Engineering Economics Module

EE CORRELATION COURSE 1: ENGINEERING ECONOMICS
Lesson 1
ENGINEERING ECONOMICS
Content:
❑ Definition of Engineering Economics;
❑ Interest and its types namely (a) Simple Interest, (b) Discount, (c)
Compound Interest, (d) Nominal Interest Rate, and (e) Effective Interest
Rate;
❑ Annuity and its types namely (a) Ordinary Annuity, (b) Annuity Due, (c)
Deferred Annuity, and (d) Perpetuity;
❑ Uniform Arithmetic and Geometric Gradients;
❑ Bonds and determining its value;
❑ Types of Depreciation and the Ways in Computing Depreciation;
❑ Depletion and the Methods of Computing Depletion Charge for a year;
❑ Determining the Capitalized and Annual Costs;
❑ Break-even Analysis; and
❑ Present Economy
Objectives:
At the end of this Lesson, the students will be able to:
❑ Understand the concepts and principles of Engineering Economics;
❑ Identify the different types of Interest and perform problem solving exercises
involving Interest;
❑ Understand the different types of Annuity and perform problem solving
exercises involving Annuity;
❑ Differentiate Uniform Arithmetic and Geometric Gradients and perform
problem solving exercises involving them;
❑ Determine the Value of Bond;
❑ Identify the different types of Depreciation and perform the different ways
in computing it;
❑ Identify and perform the Methods of Computing Depletion Charge for a year;
❑ Understand the concepts and principles of Capitalized and Annual Costs and
perform problem solving exercises involving them;
❑ Understand and perform the Break-even Analysis; and
❑ Understand the Present Economy.
PRE-TEST Time Allotment: 2 hours Score:______
1. In a cash flow series:

A. Uniform gradient signifies that an income or disbursement changes by the
same amount in each interest period.
B. Either an increase or decrease in the amount of a cash flow is called the
gradient
C. The gradient in the cash flow may be positive or negative
D. All of these
2. In a cash-flow diagram:
A. Time 0 is considered to be the present
B. Time 1 is considered to be the end of time period 1
C. A vertical arrow pointing up indicates a positive cash flow
D. All of these
3. Which method is adopted to develop an approximate or conceptual estimate for
perimeter works for buildings from the following?
A. Base unit method C. Cost per square metre method
B. Cost per function method D. Cost per linear metre method
4. Choose the correct statement from the following:
A. The ratio of current assets, loans and advances, and the current liquidity is
called current ratio
B. Larger the current ratio, larger is the margin of safety
C. The operating profit is the difference between gross profit and operating
expenses
D. All of these
5. The ratio of current assets to current liabilities is known as
A. Liquidity ratio C. Acid-Test (or Quick) ratio
B. Current ratio D. Debts ratio
6. In the cash-flow diagram shown in the given figure
A. Equal deposits of Rs 3000 per year (A) are made, starting now
B. The rate of interest is 10% per year account
C. The amount accumulated after the seventh deposit is to be computed
D. All of these
7. The more critical (or severe) test of the firm's liquidity can be judged by:
8. If interest is paid more than once in a year, ‘i’ is the rate of interest per year,
‘n’ is the number of periods in years and ‘m’ is a number of periods per years,
compound amount factor (CAF) is:
A. (1 + i/m)n C. (1 + i/n)1/m
B. (1 + i/n)m D. (1 + i/m)1/n
9. Pick up the correct reason for making conceptual (or preliminary) estimate from
the following:
A. To have a check on a definitive cost estimate
B. To check quotations from contractors and/or sub-contractors
C. To compute target estimate for the owner while drawing and specifications
are in initial stage
D. All of these
10. Choose the correct method adopted for developing the approximate or
conceptual estimates from the following:
A. Base unit method C. Cost per square metre
B. Cost per function method D. All of these
A. An annuity is a series of equal payments occurring at equal period of time
B. Annuity is called an equal payment or uniform payment series
C. An annuity may have periods of time of any length but should always be of
equal length
D. All of these
12. The sunk costs include:
A. A past expenditure C. An invested capital that cannot be retrieved
B. An unrecovered balance D. All of these
13. Choose the element of the cost from the following:
A. Direct material C. Over head
B. Direct labour D. All of these

14. The ratio obtained by dividing 'quick assets' by current liabilities is called
A. Turnover ratio B. Acid test ratio C. Solvency ratio D. None of these
15. The construction estimate of a project is used by:
A. The owner of the facility C. The contractor of the project
B. The consulting architect/engineer D. All of these
A. The ratios which show profitability in relation to sales and those which show
profitability in relation to investment are called profitability ratios
B. The ratio of gross profit and net sales is called profitability in relation to sales
ratio
C. The ratio of net profit after taxes to total assets is known as profitability in
relation to investment ratio
D. All of these
17. Which one of the following is not a construction estimate?
A. Initial feasibility estimate C. Definite estimate
B. Conceptual preliminary budget D. None of these
18. If ‘P’ is principal amount, ‘I’ is the rate of interest per annum and ‘n’ is the
number of periods in years, the compound amount factor (CAF) is:
A. (1 + i)n C. √(n + i)
B. (1 + i)(1/2n) D. None of these
19. If ‘P’ is principal amount, ‘i’ is the rate of interest and ‘n’ is the number of
periods in years, then the interest factor is:
A. (1 + ni) C. ni
B. (ni - 1) D. None of these
20. Which one of the following is included in financial ratios of the firm?
A. Profitability ratio C. Turnover ratio
B. Liquidity ratio D. All of these
A. The ability of a company to meet obligations which are likely to mature in
short term, is called liquidity
B. The liquidity ratio may be defined as a relationship of current liabilities and
current assets and advances
C. The liquidity ratios are used to indicate the financial position of the firm
D. All of these

A. The receipts and disbursements in a given time interval are referred to as
cash flow
B. The assumptions that all cash flows occur at the end of the interest period,
is known as the end of period convention
C. The cash flow diagram represents the statement of the problem and also
includes what is given and what is to be found
D. All of the above
A. Engineering economy is a collection of mathematical techniques which
simplify economic comparisons
B. Engineering economy is a decision assistance tool by which one method will
be chosen as the most economically one
C. For understanding the engineering economy, one should be able to classify
the basic terminology and fundamental concepts of economy
D. All of the above
24. Choose the main purpose of project cost control from the following:
A. To signal immediate warning of uneconomic operations
B. To provide a feed back to the estimator
C. To promote cost consciousness
D. All of the above
A. A NPV profile graph shows the curvilinear relationship between the net
present value of the project and discount rate employed
B. In a NPV profile, if discount rate is zero, then net present value is simply
total cash inflows less the total cash outflows of the project
C. As the discount rate increases, the net present value profile slopes downward
to the right
D. All of the above
26. First Benchmark Publishing’s gross margin is 50% of sales. The operating costs
of the publishing are estimated at 15% of sales. If the company is within the
40% tax bracket, determine the percent of sales is their profit after taxes?
A. 21% B. 20% C. 19% D. 18%
27. A farmer selling eggs at 50 pesos a dozen gains 20%. If he sells the eggs at
the same price after the costs of the eggs rises by 12.5%, how much will be his
new gain in percent?
A. 6.89% B. 6.65% C. 6.58% D. 6.12%
28. A feasibility study shows that a fixed capital investment of P10,000,000 is

