Sagun, May B.

BSME- 5

ENGINEERING ECONOMY

CHAPTER IV

EXERCISES:

1. A bond issue of P200,000.00 in 10yr bonds, in P1,000 units, paying 16% nominal interest in semi-annual payments,
must be retired by the use of sinking fund that earns 12% compounded semi-annually. What is the total semi-annual
expense?

Given: F= Php 200,000

r= 16% semi-annually
0.16
r= =0.08
2
i= 12% semi-annually
0.12
i= =0.06
2
n=10x2= 20 Periods

Solution:
Total Semi-annual Payment= A+I

Php 200,000
( 1+0.06)20 −1
A= = 0.06 = Php 5,436.91
I= Fr= (Php 200,000)(0.08)= Php 16,000
Therefore:
Total Semi-annual Payment= 5,436.91+ 16,000
Total Semi-annual Payment= Php 21,436.91 //Answer

2. A man wants to make 14% nominal interest compounded semi-annually on a bond investment. How much should
the man
be willing to pay now for a 12%. P10,000.00-bond will mature in 10 yrs and pays interest semi-annually?

Given: F=C= P10,000

i= 14% Compounded semi-annually;
0.14
i= = 0.07
2
r=12% semi-annually;
0.12
r= =0.06
2
n=10x2=20 periods

P 10,000

P 600 P 600 P 600 P 600 P 600

0 1 2 3 19 20

1
 Solution:

P = Fr + C(1+i)-n
I=Fr= (P10,000)(0.06)= P600
1−(1+0.07)−20
P= (P600)
[ 0.07 ] +(P10,000) (1+0.07)−20

P= Php 8940.60 //Answer

3. You purchased a 5,000 bond for 5,100. The bond pays 200/yr. It is redeemable for 5,050 after 10yrs. What is the
rate of interest on your investment?

Given: P= P 5,100.00
I= Fr= P200.00
C= P 5,050
n= 10

P 5,100

0 1 2 3 4 5 6 7 8 9 10

P 200 P200 P200 P200 P200 P200 P200 P200 P200 P200

C= P 5,050

Solution:

P = Fr + C(1+i)-n

1−(1+i)−10
P 5,010= (P200)
[ i ] +(P 5,050) (1+i)−10

By trial and error,

i= 0.0384 or 3.84% // Answer

CHAPTER V

EXERCISES:

1. A machine used for cutting materials in a factory has the following outputs per hour at various speeds and required
periodic tool regrinding at the intervals cited.

Speed Output per Hour Tool Regrinding

A 200 pieces every 8 hrs
B 280 pieces every 5 hrs

A set of tools costs P1,260 and can be ground twenty times. Each regrinding costs P54.00 and the time needed to regrind
and change tools is 1hour. The machine operator is paid P35.00per hour, including the time the tool is changed. The tool
grinder who also sets the tools to the machine is paid P40.00/hour. The hourly rate chargeable against the machine is
P38.00, regardless of machine speed. Which speed is the most economical?
Solution:

Machine A: Machine B:

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 200 pcs 280 pcs
Outputs per cycle: x 8hrs= 1600 pcs Outputs per cycle: x 5hrs= 1400 pcs
hr hr
Cycle Time: 8+1= 9 hrs Cycle Time: 5+1= 6 hrs
P 35.00 P 35.00
Operator: x 9hrs= P315.00 Operator: x 6hrs= P210.00
hr hr
P 40.00 P 40.00
Sets Tool: x 1hr = P40.00 Sets Tool: x 1hr = P40.00
hr hr
P 1260 P 1260
Tools Costs: = P63.00 Tools Costs: = P63.00
20 20
Regrinding Cost= P54.00 Regrinding Cost= P54.00
P 38.00 P 38.00
Rate of Machine = x 8 hrs=P304.00 Rate of Machine = x 5 hrs=P190.00
hr hr

Total Cost = P776.00 Total Cost = P557.00

P776.00 P557.00
Cost per Piece: = P0.485/pc Cost per Piece: =
1600 pieces 1400 pieces
P0.397857/pc

Comparing the cost per piece of each machine,

P0.485- P0.397857 = P0.087143

Answer : We can conclude that the Machine B is more economical than Machine A by P0.087143 per piece.

