% compounded daily?
Take 1 year is equal to 360 days. 4. Money paid for the use of borrowed capital.
a. 19.23% c. 19.72% a. Discount c. Interest
b. 19.53% d. 19.86% b. Credit d. Profit

13. What nominal rate, compounded semi-annually, yield the same amount 5. Defined as the future value minus the present value.
as 16% compounded quarterly? a. Interest c. Discount
a. 16.22% c. 16.48% b. Rate of return d. Capital
b. 16.32% d. 16.83%
6. The flow back of profit plus depreciation from a given project is called
14. Find the nominal rate, which if converted quarterly could be used a. capital recovery c. economic return
instead of 12% compounded semi-annually b. cash flow d. earning value
a. 11.82% c. 11.94%
b. 11.92% d. 11.96% 7. The ratio of the interest payment to the principal for a given until of time
and usually expressed as a percentage of the principal.
15. 4. An amount of P 1,000 becomes P 1,608.44 after 4 years compounded a. Interest c. Investment
bi-monthly. find the nominal interest. b. Interest rate d. Discount
a. 10% c. 14%
b. 12% d. 16% 8. It is negotiable claim issued by a bank in lieu of a term deposit.
a. Time deposit c. Capital gain
b. Bond d. Certificate of deposit
 9. The money that is inactive and does not contribute to produce effort in 18. The claims of anyone against the assets of the enterprise.
an economy is known as  a. profits c. equities
C a. idle money c. hard money b. liabilities d. expenses
C
u b. soft currency d. frozen asset
u
t 19. The process of recording all the transactions of the company which
t
affect any investment of capital.
H 10. The payment for the use of borrowed money is called a. bookkeeping c. budgeting
H
e a. loan c. interest b. accounting d. balance sheet
e
r b. maturity value d. principal r
e 20. An accounting book where the original record of all transactions is
e
11. Products that are directly used by people to satisfy their wants. ordinarily recorded.
a. Producer goods c. Dry goods a. ledger c. balance sheet
b. Consumer goods d. Wet goods b. log book d. journal

12. Which of the following funds supplied and used by owners of an

enterprise in the expectation that a profit will be earned?
a. Investment c. Inflation
b. Depreciation d. Depletion

13. Which of the following funds supplies by others on which a fixed rate of
interest must be paid and the debt be repaid at a specific time?
a. Investment capital c. Equity capital
b. Borrowed capital d. Owned capital

14. Which of the following goods are used to produce consumer goods?
a. Consumer good c. Producer good
b. Commercial good d. Any of the above

15. The amount of money paid for the use of capital of the income produced
by money which has been loaned.
a. discount c. annuity
b. interest d. amortization

16. The value of personal and professional services rendered.

a. salary c. saving
b. income d. profit

17. Anything of value possessed by an enterprise.

a. assets c. equities
b. liabilities d. expenses
 MODULE 3:
ANNUITY c. Annuity Due
ANNUITY Is an annuity whose first payment is made at the start of each
is a series of equal payments made at equal interval of time. period.
P
TYPES OF ANNUITY
a. Ordinary Annuity
is one where the payments are made at the end of each payments
0 1 2 3 n-1 n
P
Reference time F
A A A A A A
1
P  A/( 1  i)
0 1 2 3 n-1 n
P  A/ ( 1  i)2
A A A A
P  A/ ( 1  i)1
A P  A/ ( 1  i)3
P  A/ ( 1  i)n-1
P  A/ ( 1  i)2
P  A/( 1  i)n
P  A/ ( 1  i)3
P  A/ ( 1  i)n-1 In general,
P  A/ ( 1  i)n
P A 

A (1  i )n - 1 
n
In general, (1  i ) i

P

A (1  i )n - 1  or F

A (1  i )n - 1 
n i
(1  i ) i
d. Perpetuity
b. Deferred Annuity
is an annuity whose payment periods continues indefinitely
Is an annuity whose first payment is deferred to a certain number
of periods.
P P
F Reference time
Reference time

R
0 1 2 3 4 5 0 1 2 3 n-1 

P  R/ ( 1  i)1 A A A A A A A A A
R  A/ ( 1  i)1
R  A/ ( 1  i)2 A
P
R  A/ ( 1  i)3 i
R  A/ ( 1  i)4
27 28
Example:
Deposits at the end of each year are made by a father to his son
starting from his son’s first birthday until the son’s 20th birthday.
The son will have to withdraw equal amounts of Php 20,000 for each
year starting from his 21st birthday to his 24th birthday from the
deposits’ his father made. How much was the yearly deposit the
father made if money is worth 8% compounded annually?
Solution:
Example:
Mr. John buys a car and paid Php 108,000 cash and agreed to pay
Php 30,000 at the end of 6 months for 10 years. He failed to make
the first 5 payments at Php 30,000 each. At the end of three years,
he desires to pay the car by a single payment which will cancel both
his accumulated liabilities and his future liabilities. Calculate the
amount needed if money is worth 6% per annum compounded semi-
annually?

P20 

W (1  i )4 - 1  Solution:
4
(1  i ) i Calculating the previous liability:

20000 (1  0.08 )4 - 1 
P20 
(1  0.08 ) (0.08) 4
 P20  Php 66,242.54
F

A (1  i )n - 1 
But P20  F20 i
 0.06 
3(2) 
30000   1  - 1
F20 

A (1  i )20 - 1  F6 


2 
)

  F6  Php 194,052.29
i 0.06

66242.54 

A (1  0.08 )20 - 1   A  Php 1447.55
2
0.08 Calculating the future liability:

P

A (1  i )n - 1 
Example: (1  i )n i
Engr Lozada bought a car with a cash value of Php 340,000 on an
instalment plan under the following terms: Php 40,000 cash upon  0.06 
7(2) 
delivery and the balance payable in 12 equal monthly payments, 30,000   1   - 1
 2  
each payment combining an amortization instalment and 2% P6     P  Php 338,882.19
7(2)
interest on the remaining unpaid balance. What is his monthly  0.06  0.06
payment? 1  
 2  2
Solution:
Therefore, solving for the total liability
P  340,000 - 40,000  P  Php 300,000

P

A (1  i )n - 1  T  F 6  P6
n
(1  i ) i

300,000 

A (1  0.02 )12 - 1   A  Php 28,367.88
T  Php 532,934.48

(1  0.02 )n 0.02

29 30
Capitalized Cost (is simply the sum of the first cost and the present worth of Solving for A:
all costs of replacement, operation and maintenance on a certain periods or  5 
 0.20 
forever). This is an important application of annuity. A 1   - 1
P

A (1  i )n - 1   16,105.10 


2  
  A  4,248.48
CC  FC  Preplacemen t  P operation  Pmaintenance n
(1  i ) i 5
 0.20  0.20
1  
 2  2
Example:
Determine the capitalized cost of a structues that requires an initial
investment of Php 1,500,000 and an annual maintenance of Php Outstanding Interest Due at Repaid
150,000 assuming an interest rate of 15% Period Principal at the the end of Payments Principal at
beginning of period period end of period
Solution: 1 10,000.00 1,000.00
CC  FC  Preplacemen t  P operation  Pmain tenance 2 11,000.00 1,100.00
3 12,100.00 1,210.00
A 150,000
P  P  P  Php 1,000,000 4 13,310.00 1,331.00
i 0.15 5 14,641.00 1,464.10
CC  1,500,000  1,000,000  CC  Php 2,500,000
6 16,105.10 1,610.51 4,248.48 2,637.97
7 13,467.13 1,346.71 4,248.48 2,901.77
Amortization (any method of repaying a debt, including the principal and 8 10,565.36 1,056.54 4,248.48 3,191.94
interest and is usually by a series of equal payments at equal interval of time. 9 7,373.42 737.34 4,248.48 3,511.14
10 3,862.28 386.20 4,248.48 3,862.28
Example:
A debt of Php 10,000 with an interest rate of 20% compounded
Uniform Arithmetic Gradient (is an instance where the disbursement or
semi-annually is to be amortized by 5 equal payments at the end of
receipts involves is uniformly increasing or decreasing amount on each period)
each 6 months and the first payment will be made after 3 years.
Calculate the semi-annual payments and construct an amortization 4G
table. 3G

Solution: 2G
10,000 F5 = P5 Reference time 1G
Start of
payment

0
0 2 4 6 8 10
1 2 3 4 5
A A A A A
G  1  i n - 1  1 
P  - n  
i  i   1  i  
n
nm 5
 i   0.20 
F  P 1    F5  10,000 1    F5  16,105.10
 m  2  (Students should derive this equation based on the above learning)

31 32
Example: Exercise No. 6: Annuity
A loan of $ 8,000 was agreed to be amortized in four years forming 
an ascending arithmetic progression. Calculate the initial amount to Name: ______________________________________________________
Cut
be paid if the interest rate of the loan is 15%. Course: ____________________________ Date: _________________
He SCORE
re
Solution: Instruction:Answer the following problems and show the complete solution.
G  1  i n - 1  1 
P  - n   1. What is the present worth of a P 2,000.00 annuity over a 10-year period,
i  i   1  i n  if interest rate is 8%?
G  1  0.154 - 1  1  a. P 13,420 c. P 15,340
8000   - 4   b. P 14,290 d. P 16,340
0.15  0.15   1  0.154 
2. Abegail invested P 5,000 per month on a bank that offers 6% interest.
G  $ 2,112.80 How much can he get after 5 years?
a. P 334,790 c. P 356,850
b. P 348,850 d. P 386,290

3. A house and lot can be acquired by a down payment of P 500,000 and a

yearly payment of P 100,000 at the end of each year for the period of 10
years, starting at the end of 5 years from the date of purchase. If money
is worth 14% compounded annually, what is the cash price of the
property?
a. P 770,289.80 c. P 808,835.92
b. P 785,550.30 d. P 810,380.92

4. A young engineer borrowed P 10,000 at 12% interest and paid P 2,000

per annum for the last 4 years. How much does he have to pay at the end
of the fifth year in order to pay off his loan
a. P 6,922.93 c. P 6,872.89
b. P 6,633.22 d. P 6,760.20

5. A man purchased on monthly instalment at P 100,000 worth of load. The

interest rate is 12% nominal and payable in 20 years. What is the
monthly amortization?
a. P 1,101.08 c. P 1,328.30
b. P 1,290.09 d. P 1,590.20