required for a proposed construction firm and an estimated working capital of
P2,000,000. Annual depreciation is estimated to be10% of the fixed capital
investment. Determine the rate of return on the total investment if the annual
profit is P3,500,000.
A. 28.33% B. 29.17% C. 30.12% D. 30.78%
29. The monthly demand for ice cans being manufactured by Mr. Camus is 3200
pieces. With a manual operated guillotine, the unit cutting cost is P25.00. An
electrically operated hydraulic guillotine was offered to Mr. Camus at a price of
P275,000.00 and which cuts by 30% the unit cutting cost. Disregarding the
cost of money, how many months will Mr. Camus be able to recover the cost
of the machine if he decides to buy now?
A.10 months B. 11 months C. 12 months D. 13 months
30. Engr. Trinidad loans from a loan firm an amount of P100,000 with a rate of
simple interest of 20% but the interest was deducted from the loan at the time
the money was borrowed. If at the end of one year, she has to pay the full
amount of P100,000, what is the actual rate of interest?
A. 23.5% B. 24.7% C. 25.0% D. 25.8%
31. A loan of P5,000 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?
A. 5,937.50 B. 5,873.20 C. 5,712.40 D. 5,690.12
32. Mr. Bacani borrowed money from the bank. He received from the bank P1,842
and promised to repay P2,000 at the end of 10 months. Determine the rate of
simple interest.
A. 12.19 % B. 12.03 % C. 11.54 % D. 10.29 %
33. A college freshman borrowed P2,000 from a bank for his tuition fee and
promised to pay the amount for one year. He received only the amount of
P1,920 after the bank collected the advance interest of P80.00. What was the
rate of discount?
34. It is the practice of almost all banks in the Philippines that when they grant a
loan, the interest for one year is automatically deducted from the principal
amount upon release of money to a borrower. Let us therefore assume that
you applied for a loan with a bank and the P80,000 was approved at an interest
rate of 14% of which P11,200 was deducted and you were given a check of
P68,800. Since you have to pay the amount of P80,000 one year after, what
then will be the effective interest rate?
A. 16.02 % B. 16.28 % C. 16.32 % D. 16.47 %
35. A man invested P110,000 for 31 days. The net interest after deducting 20%
withholding tax is P890.36. Find the rate of return annually.
A. 11.50 % B. 11.75 % C. 11.95 % D. 12.32 %
36. A investor wishes to earn 7% on his capital after payment of taxes. If the
income from an available investment will be taxed at an average rate of 42%,
what minimum rate of return, before payment of taxes, must the investment
offer to be justified?
A. 12.07 % B. 12.34 % C. 12.67 % D. 12.87 %
37. Mr. Jun Ramos was granted a loan of P20,000 by his employer Excel First
Review and Training Center, Inc. with an interest of 6% for 180 days on the
principal collected in advance. The corporation would accept a promissory
note for P20,000 non-interest for 180 days. If discounted at once, find the
proceeds of the note.
A. P18,000 B. P18,900 C. P19,000 D. P19,100
38. Miss Evilla borrowed money from a bank. She receives from the bank
P1,340.00 and promised to pay P1,500.00 at the end of 9 months. Determine
the corresponding discount rate or often referred to as the “banker’s
discount”.
A. 13.15 % B. 13.32 % C. 13.46 % D. 13.73 %
39. The exact simple interest of P5,000 invested from June 21, 1995 to December
25, 1995 is P100. What is the rate of interest?
A. 3.90 % B. 3.92 % C. 3.95 % D. 3.98 %
40. What is the ordinary interest on P1,500.50 for 182 days at 5.2%?
A. P39.01 B. P39.82 C. P39.45 D. P39.99
41. A loan for P50,000 is to be paid in 3 years at the amount of P65,000. What is
the effective rate of money?
A. 9.01 % B. 9.14 % C. 9.31 % D. 9.41 %
42. What is the effective rate corresponding to 18% compounded daily? Take 1
year is equal to 360 days.
A. 19.61 % B. 19.44 % C. 19.31 % D. 19.72 %
43. What rate of interest compounded annually is the same as the rate of interest
of 8% compounded quarterly?
A. 8.07 % B. 8.12 % C. 8.16 % D. 8.24 %
44. Which of these gives the lowest effective rate of interest?
A. 12.35% compounded annually C. 12.20% compounded annually
B. 11.90% compounded annually D. 11.60% compounded annually
45. An amount of P1,000 becomes P1,608.44 after 4 years compounded
bimonthly. Find the nominal interest.
A. 11.89 % B. 12.00 % C. 12.08 % D. 12.32 %
46. How long will it take money to double itself if invested at 5% compounded
annually?
A. 13.7 years B. 14.7 years C. 14.2 years D. 15.3 years
47. By the condition of a will, the sum of P20,000 is left to a girl to be held in trust
fund by her guardian until it amounts to P50,000. When will the girl receive the
money if fund invested at 8% compounded quarterly?
48. A sum of P1,000 is invested now and left for eight years, at which time the
principal is withdrawn. The interest has accrued is left for another eight years.
If the effective annual interest rate is 5%, what will be the withdrawal amount
at the end of the 16th year?
A. P693.12 B. P700.12 C. P702.15 D. P705.42
49. Mandarin Bank advertises 9.5% account that yields 9.84% annually. Find how
often the interest is compounded.
A. Monthly B. Bimonthly C. Quarterly D. Annually
50. A student plans to deposit P1,500 in the bank now and another P3,000 for the
next 2 years. If he plans to withdraw P5,000 three years from after his last
deposit for the purpose of buying shoes, what will be the amount of money left
in the bank after one year of his withdrawal? Effective annual interest rate is
10%.
A. P1,549.64 B. P1,459.64 C. P1,345.98 D. P1,945.64
ENGINEERING ECONOMICS
- involves formulating, estimating, and evaluating the expected economic
outcomes of alternatives designed to accomplish a defined purpose. Mathematical
techniques simplify the economic evaluation of alternatives.
- involves the systematic evaluation of the economic merits of proposed

solutions to engineering problems. To be economically acceptable (i.e. affordable),
solutions to engineering problems must be demonstrate a positive balance of long-
term benefits over long-term costs.
INTEREST
Suppose a debtor loans money from a creditor. The debtor must pay the
creditor the original amount loaned plus an additional sum called interest. For the
debtor, interest is the payment for the use of the borrowed capital while for the
creditor, it is the income from invested capital.
Fig.1: Blank, L. T., & Tarquin, A. J. (2012). Engineering economy. McGraw-Hill.
Simple Interest
Simple Interest (denoted as I), is defined as the interest on a loan or principal
that is based only on the loan or principal that is based only the original amount of
the loan or principal. This means that the interest charges grow in linear function
over a period of time. This is usually used for short-term loans where the period of
the loan is measured in days rather than years. It can be calculated using the
following formula:
Principal/Loan
Interest I=Pin Period
Interest Rate
The future amount of the principal may be calculated by adding the interest (I) to
the principal (P).
F= P + I
F = P + Pin
Thus, F=P (1+in)
Two Types of Simple Interest
Ordinary Simple Interest
- based on one baker’s year. A banker year is composed of 12 months of 30

days each which is equivalent to a total of 360 days in a year. The value of n that is
used in the preceding formulas may be calculated as
𝒅 number of days the

n= principal was invested
𝟑𝟔𝟎
Sample Problem:
On May 30, 2012 a businessman loans $15,000 in the bank for the expansion
of his restaurant. It was agreed that he will pay the amount with 6% rate of interest
on August 10, 2012. What is the ordinary simple interest to be paid?
Solution:
Principal amount (P) is $15,000.

Rate of interest (i) is 6%.
Counting the number of days from May 30 to August 10;
Note: Since May 30 is the beginning date, it is not included in counting.
May 31 = 1 day August 1-10 = 10 days
June 1-30 = 30 days Total 72 days
July 1-31 = 31 days
Converting days into years:
72 days x (1year/360days) = 72/360 yr
Using the formula for solving the simple interest;
I = Pin
I = $15,000 x 0.06 x 72/360 = $180

Exact Simple Interest
-based on the exact number of days in a given year. A normal year has 365
days while a leap year (which occurs once every 4 years) has 366 days. Unlike the
ordinary simple interest where each month has 30 days, in the type of simple
interest, the number of days in a month is based on the actual number of days each
month contains in our Gregorian calendar.
- To determine the year whether leap year or not, one has to divide the year
by 4. If it is exactly divisible by 4, the year is said is to leap year otherwise it will be
considered just a normal year with 365 days. However, if the year is a century year
(ending with two zeros, e.g. 1700. 1800…), the year must be divided by 400 instead
of 4 to determine the year whether or not a leap year. Hence, year 1600 and year
2000 are leap years.
- Under this method of computation of interest, it must be noted that under

normal year, the month of February has 28 days while during leap years it has 29
days. Again, the values of n to be used in the preceding formulas are as follows:
𝒅 𝒅
n= for normal year n= for leap year
𝟑𝟔𝟓 𝟑𝟔𝟔
Sample Problem:
Determine the exact simple interest on 1,000,000 invested for the period from
October 24,1987 to January 7, 1990; if the rate of interest is 17%
Solution:
October 24−31 is 7 days Total days in 1987 is 68 days
November = 30 days Total days in 1988 is 366 days
December = 31 days Total days in 1989 is 365 days
January 1−7 is 7 days Total days in 1990 is 7 days
Number of interest days =68+366+365+7=806 days
Number of days from 1987 to 1990 is =365+366+365+365=1461 days
Using the formula for solving the simple interest;
I = Pin
I = 1,000,000 (0.17) (806/1461) = 93,785.079