2. An executive receives an annual salary of P600, 000 and his secretary of P180, 000. 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 mins to
explain the work and another 45 mins to check the finished work. Due to the unfamiliarity of the secretary to do the task, it
takes her an additional time of 6 hrs after being constructed. Considering salary cost only, determine the cost of performing
the task by each method, if the secretary works 2,400 hrs a year and the executive 3,000hrs a year.
Solution:
If the executive works alone:

Annual Salary= P600,000.00

Time to finish the work= 4 hrs
Annual working hours = 3000 hrs/yr
P 600,000/ yr
Rate per hour= = P200.00/hr
3000 hrs / yr
Cost of performing the task = P200.00/hr x 4000 hrs = P800.00

Answer: P800.00

If the executive delegates the work to his secretary:

Annual salary of the executive= P600,000.00

Annual salary of the secretary = P180,000.00
Annual working hours of the executive=3000 hrs/yr
Annual working hours of the executive=2400 hrs/yr
P 600,000/ yr
Rate per hour of the executive= = P200.00
3000 hrs / yr

P 180,000/ yr
Rate per hour of the secretary= = P75.00
2400 hrs / yr

Cost of performing the work= (P200/hr x 1.25 hours)+(P75/hr x 6.5 hours) = P737.50

Answer: P737.50

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 CHAPTER VI
EXERCISES:

1. An investment of 270,000 can be made in a project that will produce a uniform annual revenue of 185,400 for 5 yrs
and then a salvage value of 10% of the investment. Out of pocket costs for operation and maintenance will be 81,000/yr.
Taxes and insurance will be 4% of the first cost/yr. The company expects capital to earn not less than 25% before income
taxes. Is this a desirable investment? What is the payback period of the investment?

Solution:

By the rate of return method:

Annual revenue P185,400

Annual Costs:
(Co−CL) P 270,000−P 27000
L 5
Depreciation= (1+i) = (1+0.25) −1 = P29,608.76
i 0.25
Operation and maintenance = P81,000
Taxes and insurance= (P270,000)(0.04) = P10,800

Total Annual cost = P 121,408.76

Net annual Profit = P185,000-P121,408.76= P63,991.24

Net annual profit P 63,991.24

Rate of return= = =0.2370=23.70%
Capital invested P 270,000

ANSWER: Since the rate of return is less than 25%,the investment is not justified.

By the annual worth method:

Annual revenue P185,400

Annual Costs:
(Co−CL) P 270,000−P 27000
Depreciation= (1+i) L
= (1+0.25)5−1 = P29,608.76
i 0.25
Operation and maintenance = P81,000
Taxes and insurance = (P270,000)(0.04) = P10,800
Interest on capital = (P270,000)(0.25) = P67,500
Total annual cost: = P188,908.76
Excess = P185,400-P188,908.76 = - P3,508.76
ANSWER: Since the excess of annual cash inflows over annual cash outflows is less than zero (-P3,508.76), the
invest is not justified.
P27,000
By the present worth method:

P185,400 P185,400 P185,400 P185,400 P185,400

0 1 2 3 4 5
Cash flow diagram of cash inflows
1−(1+0.25)
−5
1−(1+0.25)−5
Present worth of cash outflows = (P185,400)( )+(P27,000)( )
0.25 (1+ 0.25)5 −1
= (P185,400)(2.6893)+(P27,000)(0.3277)
= P507,439.872
Annual cost (excluding depreciation) = P81,000+(P270,000)(0.04)= P91,800
0 1 2 3 4 5

4
 P91,800 P91,800 P91,800 P91,800 P91,800

Cash flow diagram of cash outflows

−5
1−(1+0.25)
Present worth of cash outflows = P270,000+(P91,800)( )= P516,875.904
0.25

Present worth of net cash flows= P507,439.872- P516,875.904 = -P9436.032

ANSWER: Since the present worth of the net cash flows is less than zero (- P9436.032), the investment is not
justified.

By the future worth method:

Referring to the cash flow diagrams in the solution by the Present worth method.

5
(1+0.25) −1
Future worth of cash inflows = P27,000+(P185,400)( )
0.25
= P27,000+(P185,400)(8.2070)
= P1,548,577.80

5 5
(1+0.25) −1 (1+ 0.25) −1
Future worth of cash outflows= (P91,800)( )+(P270,000)( )
0.25 1−(1+0.25)−5
= (P91,800)(8.2070)+(P270,000)(3.0518)
= P1,577,388.60

Future worth of net cash flows= P1,548, 577.80 - P1,577,388.60 = - P28,810.80

ANSWER: Since the future worth of the net cash flows is less than zero (- P28,810.80), the investment is not
justified.

By the payback period:

Total annual cost= P81,000+(P270,000)(0.04)= P91,800

Net annual cash flows= P185,400-P91,800= P93,600

investment −salvage value P 270,000−P 27,000

Payback period = =
net annual cash flows P 93,600

Payback period = 2.6 years // Answer

2. A gasoline driven pump and an electric power pump are being considered for use in a mine for a period of 10yrs.
The data are as follows:

Gasoline Electric

First cost 12,000 25,000

Life in years 5yrs 10yrs
Salvage value 1,000 2,000
Annual Operating Cost 3,200 1,800
Annual repairs 600 400
Annual taxes (% of Co) 3% 3%
If money is worth 12% compounded annually, which would you recommend on the basis of annual cost?