6. A manufacturing firm wishes to give each 80 employees a holiday bonus.

How much is needed to invest monthly for a year at 12% nominal
interest rate compounded monthly, so that each employee will receive a
P 2,000 bonus?
33

a. P 10,200.39 c. P 14,289.30
b. P 12,615.80 d. P 16,289.37  13. If P 10,000 is deposited each year for 9 years, how much annuity can a
C
person get annually from the bank every year for 8 years starting 1 year
7. An instructor plans to retire in exactly one year and want an account u after the 9th deposit is made. Cost of money is 14%.
that will pay him P 25,000 a year for the next 15 years. Assuming a 6% t a. P 34,675 c. P 36,903
annual effective interest rate, what is the amount he would need to b. P 35,950 d. P 38,250
deposit now? H
a. P 242,806.22 c. P 367,290.22 e 14. A car dealer advertises the sale of a car model for a cash price of P
b. P 256,890.20 d. P 379,390.11 r 280,000. If purchased on instalment, the regular downpayment is 15%
e and balance payable in 18 equal monthly instalments at an interest rate
8. Mr. Robles plans a deposit of P 500 at the end of each month for 10 years of 1.5% per month. How much will be required monthly payments?
at 12% annual interest, compounded monthly. What will be the amount a. P 12,255 c. P 15,186
that will be available in two years? b. P 13,370 d. P 16,225
a. P 12,345.55 c. P 13,486.73
b. P 12,980.44 d. P 14,289.34 15. If you obtain a loan of P 1,000,000 at the rate of 12% compounded
annually in order to build a house, how much must you pay monthly to
9. A small machine has an initial cost of p 20,000, a salvage value of P 2,000 amortize the loan within a period of ten years?
and a life of 10 years. If your cost of operation per year is P 3,500 and a. P 10,255 c. P 15,259
your revenues per year is P 9,000, what is the approximate rate of return b. P 13,994 d. P 16,550
on investment?
a. 24.8% c. 16.29%
b. 20.38% d. 14.6%

10. A man paid 10% down payment of P 200,000 for a house and lot and
agreed to pay the balance on monthly instalments for n years at an
interest rate of 15% compounded monthly. If the monthly instalment
was P 42,821.87, find the value of n?
a. 3 years c. 5 years
b. 7 years d. 9 years

11. If a low cost house and lot worth P 87,000 were offered at 10% down
payment and P 500 per month for 25 years, what is the effective monthly
interest rate on the diminishing balance?
a. 36% c. 49%
b. 42% d. 54%

12. A debt of P 12,000 with interest of 20% compounded quarterly is to be

amortized by equal semi-annual payments over the next three years, the
first due in 6 months. How much is the semi-annual payments?
a. P 2,775 c. P 3,125
b. P 2,965 d. P 3,510
 Exercise No. 7: Annuity 8. The process of determining the value of certain property for specific
 
reasons.
Name: ______________________________________________________ C a. bond c. annuity
C
u Course: ____________________________ Date: _________________ u b. demand d. appraisal
SCORE
t t
Instruction: Select the correct answer for each of the following questions. 9. A series of equal payments occurring at equal periods of time.
H H a. equity capital c. amortization
e 1. It is a series of equal payments occurring at equal interval of time. e b. investment d. interest
r a. annuity c. amortization r
e e 10. The systematic recording of all business transactions in financial terms.
b. debt d. deposit
a. bookkeeping c. budgeting
2. It is a series of equal payments occurring at equal interval of time where b. accounting d. booking
the first payment is made after several periods, after the beginning of the
payment. 11. Which of the following is not considered an injection in the economy?
a. perpetuity c. annuity due a. exports c. investment
b. ordinary annuity d. Coupon b. imports d. none of the above

3. A series of uniform accounts over an infinite period of time. 12. Which of the following is not considered a leakage in the economy?
a. depreciation c. perpetuity a. savings c. imports
b. annuity d. inflation b. income taxes d. investment spending

4. A type of annuity where the payments are made at the end of each 13. The government’s attempt to control the decisions and choices of private
payment period starting from the first period. firms.
a. ordinary annuity c. deferred annuity a. localization c. nationalization
b. annuity due d. perpetuity b. privatization d. regulation

5. A type of annuity where payments are made at the start of each period, 14. The opportunity cost holding money is the
beginning from the first period. a. bond rate c. dividend
a. ordinary annuity c. deferred annuity b. interest rate d. shares
b. annuity due d. perpetuity
15. Assets which can be easily converted to cash are called
6. As applied to a capitalized asset, the distribution of the initial cost by a a. real assets c. liquid assets
periodic changes to operation as in depreciation or the reduction of a b. solvent assets d. ideal assets
debt by either periodic or irregular prearranged program is called.
a. annuity c. annuity factor 16. Which function of money represents its role as an instrument for buying
b. capital recovery d. amortization and selling goods and services?
a. medium of exchange c. store of value
7. Annuity can be applied only to a payment of b. unit of account d. all of the above
a. monthly c. annually
b. semi-annually d. all of the above 17. A closed economy is one that
a. does not have government
 b. does not allow free markets MODULE 4:
 c. does not engaged in transactions with the rest of the world DEPRECIATION & DEPLETION
d. none of the above
C Depreciation
u
18. A devaluation refers to is the decrease in the value of physical property with the passage of time
t
a. an increase in the value of domestic currency in terms of foreign
H
currency Purpose of Depreciation
e b. an increase in the value of foreign currency in terms of domestic a. to provide for the recovery of the capital which has been invested in
r currency physical property
e c. a decrease in the value of foreign currency in terms of domestic b. to enable the cost of depreciation to be charged to the cost of
currency producing products or services that results from the use of the
d. any of the above property

19. The price of a country’s currency in terms of another country’s currency Types of Depreciation
is called a. Physical Depreciation (deterioration caused by various chemical and
a. exchange rate c. purchasing power mechanical factors on the materials composing a property)
b. interest rate d. none of the above b. Functional Depreciation(deterioration caused by the decrease in
demand for the equipment for which it was designed)

‘ Requirements of a Depreciation Method

a. It should be simple
b. It should recover capital
c. The book value will be reasonably close to the market value at any
time
d. Methods should be accepted by the BIR

Methods of Computing Depreciation

The following symbols will be used for the different depreciation
methods
N = useful life of the property (years)
FC = first cost or original cost
SV = the value at the end of life, the scrap value
d = the annual depreciation cost
BV = book value at the end of n years
dm = total depreciation up to m years

40
1. STRAIGHT LINE METHOD(assumes that the loss in value is directly Solution:
proportional to the life span of the property) (FC - SV) i
d
FC - SV (1  I ) n - 1
d ; annual depreciation cost
N (54,500 - 5,000)0.065
m(FC - SV) d  d  Php 3668.18
dm  ; total depreciation cost up to m years (1  0.065 ) 10 - 1
N
BVm  FC - Dm ; book value at the end of m years 3. DECLINING BALANCE METHOD (assumes that the annual cost of
depreciation is a fixed percentage of the salvage value at the beginning of
Example: (Ch E Board Exam 1989) the year
An electronic balance costs Php 90,000 and has an estimated salvage
value of Php 8,000 at the end of its 10 years life span. What would SV
k 1-n ; ratio of depreciation in any one year to the
be the book value after three years using the straight line method? FC
book value at the beginning of that year
Solution: m -1
dm  FC (k)(1 - k)
FC - SV m
d  d  Php 8,100
N  SV  N
BVm  FC (1 - k)m or BVm  FC  
D3  n (d)  D3  Php 24,600  FC 
SV  FC (1 - k)N
C 3  FC - D 3  C 3  Php 65,400

Note that this method is NOT applicable when the salvage value is
2. SINKING FUND METHOD(assumes that a sinking fund is established in zero as k will be equal to one.
which funds will accumulate for replacement)
Example: (M E Board Exam 1978)
An certain type of machine loses 10% of its value each year. The
(FC - SV) i machine costs Php 2,000.00 originally. Make out a schedule showing
d
(1  I ) n - 1 the yearly depreciation, the total depreciation and the book value at
the end of each year for 5 years.
d [ (1  i )m - 1 ]
dm 
i Solution:
BV  FC - Dm Book Value Total
Depreciation Book Value
at the Depreciation at
Example: (ECE Board Exam 1975) YEAR during the at the end of
beginning of the end of the
A broadcasting company purchased an equipment for Php 53,000 year (10%) the year
year year
and paid 1,500 for freight and delivery charges to the job site. The 1 Php 2,000.00 Php 200.00 Php 200.00 Php 1,800.00
equipment has a natural life of 10 years with a trade in value of Php 2 Php 1,800.00 Php 180.00 Php 380.00 Php 1,620.00
5,000 at the end of life. Calculate the annual depreciation cost using 3 Php 1,620.00 Php 162.00 Php 542.00 Php 1,458.00
sinking fund method assuming an interest rate 6.5 % compounded
4 Php 1,458.00 Php 145.80 Php 687.80 Php 1,312.20
annually.
5 Php 1,312.20 Php 131.22 Php 819.22 Php 1,180.98

41 42
4. DOUBLE DECLINING BALANCE(same as declining balance except that Example:
the rate of depreciation, k, is replaced by 2/N A structure costs Php 12,000. It is estimated to have a life of 5 years
n -1 with a salvage value of Php 1,000 at the end of life. Determine the
 2  2
d  FC   1 -  book value at the end of each year using SYD Method.
 N  N
 2
m Solution:
BVm  FC  1 - 
 N  of digits  1  2  3  4  5   of digits  15
N
 2 Year in Book Value
SV  FC  1 - 
 N YEAR reverse Depreciation during the year at the end of
order the year
Note that when the DBB method is used, the salvage value should not 1 5 (5/15)(12000-1000) = 3,666.67 Php 8,333.33
be subtracted from the first cost when calculating the depreciation 2 4 (4/15)(12000-1000) = 2,933.37 Php 5,400.00
charge. 3 3 (3/15)(12000-1000) = 2,200.00 Php 3,200.00
4 2 (2/15)(12000-1000) = 1,466.67 Php 1,733.33
Example: (Ch E Board Exam 1974) 5 1 (1/15)(12000-1000) = 733.33 Php 1,000.00
A plant bought a calciner for Php 220,000 and used it for 10 years,
the life span of the equipment. What is the book value of the calciner 6. THE SERVICE OUTPUT METHOD (assumes that the total depreciation
after 5 years of use assuming a scrap value of Php 20,000 for double that has taken place directly proportional to the quantity of the output of
declining balance method? the property up to that time.
FC - SV
Solution: do 
T ;depreciation per unit output
m
 2
 FC - SV 
BVm  FC  1 -  dn     Qn 
 N T 
 ; depreciation per any unit output
5
 2 where: Qn = quantity of produced units
BVm  220,000 1 -   BV5  Php 72,090.00
 10 

Example: (M E Board Exam 1991)

5. SUM-OF-THE-YEARS-DIGITS (SYD) METHOD A television company purchased a machinery for Php 100,000 on
reverse digit July 1, 1979. It is estimated that it will have a useful life of 10 years,
d (FC - SV) ; depreciation at a certain year scrap value of Php 4,000; production of 400,000 units and working
sum of digits
hours of 120,000. The company uses the machinery for 14,000
hours producing 36,000 units in 1979 and 18,000 hours producing
sum of reverse digit 44,000 in 1980. Calculate the depreciation in 1980 using SO Method.
dm  (FC - SV)
sum of digits
Solution:
BVm  FC - dm  FC - SV 
dn    ( Qn 
 T 
43 44
  100,000 - 4,000  is an annual charge that is made for the maintenance of investment in
d80    ( 44,000   d80  Php 10,560 wasting assets such as mines, oil and gas wells.
 400,000 
Let:

