Engineering Economy Lecture 6 (Sept 6) #3.

By AW
Annual Revenue = (12)(25)(8)(6)(50) = P720,000
Solutions to Probs. 3, 4 & 5 Annual Costs
Instructions: Study these on your own,
Dep = 500,000
= 500,000 = 74,160
pre-final exams on Sept 13 (Tue) covering bonds and  F A,15%,5 6.7424

making economic decisions via ROR, AW, PW, FW Labor = (2)(48)(50)(P25) = 120,000
Vacation Pay = (2)(2)(48)(P25) = 4,800
#3. By ROR Misc. = (12)(P8,500) = 102,000
Annual Revenue = (12)(25)(8)(6)(50) = P720,000 Owner’s Salary = (12)(25,000) = 300,000
Annual Costs Interest on Capital = 500,000 (0.20) = 100,000
Dep = 500,000
= 500,000 Total Annual Cost = (P700,960)
 F A,15%,5 6.7424 = 74,160

(reasons: no stated SV, 15% is used in computing annual Excess = P 19,040

dep since his current standing as a businessman earns
him 15%, so that is his MARR, minimum attractive rate of Conclusion: Since the excess is positive, he should invest.
return. The 20% on the other hand is his desired rate of
return from the new business) Reasons:
Labor = (2)(48)(50)(P25) = 120,000 *the costs are normally the same with ROR method, but
Vacation Pay = (2)(2)(48)(P25) = 4,800 with the addition of the interest on capital.
Misc. = (12)(P8,500) = 102,000
Owner’s Salary = (12)(25,000) = 300,000 #4. ROR may be used when deciding
Total Annual Cost = (P600,960) Annual Savings
Reduction in annual cost = 40,00
Net Annual Profit = P119,040 Rental = 10,000
Total Annual Savings = P50,000
119,040 Annual Costs
ROR = * 100 = 23.81% > 20%
500,000 300,00050,000 250,000
Dep = = = 28,018
F ,8%,7
A  8.9228

Conclusion: The man should invest. Maintenance = 6,000

Reasons:
*no SV stated so Dep. is entirely based on 500,000. Also,
15% was used for the Dep. since his capital was used
originally used somewhere else earning 15%. So, if he
diverts that capital to this car wash business, then, it must
be recovered with at least the same interest rate = 15%
*Note that the purpose of Dep. is so that the capital may
be recovered by the end of the study period
*Owner’s salary is also a cost since the owner is a
different entity from the business, he expects to earn the
same income when he quits his former job, so that
quitting his job is justifiable to start the business.
*Note that the 20% is only for deciding of the final ROR
is acceptable, since he set it as the deciding factor
*Arrange your solutions this way, in summarized form.
For the calculations, which is important as well, you may
do it prior to the summary.
*Learn as much as you can from here.
Total Annual Cost = (P34,018)
Annual Net Savings = P15,982
15,982
ROR = * 100 = 5..33% < 8%
300,000
Conclusion: The equipment should not be purchased.
Reasons:
*In problems regarding economic decisions, there is
typically a versus case. Here the case is savings vs. cost
*consider the costs as “cost” to gain that “savings”
*which is analogous to “cost” to gain the “revenue”
*simply, by ROR, the ROR must exceed the set MARR.
*there are two sources of savings here for the company:
the basic “reduction in annual cost” and rental when it is
not in used
*simple example is when a Poultry company buys its
own delivery truck instead of renting. When not used,
they could rent their deliver truck to others.
*the conclusion implies that, with the given data, it is
more economic to rent than buy and own the equipment
Engineering Economy Lecture 6 (Cont.)
For Sept. 6, 2016
Seatwork: (1 whole)
Instructions: SW,QZ,AS comprise 20% of your entire
grade, so take due diligence in answering all seat works,
assignments and quizzes.
Somebody collect the papers and pass on the same day,
6:00pm at the ME. Dept.
1. The XYZ company is considering constructing a new
plant to manufacture a proposed new product. The
land costs P15million , the building costs P30million,
the equipment costs P12.5million and P5million
working capital is required.
At the end of 12 years, the land can be sold for
P25million, the building for P12million, the
equipment for P250,000 and all working capital
recovered.
The annual disbursement for labor, materials and all
other expenses are estimated to cost P23,750,000. If
the company requires a minimum return of 25%,
what should be the minimum annual sales for 12
years to justify the investment?
(ans. P39,748,560)
2. A man formerly employed as a chief mechanic of an
automobile repair shop has saved P1million which
now are currently invest in certain securities earning
him an annual dividend of 15%.
He now plans to invest this amount to start his own
repair shop. In his present job, he is earning P25,000
a month, but he has to resign to run his own business.
He will need the services of the following: 2
mechanics each earning P400 a day, and 8 helpers
each earning P200 a day. These men will work on the
average 300 days a year. His other expenses are the
following:
Rental P30,000 a month
Misc P25,000 a month
Sales Tax 3% of gross income
Insurance 2% of Initial Investment
The length of his lease is 5 years. If the average
charge for each car repaired by his shop is P1000,
determine the number of cars he must service in one
year so that he will obtain a profit of at least 20% on
his investment.
(ans. 2,098 units)
Engineering Economy Lecture 6 (Cont.)
Assignment for Sept 8 (1 whole)
Instructions: SW,QZ,AS comprise 20% of your entire
grade, so take due diligence in answering all seat works,
assignments and quizzes.
Pass this on Sept 13 before the exam.
1. A food processing plant consumed 600,000 kWh of
electrical energy annually and pays an average of
P2.00 per kWh. A study is being made to generate its
own power to supply the plant the energy required,
and that the power plant installed would cost
P2million. Annual operation and maintenance,
P800,000. Other expenses, P100,000 per year. Life of
power plant is 15years; a salvage value at the end of
life of P200,000; annual taxes and insurance, 6% of
first cost, and rate of interest is 15%. Using sinking
fund method for depreciation, determine if the power
plant is justifiable.
2. A young entrepreneur is considering establishing his
own small company. An investment of P400,000 will
be required, which will be recovered in 15 years. It is
estimated that sales will be P800,000 per year and
that the operating expenses will be as follows:
Materials P160,000 per year
Labor P280,000 per year
Overhead P40,000 + 10% of sales per year
Selling Expense P60,000 per year
The man will give up his regular job paying
P216,000 per year and devote full time to the
operation of the business; this will result in
decreasing labor cost by P40,000 per year,
material cost by P28,000 per year and overhead
cost by P32,000 per year. If the man expects to
earn at least 20% of his capital, should he invest?
Notes:
Overhead means expenses such as electricity, water,
maintenance, etc. which are necessary and usual to
operation
(ans. 7.11%, 14.61%)