DISCOUNT
Consider the following cases where discount is involved:
CASE 1:
A person has a bond or financial security that is not due yet but payable in
some future date, desires to exchange it into an immediate cash. In the process,
he will accept an amount in cash smaller than the face value of the bond. The
difference between the amount he receives in cash (present worth) and the face
value of the bond or financial security (future worth) is known as discount. The
process of converting a claim on a future amount of money in the present is called
discounting.
CASE 2:
In a bank loan, a person borrows Php 100 for 1 year with an interest of
10%. The interest as computed is Php 10. The bank deducts the interest, which is
Php 10 from Php 100 and gives the borrower only Php 90. The borrower then
agreed to repay Php 100 at the end of the year. The Php 10 that was deducted
represent the interest paid in advance. In this case, discount also represent the
difference between the present worth (i.e. Php 90) and the future worth (i.e. Php
100).
𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭 = 𝐅𝐮𝐭𝐮𝐫𝐞 𝐰𝐨𝐫𝐭𝐡 − 𝐏𝐫𝐞𝐬𝐞𝐧𝐭 𝐰𝐨𝐫𝐭𝐡
Let d= rate of discount
1
d= 1− = (1 + 𝑖)(1 − 𝑑) = 1
1+𝑖
1
𝑖= −1
(1 − 𝑑)
𝑑
𝑖=
1−𝑑
High discount rates reflect the belief that a large profit can be made from an
alternative investment. Thus, money today is very valuable and future money is less
valuable. As you know, the value of money is dependent on time; you prefer to have
100 dollars now rather than five years from now, because with 100 dollars you can
buy more things now than five years from now, and the value of 100 dollars in the
future is equivalent to a lower present value.
COMPOUND INTEREST
-defined as the interest of loan or principal which is based not only on the
original amount of the loan or principal but the amount of loan or principal plus the
previous accumulated interest. This means that aside from the principal, the
interest now earns interest as well. Thus, the interest changes grow exponentially
over a period of time.
-frequently used in commercial practice than simple interest, more especially

if it is a longer period which spans for more than a year.
The future amount of principal may be derived by the following tabulation:
Period Principal Interest Total Amount

1 P Pi P+Pi = P(1+i)
2 P(1+i) P(1+i)i P(1+i)(1+i)= P(1+i)2
3 P(1+i)2 P(1+i)2i P(1+i)2(1+i)= P(1+i)3
n P(1+i)n
The tabulation above shows that the future amount (total amount) is just the
value P(1+i) with an exponent which is numerically equal to the period.
It is also observed that the compound interest is based on the principles of

geometric progression and using such method, the total amount after each period
are as follows:
First term: a1= P(1+i)
Second term: a1= P(1+i)2
Third term: a1= P(1+i)3 and so on.
Solving for the common ratio,
𝑎2 P(1 + i)2
𝑟= =
𝑎1 P(1 + i)
𝑟 =1+𝑖
Using the formula for nth term of a G. P.
an = a1 r n−1 = P(1 + i)(1 + i)n−1

an = (1 + i)n
a. Future amount, F:
interest per period

Principal (in decimal)
F = P (1 + i)n
number of interest
single payment compound periods
amount factor
Fig.2: J. Dutton (2020). “Discounting and Compounding,”https://www.e-

education.psu.edu/eme460/node/654. Retrieved date: October 19, 2021.
Note that a cash flow is the expected life cycle costs and revenues (or savings) of
a contemplated investment.
Sample Problem:
Assume you put 20,000 dollars (principal) in a bank for the interest rate of 4%.
How much money will the bank give you after 10 years?
Given: P = $20,000 i = 4% or 0.04 n = 10
Solution: F = P(1 + i)n = 20,000(1 + 0.004)10 = $ 29604.89
So the bank will pay you $29,604.89 after 10 years
b. Present worth, P:
single payment
𝐅 present worth factor
𝐏=
(𝟏 + 𝐢)𝐧

Sample Problem:
Assuming the discount rate of 25 %, present value of 500 dollars which will be
received in 2 years from now can be calculated as:
Given: F= $500 i=25% or 0.25 n= 2
F $500
Solution: P = (1+i)n = (1+0.25)2 = $𝟑𝟐𝟎

The concept of compounding and discounting are similar. Discounting brings

a future sum of money to the present time using discount rate and compounding
brings a present sum of money to future time.
CONTINUOUS COMPOUNDING
-Compound interest is usually calculated on a daily, weekly, monthly,
quarterly, half-yearly, or annual basis. In each of these cases, the number of times
it is compounding is different and is finite. But what if this number is infinite? This
leads to the continuous compounding formula. In continuous compounding
number of times by which compounding occurs is tending to infinity.
The continuous compounding formula should be used when they mention

specifically that the amount is "compounded continuously" in a problem.
Continuous Compounding Formula
mathematical constant
(e ≈ 2.7183) rate of interest
A = Pert time
final amount
initial amount
Sample Problem:
Sage invested $3000 in a bank that pays an annual interest rate of 7%

compounded continuously. What is the amount she can get after 5 years from the
bank? Round your answer to the nearest integer.
Solution:
To find: The amount after 5 years.
The initial amount is P = $3000.
The interest rate is, r = 7% = 7/100 = 0.07.
Time is, t = 5 years.
Substitute these values in the continuous compounding formula,
A = Pert
A = $3000 × e (0.07)(5)
≈ $4257
The answer is calculated using the calculator and is rounded to the nearest integer.
Answer: The amount after 5 years = $4,257.

NOMINAL INTEREST RATE

It is the annual (per year) interest rate for a certain compounding period.
Nominal interest rate can be applied to the advertised or stated interest rate on a
loan, without taking into account any fees or compounding of interest. The nominal
interest rate can be calculated using the formulas:
Formula 1: (compound interest formula)

periodic
Initial value
interest rate
F = P (1 + i ) n
number of years times the
future value
compounding periods
Formula 2: (finding effective rate and nominal rate)
number of
compounding periods
j=im
nominal/stated rate
periodic
interest rate
Sample Problem:
An amount of Php 1000 becomes Php 1608.44 after 4 years compounded bimonthly.
Find the nominal interest.
Solution:
𝐹 = 𝑃(1 + 𝑖)𝑛 𝑁𝑅
0.02 =
6
1608.44 = 1000(1 + 𝑖)4(6)
𝑁𝑅 = 0.12
1
1.6084424 =1+𝑖
𝑵𝑹 = 𝟏𝟐%
1.02 = 1 + 𝑖
0.02 = 𝑖
EFFECTIVE INTEREST RATE

The effective interest rate (f), (or simply effective rate) is the annual interest
rate compounded annually. It may be seen on a loan or financial product restated
from the nominal interest rate and expressed as the equivalent interest rate if
compound interest was payable annually in arrears. It can be calculated with the
following formula:
number of
effectuive rate compounding periods
f = ( 1 + i )m – 1
periodic
interest rate
Sample Problem:
A credit card company charges 21% interest per year,

compounded monthly. What effective annual interest rate (to two decimal places)
does the company charge?
Given: m = 12 (months per year) j = 21% or 0.21
Solution:
using the effective interest rate formula, f = (1+i)m – 1
we know that “ i ” can be denoted as “ j/m “ from the nominal interest rate formula
now we have, f = (1+(j/m))m – 1
substituting values,
f = (1+(0.21/12))12 – 1
f = (1+ 0.0175)12 – 1
f = 0.2341 or 23.14%
Therefore, the effective rate of the company is 23.14% compounded monthly per
year.
ANNUITY
-defined as a series of equal payments occurring at equal interval of time.
When an annuity has a fixed time span, it is known a annuity certain. The
following are annuity certain:
Ordinary Annuity
-the payments are made at the end of each compounding period beginning
at the first compounding period.
Derivation of formula for the sum of ordinary annuity:
Let A be the periodic or uniform payment and assuming only four payments.
Annuity is based on the principles of compound interest. Hence computation of

the sum of annuity may be done using the formulas of geometric progression.
Solving for common ration: Solving for the sum:
a2 a1 (rn −1)
r= S=
a1 r−1
A(1+i) A[(1+i)4 −1)

r= S=
A 1+i−1
r = 1 +i A[(1+i)4 −1)
S= i
a. Sum of Ordinary Annuity (Future Amount of Ordinary Annuity)
The future amount F is the sum of payments starting from the end of the first
period to the end of the nth period.
In ordinary annuity, the number of payments and the number of compounding

periods are equal.
0 1 2 3 4
A A A A
F
Uniform payment
Number of payments
𝐀[(𝟏 + 𝐈)𝐧 − 𝟏]
𝐅= Interest
Future amount 𝐢 per period
(1+𝑖)𝑛 −1
= uniform series compound amount factor
𝑖
Sample Problem:
A man borrowed Php 300 000 from a lending institution which will be paid
after 10 years at an interest rate of 12% compounded annually. If money is worth
8% per annum, how much he deposits to a bank monthly in order to discharge his
debt 10 years hence?
Solution:
𝐹1 = 𝐹2 Eq. 1 1 + 𝑖 = 1.00643
𝐹1 = 𝑃(1 + 𝑖)𝑛 𝑖 = 0.00643
𝐹1 = 300000(1 + 0.12)10 𝐴(1+𝑖)𝑛 −1