Example: C = capital investment

A machine costs $ 7,000 last 8 years and has a salvage value at the Ap = annual profit
end of life of $350. Determine the depreciation charge during the 4th SV = salvage value
year and the book value at the end of four years using (a) SL Method; n = no of years of the business venture
(b) DB Method; and (c) SYD Method. r = rate of return on the investment
i = interest rate earned on sinking fund
Solution: C(r) = annual return on investment
a. SL Method Ap – C(r) = annual deposit in the sinking fund
FC - SV 7000 - 350
d  d  d  $ 831.25 From the relation (annuity equation)
n 8
F

A (1  i )n - 1 
BVm  FC - Dm  BV4  7000- 831.25(4)  BV  $3,675 i

where: F = C - SV
b. DB Method A = Ap – C(r)
SV 350
k 1-n  k 1 - 8 Substituting and simplifying
FC 7000
k  0.3123  
Ap 1  i n - 1  SV (i)
dm  FC (k)(1 - k) m -1
 d4  7000(0.3123)(1 - 0.3123) 4 C

i  r 1  i n - 1 
d4  $ 711
Example:
BVm  FC(1 - k)m  BVm  7000(1 - 0.3123)4 It is estimated that a mine will yield an annual profit of $ 36,000 for
BVm  $1,563.83 10 years at the end of which time it will have a salvage value of $
4,000. Assuming that the recovery capital can be reinvested at 3%,
what is the purchase price required to yield an investment rate of
8%.
c. SYD Method
sum of reverse digit  26 
dm  (FC - SV)  d4   7000 - 350 Solution:
sum of digits  36  
Ap 1  i n - 1  SV (i)
d 4  $ 4802.78 C

i  r 1  i n - 1 
BVm  FC - dm  BV4  7000 - 4802.78  BV4  $2,197.22 
36000 1  0.0310 - 1  4000(0.03) 
C

0.03  0.08 1  0.0310 - 1   $ 217,358.20

Depletion 45 46
Exercise No. 8: Depreciation and Depletion first cost at any time with no salvage value. Determine the length of
 service life necessary if the depreciation used is the SYD method.
C
Name: ______________________________________________________ a. 5 years c. 9 years
u
Course: ____________________________ Date: _________________ b. 7 years d. 12 years
SCORE t
7. A motor cycle has an initial cost of P 50,000.00 and a salvage value of P
Instruction: Answer the following problems and show the complete solution. H 10,000.00 after 10 years. What is the straight line method depreciation
e rate as a percentage of the initial cost?
1. A certain company makes it the policy that for any new piece of r
equipment the annual depreciation cost should not exceed 10% of the a. 6% c. 10%
e
original cost at any time with no salvage value. Determine the length of b. 8% d. 12%
service life necessary if the depreciation method used is Straight Line 8. A computer machine initially worth P 50,000 depreciates in value each
Method: year by 20% of its value at the beginning of that year. Find its book value
a. 8 years c. 12 years when it is 9 year old.
b. 10 years d. 14 years a. P 6,710.89 c. P 7,216.39
2. A certain company makes it the policy that for any new piece of b. P 6,890.27 d. P 7,562.29
equipment the annual depreciation cost should not exceed 10% of the 9. The original cost of modem equipment is P 300,000 and it is depreciated
original cost at any time with no salvage value. Determine the length of by a 10% sinking fund method. Determine the annual depreciation
service life necessary if the depreciation method used is Sinking Fund charge if the book value of the equipment after 10 years is the same as if
method: it had been depreciated at P 28,000 each year by straight line method.
a. 5.34 years c. 7.64 years a. P 12,054 c. P 14,290
b. 6.28 years d. 8.48 years b. P 13,290 d. P 15,389
3. A certain company makes it the policy that for any new piece of 10. The certain publisher purchased a machine for P 30,000, used it for 5
equipment the annual depreciation cost should not exceed 10% of the years and then sold it for P 10,000. If capital I worth 8%, determine the
original cost at any time with no salvage value. Determine the length of annual cost of depreciation and interest using the sinking fund
service life necessary service life necessary if the depreciation method depreciation and interest on first cost.
used is the Sum of the Years Digit Method. a. 3,904.13 c.
a. 9 years c. 17 years b. 3,409.13 d.
b. 13 years d. 19 years
11. An asset is purchased for P 9,000.00. Its estimated economic life is 10
4. A resistor has a selling price of P 400. It it’s selling price is expected to years after which it will be sold for P 1,000.00. Find the depreciation in
decline at a certain rate of 10% per annum due to obsolescence, what the first three years using sum of the years digit method.
will be it’s selling price after 5 years? a. P 3,290 c. P 4,290
a. P 236.20 c. P 245.10 b. P 3,927 d. P 4,389
b. P 238.30 d. P 254.10
12. A welding machine cost P 45,000 with an estimated life of 5 years. Its
5. A CPU costs P 8,000 and an estimated life of 10 years with a salvage salvage value is P 2,500. Find its depreciation rate by straight line
value of P 500. What is its book value after 8 years using straight method? method.
a. P 1,800 c. P 2,200 a. 9.29% c. 16.39%
b. P 2,000 d. P 2,400 b. 12.39% d. 18.89%
6. A certain corporation makes it a policy that for any new equipment
purchased, the annual depreciation cost should not exceed 20% of the
 MODULE 5: Monthly Cutting Cost  3,200 (25)  Monthly CC  Php 80,000
SELECTIONS IN PRESENT ECONOMY

Some problems encountered in engineering economics studies does consider Method B: Electrically operated Hydraulic guillotine
interest as a factor. These problems usually involve selections between Monthly Cutting Cost  no. of unit (cost/unit)
alternative designs, materials, or methods. Monthly Cutting Cost  3,200 (25)(1 - 0.30)  Monthly CC  Php 56,000

Example: (M.E. 1987 Board Exam)

Therefore, he has a savings of Php 24,000 per month.
In a new gold mining in Davao, the ore contains on the average one
275,000
ounce of gold per ton. Two methods are being considered in No of months to recover the cost of machine   11.5 months
processing this ore. Method A costs Php 1,500 per ton and can 24,000
recover 90% of gold. Method B costs Php 1,200 per ton and can
recover 80% of gold. If gold can be sold at Php 4,000 per ounce,
which method is better and by how much? Example: (E.E. 1989 Board Exam)
An electrical contractor has a job which should be completed in 100
Solution: days. At present, he has 80 men on the job and is estimated that they
Method A : will finish the work in 130 days. If of the 80 men, 50 are paid P62 a
Profit  Income - Expense  Profit  (4000)(0.90) - 1,500 day, 25 at P68 a day, and 5 at P75 a day and if for each day beyond
Profit  Php 2,100 the original 100 days, the contractor has to pay P250 liquidated
damages. (a) How many more men should the contractor add so he
can complete the work on time? (b) If the additional men of 5 are
Method B :
paid P68 a day and the rest at P62 a day, would the contractor save
Profit  Income - Expense  Profit  (4000)(0.80) - 1,200
money by employing more men and not paying the fine?
Profit  Php 2,000
Solution:
Therefore, Method A is better than Method B by P 100 per ton of ore a. Let x = number of men to be added to complete the job on time
processed ( x  80)100  (80)130
x  24 men

Example: (M.E. 1986 Board Exam) b. Computing for the savings if there is
The monthly demand for ice cans being manufactured by Mr Cruz is
3,200 pieces. With a manually operated guillotine, the unit cutting 80 men on the job
cost is P25.00. An electrically operated hydraulic guillotine was Wages 50 (P62)130 = 403,000.00
offered to Mr Cruz at a price of P275,000 and which will cut by 30% 25 (P68)130 = 221,000.00
the unit cutting cost. Disregarding the cost of money, how many 5 (P75)130 = 48,750.00
months will Mr Cruz be able to recover the cost of machine if he
decides to buy now? Damages (P250)30 = 7,500.00

Solution: Total Expenses = 680,250.00

Method A : Manually operated guillotine
Monthly Cutting Cost  no. of unit (cost/unit)
49 50
104 men on the job Exercise No. 9: Selections in Present Economy
Wages (50+19)(P62)100 = 427,800.00 
(25+ 5)(P68)100 = 204,000.00 Name: ______________________________________________________
C
5 (P75)100 = 37,500.00 Course: ____________________________ Date: _________________
u SCORE
t
Total Expenses = 669,300.00 Instruction: Answer the following problems and show the complete solution.
H
So, there is a savings of P 10,950 by employing more men e 1. High carbon steel or alloy steel can be used for the set of tools on a lathe.
r The tools must be sharpened periodically. Data for each material are as
e follows:

High Carbon Alloy Steel

Steel
Output per hour 60 pcs 70 pcs
Time between tool 4 hr 6 hr
grinds
Time required to 1 hr 1 hr
change tools

The wages of the lathe operator is P24 per hour based on the actual
working hours. The tool changer costs P30 per hour. Overhead costs for
the lathe is P14 per hour including tool-change time. A set of
unsharpened high carbon steel costs P500 and can be ground ten times;
a set of unsharpened alloy steel costs P650 and can be ground five times.
Which type of steel should be used economically?

2. An equipment installation job in the completion stage can be completed

in 40 days of 8-hour day work with 40 men working. With the contract
expiring in 30 days, the mechanical engineer contractor decided to add
10 men on the job, overtime not permitted. If the liquidated damages is
P2,000 per day of delay, and the men are paid P80 per day, will the
engineer be able to complete the job on time? Would be save money
with the addition of workers?

