Chapter I

Introduction
Engineering is not a science, but an application of science. It is an art
composed of skill and ingenuity in adapting knowledge to the uses of
humanity. Engineering is the profession in which a knowledge of the
mathematical and natural sciences gained by study, experience, and practice
is applied with judgment to develop ways to utilize, economically, the
materials and forces of nature for the benefit of mankind.
The role of the scientist is to add to mankind’s accumulated body of
systematic knowledge and to discover universal laws of behavior. The role of
the engineer is to apply this knowledge to particular situations to produce
products and services.
Engineers are confronted with two important interconnected
environments; the physical and economic. In dealing with the physical
environment engineers have a body of physical laws upon which to base their
reasoning. Since economics is involved with the actions of people, it is
apparent that economic laws must be based upon their behavior. Economic
laws can be no more exact than the description of the behavior of people
acting singly and collectively. Want satisfaction in the economic environment
is linked by the production or the construction process. The usual function of
engineering is to manipulate the elements of one environment, the physical, to
create value in a second environment, the economic. However, engineers
sometimes have a tendency to disregard economic feasibility and are often
appalled in practice by the necessity for meeting situations in which actions
must be based on estimates and judgment.
The objective of the engineering application is to get the greatest end
result per unit of resource input. In the final evaluation of most ventures, even
those in which engineering plays a leading role, economic efficiencies must
take precedence over physical efficiencies. This is because the function of
engineering is to create utility in the economic environment by altering
elements of the physical environment.

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The Engineering Process
Engineering activities dealing with the physical environment take place to
meet human needs that arise in economic setting. It employed different
phases:
a. Determination of objectives – One important facet of the engineering
process involves the search for new objectives for engineering
application – to find out what people want that can be supplied by
engineering. Economic limitations are continually changing with
people’s needs and wants. Physical limitations are continually being
pushed back through science and engineering.
b. Identification of Strategic Factors
The factors that stand in the way of attaining objectives are known as
limiting factors. An important element of the engineering process is the
identification of the limiting factors restricting accomplishment of desired
objective. Once the limiting factors have been identified, they are examined
to locate strategic factors- those factors, which can be altered to remove
limitations restricting the success of an undertaking.
c. Determination of means
The determination of means is subordinate to the identification of strategic
factors. Strategic factors may be altered in many different ways. Each
possibility must be evaluated to determine which will be most successful in
terms of overall economy. Engineers are well equipped by training and
experience to determine means for altering the physical environment. If the
means devised to overcome strategic factors come within the field of
engineering, they may be termed engineering proposals.
d. Evaluation of engineering proposals
It is usually possible to accomplish a desired result by several means,
each of which is feasible from the technical aspects of engineering
application. The most desirable of the several proposals is the one that can be
performed at the least cost. The evaluation of the engineering proposals in
terms of comparative cost is the important facet of the engineering process
and an essential ingredient in the satisfaction of wants with maximum
economic efficiency.

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e. Assistance in decision making
Engineering is concerned with action to be taken in the future. Therefore,
an important facet of the engineering process is to improve the certainty of
decision with respect to the want-satisfying objective of engineering
application.

Chapter II – Basic Economic Principles

Economics is one of the social sciences, which consist of that body of
knowledge dealing with people and their assets or resources. Economics has
also been defined as the sum of total of knowledge, which treats of the
creation, and utilization of goods and services for the satisfaction of human
wants.
Engineering economy is defined as that branch of economics, which
involves the application of definite laws of economics, theories of investment
and business practices to engineering problems involving cost. Engineering
economy may also be considered to mean the study of economic problems
with the concept of obtaining the maximum benefit at the least cost.
Engineering economy also involves the study of cost features and other
financial data and their application in the field of engineering as bases for
decision.