𝐹2 = 𝒊
𝐹1 = 931754.46
𝐵𝑢𝑡 𝐹2 = 𝐹1 = 931754.46
For annuity, the interest is 8% per annum. Since
the payment is monthly, solve the interest per 𝐴(1+0.00643)12(10) −1
931754.46 = 𝟎.𝟎𝟎𝟔𝟒𝟑
annum
ERmonthly=ERannually
𝐴 = 𝟓𝟏𝟕𝟒. 𝟐𝟑
(1 + 𝑖)12 − 1 = (1 + 𝑖)12 − 1
b. Present Worth of Ordinary Annuity

Using compound interest formula:
F A[(1+I)n −1]
P= But: F = i
(1 + i)n
Substituting the value of F:
𝐀[(𝟏+𝐈)𝐧 −𝟏]
P=
𝐢(𝟏+𝐢)𝐧
[(1+I)n −1]
where: i(1+i)n
= uniform series present worth factor
Sample Problem:
What is the present worth of Php 500 annuity starting at the end of the 3rd year and
continuing to the end to the end of the 4th year, if the annual interest rate is 10%?
Solution:
𝐴[(1 + 𝑖)𝑛 − 1] 𝑃1
𝑃1 = 𝑃=
𝑖(1 + 𝑖)𝑛 (1 + 𝑖)𝑛
867.77
500[(1 + 0.1)2 − 1] 𝑃=
𝑃1 = (1 + 0.1)𝑛
0.1(1 + 0.1)2
𝑷 = 𝑷𝒉𝒑 𝟕𝟏𝟕. 𝟏𝟕
𝑃1 = 867.77
𝐹
𝑃=
(1 + 𝑖)𝑛
Annuity Due
Annuity due is a type of annuity where the payments are made at the beginning
of each period starting from the first period.
Fig.5: Vert, J. (2021). Types of Annuities. Retrieved from MATHalino:

https://mathalino.com/reviewer/engineering-economy/types-annuities
.
a. Future Amount of Annuity Due

From the figure 5, F1 is the sum of ordinary annuity of n payments. The
future amount F of annuity due at the end of nth period is one compounding period
away from F1. In symbol, F = F1(1+i).
𝐀[(𝟏 + 𝐈)𝐧 − 𝟏]
𝐅= (𝟏 + 𝒊)
𝐢
Sample Problem:
Shaun is a government program beneficiary designated to immediately
receive Php10,000.00 each year for 10 years, earning an annual interest rate of 3%.
What is the future value of the payments?
Given: A= Php10,000.00 i= 3% or 0.03 n= 10
Solution:
(1 + 𝑖)𝑛 − 1
𝐹 =𝐴×[ ] × (1 + 𝑖)
𝑖
(1 + 0.03)10 − 1
𝐹 = 10,000 × [ ] × (1 + 0.03)
0.03
𝐹 = 𝑷𝒉𝒑 𝟏𝟏𝟖, 𝟎𝟕𝟕. 𝟗𝟔
a. Present Amount of Annuity Due
𝟏 − (𝟏 + 𝐢)−𝐧
𝐏 = 𝐀[ ] (𝟏 + 𝐢)
𝐢
Sample Problem:
Shaun is a government program beneficiary designated to immediately

receive Php10,000.00 each year for 10 years, earning an annual interest rate of
3%. He wants to know the present value of these payments.
Given: A= Php10,000.00 i= 3% or 0.03 n= 10
1−(1+𝑖)−𝑛
Solution: 𝑃 =𝐴×[ ] × (1 + 𝑖)
𝑖
1−(1+0.03)−10
𝑃 = 10,000 × [ ] × (1 + 0.03)
0.03
𝑃 = 𝑷𝒉𝒑 𝟖𝟕, 𝟖𝟔𝟏. 𝟎𝟗

Deferred Annuity
Deferred annuity is a type of annuity where the first payment does not
begin until some later date in the cash flow.
In the diagram below, the first payment was made at the end of the kth period
and n number of payments was made. The n payments form an ordinary annuity as
indicated in the figure.

.
a. Future Amount of Deferred Annuity
𝐀[(𝟏 + 𝐈)𝐧 − 𝟏]
𝐅=
𝐢
b. Present Amount of Deferred Annuity
𝟏 − (𝟏 + 𝐢)−𝐧
𝐏=𝐀× [ ]
(𝟏 + 𝐢)𝐤+𝐧 𝐢
Sample Problem:
David deposited a certain amount of money today and is supposed to receive 30

annual payments of Php15,000.00 each. However, the annuity will start 4 years from
now and the applicable interest rate is 5%. Calculate the amount of money deposited
if the annuity payment is supposed to be made at the end of each year.
Given: A= Php15,000.00 i= 5% or 0.05
n= 30 k+n= 4
Solution:
1 − (1 + 𝑖)−𝑛
𝑃 =𝐴× [ ]
(1 + 𝑖)𝑘+𝑛 𝑖
1 − (1 + 0.05)−30
𝑃 = 15,000.00 × [ ]
(1 + 0.05)4 × 0.05
𝑃 = 𝑷𝒉𝒑 𝟏𝟖𝟗, 𝟕𝟎𝟒. 𝟑𝟎
Perpetuity
When annuity does not have a fixed timespan but continuous indefinitely. The
sum of perpetuity is an infinite value.

Uniform
payment
𝐀
𝐏=
𝐢
Interest
per period
Sample Problem:
Company XY pays Php2,000.00 in dividends annually and estimates that they

will pay indefinitely. How much are investors willing to pay for the dividend with a
required rate of return 5%?
Given: A= Php2,000.00 i= 5% or 0.05

Solution:
𝐴
𝑃=
𝑖
2,000
𝑃=
0.05
𝑃 = 𝑷𝒉𝒑 𝟒𝟎, 𝟎𝟎𝟎. 𝟎𝟎
UNIFORM ARITHMETIC GRADIENT
Uniform arithmetic gradient is a series of disbursement or receipts that

increases or decreases in each succeeding period by a constant amount.
Fig 8: Chapter 18-Page 09, 2001 Engineering Sciences and Applied Subject
.
The cash flow can be converted into its equivalent annuity and uniform
arithmetic gradient whose present worth are P1 and P2 respectively.
Fig 9: Chapter 18-Page 09, 2001 Engineering Sciences and Applied Subject
.
The total present worth P is equal to the sum of P1 and P2, mathematically,
𝑷 = 𝑷𝟏 + 𝑷𝟐
Also, the total future worth is,
F = F𝟏 + F𝟐
Analyzing the uniform arithmetic gradient cash flow only:
a. Present Worth
Let P = present worth of the following uniform arithmetic gradient
Fig 10: Chapter 18-Page 11, 2001 Engineering Sciences and Applied
Subject
. G 2G 3G (n−2)G (n−1)G
P= (1+i)2
+ (1+i)3 + (1+i)4 + . . . + (1+i)n−1
+ (1+i)n
Factor out G:
1 2 3 (n−2) (n−1)
P = G [(1+i)2 + (1+i)3 + (1+i)4 +. . + (1+i)n−1
+ (1+i)n ] (Equation 1)
Multiply Equation 1 by (1 + i):
1 2 3 (n−2) (n−1)
P(1+i) = G [(1+i) + (1+i)2 + (1+i)3 +. . + (1+i)n−2
+ (1+i)n−1 ] (Equation 2)
Subract Eq.1 from Eq. 2
1 2 3 (n−2) (n−1)
P(1+i) = G [(1+i) + (1+i)2 + (1+i)3 +. . + (1+i)n−2
+ (1+i)n−1 ]
1 2 3 (n−2) (n−1)
-G[ + + +. . + + ]
(1+i)2 (1+i)3 (1+i)4 (1+i)n−1 (1+i)n
1 1 1 1 1 1
Pi = G [(1+i) + (1+i)2 + (1+i)3 +. . + (1+i)n−1
+ (1+i)n − (1+i)n ] ( Equation 3)
This forms a geometric progression. The sum of these may be
calculated using the formula for geometric progression.
Let a1=
1
Solving for the sum, S:
(1+i)
𝑎1 (1−𝑟 𝑛 )
1 S=
a2=(1+i)2 1−𝑟
1 1 n
1 ( ) [1−( ) ]
a3= S=
1+i 1+i
(1+i)3 1−
1
(1+i)
Solving for the common ration, r 1 n