3. An executive receives an annual salary of P240,000 and his secretary a

salary of P60,000 a year. A certain task can be performed by the
executive working alone in 4 hours. If he delegates the task to his
secretary it will require him 30 minutes to explain the work and another
45 minutes to check the finished work. Due to the unfamiliarity of the
secretary to do the task, it takes her an additional time of 6 hours after
being instructed. Considering salary cost only, determine the cost of
51
 performing the task by each method if the secretary works 2,400 hours a
 year and the executive 3,000 hours a year.
C C
u 4. (ME 1987 Board Exam) A cement girinding mill “A” with a capacity of 50
t tons per hour utilizes forged steel grinding balls costing Php 12,000 per
ton, which have a wear rate of 100 grams per ton of cement milled.
H H
Another cement grinding mill of the same capacity uses high chrome
e e
stell grinding balls costing Php 30,000 per ton which has a wear rate of
r
10 grams per ton of cement milled. Determine by calculation the more
e
economical grinding mill considering other factors to be the same?
5. A machine used for cutting materials in a factory has the following
outputs per hour at various speeds and requires a periodical tool
regrinding at the intervals cited.
Speed Output per Tool
hour Regrinding
A 200 pieces Every 8 hours
B 280 pieces Every 5 hours
A set of tools costs Php 1,260 and can be ground twenty times. Each
regrinding costs Php 54,000 and the time needed to regrind and change
tool is 1 hour. The machine operator is paid Php 19.20 per hour,
including the time the tool is changed. The tool grinder who also sets the
tool to the machine is paid Php 21 per hour. The hourly rate chargeable
against the machine is Php 38.00, regardless of machine speed. Which
speed is the most economical?
on some operational factors and the life of the bricks. The locally
 produced bricks costs Php 25,000 per ton and has a life of 4 months,
while certain imported bricks cost Php 30,000 per ton and have a life of
u 6 months. Determine which is more economical bricks and by much?
t
8. (EE 1985 Board Exam) Motors from two different manufacturers are
being considered for application. Both motors are 50 hp., 460 volts, 3-
r
phase, 60 cycles, but motor A operates 80% efficiency while motor B
e operates at 88% efficiency. The expected need for the motor is 15 years.
Motor A costs Php 60,000 and motor B costs Php 75,000. Electrical
energy costs Php 2 per kw-hr and the motors will be operated for 8
hours per day, 250 days a year. Assuming taxes to 3%, which of the two
motors should be purchased?
9. (ME 1985 Board Exam) An ice plant owner decided to install a water
pump from a nearby clean fresh water source to supply its water
requirements. The capacity of the pump is 45.5 cu m per hour against a
head of 43 m with an efficiency of 70% at full load and 40% at half load,
The total cost of pumping unit including the piping system is Php
700,000 with zero salvage value at the end of its estimated life of 20
years. The prime mover of the pump is an electric motor and cost oo
power is P2.10 per kw-hr. Taxes, insurance and maintenance cost is
1.5% of the first cost per year. The pump will operate 200 days
continuous operation per year at half load and 150 days at full load. If
the cost of money is 12%, how much will it cost to operate the pump per
cu.m?

6. (ME 1987 Board Exam) A paint manufacturing uses a sand mill for fine
grinding of paint with an output of 100 liters per hour using glass beads
as grinding media. Media load in the mill is 25 kgs, costing Php 200 per
kg and is fully replenished in 2-month time, at 8-hour per day operation,
25 days in a month.
A ceramics grinding media is offered to this company costing Php 400
per kg and needs 30 kg load in the sand mill, but guarantees an output of
120 liters per hour, and full replenishment of media in 3 months.
If profits on paint production isPhp 15 per liter, would you recommend
the change in meida?

7. (ME 1987 Board Exam) A cement kiln with production capacity of 130
tons per day (24 hours a day) of clinker has at its burning zone of 45
tons of magnesitechrome bricks being replaced periodically depending
 MODULE 6:
BASIC METHODS FOR MAKING ECONOMIC STUDIES Example:
A project needs an investment of P 500,000 that will produce a
Basic methods or patterns for making economic studies uniform annual revenue of P 354,800 for 5 years. Out of pocket costs
for operation and maintenance will be P 158,300 per year. Taxes
a. Rate of Return Method (ROR Method) and insurance will be 4% of the first cost. The company expects the
measures of the effectiveness of an investment, thus the rate of investment to earn not less than 25% before income tax. Salvage
return is being considered to justify the investment value will be 10% of the investment. Is this a desirable project
investment? What is the payback period?
net annual profit
Rate of Return  Solution:
capital investment
A. Using the Rate of Return Method
b. Annual Worth Method (AW Method)
considers a single initial investment of capital and a uniform Annual Revenue 354,800
revenue and cost throughout the life of the investment, thus in AW Annual Cost
method, the annual cash inflow should be greater than the cash Depreciation 54,831.03
(FC - SV) i
outflow to justify investment. d
(1  I ) n - 1
(FC - SV)(1  i)n i Operation and Maint. 158,300.00
AW   Annual Expenses Taxes & Insurance 20,000.00
(1  i)n - 1 (4% of FC)
Total Annual Cost 233,131.03
c. Present Worth Method (PW Method)
reflects all revenues and expenses in the present time, where net Net Annual Profit 121,668.97
cash flow should be greater than zero to consider the project
economically justified. (This is a very flexible method and can be 121,668.97
used in any type economy study) Rate of Return  x 100  24.33%
500,000
Since the rate of return is less than 25%, the investment is NOT justified.
d. Future Worth Method (FW Method)
same as PW method only that all cash inflow and cash outflow are
B. Using the Annual Worth Method
computed based on the future reference time, thus the future
worth of net cash flow should be greater than zero to economically
Annual Revenue 354,800
justify a project.
Annual Cost
Depreciation 54,831.03
e. Payback (Payout) Period Method (PP Method)
(FC - SV) i
is defined as the length of time required to recover the first cost of d
an investment from the net cash flow generated by the investment (1  I ) n - 1
with an interest rate of zero. Operation and Maint. 158,300.00
Taxes & Insurance 20,000.00
investment - salvage value (4% of FC)
Payback Period  55 56
net annual cash flow Interest on Capital 125,000.00
 (25% of investment)
Total Annual Cost 358,131.03 FWinflows 

A (1  i )n - 1
 SV

i
Excess - 3,331.03(loss)
FWinflows 

354,800 (1  0.25 )5 - 1 
 50,000
Since cash outflow is greater than cash inflow, the investment is NOT 0.25
justified.  2,961,854.69

C. Using Present Worth Method

FWoutflows 

A (1  i )n - 1 
 FC (1  i )n
i
Annual Cost = operation and maintenance + taxes and insurance
FWoutflows 

178,300 (1  0.25 )5 - 1 
 500,000(1  0.25)5
50,000 0.25
0 1 2 3 4 5  2,989,192.58

354,800 Since cash outflow is greater than cash inflow, the investment is NOT
178,300 justified.
0
1 2 3 4 5 500,000 E. Using Payback Period
Cash flow diagram of cash Cash flow diagram of cash
inflows outflows investment - salvage value
Payback Period 
net annual cash flow

PWinflows 

A (1  i )n - 1  SV
500,000 - 50,000
(1  i )n i (1  i )n Payback Period   2.6 years
 
354,800 - 178,300
354,800 (1  0.25 )5 - 1 50,000
PWinflows   970,540.54
(1  0.25 )5 0.25 (1  0.25 )5 Note that payback period is not advisable to be the basis in making
investment decisions as it may give a misleading results.

PWoutflows 

A (1  i )n - 1   FC
(1  i )n i Example: (M.E. 1987 Board Exam)

PWoutflows 

178,300 (1  0.25 )5 - 1   500,000  979,498.62
A firm is considering purchasing an equipment that will reduce costs
by P 40,000. The equipment costs P 300,000 and has a salvage value
(1  0.25 )5 0.25 of P 50,000 and a life of 7 years. The annual maintenance cost is P
6,000. While not in used by the firm, the equipment can be rented to
Since cash outflow is greater than cash inflow, the investment is NOT others to generate an income of P 10,000 per year. If money can be
justified. invested for an 8% return, is the firm justified in buying the
equipment?
57 58
D. Using Future Worth Method
Solution:
Annual savings
 Reduction in annual cost 40,000.00 Exercise No. 10: Basic Methods for Making Economic
Rental 10,000.00  Studies
C
TOTAL ANNUAL SAVINGS 50,000.00 u
Name: ______________________________________________________
SCORE
t Course: ____________________________ Date: _________________
Annual costs
Depreciation 28,018.10 H Instruction: Answer the following problems and show the complete solution.
(FC - SV) i e
d
(1  I ) n - 1 r 1. A man is considering investing Php 750,000 to open a semi-automatic
Maintenance 6,000.00 e auto washing business in the city of 450,000 population. The equipment
can wash on average, 12 cars per hour using 2 men to operate it and to
TOTAL ANNUAL COSTS 34,018.10 do some small amount of hand work. The man plans to hire to
additional men in addition to himself and operate the station on an 8-
Net Annual Savings 15,981.90 hour basis, 6 days a week and 50 weeks per year. He will pay his
employee Php 15 per hour. He expects to charge Php 30 for a car wash.
15,981.9 Out of pocket miscellaneous cost would be Php 9,750 per month. He
Rate of Return  x 100  5.33% would pay his employees for 2 weeks vacations each year. Because of
300,000
the length of his lease, he must write off his investment within 5-years.
His capital now is earning 15% and he is employed at a steady job that
Since the rate of return is less than 8%, the purchase of the equipment is NOT
pays 20,000 a month. He desires a rate of return of at least 20% on his
justified.
investment. Would you recommend the investment?

2. (M.E. 1966 Board Exam) The GJE company has a contract with a hauler to
transport its naphtha requirements of 3,600,000 liters per year from a
refinery in Batangas to its site in Paco at a cost of 30 centavo per liter. It
is proposed that the company buys a tanker with a capacity of 18,000
liters to service its requirements at a first cost of Php800,000, life is 6
years and a salvage value of Php 20,000. Other expenses are as follows:
Diesel fuel at Php 5 per liter and tanker consumes 120 liters per
round trip
Lubricating oil and servicing is Php 800 per month
Labor including overtime and other fringe benefits for one driver
and on helper is Php 7,000 per month
Annual taxes and insurance is 5% of the first cost
General maintenance per year is Php 20,000
Trips cost Php 21,000 per set and will be renewed every 150 round
trips
What should the GJE company do assuming a 15% interest rate on
investment in the analysis?

59
 3. A young mechanical engineer is considering establishing his own small operate 200 days continuous operation per year at half load and 150
 company. An investment of Php 100,000 will be required which will be  days at full load. If cost of money is 12%, how much will it cost the
recovered in 15 years. It is estimated that the sales will Php 150,000 per owner to operate the pump per cubic meter?
C C
year and that operating expenses will be as follows:
u u
Materials Php 40,000 per year 7. Mr Arguillon is considering building a 25-unit apartment in a place near
t t
Labor 70,000 per year a progressive commercial center. He felt that because of the location of
H Overhead 10,000 + 10% of sales per year the apartment, it will be occupied 90% at all time. He desires a rate of
H
e Selling expense 5,000 per year e return of 20%. Other pertinent data are the following:
r This man will give up his regular job paying Php 15,000 per year and r Land investment P 5,000,000
e devote full time to the operation of the business; this will result in e Building investment 7,000,000
decreasing labor cost by Php 10,000 per year, material cost Php 7,000 Study period 20 years
per year and overhead cost by 8,000 per year. If he expects to earn at Cost of land after 20 years 2,000,000
least 20% of his capital, should you recommend him to invest? Rent per unit per month 6,000
Upkeep per unit per year 500
4. The BLE company is considering constructing a plant to manufacture a Property taxes 1%
proposed new products. The land costs P 15,000,000; the building costs Insurance 0.50%
P 30,000,000; the equipment cost p 12,500,000; and P 5,000,000
working capital is required. At the end of 12 years, the land can be sold Is this a good investment?
for P 25,000,000; the building for P 12,000,000; the equipment for P
250,000; and all of the working capital recovered. The annual
disbursement for labor, materials, and all other expenses are estimated
to cost P 23,750,000. If the company requires a minimum return of 25%,
what should be the minimum annual sales for 12 years to justify this
investment?