MARKET STRUCTURES and MARKETING MANAGEMENT

The different structures are as follows:
1. Monopoly
2. Competition
3. Oligopoly
A perfect monopoly occurs when a unique product or service is
available only from a single supplier and entry of all other possible suppliers
are prevented. Under conditions of perfect monopoly, the single vendor can
control the supply and the price of the product or service.
Perfect competition occurs when a certain product is offered for sale by
many vendors or suppliers, and there is no restriction against other vendors
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3
from entering the market. Buyers are free to buy from any vendor, and
vendors are free to sell to anyone.
Oligopoly – occurs when there are few suppliers and any action taken by
anyone of them will definitely affect the course of action of the others.
Laws Of Supply And Demand
Demand is the quantity of a certain commodity that is bought at a certain
price at a given place and time. It should not be confused with the quantity of
the commodity, which a person desires to purchase. Desire without actual
purchase of the commodity does not constitute demand.
Local and national market
A market is defined to be a place where sellers and buyers come
together. A limited locality where certain goods such as those which are
perishable are sold, is said to be a local market. Certain goods sold all over
the country are said to have national market. Goods that are exported to other
countries are said to have a world market.
Law of Demand
The law states that:
The demand for a commodity varies inversely as the price of the
commodity, though not proportionately.
Supply is the quantity of a certain commodity that is offered for
sale at a certain price at a given place and time. A merchant may have more
goods in his warehouse, but if he only wishes to sell a certain quantity, then
that quantity represents the supply.
Law of Supply
The law states that:
The supply of a commodity varies directly as the price of the commodity,
though not proportionately. As the price increases, the supply also increases.
Likewise, as the price decreases, the supply will also decrease.
Law of Supply and Demand
This may be stated as follows:
When free competition exists, the price of a product will be that value
where supply is equal to the demand.

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Chapter III – Money and Interest Formulas and Equivalence
Money is usually defined as any article or substance used as medium of
exchange, means of payment or ,measure of wealth. However when money is
invested in a business or deposited in a bank, every one is expecting of an
income called the interest. Hence interest is the amount of money paid for the
use of borrowed capital or which has been loaned.
The rental of money is usually expressed as the percent of the sum that is
to be paid for its use for a period of one year. Interest rates are quoted for
periods other than one year, known as interest periods.
Formula:
I = Pni F= P + I
Where: I = interest P = Principal n = no. of periods i = interest rate
F = Accumulated amount
Types of Interest
1. Simple Interest
a. Exact Simple Interest – considers exact number of days in a year
period, that is 365 days for ordinary year and 366 days for a leap year.
Example: Suppose that P1,000 is borrowed on January 1, 2013 at an
interest rate of 18% per annum. How much is the accumulated amount at
the end of July of the same year will the money accumulate?
January 1-31 = 31
Feb. = 28 I = 1,000 ( 212/365 ) ( 0.18) = P104.55
March = 31
April = 30 F = 1,000 + 104.55 = P1,104.55 Ans.
May = 31
June = 30
July = 31
_______
212 days
b. Ordinary simple interest – considers a 30 days a month period, 12
months a year or 360 days a year.
I = 1,000 (212/360) (0.18) = 106
F = 1,000 + 106 = P1,106

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2. Compound Interest
It is the method of paying interest where the interest earned on the
previous period is added to the principal for the succeeding period and earn
interest, too.
Using the same nomenclature as that of simple interest, the total amount
due after n periods for compound interest is:

F = P ( 1+i)n
The factor (1+ i) n is called the “Single Payment Compound

Amount Factor” and is designed by CAF = (F/P,i%. n)

Uniform Series Compound Amount Factor
( 1+I)n -1
SCAF –i% - n = i

Example: A loan of P1,000 is payable in four years compounded

annually at 16% per annum interest. What is the accumulated amount due
after four years?
Calculation of Compound Interest When Interest is paid annually
Perio Amt. At the I to be paid Amt. Amt. To be
d beginning of Owned At paid by the
the period the end of borrower
the year
1 1,000 160 1,160 160
2 1,000 160 1,160 160
3 1,000 160 1,160 160
4 1,000 160 1,160 1,160

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 Calculation of Compound Interest When Interest is permitted to
compound
Period Amt. At the I to be paid Amt. Amt. To be
beginning of Owned At paid by the
the period the end of borrower
the year
1 1,000 160 1,160 00
2 1,160 185 1,345.60 00
3 1,345.60 215.30 1,560.90 00
4 1,560.90 249.75 1,810.64 1,810.64

F = 1,000(1+0.16)4 = 1,810.64
Nominal Rate of Interest
It is the rate of interest that specify the number of interest periods in one
year.
For compound interest, the rate of interest usually quoted is nominal
rate of interest which specifies the rate of interest and the number of interest
periods per year. Thus a nominal rate of interest of 8% compounded quarterly
means that there are 4 interest periods each year, the rate per period being
8%/4=2%.