[1−(1+i) ]
S= 1
1 (1+i)(1− )
a2 1 1+i
(1+i)2
r= a1
= 1 = (1+i)
(1+i) 1 n
1− ( )
S= 1+i
1+i−1
1
a3 (1+i)3 1
r= a2
= 1 = (1+i) 1− (1+i)−1n
(1+i)2
S=
i
1− (1+i)−n
S=
i
Substitute values in Eq.3
1− (1+i)−n n
Pi = G [ i
− (1+i)n ]
𝐆 𝟏− (𝟏+𝐢)−𝐧 𝐧
P= [ − (𝟏+𝐢)𝐧 ] P = G(P/G,i,n)
𝐢 𝐢
Gradient Series Present-Worth Factor
where: G= arithmetic gradient change in the periodic amounts at the end of each
period.
Sample Problem:
A textile mill has just purchased a lift truck that has a useful life of five years.
The engineer estimates that maintenance costs for the truck during the first year
will be $1,000. As the truck ages, maintenance costs are expected to increase at a
rate of $250 per year over the remaining life. Assume that the maintenance costs
occur at the end of each year. The firm wants to set up a maintenance account that
earns 12% annual interest. All future maintenance expenses will be paid out of this
account. How much does the firm have to deposit in the account now?
Solution:
The idea here is to have a strict

gradient series
Solution from Engineering Economy by Nabil Dmaidi
.
We have:
A1 = $ 1000 ; G = $250 ; i = 12% and n = 5 years
The cash flow can be broken into two components where the first is an equal
uniform payment series (A1) and the second is a strict linear gradient series (G)
P = P 1 + P2
P = A1 ( P / A, 12%, 5) + G ( P / G, 12%, 5)
= $1,000(3.6048) + $250(6.397)
= $5,204
b. Future Worth
Let F = future worth of the uniform arithmetic gradient
Subject
.
F = P (1 + i)n
G 1− (1+i)−n n
F= i
[ i
− (1+i)n] (1 + i)n
𝐆 (𝟏+𝐢)𝐧 −𝟏 F = G(F/G,i,n)
F= [ − 𝐧]
𝐢 𝐢
Arithmetic-Gradient Future Worth Factor
where: G = arithmetic gradient change in the periodic amounts at the end of each
period.
Sample Problem:
Suppose that you make a series of annual deposits into a bank account that
pays 10% interest. The initial deposit at the end of the first year is $1,200. The deposit
amounts decline by $200 in each of the next four years. How much would you have
immediately after the fifth deposit?
Given: A1 = $1200; i = 10% and n = 5 years
Solution:
.
F = F 1 – F2
F = A1(F/A,10%,5) – $200(F/G,10%,5)
= $1,200(6.105) – $200(11.051)
= $5,115
c. Equivalent Periodic Amount
Let A = equivalent periodic amount
Subject
.
Subject
.
Using formula for annuity:
A [(1+i)n −1]
P=
i (1+i)n
G 1− (1+i)−n n
But P= i
[ i
− (1+i)n ]
Substituting;
G 1−(1+i)−n (1+i)n n A [(1+i)n −1]

{ [ n ] − n }=
i i (1+i) (1+i) i (1+i)n
Added
G (1+i)n −1 n i (1+i)n
A= i
[ i (1+i)n
− (1+i)n ] [(1+i)n −1]
G ni
A= i
[1 − (1+i)n−1]
𝟏 𝐧
A=G[ − ] A = G(A/G,i,n)
𝐢 (𝟏+𝐢)𝐧 −𝟏
Arithmetic-Gradient Uniform-Series Factor
Sample Problem:
You want to deposit $1,000 in your saving account at the end of the first year
and increase this amount by $300 for each of the next five years. Then what should
be the size of an annual uniform deposit that yields an equal balance with the above
by the end of six years if the interest rate is 10%?
Solution:
We have:
A1 =$1,000; G=$300; i=10%, and n=6
We have to separate the constant portion of $1,000 from the series leaving the
gradient series of 0; 0; 300; 600; ….; 1,500
To find the equal payment series beginning at the end of year 1 and ending at year
6 we consider:
A = $1,000 + $300(A/G,10%,6)
= $1,000 + $300(2.2236)
= $1,667.08
UNIFORM GEOMETRIC GRADIENT
A geometric gradient series of a sequence consisting of end-of-period

payments, where each payment increases or decreases by a fixed percentage. In
a geometric gradient, payment begins at the end of the first payment.
1+𝑟
first payment 𝑤=
1+𝑖
𝐂 𝟏 − 𝐰ⁿ
𝐏= ( ) r= rate of increase
sum of the present values
𝟏+𝐢 𝟏−𝐰
of each of the payments
interest rate per period
Fig 14: Chapter 18 Engineering Economics. Page 16-18. 2001 Solved

Problems in ESAS- Excel Review Center.
Sample Problem:
Annual costs for a maintenance cost for a machine are p 1,500 this year and
are estimated to increase 10% each year every year. What is the present worth of
the maintenance costs for six years if 𝑖 = 8%
Solution:
1+𝑟 1 + 0.10 55
𝑤= = =
1+𝑖 1 + 0.08 54
𝐶 1−𝑤ⁿ
𝑃 = 1+𝑖 ( 1−𝑤 )
55
1,500 1+( )⁶
=1+0.08 = [ 54
55 ].
1−( )
54
𝑃 = 𝑷𝟖, 𝟕𝟐𝟖. 𝟖𝟎
BONDS
Bond is a financial security note issued by businesses or corporation and by

the government as a means of borrowing long-term fund. It may also be defined as
a long-term note issued by the lender by the borrower stipulating the terms of
repayment and the conditions.
Bonds do not represent ownership of a business or corporation and therefore

not entitled to share the profits. The bondholder has no voice in the affair of the
business. However, the bondholder has a more stable and secured investment that
does holder of common or preferred stock of the business or corporation.
Bonds are issued in certain amounts known as the face value or par value of
the bond. When the face value has been repaid, normally at maturity, the bond is
said to be redeemed or retired. Bond rate is the interest rate quoted in the bond.

Value of Bond
Value of a bond- is the present worth of all the amounts the bondholder will receive
through his possession of the bond. The two payments that the bondholder will
receive are the following:
• Periodic payments as interest of the bond until it is redeemed

• Single payment upon maturity of bond. This payment is usually equal to the
par value of the bond.
Derivation of the formula for the value of a bond.

Let 𝑉ₙ=𝑃₁+𝑃₂ →𝐸𝑞. 1
Using formula for present worth annuity
𝐴[(1+𝑖)ⁿ−1]
𝑃₁= 𝑖(1+𝑖)ⁿ
𝑍𝑟[(1+𝑖)ⁿ−1]
𝑃₁= 𝑖(1+𝑖)ⁿ
Using the formula for present worth of compound interest:
𝐹
𝑃₂=(1+𝑖)ⁿ
𝐶
𝑃₂=(1+𝑖)ⁿ
Substituting in Eq.1
rate of interest on
par value of the bond per period redemption
the bond price of bond
𝒁𝒓[(𝟏+𝒊)ⁿ−𝟏] 𝑪
𝑽ₙ= +
𝒊(𝟏+𝒊)ⁿ (𝟏+𝒊)ⁿ
interest rate number of years
per period before redemption
Sample Problem:
A Php 1000, 6% bond pays dividend semiannually and will be redeemed at

110% on June 21, 2014. It is bought on June 21, 2021 to yield 4% interest. Find the
price of the bond.
Solution:
0.06
𝐹𝑟 = 1000( 2
)= 30
𝐹𝑟 [(1 + 𝑖)𝑛 ] 𝐶
𝑉𝑛 = 𝑛
+
𝑖(1 + 𝑖) (1 + 𝑖)𝑛
0.04 6
30[(1 + 2 ) − 1] 1100
𝑉𝑛 = +
0.04 0.04 6 0.04
2 (1 + 2 ) (1 + 2 )6
𝑽𝒏 = 𝑷𝒉𝒑 𝟏𝟏𝟒𝟒. 𝟖𝟏
DEPRECIATION
Depreciation is the process of deducting the total cost of something

expensive you bought for your business. But instead of doing it all in one tax year,
you write off parts of it over time. When you depreciate assets, you can plan how
much money is written off each year, giving you more control over your finances.
Types of Depreciation
A. Physical depreciation is due to the reduction of the physical ability of an

equipment or asset to produce results.
B. Functional depreciation is due to the decrease of the demand for the

function that the equipment is designed to do. It is also called obsolescence.
Ways in Computing Depreciation
a. Straight Line Method
In this method, it is assumed that the loss in value is directly proportional

to the age of the equipment or the asset
Annual depreciation charge, d

cost after “n” years

𝐂𝐢 − 𝐂𝐧 (salvage/ scrap value)
initial cost 𝐝=
𝐧
life of the property
Book value at the end of “m” years using 𝐶𝑚
𝐂𝐦 = 𝐂𝐢 − 𝐃𝐦
where: 𝐷𝑚 = total depreciation after “m” years
=dxm
Sample Problem:
Given: initial cost, 𝐶𝑖 =Php 10 000 Solution: Using straight line method:
Salvage value, 𝐶𝑛 = Php 500 𝐶𝑖 − 𝐶𝑛

𝑑=
𝑛
Life of property, n = 5 years
10 000 − 500
𝑑=
5
𝒅 = 𝑷𝒉𝒑 𝟏, 𝟗𝟎𝟎
Tabulation of book value
Period Depreciation Book Value