5. A coal fired Power plant with 30,000 kw rated capacity costs P 15,000
per kw installed. Annual operating cost, P 12 million; annual
maintenance cost, P 8 million; annual depreciation, P 15 million; interest
on investment per year, 8%; cost of coal, P 800 per ton. If one pound of
coal is needed to generate 1 kwh, find the total annual cost to operate
the plant assuming plant capacity factor of 50%.

6. (ME 1985 Board Exam) An ice plant owner decided to install a water
pump from a nearby clean fresh water source to supply its water
requirements. The capacity of the pump is 45.5 cu m per hour against a
head of 43 meters with an efficiency of 70% at full load and 40% at half
load. The total cost of the pumping unit including the piping system of
the plant is P 700,000 with zero salvage value at the end of the its
estimated life of 20 years. The prime mover of the pump is an electric
motor and cost of power is P2.10 per kwh. Taxes, insurances and
maintenance cost is 1.5% of the first cost per year. The pump will
 MODULE 7:
COST COMPARISON OF ALTERNATIVE METHODS First Cost P 200,000.00 P 300,000.00
Annual Operating Cost 32,000.00 24,000.00
The fundamental principle on which alternative to be choose would be an Annual Labor Cost 50,000.00 32,000.00
alternative that requires minimum investment of capital that will produce Insurance & Property 3% 3%
satisfactory functional result unless there are definite reasons for choosing or Taxes
adopting alternative with larger investment. Payroll Taxes 4% 4%
Estimated life 10 10
Methods in Comparing Alternatives If the minimum required rate of return is 15%, which equipment
should be selected?
a. Rate of Return on Additional Investment Method (ROR AIM)
considers a satisfactory rate of return on additional investment to Solution:
accept alternative requiring larger investment a. Using Rate of Return on Additional Investment Method
TYPE A : Annual Cost
annual net savings Depreciation 9,850.41
ROR AIM 
additional investment (FC - SV) i 200,000(0.15)
d 
(1  I ) n - 1 (1  0.15)10 - 1
b. Annual Cost Method (AC Method) Operation 32,000.00
determines the annual costs of the alternatives including interest Labor 50,000.00
on investment with the least annual cost as the best alternative Payroll taxes (50,000)(0.04)
2,000.00
c. Present Worth Cost Method (PWC Method) Taxes & Insurance (200,000)(0.03) 6,000.00
determines the present worth of the net cash flows for each
alternative for the same period of time with the least as the best TOTAL : 99,850.41
alternative
TYPE B : Annual Cost
d. Capitalized Method (Cap Method) Depreciation 14,776.62
a variation of the PWC method that is used for alternatives having (FC - SV) i 300,000(0.15)
d 
long lives, with the least capitalized cost as the best alternatives (1  I ) - 1 (1  0.15)10 - 1
n

Operation 24,000.00
e. Payback (Payout) Period Method (PP Method) Labor 32,000.00
seldomly used method, in which the payback period is being Payroll taxes (50,000)(0.04) 1,280.00
determined and the shortest payback is the best option. Taxes & Insurance (200,000)(0.03) 9,000.00
TOTAL : 81,056.62
Example:
A company is considering two types of equipment for its Annual savings: 99,850.41 - 81,056.62=18,793.79
manufacturing plant. Pertinent data are as follows
Additional Investment: 300,000 - 200,000 = 100,000.00
63 64
TYPE A TYPE B
 ROR AIM 
annual net savings

18,793.79
 18.79 % PWType A  FC 

A (1  i )n - 1 
additional investment 100,000 n
(1  i ) i
Since ROR AIM is greater than 15%, the best option is Type B
 200,000 

90000 (1  0.15 )10 - 1 
10
b. Using Annual Cost Method (1  0.15 ) (0.15)
TYPE A : Annual Cost
Depreciation 9,850.41 PWType A  651,689.18
(FC - SV) i 200,000(0.15)
d 
(1  I ) - 1 (1  0.15)10 - 1
n TYPE B : Annual Cost (excluding depreciation)
Operation 32,000.00 Operation 24,000.00
Labor 50,000.00 Labor 32,000.00
Payroll taxes (50,000)(0.04) 2,000.00 Payroll taxes (50,000)(0.04) 1,280.00
Taxes & Insurance (200,000)(0.03) 6,000.00 Taxes & Insurance (200,000)(0.03) 9,000.00
Interest on Capital (200,000)(0.15) 30,000.00 TOTAL : 66,000.00
TOTAL : 129,850.41

TYPE B : Annual Cost

PWType B  FC 

A (1  i )n - 1 
Depreciation 14,776.62 n
(1  i ) i
(FC - SV) i 300,000(0.15)
d 
(1  I ) - 1 (1  0.15)10 - 1
n
 300,000 

66000 (1  0.15 )10 - 1 
10
Operation 24,000.00 (1  0.15 ) (0.15)
Labor 32,000.00 PWType B  631,238.73
Payroll taxes (50,000)(0.04) 1,280.00
Taxes & Insurance (200,000)(0.03) 9,000.00
Since present worth cost of Type B is less the Type A, select Type B
Interest on Capital (300,000)(0.15) 45,000.00
TOTAL : 126,056.62
Example:
Since annual cost of Type B is less the Type A, select Type B Which is more economical given the two choices of machines?
Machine A Machine B
c. Using the present worth Cost Method
First Cost P 8,000.00 P 14,000.00
TYPE A : Annual Cost (excluding depreciation) Salvage Value 0 2,000.00
Operation 32,000.00 Annual Operation 3,000.00 2,400.00
Labor 50,000.00 Annual Maintenance 1,200 1,000
Payroll taxes (50,000)(0.04) 2,000.00 Taxes and Insurance 3% 3%
Taxes & Insurance (200,000)(0.03) 6,000.00 Estimated life 10 15
TOTAL : 90,000.00 Money is worth at least 16%
Solution:
65 66
a. Using Rate of Return on Additional Investment Method Maintenance 1,200.00
MACHINE A : Annual Cost Taxes &Insurance (8,000)(0.03) 240.00
Depreciation 375.21 Interest on Capital (8,000)(0.16) 1,280.00
(FC - SV) i 8,000(0.16)
d  TOTAL :
(1  I ) - 1 (1  0.16)10 - 1
n
6,095.21
Operation 3,000.00
Maintenance 1,200.00
MACHINE B : Annual Cost
Taxes & Insurance (8,000)(0.03) 240.00
Depreciation 232.29
TOTAL : 4,815.21 (FC - SV) i 12,000(0.16)
d 
(1  I ) n - 1 (1  0.16)15 - 1
MACHINE B : Annual Cost Operation 2,400.00
Depreciation 232.29 Labor 1,000.00
(FC - SV) i 12,000(0.16) Taxes &Insurance (14,000)(0.03) 420.00
d 
(1  I ) - 1 (1  0.16)15 - 1
n Interest on Capital (14,000)(0.16) 2,240.00
Operation 2,400.00 TOTAL : 6,292.29
Labor 1,000.00
Taxes & Insurance (14,000)(0.03) 420.00 Since annual cost of Machine Ais less the Machine B, therefore
TOTAL : 4,052.29 Machine A is more economical

Annual savings: 4,815.21 - 4,052.29 = 762.92 c. Using Present Worth Cost Method
Additional Investment: 14,000 - 8,000 = 6,000.00
(Students will solve this same problem using the PWC method
with a common multiple of 30 years)
annual net savings 762.92
ROR AIM    12.72 %
additional investment 6,000

Since ROR AIM is less than 16%, Machine A is economical

b. Using Annual Cost Method

MACHINE A : Annual Cost

Depreciation 375.21
(FC - SV) i 8,000(0.16)
d 
(1  I ) - 1 (1  0.16)10 - 1
n

67 68
Operation 3,000.00
 Exercise No. 11: COST COMPARISON OF cu m of block per month but consumes 120 liters of diesel fuel for the
 ALTERNATIVE METHODS compressor drive per 6 cu m of block produced utilizing 2 workers per
C quarry bar drill. Considering diesel fuel at P6.00 per liter at the quarries,
u Name: ______________________________________________________ worker earning P 80 per day, 25 days a month, 5 years life on both drills
SCORE with 20% salvage value, neglecting cost of money, other cost at P 500
t Course: ____________________________ Date: _________________
per cu m and marble block sold at P 2,000 per cu m. Would you
H Instruction:Answer the following problems and show the complete solution. recommend the purchase of the new equipment? What is the pay-out
e period of the better drill?
r 1. An industrial plant is considering the purchase of a centrifugal pump.
e Three offers were received and basis of selection have been tabulated as 4. A company is being offered a special coating for the gasoline
follows: underground tank in installing in its service stations which will increase
Offer A Offer B Offer C the life of the tank from the usual 10 years to 15 years. The cost of the
Price of Pump Php 60,000 Php 96,000 Php 120,000 special coating will increase the cost of the P 40,000 – tank to P 58,000.
Cost of installation for either of the tanks is P 24,000. If the salvage
Economic life (yrs) 3 5 10
value for both is zero, and the interest rate is 26%, would you
Salvage Value@ end of econ 5,000 10,000 8,000 recommend the use of the special coating?
life
Yearly Maintenance cost 10,000 6,000 5,000 To remedy the traffic situation at a busy intersection in Quezon City, two
5.
plans are being considered. Plan A is to build a cloverleaf costing P
If cost of money is 14%, what offer would you recommend to be
9,200,000 which would provide all the needs during the next 30 years.
purchased?
Maintenance costs are estimated to be P 24,000 a year for the first 15
years and P 42,000 a year for the second 15 years.
2. A plant to provide the company’s present needs can be constructed for P
2,800,000 with an annual operating disbursement of P 600,000. It is
Plan B is to build a partial clover-leaf at a costs of P 6,500,000 which
expected that at the end of 5 years, the production requirements could
would be sufficient for the next 15 years. At the end of 15 years, the
be doubled, which necessitate the addition of an extension costing P
cloverleaf will be completed at an estimated cost o P 7,500,000.
2,400,000. The disbursement after 5 years will be likewise double. Maintenance would cost P 16,800 a year during the first 15 years and P
36,000 a year for the second 15 years. If money is worth 18%, which of
Another plan is to provide the entire expected capacity can be the two plans would you recommend?
constructed for P 4,000,000 and its operating disbursement will be P
640,000 when operating on half capacity (for the first five years) and P
900,000 on full capacity. The plants are predicted to have
indeterminately long life. The required rate of return is 20%. What
would you recommend?

3. In a marble quarrying operation, hand rock drills costing P 50,000 each

are used. It has a drilling rate of 10 cm per minute, producing 10 cu m of
block per month and consumes 60 liters of diesel fuel for compressor
drive per rock drill per cu m produced utilizing 1 worker per drill.