Effective Rate of Interest

The effective rate of interest is the actual rate of interest on the principal
for one year. It is equal to the nominal rate if the interest is compounded
annually, but greater than the nominal rate if the number of interest periods
per year exceeds one, such as for interest compounded semi-annually,
quarterly or monthly.
Effective rate of interest = F1 – 1 = (1+i)n –1
Example: Find the nominal rate compounded monthly which is equivalent
to 12% compounded quarterly. What is the corresponding effective rate?
Let i = rate of interest per month, which will correspond to 3% quarterly
(1+i )12 = (1+0.03)4
7
(1+i )12 = 1.1255

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 i = 1.0099 – 1 = 0.0099

Nominal rate compounded monthly = 0.0099 x 12 = 11.8819%

Effective rate = (1+3%)4 - 1 = 12.551%
Present Value
The principal P in the formula F = P( 1+i)n may be considered as the value
of the compound amount F at present, or it is the amount which when
invested now will become F after n periods. P is called the present value of
the amount F, and is given by the formula:
P = F ( 1+i )-n
The factor ( 1+ I ) –n is called the Single Payment Present Worth Factor”
and is designated SPWF = (P/F, i%, n) or P = F ( PWF-i%-n)

PWF-I%-n = Present Worth Factor at i% in n interest periods

Example: The present worth of several cash payments may be defined as the
sum of the values of the future cash payments discounted at a given rate for
the corresponding period to the present. Find the present value of installment
payments of P1,000 now, P2,000 at the end of the first year, P3,000 at the
end of the second year, P4,000 at the end of the third year, and P5,000 at the
end of the fourth year. Money is worth 10% compounded annually.
Solution:
P = 1,000 +2,000(1.10)-1 + 3,000(1.10)-2 + 4,000(1.10)-3 +5,000(1.10)-4
= 1,000 + 1,818.18 + 2,479.34 + 3,005.26 + 3,415.07
= P11,717.85

SPWF-I%-n = the uniform Series Present Worth Factor or the present worth of
n future payments of P1 each.

Uniform Series Present Worth Factor

1 - ( 1+I-n
SPWF –i% - n = i

Other derivations:
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 1
= SFF-i%-n
SCAF-i%-n

where: SFF-I%-n is sinking Fund Factor

1
= CRF-i%-n
SPWF-i%-n

where: CRF-i%-n is Capital Recovery Factor

Let A = the present worth of n payments of R pesos each

F = the accumulated amount of n payments of R pesos each
A = R ( SPWF-i%-n)
F = R ( SCAF –i%-n)

Thus: CRF-i%-n = SFF-i%-n + i

Example: What are the present worth and the accumulated amount of a 15-
year annuity paying P8500 at the end of each year, with interest at 8%
compounded annually?
Solution: R = P8500 I = 8% n = 15 periods
1-(1+i ) –n 1- (1+0.08) -15
SPWF –i%-n = = = 8.56
i 0.08

(1+i ) n -1 (1+0.08) 15 - 1
SCAF –i%-n = = = 27.15
i 0.08

A = R ( SPWF –8%-15) = (P8500) (8.56 ) = P72,760

F = R ( SCAF –8%-15) = (P8500) ( 27.15) = P230,775

Cash Flows
In engineering economy studies only small elements of an
enterprise are considered. For example, studies are often made to evaluate
the consequences of the purchase of a single equipment item in a complex of
many facilities. It is necessary to itemize all receipts and the disbursements
that would arise from the acquisition and operation of the machine being
considered. Then the disbursements could be subtracted from the receipts.
This difference would represent profit or gain, from which the investment’s
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return could be calculated.

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 To aid in identifying and recording the economic effects of alternative
investments, a graphical description of each alternative’s cash transactions
may be used. This pictorial descriptor, referred to as cash flow diagram, which
will provide all the information necessary for analyzing an investment
proposal. A cash flow diagram represents receipts received during a period of
time by an upward arrow (an increase in cash) located at the period’s end.
The arrow’s height may be proportional to the magnitude of the receipts
during that period. Similarly, disbursements during a period are represented
by a downward arrow (decrease in cash). These arrows are then placed on a
time scale that spans all time periods covered by the proposal.
As an example, consider the cash flow diagrams which pertain to the
simple loan transaction. In this illustration the borrower receives $1,000 and
this amount appears as a positive cash flow on the borrower’s cash flow
diagram. Each year the borrower pays $160 in interest; these amounts plus
repayment of the $1,000 borrowed, appear as negative cash flows. Also
shown is the lender’s cash flow diagram. The lender experiences a negative
cash flow of $1,000, followed by positive cash flows for interest received and
for repayment of the original amount loaned. It is important to recognize that
the point of view taken determines the shape of any cash flow diagram.
When an investment alternative has both cash receipts and
disbursements occurring simultaneously, a net cash flow may be calculated.
The net cash flow is the arithmetic sum of the receipts (+) and the
disbursements (–) that occur at the same point in time. The utilization of net
cash flows in decision making implies that the net dollars received or
disbursed have the same effect on an investment decision as do an
investment’s total receipts and disbursements considered separately.