0 10 000.00
1 1 900.00 8 100.00
2 1 900.00 6 200.00
3 1 900.00 4 300.00
4 1 900.00 2 400.00
5 1 900.00 500.00
b. Sinking Fund Method

In this method, it is assumed that a sinking fund is established which funds
will accumulate for replacement purposes
Annual depreciation charge, d
cost after “n” years
initial cost (salvage/ scrap value)
( 𝑪 𝒊 − 𝑪 𝒏 )𝒊
d= interest
(𝟏+𝒊)𝒏 −𝟏
life of the property
Book value at the end of “m” years of using, 𝐶𝑚
𝐂𝐦 = 𝐂𝐢 − 𝐃𝐦
Where: 𝐷𝑚 is the total depreciation after “m” years
𝒅[(𝟏 + 𝒊)𝒎 − 𝟏
𝑫𝒎 =
𝒊
Sample Problem:
Given: initial cost, 𝐶0 =Php 10 000
Salvage value, 𝐶𝑛 = Php 500
Interest = 10 %
Solution:
( 𝐶𝑖 − 𝐶𝑛 )𝑖 𝑑(1 + 𝑖)𝑚 − 1
𝑑= 𝐷3 =
(1 + 𝑖)𝑛 − 1 𝑖
( 10 000 − 500)(0.10) 1 556.076(1 + 0.1)3 − 1
𝑑= 𝐷3 =
(1 + 0.10)5 − 1 0.1
d= 1 556.076 𝐷3 = 𝑃ℎ𝑝 5 159.6166
𝐷1 = 𝑑 𝑑(1 + 𝑖)𝑚 − 1
𝐷4 =
𝑖
𝑑[(1 + 𝑖)𝑚 − 1
𝐷2 = 1 556.076(1 + 0.1)4 − 1
𝑖
𝐷4 =
𝐷1 = 𝑑 0.1
𝐷4 = 𝑃ℎ𝑝 7 221.7487
𝑑(1 + 𝑖)𝑚 − 1
𝐷2 =
𝑖 𝑑(1 + 𝑖)𝑚 − 1
𝐷5 =
1 556.076(1 + 0.1)2 − 1 𝑖
𝐷2 =
0.1 1 556.076(1 + 0.1)5 − 1
𝐷5 =
𝐷2 = 𝑃ℎ𝑝 3 267.7596 0.1
𝐷5 = 𝑃ℎ𝑝 9 500.00

0 10 000.00
1 1 556.08 8 443. 92
2 3 267.76 6 732.24
3 5 159.61 4 849.39
4 7 221.75 2 778.29
5 9 500.00 500.00
c. Declining Balance Method

In this method, it is assumed that the annual cost of depreciation is a fixed
percentage of the book value at the beginning of the year. This method is sometimes
known as constant percentage method or Matheson Formula.
Matheson Formula Matheson Formula
𝒏 𝑪
𝒏 or 𝒎 𝑪
𝒎
𝒌=𝟏− √ 𝒌=𝟏− √
𝑪𝒊 𝑪𝒊
The value k is the constant percentage. Hence k must be a decimal and a value
less than 1. In this method, the salvage or scrap value must not be zero.
Sample Problem:
Given: Solution:
initial cost, 𝐶𝑖 =Php 10 000 𝑛 𝐶𝑛

𝑘 =1− √
𝐶𝑖
Life of property, n = 5 years 5 500

𝑘 =1− √
10 000
𝑘 = 1 − 0.5493
𝑘 = 𝟎. 𝟒𝟓𝟎𝟕

0 10 000.00
1 0.4507(10 000) = 4 507.00 5 493.00
2 0.4507(5 493.00) = 2 475.69 3 017.30
3 0.4507(3 017.30) = 1 359.90 1 657.40
4 0.4507(1 657.40) = 746.99 910.41
5 0.4507(910.41) = 410.32 500.09
d. Sum-of-Years’ Digit (SYD) Method

Respective depreciation charges:
𝑛
FIRST YEAR: 𝑑1 = (𝐶𝑖 − 𝐶𝑛 ) ∑
𝑦𝑒𝑎𝑟𝑠
𝑛−1
SECOND YEAR: 𝑑2 = (𝐶𝑖 − 𝐶𝑛 ) ∑
𝑛−2
THIRD YEAR: 𝑑3 = (𝐶𝑖 − 𝐶𝑛 ) ∑ and so on…
Book value at the end of “m” years using, 𝐶𝑚

𝐶𝑚 = 𝐶𝑖 − (𝑑1 + 𝑑2 + 𝑑3 … 𝑑𝑚 )
Sum of years’ digit,∑ 𝑦𝑒𝑎𝑟𝑠

𝑛(𝑛+1)
∑ 𝑦𝑒𝑎𝑟𝑠 =
2
Sample Problem:
Given: initial cost, 𝐶𝑖𝑖 =Php 10 000
Solution:
𝑛
𝑛(𝑛 + 1) 𝑑1 = (𝐶𝑖 − 𝐶𝑛 ) ∑
5
= (10 000 – 500)( )= 3 166.67
∑ 𝑦𝑒𝑎𝑟𝑠 = 𝑦𝑒𝑎𝑟𝑠 15
2
𝑛−1 4
5(5 + 1) 𝑑2 = (𝐶𝑖 − 𝐶𝑛 ) ∑ 𝑦𝑒𝑎𝑟𝑠=(10 000 – 500)(15)= 2 533.33
∑ 𝑦𝑒𝑎𝑟𝑠 =
2
𝑛−2 3
𝑑3 = (𝐶𝑖 − 𝐶𝑛 ) ∑ 𝑦𝑒𝑎𝑟𝑠=(10 000 – 500)(15)= 1 900.00
∑ 𝑦𝑒𝑎𝑟𝑠 = 15
𝑛−3 2
𝑑4 = (𝐶𝑖 − 𝐶𝑛 ) ∑ 𝑦𝑒𝑎𝑟𝑠=(10 000 – 500)(15)= 1 266.67
𝑛−4 1
𝑑5 = (𝐶𝑖 − 𝐶𝑛 ) ∑ 𝑦𝑒𝑎𝑟𝑠=(10 000 – 500)(15)= 633.33

0 10 000.00
1 3 166.67 6 833.33
2 2 533.33 4 300.00
3 1 900.00 2 400.00
4 1 266.67 1 133.33
5 633.33 500.00
DEPLETION
Depletion cost is the reduction of the value of certain natural resources such as
mines, oil, timber, quarries, etc. due to the gradual extraction of its content.
Methods of Computing Depletion Charge for a year
a. Unit or Factor Method

This method is dependent on the initial cost of the property and the number of
units in the property. The depletion charge during any year is calculated using this
formula.
𝒊𝒏𝒊𝒕𝒊𝒂𝒍 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒑𝒓𝒐𝒑𝒆𝒓𝒕𝒚

𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏 𝒄𝒐𝒔𝒕 𝒅𝒖𝒓𝒊𝒏𝒈 𝒂𝒏𝒚 𝒚𝒆𝒂𝒓 = (𝒖𝒏𝒊𝒕 𝒔𝒐𝒍𝒅 𝒅𝒖𝒓𝒊𝒏𝒈 𝒕𝒉𝒆 𝒚𝒆𝒂𝒓)
𝒕𝒐𝒕𝒂𝒍 𝒖𝒏𝒊𝒕 𝒐𝒇 𝒑𝒓𝒐𝒑𝒆𝒓𝒕𝒚
Sample Problem:
The Saudi Arabian Oil Refinery developed and oil well which is estimated to
contain 5,000,000 barrels of oil at an initial cost of $50, 000,000. What is the depletion
charge during the year where it produces half million barrels of oil? Use Unit or Factor
method in computing depletion.
Solution:
$50, 000,000
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 =
5,000,000
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 = $10.00 𝑝𝑒𝑟 𝑏𝑎𝑟𝑟𝑒𝑙
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 = (500,000)(10)
𝑇𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝑑𝑢𝑟𝑖𝑛𝑔 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 = $𝟓, 𝟎𝟎𝟎, 𝟎𝟎𝟎
b. Percentage or Depletion Allowance Method

The depletion charge under this method, is computed as follows:
𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏 𝑪𝒉𝒂𝒓𝒈𝒆 = 𝑭𝒊𝒙𝒆𝒅 𝑷𝒆𝒓𝒄𝒆𝒏𝒕𝒂𝒈𝒆 𝒐𝒇 𝑮𝒓𝒐𝒔𝒔 𝑰𝒏𝒄𝒐𝒎𝒆

or
𝑫𝒆𝒑𝒍𝒆𝒕𝒊𝒐𝒏 𝑪𝒉𝒂𝒓𝒈𝒆 = 𝟓𝟎 % 𝒐𝒇 𝒕𝒉𝒆 𝑵𝒆𝒕 𝑻𝒂𝒙𝒂𝒃𝒍𝒆 𝑰𝒏𝒄𝒐𝒎𝒆
Note: Always use the smaller depletion charge