 A modern equipment quarry bar mounted rock drill is being offered for
P 180,000 per unit with a drilling rate of 60 cm per minute producing 60
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 MODULE 8: Maintenance 100,000.00
REPLACEMENT STUDIES Production excess 240,000.00
Total Annual Cost 509,226.57
The fundamental question to be answered by a replacement study is about a
currently installed asset or system: Should it be replaced now or later? One
New Building
of the most commonly performed engineering economy studies is that
Annual costs
ofreplacement or retention of an asset or system that is currently installed.
Depreciation 93,964.50
(FC - SV) i
This replacement study is necessary for several reasons—unacceptable d
performance or reliability, physical deterioration, competitive or technological (1  I ) n - 1
obsolescence, or changed requirements. ( 5,000,000 - 700,000)0.08
d
(1  0.08 ) 20 - 1
A common temptation in making economic analysis is to increase the
newinitial cost by the old unrecovered depreciation. This amount is a sunk Maintenance 160,000.00
cost related to the old unit and must not be borne by the new alternative. Total Annual Cost 253,964.50

Example: (M.E. 1989 Board Exam) Annual Savings on cost with the new building 255,262.07
An existing factory must be enlarged or replaced to accommodate
new production machinery. The structure was built at a cost P 2.6 Additional Investment
million. Its present book value, based on straight line depreciation is (5,000,000 – 800,000 – 1,600,000) 2,600,000.00
P 700,000 but it has been appraised at P 800,000. If the structure is
altered, the cost will be P 1.6 million and its service life will be 255,262.07
extended 8 years with a salvage value of P 600,000. A new factory Rate of Return  x 100  9.82%
2,600,000
could be purchased or built for 5.0 million. It would have a life span
of 20 years and a salvage value of P 700,000. Annual maintenance of
the new building would be P 160,000 compared with the P 100,000 Since the rate of return is more than 8%, construct the new building
in the enlarged structure. However, the improved layout in the new
building would reduce the annual production cost by P 240,000. All
other expenses for the new structure are estimated as being equal. Example: (M.E. 1985 Board Exam)
Using an investment rate of 8%, determine which is more attractive A tracking company in Central Luzon has a fleet of 15 units of 10-
investment for the firm. wheeler trucks which are used in hauling sand and gravel from the
provinces to Metro Manila. Ten of the fifteen trucks were purchased
Solution: five years ago and the other five units were purchased only recently.
Enlarge Building Due to frequent breakdowns, the old trucks could make only an
Annual costs average of 14 trips per month. Fuel consumption per trip also
Depreciation 169,226.57 reaches an average of P 320. Average maintenance cost per truck
per month is P1,200. It is estimated that the old trucks can still be
(FC - SV) i
d sold at P 18,000 per unit, and that they can still be operated at least,
(1  I ) n - 1 for the next 2 years.
(800,000  1,600,000 - 600,000)0.08
d
(1  0.08 ) 8 - 1
71 72
 The new trucks could make an average of 22 trips per month. They Maintenance (12 mon)(320) = 3,840.00
were purchased at P 120,000 each only two months ago. It is
Total Annual Cost = 68,133.34
estimated that the maintenance cost would average P320 per month.
Fuel consumption was recorded at P180 per trip. Interest rate on
Annual profit = 143,066.66
capital investment is 18%

All other out of pocket cost for the old and new trucks are equal. The
Therefore, there is an increase in profit by Php85,083.54
company has an average income of P800 per trip.
Additional investment 120,000 – 18,000 Php 102,000.00
Because of the frequent breakdowns and high fuel consumption of
the old units, the owner would like to know if it is time to replace his 85,083.54
Rate of Return on add' l invest  x 100  83.42%
old units. Will it be profitable to change the old trucks at this time? 102,000
Economic life of the new trucks is 5 years.
Replacing the old trucks is advisable now.
Solution:
Old trucks
Annual income per unit 14(12)(P 800) = 134,400.00
Annual cost per unit
Depreciation = 8,256.88

(FC - SV) i (18,000 - 0)0.18

d 
(1  I ) n - 1 (1  0.18)2 - 1

Fuel 14(12)(P 320) = 53,760.00

Maintenance (12 mon)(1,2000) = 14,400.00
Total Annual Cost = 76,416.88
Annual profit = 57,983.12

New trucks
Annual income per unit 22(12)(P 800) = 211,200.00
Annual cost per unit
Depreciation = 16,773.34

(FC - SV) i (120,000- 0)0.18

d 
n
(1  I ) - 1 (1  0.18)5 - 1

Fuel 22(12)(P 180) = 47,520.00

73 74
 Exercise No. 12: REPLACEMENTSTUDIES
4. A decision by the supervising engineer must be made whether to replace
C Name: ______________________________________________________ a certain engine with a new one or to rebore the cylinders of the old
u Course: ____________________________ Date: _________________ engine and thoroughly recondition it. The original cost of the engine 10
t SCORE years ago was P 70,000 to rebore and recondition it now will cost P
Instruction:Answer the following problems and show the complete solution. 28,000 but would extend its useful life 5 years. A new engine will be
H about P 20,000 and this cost will be 15% less with the new engine than
e with the reconditioned one. If money is worth 10%, what would you
r
1. An industrial plant has an engine costing of P 7,200 which is 5 years old.
Its working life if 15 years and salvage value if P 500. The average recommend?
e a. retain c. replace
operating cost per year thus far has been P 4,200. A new engine costing P
12,000 estimated life 15 years and salvage value of P 800 is guaranteed b. replace d. all of the above
to have an operating cost of P 3,500 per year. The new engine is
considered as a replacement of the old. Will the replacement be justified
if P 4,500 can be obtained by the sale of the old engine? Use straight line
depreciation with 6% interest rate.
a. replacement is not advisable c. both a and b
b. replacement is advisable d. none of the above

2. An old machine may be repaired at a cost of P9,000 or it may be replaced

by a modern machine of the same size at a cost of P 57,000.00. The
present net salvage value of the old machine is P 13,000. It is estimated
that the repaired machine will last for 5 more years with a net salvage
value of P 10,000.00 and that of the new machine will be P 1,500 more
per year than for a new machine. Assuming a return of 8% and
depreciation on straight line basis, determine whether it is more
economical to repair the machine or replace it.
a. repair the old machine c. both a and b
b. repair the modern machine d. none of the above

3. A pipe line 6000 m long is to convey a sewage having some corrosive

effect. Bids have been received for reinforced concrete, cast iron and
steel. Because of the varying hydraulic qualities of the inside surfaces the
reinforced concrete was to be 39 inches in diameter, the cast iron pipe
42 inches in diameter and steel 45 inches in diameter. The assumed
length of life of the materials are 100,75 and 50 years for cast iron,
concrete and steel respectively. Annual maintenance costs are assumed
as P 600 for cast iron, P 900 for concrete and P 3,600 for steel. The bids
are P 790,000 for reinforced concrete and P 580,000 for steel. If interest
rate is 5%, which of the bid is favourable?
a. steel is favourable c. both a and b
 b. steel is not favourable d. none of the above

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 MODULE 9:
BREAK EVEN ANALYSIS Example:
John Rock Water LLC dispenses its product Nature’s Pure Water via
Breakeven analysis is performed for one project or two alternatives. This vending machines with most current locations at food markets and
involves investment of capital wherein at a certain level the cost will be equal pharmacy stores. The average monthly fixed cost per site is $900,
to the revenue. Thus, make-or-buy decisions formost subcontractor services, while each gallon costs 18¢ to purify and sells for 30¢. (a) Determine
manufactured components, or international contracts,are routinely based the monthly sales volume needed to break even. (b) John Rock’s
upon the outcome of a breakeven analysis. president is negotiating for a sole-source contract with a municipal
government where several sites will dispense larger amounts. The
$ fixed cost and purification costs will be the same, but the sales price
Total cost per gallon will be 30¢ for the first 5000 gallons per month and 20¢
Breakeven revenue line, TC for all above this threshold level. Determine the monthly breakeven
point line, R volume at each site.

BEP with TC with Solution:

lowered VC lowered VC a. The Break Even Point
Fc
Q BEP 
r-v
Fixed cost 900
line, Fc Q BEP   7500 gallons
0.30 - 0.18
loss BEP PROFIT
moves b. The Break Even Point with condition on quantity price
Quantity R  TC
0.30(5,000)  0.20 (Q ABOVE )  900  0.18 (5,000  Q ABOVE )
Q ABOVE  15,000
Profit, P  Revenue, R  Total Cost, TC
Therefore, the required volume per site is 20,000 gallons per
Total Cost, TC  Fixed Cost, Fc  Variable Cost, VC month, the
point at which revenue and total cost break even at $4500.
At break even point
R  TC where:
rQ  Fc  vQ r = revenue per unit Example: (M.E. 1984 Board Exam)
Fc
A factory engaged in the fabrication of an automobile part with a
Q BEP  v = variable per unit production capacity of 700,000 units per year is only operating at
r-v 62% of its capacity due to unavailability of the necessary foreign
currency to finance the importation of raw materials. Annual income
is P430,000, annual fixed cost is P190,000.00 and variable cost of
P0.348 per unit. What the current profit of the company? What is
the break even point?