$ 1,000 $ 1, 160

$160 $160 $160

1 2 3 4 0
0 1 2 3 4

$160 $160 $160

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 Borrower Lender
$1,160 $1,000

Cash Flow Diagrams

DISCOUNT
Discount is the difference between what it is worth in the future and its
present worth. Thus,
Discount = Future Value – Present value
The rate of discount is the discount on one unit of principal per unit of time. If
d is the rate of discount , then
d = 1 – (1 +i) -1

1 d = rate of discount
d=
1+i

d
i = ---------
1–d
Illustrative Problem
Mr X bought 3 dozens of eggs and was given 10% discount per dozen by
the owner. If 1 dozen of eggs cost P100 pesos how much does Mr. X paid?
Solution:
I 0.10
d = -------- = = 0.09 x 100 = P9

1+I 1 + 0.10

Thus:
P100 X 3 = P300

P300 – P9 (3) = P273

Mr X paid P273 for the three dozens.

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Summary:

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Simple Interest
Interest – is the amount of money paid for the use of capital for a certain
period of time.
Simple interest – is the interest charged in proportional to the length of time
the principal is used.
Principal – is the amount of money used in which interest is charged.
Rate of interest – is the amount earned by one unit of principal in a period of
time.
Ordinary interest- is an interest based on exact number of bankers year
which is equal to 12 months where 1 month is considered 30 days and 1
year is 12 months or 360 days.
Exact interest – is an interest based on the exact number of days; 365 days
for ordinary year and 366 days for a leap year.

I =Pni
I = interest
P = principal
i = rate of interest
n = number of periods
F = total amount
=P+I
F = P + Pni
F = P ( 1 + ni )
When n = 1 after one year
F = P ( 1+ I )
Discount = is the difference between the future worth and its present worth
Rate of discount = is the discount on one unit of principal per unit of time
d = rate of discount
d = F –P1
1
d=1-
(1+i)

i
d = ----------- ( rate of discount )
1+i

d
i = ---------- ( rate of interest )
1-d
Problems:
1. A price tag of P1200 is payable in 60 days but if paid within 30 days
it will have a 3% discount. Find the rate of interest.

Solution:
Discount = 0.03 ( 1200 ) = 36
Amt.to be paid = 1200-36 = 1164
12

I = Pni

12
 ( 30 )
36 = 1164 i -----------
360

i = 0.371 or 37.1% answer

2. A bank charges 12% simple interest on a P300 loan. How much
will be repaid if the load is paid back in one lump sum after three
years?

Solution:
A = P + Pni
= 300 + 300 ( 0.12 ) ( 3 )
= P 408
3. A deposit of P110,000 was made for 31 days. The net interest after
deducting 20% withholding tax is P890.36. Find the rate of return
annually.

Solution:
Net interest = 890.36
890.36
Gross interest = ------------- = 1112.95 ( before deducting 20% tax )
0.80

I = Pni
110000 i ( 31 )
1112.95 = --------------------- = 0.1175 = 11.75%
360

4. A P4,000 is borrowed for 75 days at 16% per annum simple

interest. How much will be due at the end of 75 days?

Solution:
I = Pni
I= 4000 (0.16) ( 75/360 )
= P133.33

A = P + I = 4,000 + 133.33 = P4133.33

5. 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 P3,280?
Solution:
A=P+I
I = Pni
3280 = 2,000 + 2000 ( 0.08 ) n

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 N = 8 years

6. A businessman invested P50,000 in a company that engage in

manufacture of plastic products. In return he receives P3,000 per
year for 5 years and his P50,000 investment back at the end of 5
years. Compute the rate of return of the investment.

profit
Rate of return = ----------------- X 100
Investment
300
Rate of return = ----------------- X 100 = 6%
50,000

7. A man borrowed P20,000 from a local commercial bank which has

a simple interest of 16% but the interest is to be deducted from the
loan at the time that the money was borrowed, and the loan is
payable at the end of one year. How much is the actual rate of
interest?

Solution:
Interest = 0.16 ( 20,000 ) = 3, 200

P = 20,000 – 3,200
P = 16,800 ( amount he actually received )

3,200
i = ---------------- X 100
16, 800

i = 19%

8. A merchant is offered a 5% discount for immediate payment of a bill

which is due in 90 days. What is the largest simple interest rate at
which he could afford to borrow in order to pay cash?