Fixed Percentage Allowed for Certain Natural Resources:
Natural Resources Maximum

Percentage
Sulfur, Cobalt, Lead, Nickel, Zinc, etc. 22
Oil and Gas Wells 22
Gold, Silver, Copper, Iron ore 15
Coal, Sodium Chloride 10
Gravel, Sand, Clay 5
*Based on Gross Income
Sample Problem:
Shell Philippines, a multinational company, has a total gross income for a
particular year of ₱ 50,000,000. The taxable income after taking all deductions except
for depletion is ₱18,500,000. What is the allowable depletion allowance for that
particular year? The percentage of gross income for oil as 22%.
Solution:
Using Depletion Allowance method:
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝐶ℎ𝑎𝑟𝑔𝑒 = 0.22(50,000,000) = ₱11,000,000
𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝐶ℎ𝑎𝑟𝑔𝑒 = 0.50(18,500,000) = ₱9,250,000
Note: Use smaller value.
Therefore, 𝐷𝑒𝑝𝑙𝑒𝑡𝑖𝑜𝑛 𝐶ℎ𝑎𝑟𝑔𝑒 = ₱𝟗, 𝟐𝟓𝟎, 𝟎𝟎𝟎
CAPITALIZED AND ANNUAL COST
Capitalized Cost
The sum of its first cost and the present worth of all costs of replacement,
operation, and maintenance for long time or forever.
𝑪𝒂𝒑𝒊𝒕𝒂𝒍𝒊𝒛𝒆𝒅 𝑪𝒐𝒔𝒕 = 𝑭𝒊𝒓𝒔𝒕 𝑪𝒐𝒔𝒕 + 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑷𝒆𝒓𝒑𝒆𝒕𝒖𝒂𝒍 𝑴𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆
Annual Cost
The sum of the annual depreciation cost, interest of the first cost and the
annual operating and maintenance cost.
𝑨𝒏𝒏𝒖𝒂𝒍 𝒄𝒐𝒔𝒕 = 𝑨𝒏𝒏𝒖𝒂𝒍 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 + 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒐𝒇 𝒕𝒉𝒆 𝑭𝒊𝒓𝒔𝒕 𝑪𝒐𝒔𝒕

+ 𝑨𝒏𝒏𝒖𝒂𝒍 𝑶𝒑𝒆𝒓𝒂𝒕𝒊𝒏𝒈 & 𝑴𝒂𝒊𝒏𝒕𝒆𝒏𝒂𝒏𝒄𝒆 𝑪𝒐𝒔𝒕𝒔
Sample Problem:
An item is purchased for ₱100,000. Annual cost is ₱18,000. Using interest
rate of 8%, what is the capitalized cost of perpetual services?
Given: Initial Cost (Co) = ₱100,000
Annual Cost (A) = ₱18,000
interest rate(i) = 8% or 0.08
Solution:
𝐴
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = 𝐶𝑜 +
𝑖
₱18,000
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 = ₱100,000 +
0.08
𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑪𝒐𝒔𝒕 = ₱𝟑𝟐𝟓, 𝟎𝟎𝟎
BREAK-EVEN ANALYSIS
It is used to determine the break-even cost, in which the total income is
equivalent to the total expenses incurred in the business.
The diagram below is the most convenient chart used in break-even

analysis. This is known as the break-even chart. It represents the graphs of fixed
costs, variable costs, the expected income, etc.
*The company or business is neither gaining nor losing profit since the revenue or
profit equals the costs
*Variable costs- costs that vary proportional to the quantity of production (example:
raw materials)
*Fixed costs- costs that must be paid regardless of the production (example: rent,
equipment maintenance, labor)
Fig 17: INDIAFREENOTES. (2020, February 7). Break Even Point: Meaning, Features, and
Significance. https://indiafreenotes.com/break-even-point-meaning-features-and-significance/.
Calculation:
𝑻𝒐𝒕𝒂𝒍 𝒄𝒐𝒔𝒕𝒔 = (𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕𝒔)(𝑵) + 𝒇𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕𝒔

𝑹𝒆𝒗𝒆𝒏𝒖𝒆 = (𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕)(𝑵)
𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕𝒔
𝑩𝒓𝒆𝒂𝒌 − 𝒆𝒗𝒆𝒏 𝒑𝒐𝒊𝒏𝒕 =
(𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕 − 𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕𝒔)
Sample Problem:
A photocopying business determined that for every page of paper, the ink
used is worth 10 cents, while the electrical consumption for each page costs 10
cents. If each paper costs 40 cents, they need to pay Php 7,500 for the rent and
permit, and have a salary of Php 5,000. How many pages must they print in order
to break-even if they charge 1 peso per page?
Let N be the no. of pages.
Costs:
Variable costs- ink used, electrical consumption per page, and cost of paper
Variable costs= 10 cents + 5 cents + 40= 55 cents
Variable costs= 0.55N
Fixed costs- rent and permit, and salary of employees