Solution:
For Gasoline:
By the annual cost method:
Annual cost= Depreciation + interest on investment +operation and maintenance + others

5
 (Co−CL)
Annual cost=
[ L
(1+i) −1
i ] + interest on investment +operation and maintenance + others

( 12000−1000)
Annual cost=
[
Annual Cost= 5,891.51
(1+ 0.12)5 −1
0.12 ] + 3,200 + 600 + (0.03)(12000)

For Electric:
By the annual cost method:
Annual cost= Depreciation + interest on investment +operation and maintenance + others
(Co−CL)
Annual cost=
[ (1+i)L −1
i ] + interest on investment +operation and maintenance + others

( 25000−2000)
Annual cost=
[
Annual cost= 4,260.64
(1+0.12)10 −1
0.12 ] + 1,800 + 400 + (0.03)(25000)

For Gasoline driven pump, total annual cost = 5,891.51 + (0.12)(5,891.51)= 6,598.49
For Electric power pump, total annual cost = 4,260.64 + (0.12)( 4,260.64)= 4,771.92

Therefore: Since the total annual cost of electric power pump is lesser, therefore, ELECTRIC POWER PUMP is
recommended to use. //Answer

3. An electric cooperative is considering the use of concrete electric pole in the expansion of its power distribution
lines. A concrete pole costs 18,000 each and will last 20yrs. The company is presently using creosote wooden poles which
cost 12,000/pole and will last 10yrs. If money is worth 12%, what is the savings in choosing the most economical pole?
Given:
Creosoted Wood Pole Concrete Pole
First Cost 12,000 18,000
Salvage Value 0 0
Annual Tax 1% 1%
Estimated life 10 years 20 years
Solution:
For creosoted wood pole:

Co−CL P 12,000−0
Depreciation= ( 1+i)L −1 = ( 1+ 0.12)10−1 = P683.81
i 0.12
Annual Tax= (P12,000)(0.01) = P120.00

Total Annual Cost = P803.81

For Concrete pole:

Co−CL P 18,000−0
L 20
Depreciation= ( 1+i) −1 = ( 1+ 0.12) −1 = P249.82
i 0.12
Annual Tax= (P18,000)(0.01) = P180.00

Total Annual Cost = P429.82

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 Compare creosoted wood pole to concrete pole:

P 803.81−P 429.82
ROR on Additional Investment concrete = = 0.0623= 6.23% < 12%
P 18,000−P 12,000

Answer: Creosoted wood pole should be used.

4. A concrete mixer can be driven by a diesel engine or a gasoline engine described as follows:
Diesel Engine Gasoline Engine

First cost 1.6M 25,000

Life in yrs 10yrs 4yrs
Fuel for 8hrs 5 gal 40 lits
Operator 350/8hrs 350/8hrs
Repairs and maintenance 500/day 300/day

If money is worth 10% compounded quarterly, which do you think is more profitable to acquire? Assuming you will use the
mixer only for 6yrs? At the end of the life of the engines their value is zero. Depreciate by straight line method. Assume
300working days in 1 yr.

Solution:
I= 0.1028 converting 10 % compounded quarterly to annually

By annual cost method

Annual cost
Diesel engine
Depreciation =1.6M/10 =160,000
Operator = 350x300 =105,000
Repair = 500x300 =150,000
Interest on capital=1,600,00x0.1038 =166,080
Total cost =581,080
Gasoline engine
Depreciation=25000/4 =6250
Operator=350x300 =105,000
Repair =300x300 =900,000
Interest on capital=25000X0.1038 =2595
Total cost =203,845

Diesel engine>gasoline engine, choose gasoline engine// Answer

CHAPTER VII
EXERCISES:
1. It is estimated that insulation of steam pipes in a factory will reduce fuel bill as much as 20%. The cost of the
insulation is P900,000 installed and the annual cost of taxes and insurance is 5% of the initial cost. Without the insulation,
the annual fuel bill is P1,800,000. If the insulation is worthless after 6 years use, and a minimum return of 12% is desired,
would it be worthwhile to invest in the insulation?
Solution:
Annual Savings = (0.20)(P 1,800,000)= P360,000

Co−CL P 900,000−0
n 6
Depreciation = ( 1+i ) −1 = ( 1+ 0.12) −1 = P110,903.15
i 0.12

Taxes and insurance = (0.05)(P900,000)= P45,000.00

Total Annual Cost= P155,903.15

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 Net Annual Profit P 360,000−P 155,903.15
Rate of Return= = = 0.2268 or 22.68%
Capital Invested P 900,000

Rate of Return = 22.68% > 12%

Answer: Therefore, it is worthwhile to invest in the insulation.