Solution:
I = 0.05 P interest for 90 days and the equivalent principal is 0.95P
I = 0.95Pni
0.05 P = 0.95Pi ( 90 )/ 360

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 0.05P
i = -------------- = 0.2105 X 100 = 21.05 %
0.2375 P

9. If you borrowed P10,000 from a bank with 18% interest per annum,
what is the total amount to be repaid at the end of one year?

Solution:

I = Pni
I = 10,000 ( 0.18 ) ( 1 ) = P 1, 800
A=P+I
A = 10,000 + 1800 = P11,800

10. If you borrowed money from your friend with simple interest of 12%,
find the present worth of P50,000 which is due at the end of 7
months?

Solution:

F=P+I
I = Pni

50,000 = P + P( 0.12) ( 7 ) /12 = P 46,728.97

Exercises On Interests
Simple Interest

1. A bank deposit of P4,000 was made one year ago in one of the
local banks which pays monthly interest. The bank account
accumulates now to P4, 392.60. Compute the effective annual interest
rate. ( 9.82% )
2. Five thousand ( P5,000 ) is borrowed for 75 days at 16% per annum
simple interest. How much will be due at the end of 75 days?
( P5166.67 )
3. .A loan was made 3 years and 4 months at 6% simple interest. The
principal amount of the loan has just been repaid along
with P800 interest. Compute the principal amount of the original loan.
( P 4,000 )
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 4. What will be the future worth of money after 12 months, if the sum of
P25,000 is invested today at simple interest rate of 1% per year?
( P28,000 )
5. A loan of P5000 is made for a period of 15 months at a simple interest
rate of 15%. What future amount is due at the end of the loan period?
( P5937.5 )

Compounded Interest
1.Find the present worth of a future payment of P100,000 to be made in 10
years with an interest of 12% compounded quarterly.
Solution:
F = P ( 1+ I )n
100,000 = P(1+ 0.12/4)40
P= P30,655.68

2.If P5000 shall accumulate for 10 years at 8% compounded quarterly. Find

the compounded interest at the end of 10 years. ( P6040.20 )
3. A sum of P1,000 is invested now and left for 8 years, at which time the
principal is withdrawn. The interest that has accrued is left for another 8 years.
If the effective annual interest rate is 5%, what will be
the withdrawal amount at the end of the 16 th year? ( P705.42 )
4. One thousand five hundred was deposited in a bank account 20 years ago.
Today it is worth P3,000. Interest is paid semi-annually. Determine the
interest rate paid on this account. ( 3.5 % )
5. Two hundred thousand pesos was deposited on January 1, 2009 at an
interest rate of 24% compounded semi-annually. How much would the sum be
on January 1,2014? ( P621,170 )
6. How much should you put into a 10% savings account in order to have
P10,000 in five years? ( P6209.21 )
7. A company invest P10,000 today to be repaid in 5 years in one lump sum
at 12% compounded annually. How much profit in present day pesos is
realized over 5 years? ( P7623 )
8 Five hundred thousand was deposited 20.15 years ago at an interest rate of
7% compounded semi-annually. How much is the sum now? ( P2,000,166 )
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9. For a loan acquired six years ago, a man paid out the amount of P75,000.
The interest was computed at 18% compounded annually. How much was the
borrowed amount? ( P27782.36 )
10. A man who won P300,000 in a lottery decided to place 50% of his
winning in a thrust fund for the college education of his son. If money
will earn 14% compounded quarterly, how much will the man have at the end
of 10 years when his son will be starting his college education?
( P593,888.96 )
11. You need P4000 per year for four years to go college. Your father
invested P5000 in 7% account for your education when you were born. If
you withdraw P4000 at the end of your 17 th, 18th,19th and 20th birthday,
how much money will be left in the account at the end of the 21 st year?
(P1700 )
12. A man who won P300,000 in a lottery decided to place 50% of his
winning in a thrust fund for the college education of his son. If money will
earn 14% per year compounded quarterly, how much will the man have at
the end of 10 years when his son will be starting his college education?
(P 593,888.96 )
13. If the sum P15,000 is deposited in an account earning 4% compounded
quarterly, what will be the deposited amount at the end of 5 years?
( P18302.85 )
14. Five years ago you paid P34,000 for a house. If you sold it today for
P50,000, what would be your annual rate of appreciation?
( 8.018 % )
15. If P1000 becomes P1126.49 after 4 years when invested at a certain
nominal rate of interest compounded semi-annually, determine the
nominal rate and the corresponding effective rate.
( 3% and 3.02% )
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