77 Solution: 78
 a. Current company profit (or loss) Exercise No. 13: Break Even Analysis

Annual production = 0.62(700,000) C
Name: ______________________________________________________
= 434,000 units u Course: ____________________________ Date: _________________
Total annual cost = 190,000 + 0.348(434,000) = P 341,032.00 SCORE
t
Annual Income = P 430,000.00
H Instruction: Answer the following problems and show the complete solution.
e
Profit, P  Revenue, R  Total Cost, TC r 1. Steel drum manufacturer incurs a yearly fixed operating cost of P
e 200,000. Each drum manufactured costs P 160 to produce and sells P
Profit, P  430,000  341,032  P  P 88,968.00 200. What is the manufacturer’s break-even sales volume in drums per
year?
a. 3,000 drums c. 4,000 drums
b. The Break Even Point b. 3,500 drums d. 5,000 drums
Annual Income 430,000
r   r  0.99
Annual Production 434,000 2. A manufacturer produces certain items at a labor cost of P 115 each,
Fc material cost of P 76 each and variable cost of P 2.32 each. If the item has
Q BEP  a unit price of P 600, how many units must be manufactured each month
r-v
for the manufacturer to break-even if the monthly overhead is P 428,000.
a. 1,053 units c. 1,532 units
190,000
Q BEP   295,950 units b. 1,502 units d. 1,953 units
0.99 - 0.348
3. The annual maintenance cost of a machine shop is P 69,994. If the cost of
Example: (M.E. 1981 Board Exam) making a forging is P 56 per unit and its selling price is P135 per forged
The following data are available for the Canlubang Automotive unit, find the number of units to be forged to break-even.
Company which manufactures and sells a single product line a. 688 units c. 886 units
Unit selling price . . . . . . . . . . . . . . . . . . P 40.00 b. 868 units d. 896 units
Unit variablecost . . . . . . . . . . . . . . . . . .P 20.00
Unit contribution margin . . . . . . . . . . . . P 20.00 4. The manufacturer produces certain items at a labor cost per unit of 315,
Total Fixed Costs . . . . . . . . . . . . . . . . . . P 200,000.00 material cost per unit is P 100, variable cost of P 3.00 each. If the item
Calculate the minimum units to manufactures and sells for the has a selling price of P 995, how many units must be manufactured each
company to survive? month for the manufacturer to break-even if the monthly overhead is P
461,600?
Solution: a. 700 units c. 900 units
Fc b. 800 units d. 950 units
Q BEP 
r-v
200,000 5. An engineer produces a certain construction material at a labor cost of P
Q BEP   Q BEP  10,000 units
40 - 20 16.20 per piece, material cost of P 38.50 per piece and variable cost of P
7.40 per piece. The fixed charges on the business is P 100,000 a month. If
he sells the finished product at P 95.00 each, how many pieces must be
79
manufactured in each month to break even?
 a. 3,040 pieces c. 3,060 pieces  11. The cost of producing a small transistor radio set consists of P23.00 for
 b. 3,050 pieces d. 3,070 pieces labor and P 370.00 for material. the fixed charges in operating the plant
C C is P 100,000.00 per month. The variable cost is P 10.00 per set. The radio
u 6. A company which manufactures electric motors has a production u set can be sold for P 750.00 each. Determine how many sets must be
t capacity of 200 motors a month. The variable costs are P 150 per motor. t produced per month to break-even.
The average selling price of the motors is P 275. Fixed costs of the a. 625 c. 790
H company amount to P 20,000 per month which includes taxes. Find the H b. 714 d. 820
e number of motors that must be sold each month to break-even. e
r a. 150 motors c. 160 motors r 12. 12. An architect produces a certain construction material at a labor cost
e b. 155 motors d. 165 motors e of P 16.20 per piece, material cost of P 38.50 per piece and variable cost
of P 7.40 per piece. The fixed charges on the business is P 100,000.00 a
7. The annual maintenance cost of a machine is P 70,000. If the cost of month. If he sells the finished product at P 95.00 each, how many pieces
making a forging is P 56 and its selling price is P 125 per forged unit, find must be manufactured in each month to break even?
the number of units to be forged to break-even. a. 3,000 pieces c. 3,040 pieces
a. 1,015units c. 1,025 units b. 3,020 pieces d. 3,060 pieces
b. 1,020 units d. 1,030 units

8. A shoe manufacturer produces a pair of shoes at a labor cost of P 9.00 a

pair and a material cost of P 8.00 a pair. The fixed charges on the
business are P 90,000 a month and the variable costs are P 4.00a pair. If
the shoes sells at P 30 a pair, how many pairs must be produced each
month for the manufacturer to break-even.
a. 10,000 pairs c. 6,000 pairs
b. 8,000 pairs d. 4,000 pairs

9. A plywood manufacturer produces a pieceof plywood at a labor cost of P

0.50 and material at P 3.00. The fixed charges on business are P 50,000 a
month and the variable cost is P 0.50 a piece. If one plywood sells for P 6
each, how many pieces must be produced each month for the
manufacturer to break-even?
a. 15,000 pieces c. 25,000 pieces
b. 20,000 pieces d. 30,000 pieces

10. General Electric company which manufacture electric motor has a

capacity of producing 150 motors is P 750 per motor. Fixed costs of the
company amount to P 78,000 per month which includes all taxes.
Determine the number of motors to be produced per month to break-
even.
a. 100 units c. 115 units
b. 110 units d. 120 units
  8. A type of bond whose guaranty is in lien on railroad equipments.
 Exercise No. 14: Break Even Point
C
a. equipment obligations bond c. registered bond
C Name: ______________________________________________________
u b. debenture bond d. infrastructure bond
u Course: ____________________________ Date: _________________ t
SCORE 9. If the security of the bond is a mortgage on certain specified asset of a
t
Instruction: Select the correct answer for each of the following questions. H corporation, this bond is classified as
H e a. registered bond c. coupon bond
e 1. Represent ownership, and enjoys certain preferences than ordinary r b. mortgage bond d. joint bond
r stock. e
e 10. A type of bond where the corporation’s owner’s name are recorded and
a. authorized capital stock c. common stock
b. preferred stock d. incorporator’s stock the interest is paid periodically to the owners with their asking for it.
a. registered bond c. incorporator’s bond
2. Represent the ownership of stockholders who have a residual claim on b. preferred bond d. all of these
the assets of the corporation after all other claims have been settled.
a. authorized capital stock c. common stock 11. Bond to which attached coupons are indicating the interest due and the
b. preferred stock d. incorporator’s stock date when such interest is to be paid.
a. registered bond c. mortgage bond
3. The amount of company’s profits that the board of directors of the b. coupon bond d. collateral trust bond
corporation decides to distribute to ordinary shareholders.
a. dividend c. share stock 12. A document that shows proof of legal ownership of a financial security.
b. return d. par value a. bond c. coupon
b. banknote d. check
4. A certificate of indebtedness of a corporation usually for a period not
less than 10 years and guarantee by a mortgage on certain assets of the 13. A government bond which have an indefinite life rather than a specific
corporation. maturity.
a. bond c. preferred stock a. coupon c. debenture
b. T-bill d. common stock b. contract d. consol

5. A type of bond where the corporation pledges securities which it owns 14. A document which shows the legal ownership of financial security and
a. mortgage bond c. coupon bond entitled to payments thereon.
b. registered bond d. collateral trust bond a. Coupon c. bond
b. contract d. consol
6. A type of bond which does not have security except a promise to pay by
the issuing corporation. 15. A stock of product which is held by a trade body or government as a
a. mortgage bond c. debenture bond means of regulating the price of the product.
b. registered bond d. collateral trust bond a. stock pile c. withheld stock
b. hoard stock d. buffer stock
7. A type of bond issued jointly by two or more corporations.
a. joint bond c. registered bond
b. debenture bond d. infrastructure bond
 MODULE 10: C = redemption price
BOND VALUE EQUATION F = total face value of the bonds
r =dividend rate of the bond
Bond is a certificate of indebtedness of a corporation usually for a period not
less than 10 years, and guaranteed by a mortgage on certain assets of the Solving for the annual cost of the bond
corporation or its subsidiaries. It is normally used when a company needs for F (i)
additional capital. Annual cost of bond  F(r) 
(1  i )n - 1
2
4 Example:
A P 1,000, 6% bonds pays a dividend semi-annually and will be
redeemed at 110% on July 1, 2005. It is bought on July 1, 2002 to
3
Lender
yield 4% semi-annually. What is the price of the bond?
Corporation
1
Solution:
Bond Cycle C Fr [( 1  i )n - 1 ]
Vn  
1. Company sold bond to the lender (1  I )n (1  i )n i
2. Lender gets bond certificate from the company
 0.06    
3(2)
3. Lender receives periodic interest 0.04 
(1000) 
  1   -1 
4. Company redeems bond after n years, pays the principal and gets back  2    2  
110%(1000)
the certificates Vn  
3(2) 3(2)
 0.04   0.04  0.04
1   1  )
Bond Value  2   2  2
isthe periodic dividend (present worth) plus the present worth of the
redemption price
Vn  P 1,144.81
Vn
1 2 3 4 5
Example:
0 You purchased a P 500 at P 5100.00. The bond pays P 200 per year
and it is redeemable for 5050 after 10 years. What is the rate of
Fr Fr Fr Fr Fr
interest on your investment?
C
Solution:
5050 200[( 1  i )10 - 1 ]
C n
Fr [( 1  i ) - 1 ]
5100  
Vn  n
 n
(1  I )10 (1  i )10 i
(1  I ) (1  i ) i
by Trial and Eror
where Vn = value of bond at its date of purchase
Fr = periodic payment or dividend of bond
i = 3.846%
i = rate of investment (interest rate of 85
sinking funds) 86
 Exercise No. 15: BOND VALUE EQUATION 6. The City of Cebu plan to improve the water system distribution of the
  city. The estimated cost of the improvement is about P 5,000,000. To
Name: ______________________________________________________
C raise the amount, the city decided to sell bonds to finance the said
C
Course: ____________________________ Date: _________________ u project. The bond rate is fixed at 5% payable yearly. The interest rate of
u SCORE the money is at 10% compounded yearly. The bond is redeemable 20
t t
Instruction:Answer the following problems and show the complete solution. years from now at its face value. How much should the selling price of
H H the bond as to attract buyers.
e 1. An engineer paid P 110,000 for a P 100,000 bond that pays P 4,000 per e a. P 2,871,609 c. P 2,935,568
r year. In 20 years, the bond will be redeemed for P 105,000. What net r b. P 2,895,222 d. P 2,983,550
e rate of interest will the man obtain on his investment? e
a. 2.67% c. 3.47% 7. The City of Cebu plan to improve the water system distribution of the
b. 2.98% d. 4.25% city. The estimated cost f the improvement is about P 5,000,000. To raise
the amount, the city decided to sell bonds to finance the said project. The
2. A man wants to make 14% nominal interest compounded semi-annually rate is fixed at 5% payable yearly. The interest rate of the money is at
on a bond investment. How much should the man be willing to pay now 10% compounded yearly. The bond is redeemable 20 years from now at
for a 12%, P 10,000 bond that will mature in 10 years and pays interest its face value. How much should the City of Cebu set aside yearly to pay-
semi-annually? off its obligation?
a. P 7,289.25 c. P 7,840.50 a. P 337,298 c. P 375,390
b. P 7,390.50 d. P 8,940.50 b. P 369,290 d. P 389,280

3. A company issued 50 bonds of P 1,000.00 face value each, redeemable at 8. Engr. Budoy bought a bond having a face value of P 10,000 for P 9,700.
par at the ends of 15 years to accumulate the funds required for The bond rate was 14% nominal and interest payments were made to
redemption, the firm established a sinking fund consisting of annual him semi-annually for a total of 7 years. At the end of the seventh year,
deposits, the interest rate of the fund being 4%. What was the principal he sold the bond to a friend at a price that resulted a yield of 16%
in the fund at the end of the 12th year? nominal on his investment. What was the selling price?
a. P 37,520 c. P 39,110 a. P 10,348 c. P 12,949
b. P 38,190 d. P 39,685 b. P 11,589 d. P 13,289