2. An existing machine in a factory has an annual maintenance cost of P140,000. A new and more efficient machine
will require an investment of P290,000 and is estimated to have a salvage value of P60,000 at the end of 8 years. Its annual
expenses for maintenance and upkeep, etc. a total of P100,000. If the company expects to earn 12% on its investment, will
it be worthwhile to purchase the new machine using the a) present worth method? b) rate-of-return method?
Given:
For existing machine:
Co= P140,000
CL= 0
n=8
i =12%=0.12
For new machine:
Investment cost for new machine = P290,000.00
1−(1+ 0.12)−8
Co= P290,000+(P100,000) ( 0.12 ) = P786,763.93

CL= P60,000.00
Maintenance and upkeep = P100,000.00
n= 8
i =12%=0.12
Solution:
a.) using Present Worth method
1+0.12
¿
1−( 1+i )−n ¿
Present worth for existing machine = (Co)
( i ) = (P140,000) ¿−8
1−(¿¿ 0.12¿)
¿
¿
=P695,469.57
1−(1+i)−n
Present worth for new machine = Investment cost + (cost of maintenance and upkeep) ( i ) – (CL)

−n
1−(1+i)

( ) i
n
(1+i ) −1
i

−n
1−(1+i )
−n
1−( 1+i )
= Investment cost for new machine + (cost of maintenance and upkeep) ( i ) – (CL)
(
−8
n
(1+i) −1 )
1−(1+ 0.12)
−8
1−(1+ 0.12)
= P290,000+(P100,000) ( 0.12 ) – (P60,000)
( 8
(1+0.12) −1 )
= P 762,530.98

ANSWER: Thus, it will not worthwhile to invest in the new machine.

b.) using Rate of return method:

Compare the existing machine to new machine:
Net annual profit P 762,530.98−P 695,469.57
Rate of Return= = = 0.1037 = 10.37 %< 12%
Capital Invested P 786,763.93−P 140,000

ANSWER: Thus, it will not worthwhile to invest in the new machine.

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 3. An economic study of a proposed light oil recovery plant to recover light oils from a gas manufacturing firm has the
following data:
a.) Total investment P1,800,000
b.) Total Annual expenses P500,000
c.) Average Annual sales = 730 tons of light oils and derivatives
d.) A local chemical firm guarantees to purchase 3o tons monthly of benzene, one of the light oils, at a price of P50,
000 per ton.
e.) Paint factories guarantee 30 tons monthly purchase of light oil derivatives. The factories import their present
supply at an average cost of P7, 000 per ton.
f.) The balance of oils can be sold to drug, rubber, plastic, and other companies at P7,500 ton.

Determine:
a) the annual net profit
b) The recovery period of the investment
c) Will you recommend such a project? Justify

Solution:

Annual sales

= 30 tons/month x 12 month/year x 5, 000/tons = 1.8M

=30 tons/month x 12 month/year x 7, 000/tons = 2.52M

= 10 tons x 7, 500/tons = 75, 000

Total Annual Sales = 4.395M

a.) the annual net profit

= Annual sales – Annual Expense

= 4.395M – 500, 000

= 3.895M

b.) the recovery period of the investment

Net Annual Cash flow = Profit – Total Expenses

= 3.895M – 500, 000

= 3.395M

Payback Period =

= 0.5301 years or 6 ½ months

c) will you recommend such a project? Justify

Based on the computation for the recovery period of the capital, the project is highly recommended.

4. A certain company needs a new delivery truck, and has two choices: a gasoline engine truck costing P1,600,000,
and a diesel engine truck costing P1,950,000. The diesel engine truck is guaranteed to save P0.20 per kilometer less than
the gasoline engine truck. From previous experience, it is known that the truck 40,000 kilometers annually. If each truck
has a salvage value at the end of 5 years of 10% of first cost and a sinking fund at 8% can be set up to provide for
replacement after this time and if money is worth 12% to the company, which would you recommend?

Solution:

9
Gasoline truck cash outflow = 1600000-10%=1440000
Diesel truck outflow= 1950000-10%=1755000
Annual saving in diesel truck = 8000
Present value of saving = 8000(100/108)5=8000x3.60=28800
So the cost will be at present value is 1755000-28800= P1726200

If we compare the cost the gasoline truck is much cheaper than diesel truck

Therefore: I will recommend the gasoline truck

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