4. A bond with a par value of P 100,000 and with a bond rate of 9% payable 9. A P 15,000 bond which will mature in 10 years and with a bond rate of
annually is to be redeemed at P 105,000 at the end of 6 years from now. 15% payable annually is to be redeemed at par at the end of this period.
If it is sold now, what should be the selling price to yield 8%? If it is sold now for P 1,390, determine the yield at this price.
a. P 108,678 c. P 106,775
b. P 107,774 d. P 106,250
10. The City Savings Bank is selling P 10,000 bonds, each of which has an
5. A bond with a par value of P 100,000 and with a bond rate of 10% interest of 7.5% compounded semi-annually. The bond is callable at
payable annually is sold now for P 108,000. If yield is to be 12%, how 10.5% of its face value on August 9, 2000 that will guarantee a yield of at
much should the redemption price be at the end of 8 years? least 8% compounded semi-annually.
a. P 122,996 c. P 2,935,568
b. P 144,407 d. P 2,983,550
 Exercise No. 16: BOND 8. A type of bond whose guaranty is in lien on railroad equipments.
  a. equipment obligations bond c. registered bond
C
Name: ______________________________________________________ C b. debenture bond d. infrastructure bond
Course: ____________________________ Date: _________________ u
u SCORE t 9. If the security of the bond is a mortgage on certain specified asset of a
t
Instruction: Select the correct answer for each of the following questions. corporation, this bond is classified as
H a. registered bond c. coupon bond
H
e b. mortgage bond d. joint bond
e 1. Represent ownership, and enjoys certain preferences than ordinary r
r stock. e
e a. authorized capital stock c. common stock 10. A type of bond where the corporation’s owner’s name are recorded and
b. preferred stock d. incorporator’s stock the interest is paid periodically to the owners with their asking for it.
a. registered bond c. incorporator’s bond
2. Represent the ownership of stockholders who have a residual claim on b. preferred bond d. all of these
the assets of the corporation after all other claims have been settled.
a. authorized capital stock c. common stock 11. Bond to which attached coupons are indicating the interest due and the
b. preferred stock d. incorporator’s stock date when such interest is to be paid.
a. registered bond c. mortgage bond
3. The amount of company’s profits that the board of directors of the b. coupon bond d. collateral trust bond
corporation decides to distribute to ordinary shareholders.
a. Dividend c. share stock 12. A document that shows proof of legal ownership of a financial security.
b. Return d. par value a. Bond c. coupon
b. banknote d. check
4. A certificate of indebtedness of a corporation usually for a period not
less than 10 years and guarantee by a mortgage on certain assets of the 13. A government bond which have an indefinite life rather than a specific
corporation. maturity.
a. Bond c. preferred stock a. Coupon c. debenture
b. T-bill d. common stock b. Contract d. consol

5. A type of bond where the corporation pledges securities which it owns 14. A document which shows the legal ownership of financial security and
a. mortgage bond c. coupon bond entitled to payments thereon.
b. registered bond d. collateral trust bond a. Coupon c. debenture
b. Contract d. consol
6. A type of bond which does not have security except a promise to pay by
the issuing corporation. 15. A stock of product which is held by a trade body or government as a
a. mortgage bond c. debenture bond means of regulating the price of the product.
b. debenture bond d. infrastructure bond a. stock pile c. withheld stock
b. hoard stock d. buffer stock
7. A type of bond issued jointly by two or more corporations.
a. joint bond c. registered bond
b. preferred stock d. incorporator’s stock
 MODULE 11: Example:
BENEFIT/COST RATIO Four alternative are being considered in providing electric power
supply to a small community with the following annual benefits:
The benefit/cost ratio is a method commonly used by the government agencies
for analysing the desirability of public projects. Benefits are the advantages ALTERNATIVE ANNUAL ANNUAL COST
expressed in terms of monetary, while the project under consideration involves BENEFITS
disadvantages and is term as disbenefits. The costs are the anticipated A P 1,528,000 P 780,000
expenditures for the construction, maintenance, operations, etc. B 1,398.000 664,000
C 960,000 742,000
benefits - disbenefit s D 810,000 420,000
B/C   1 to be justifie d
costs
Select the best alternative using the B/C ratio analysis
Example:
A non-profit organizational is contemplating an investment of P 1.5 Solution:
million in grants to develop new ways of teach people the rudiments Comparing alternative A with alternative B
of profession. The grants would extend over a ten year period and 1,528,000 - 1,398,000
would achieve an estimated savings of half million pesos per year in B/C of A over B   1.12
780,000 - 664,000
professors’ salaries, students tuition, and other expenses. The
program would be an addition to ongoing and planned activities, Comparing alternative A with alternative C
thus an estimated P100,000 a year would have to be released from
1,528,000 - 960,000
the program to support the educational research, and a rate of B/C of A over C   14.95
return of 15% is expected. Is this a good program? 780,000 - 742,000

Solution: Comparing alternative A with alternative D

1,528,000 - 810,000
Benefit = 500,000 B/C of A over D   1.99
780,000 - 420,000
Disbenefit = 100,000
Therefore, alternative A is preferred over alternative D… Select
Cost (Annual) = 298,878.09 Alternative A

1,500,000

A (1  0.15 )10 - 1 
(1  0.15 )10 (0.15)
Therefore:
benefits - disbenefit s
B/C 
costs
500,000 - 100,000
B/C   1.34
298,878.09

This project is justified since the B/C ratio is greater than 1

91 92
 Exercise No. 16: COST BENEFIT RATIO 3. Data for two alternatives are as follows
 
ALTERNATIVE
Name: ______________________________________________________ C A B
C
Course: ____________________________ Date: _________________ u Investment 35,000 50,000
u SCORE Annual Benefits 20,000 25,000
t t
Instruction:Answer the following problems and show the complete solution. Annual O and M 6,450 13,830
H H Estimated life (years) 4 8
e 1. The Department of Public Works and Highways (DPWH) is considering e Net salvage value 3,500 0
r the construction of a new highway through a scenical rural area. The r
e road is expected to cost P 50 million with an annual upkeep estimated at e Using an interest rate of 20%, which alternative should be chosen?
P 400,000. The improved accessibility is expected to result in additional
income from tourists of 7 million per year. The road is expected to have
a useful life of 25 years.If the rate of interest is 15%, should the road be
constructed?

2. Determine the B/C ratio for the following project

First cost P 100,000 4. There are five alternatives for improvement of a road. Determine which
Project life (years) 5 alternative should be chosen if the highway department is willing to
Salvage value 10,000 invest money as long as there is B/C ratio of at least 1.00
Annual Benefits 66,000
Annual O and M 22,000 ALTERNATIVES Annual Annual Cost
Interest rate (%) 15 Benefits
A P 900,000 P 1,000,000
B 1,300,000 1,400,000
C 2,800,000 2,100,000
D 3,300,000 2,700,000
E 4,200,000 3,400,000
 MODULE 12: Assets = Liabilities + Ownership
THE FUNDAMENTALS OF ACCOUNTING
Other Accounting Terms:
The following items are considered current assets Net Income
a. Rate of Return on Total Assets  x 100
a. Cash in Bank Total Assets
b. Accounts Receivable Net Income
c. Accrued Interest Receivable b. Rate of Return on Sales  x 100
Total Sales
d. Short Term Securities
Sales
e. Inventory c. Asset turn - over 
f. Government Bonds Total Assets
g. Interest Earned
h. Cash in Hand
i. Notes and Account Receivable

The following items are considered fixed assets

a. Furniture and Fixture
b. Buildings and factories less depreciation Example:
c. Machineries (less depreciation) Given the following:
d. Trucks (less depreciation)
e. Land Cash P 41,012
f. Equipments Notes payable 2,500
Accrued taxes 2,950
The following items are considered assets Accounts Receivable 30,300
a. Prepaid Insurance Prepaid Insurance 2,150
b. Prepaid rentals Accounts payable 11,500
c. Prepaid taxes Furniture and Fixtures 52,125
Reserve for depreciation 21,000
The following items are considered current liabilities
a. Accounts payable Determine the ownership and create a balance sheet
b. Notes payable
c. Dividends declared on preferred stock
d. Taxes accrued
e. Declared and unpaid dividends

The following items are considered fixed liabilities

a. Mortgage payable
b. Reserve for expansion
The following items are considered liabilities
a. Advance payment on orders
b. Prepaid Income 95 96
Solution:
Solution:
BALANCE SHEET (a) Net sales = 20 x net income
ASSETS LIABILITIES Asset turn-over =3
Current Assets Current Liabilities Net Income
Rate of Return on Total Assets  x 100
Cash 41,012 Notes Payable 2,500 Total Assets
Accounts Receivable 30,300 Accounts Payable 11,500 Sales 20 x Net Income
Total Current 71,312 Accrued Taxes 2,950 Total Assets  
asset turn - over 3
Assets
Net Income
Total Current 16,950 Rate of Return on Total Assets  x 100
20 x net income
Liabilities
3
Fixed Assets Ownership 88,637 Rate of Return on Total Assets  15 %
Furniture & Fixture 53,125 TOTAL : 105,587
Reserve for depn 21,000
Total Fixed Assets 32,125 (b) Rate of return on asset = 12%
Rate of return on sales = 8%
Prepaid Charges Total Assets = Net income / 0.12  based on
Prepaid Insurance 2,150 assets
Total sales = Net income / 0.08 based on sales
TOTAL ASSETS: 105,587
Sales Net Income / 0.08
Asset turn - over    1.5
a. Ownership = Assets - Liabilities Total Assets Net Income / 0.12
= 105,587 - 16,950
= 88,637.00 Net Income
b. Balance is shown above (c) Rate of Return on Total Assets  x 100
Total Assets
0.15
Rate of Return on Total Assets  x 100
2.5
Rate of Return on Total Assets  6 %
Example:
In the situation outlined below, compute the rate of return on assets,
asset turn-over or the rate of return on net sales as required:
(a) Net sales are 20 times as great as the net income. If he sales
are turn-over 3 times during a year, what is the rate of return
on assets?
(b) The net income is 8% of net sales. What asset turn-over is
required to earn 12% on the assets?
(c) With the asset turn-over of 2.5, what must be the rate of
return be on the net sales, if the rate of return on asset is to
be 15%
97 98
References: About the compiler:

Engineering Economy 2nd Edition H Sta Maria ROSALITO JUDA V. EBOA

ME 0048496
Engineering Economy Revised Edition V Besavilla
Academic Background
Engineering Economics Simplified Approach 1stEdition CGDuaso
BS in Mechanical Engineering CIT 1992
Executive Master in Business Administration (USJR 2008)
Diploma in Professional Education (CTU Main 2010)
Doctorate in Business Administration (dessertation)

Work Experience

Instructor
Cebu Technological University Danao City Campus
Part-time Instructor
Cebu Technological University Carmen Campus
Part-time Instructor
Cebu Technological University Main Campus
Part-time Instructor
Philippine State College of Aeronautics, MBEAB Campus
Documents Control Engineering Section Manager
Timex Philippines Inc., MEPZ 1
Team Operation System Owner
Procter & Gamble Philippines, Inc.
Engineering Faculty
Cebu Institute of Technology

Travels Abroad

Bankok, Thailand
study tour
Chenzhen, China
Documentation trainor