Fixed costs= Php 7,500 + Php 5,000 = Php 12,500.00
Total costs= variable costs + fixed costs= 0.55N + 12,500
Revenue:
Revenue= (price of product)(no. of pages)= Php 1.00N
At break-even:
0= revenue - total costs
0= N - (0.55N + 12,500)
N= 0.55N + 12,500
0.45N= 12,500
N= 27,778 pages
PRESENT ECONOMY
This involves economic problems which deal with immediate or present
situations and costs. Under these studies, the effect of time such as the time value
of the money, interest and depreciation are negligible, that they need not be
considered in the solution to the problems.
Sample Problem:
Marcus bought a second-hand camera and then sold it to Jheff at a profit of
40%. Jheff then sold it to Ricky at a profit of 20%. If Ricky paid Php 2,856 more than
it cost Marcus, how much did Marcus pay for the unit?
Solution:
Let x be the amount that Marcus paid, R be the amount Ricky paid, and J be the
amount Jheff paid
R= x + 2856
J= x + 0.4x = 1.4x
R= (1.4x) (1.2) = 1.68x
1.68x= x + 2856
x= 4200
Marcus paid Php 4,200 for the second-hand camera
SUPPLEMENTARY PROBLEMS
1. You borrow P3,500.00 for one year from a friend at an interest rate of 1.5% per
month instead of taking a loan from a bank at a rate of 18% per year. How much
lesser you will pay by borrowing the money from the bank?
A. P 62.44 B. P 44.55 C. P 54.66 D. P 37.56
2. 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 150.56 B. P 152.88 C. P 153.89 D. P 151.09
3. A firm borrows P2,000 for 6 years at 8%. At the end of 6 years, it renews the
loan for the amount due plus P2,000 more for 2 years at 8%. What is the lump
sum due?
A. P 3,260.34 B. P 3,280.34 C. P 3,270.34 D. P 3,250.34
4. In year zero, you invest P 10,000.00 in a 15% security for 5 years. During that
time, the average annual inflation is 6%. How much in terms of year zero pesos
will be in the account at maturity?
A. P 15,030.03 B. P 20,113.57 C. P 18,289.05 D. P 16,892.34
5. The institute of Electronics and Communications Engineers of the Philippines
(IECEP) is planning to put up its own building. Two proposals being considered
are:
A. The construction of the building now to cost P 400,000
B. The construction of a smaller building now to cost P300,000 and at the end of
5 years, an extension to be added to cost P 200,000.
By how much is proposal B more economical than proposal A if interest rate is
20% and depreciation to be neglected?
A. P 19,122.15 B. P 19,423.69 C. P 19,518.03 D. P 19,624.49
6. What is the present worth of a P500 annuity starting at the end of the third year
and continuing to the end of the fourth year, if the annual interest rate is 10 %?
A. P 727.17 B. P 717.17 C. P 714.71 D. P 731.17
7. What annuity is required over 12 years to equate with a future amount of P
20,000? Assume i= 6% annually.
A. P 1,290.34 B. P 1,185.54 C. P 1,107.34 D. P 1,205.74
8. A factory operator bought a diesel generator set for P 10,000.00 and agreed to pay
the dealer uniform sum at the end of each year for 5 years at 8% interest
compounded annually, that the final payment will cancel the debt for principal and
interest. What is the annual payment?
A. P 2,500.57 B. P 2,544.45 C. P 2,540.56 D. P 2,504.57
9. What is the present worth of a year annuity paying P 3,000.00 at the end of each
year, with interest at 8% compounded annually?
A. P 7,654.04 B. P 7,731.29 C. P 7,420.89 D. P 7,590.12
10. A man loans P 187,400 from a bank with interest at 5% compounded annually.
He agrees to pay his obligations by paying 8 equal annual payments, the first
being due at the end of 10 years. Find the annual payments.
A. P 43,600.10 B. B. P43,489.47 C. P 43,263.91 D. P 43,763.20
11. A person buys a piece of lot for P 100,000 down payment and 10 deferred semi-
annual payments of P 8,000 each, starting three years from now. What is the
present value of the investment if the rate of interest is 12% compounded semi
annually?
A. P 142,999.08 B. P 143,104.89 C. P 142,189.67 D. P 143,999.08
12. A young engineer borrowed P 10,000 at 12% interest and paid P 2,000 per
annum for the last 4 years. What does he have to pay at the end of the fifth year
in order to pay off his loan?
A. P 6,999.39 B. P 6,292.93 C. P 6,222.39 D. P 6,922.93
13. Miss Calledo deposited P 1,000, P 1,500 and P 2,000 at the end of the 2nd year,
3rd year and 4th year, respectively in a savings account which earned 10% per
annum. How much is in the account at the end of the 4th year?
A. P 4,880.00 B. P 4,820.00 C. P 4,860.00 D. P 4,840.00
14. A P 1,000,000 issue of 3%, 15-year bond was sold at 95%. What is the rate of
interest of this investment?
A. 3.0% B. 3.4% C. 3.7% D. 4.0%
15. A P 1, 000, 6% bond pays dividend semiannually and will be redeemed at 110%
on June 21, 204. It is bought on June 21, 2001 to yield 4% interest. Find the
price of the bond.
A. P 1,122.70 B. P 1,122.70 C. P 1,133.78 D. P 1,155.06
16. A VOM has a selling price of P 400. If its selling price is expected to decline at a
rate of 10% per annum due to obsolescence, what will be its selling price after 5
years?
A. P 222.67 B. P 212.90 C. P 236.20 D. P 231.56
17. A machine costs of P 8,000 and an estimated life of 10 years with a salvage
value of P 500. What is its book value after 8 years using straight line method?
A. P 2,000.00 B. P 2,100.00 C. P 2,200.00 D. P 2,300.00
18. ABC Corporation makes it a policy that for any new equipment purchased, the
annual depreciation cost should not exceed 20% of the first cost at any time
with no salvage value. Determine the length of service life necessary if the
depreciation used is the SYD method.
A. 7 years B. 8 years C. 9 years D. 10 years
19. An asset is purchased for P 9,000.00. Its estimated economic life is 10 years
after which it will be sold for P 1,000.00. Find the depreciation in the first three
years using sum-of-years digit method.
A. P 3,279.27 B. P 3,927.27 C. P 3,729.27 D. P 3,792.72
20. Shell Philippines, a multinational company, has a total gross income for a
particular year of P 50,000,000. The taxable income after taking all deductions
except for depletion is P 18,500,000. What is the allowable depletion allowance
for that particular year? Take percentage of gross income for oil as 22%.
A. P 9,358.41 B. P 9,228.45 C. P 9,250.00 D. P 9,308.45
21. The Saudi Arabian Oil Refinery developed an oil well which is estimated to
contain 5,000,000 barrels of oil at an initial cost of $ 50,000,000. What is the
depletion charge during the year where it produces half million barrels of oil?
Use Unit or Factor method in computing depletion.
A. $ 5,000,000.00 C. $ 5,025,000.00
B. $ 5,010,000.00 D. $ 5,050,000.00
22. A manufacturer produces certain items at a labor cost of P 115 each, material
cost of P 76 each and variable cost of P 2.32 each. If the item has a unit price
of P 600, how many units must be manufactured each month for the
manufacturer to break even if the monthly overhead is P428,000
A. 1,033 B. 1,037 C. 1,043 D. 1,053
23. A manufacturing firm maintains one product assembly line to produce signal
generators. Weekly demand for the generators is 35 units. The line operates
for 7 hours per day, 5 days per week. What is the maximum production time
per unit in hours required of the line to meet the demand?
A. 1.0 hour/unit B. 1.2 hour/unit C. 1.4 hour/unit D. 1.6 hour/unit
24. A telephone switchboard 100 pair cable can be made up with either enameled
wire or tinned wire. There’ll be 400 soldered connections. The cost of soldering a
connection on the enameled wire will be P 1.65 on the tinned wire, it’ll be P 1.15.
A 100- pair cable made up with enameled wire cost P 0.55 per linear foot and
those made up of tinned wire cost P 0.75 per linear foot. Determine the length of
cable run in feet so that the cost of each installation would be the same.
A. 1,000 feet B. 1,040 feet C. 1,100 feet D. 1,120 feet
25. A leading shoe manufacturer produces a pair of Lebron James signature shoes at
a labor cost of P 900.00 a pair and a material cost of P 800.00 a pair. The fixed
charges on the business are P 5,000,000 a month and the variable costs are P
400.00 a pair. Royalty to Lebron James is P 1,000 per pair of shoes sold. If the
shoes sell at P 5,000 a pair, how many pairs must be produced each month for
the manufacturer to break-even?
A. 2.590 B. 2,632 C. 2,712 D. 2,890
POST-TEST Time Allotment: 2 hours Score:______
1. In a cash flow series:

A. Uniform gradient signifies that an income or disbursement changes by the
same amount in each interest period.
B. Either an increase or decrease in the amount of a cash flow is called the
gradient
C. The gradient in the cash flow may be positive or negative
D. All of these
2. In a cash-flow diagram:
A. Time 0 is considered to be the present
B. Time 1 is considered to be the end of time period 1
C. A vertical arrow pointing up indicates a positive cash flow
D. All of these
3. Which method is adopted to develop an approximate or conceptual estimate for
perimeter works for buildings from the following?
A. Base unit method C. Cost per square metre method
B. Cost per function method D. Cost per linear metre method
A. The ratio of current assets, loans and advances, and the current liquidity is
called current ratio
B. Larger the current ratio, larger is the margin of safety
C. The operating profit is the difference between gross profit and operating
expenses
D. All of these
5. The ratio of current assets to current liabilities is known as
6. In the cash-flow diagram shown in the given figure
A. Equal deposits of Rs 3000 per year (A) are made, starting now
B. The rate of interest is 10% per year account
C. The amount accumulated after the seventh deposit is to be computed
D. All of these
7. The more critical (or severe) test of the firm's liquidity can be judged by:
8. If interest is paid more than once in a year, ‘i’ is the rate of interest per year, ‘n’
is the number of periods in years and ‘m’ is a number of periods per years,
compound amount factor (CAF) is:
A. (1 + i/m)n C. (1 + i/n)1/m
B. (1 + i/n)m D. (1 + i/m)1/n
9. Pick up the correct reason for making conceptual (or preliminary) estimate from
the following:
A. To have a check on a definitive cost estimate
B. To check quotations from contractors and/or sub-contractors
C. To compute target estimate for the owner while drawing and specifications
are in initial stage
D. All of these
10. Choose the correct method adopted for developing the approximate or
conceptual estimates from the following:
A. Base unit method C. Cost per square metre
B. Cost per function method D. All of these
A. An annuity is a series of equal payments occurring at equal period of time
B. Annuity is called an equal payment or uniform payment series
C. An annuity may have periods of time of any length but should always be of
equal length
D. All of these
12. The sunk costs include:
A. A past expenditure C. An invested capital that cannot be retrieved
B. An unrecovered balance D. All of these
13. Choose the element of the cost from the following:
A. Direct material C. Over head
B. Direct labour D. All of these
14. The ratio obtained by dividing 'quick assets' by current liabilities is called
A. Turnover ratio B. Acid test ratio C. Solvency ratio D. None of these
15. The construction estimate of a project is used by:
A. The owner of the facility C. The contractor of the project
B. The consulting architect/engineer D. All of these
A. The ratios which show profitability in relation to sales and those which show
profitability in relation to investment are called profitability ratios
B. The ratio of gross profit and net sales is called profitability in relation to sales
ratio
C. The ratio of net profit after taxes to total assets is known as profitability in
relation to investment ratio
D. All of these
17. Which one of the following is not a construction estimate?
A. Initial feasibility estimate C. Definite estimate
B. Conceptual preliminary budget D. None of these
18. If ‘P’ is principal amount, ‘I’ is the rate of interest per annum and ‘n’ is the number
of periods in years, the compound amount factor (CAF) is:
A. (1 + i)n C. √(n + i)
B. (1 + i)(1/2n) D. None of these
19. If ‘P’ is principal amount, ‘i’ is the rate of interest and ‘n’ is the number of periods
in years, then the interest factor is:
A. (1 + ni) C. ni
B. (ni - 1) D. None of these
20. Which one of the following is included in financial ratios of the firm?
A. Profitability ratio C. Turnover ratio
B. Liquidity ratio D. All of these
A. The ability of a company to meet obligations which are likely to mature in short
term, is called liquidity
B. The liquidity ratio may be defined as a relationship of current liabilities and
current assets and advances
C. The liquidity ratios are used to indicate the financial position of the firm
D. All of these

A. The receipts and disbursements in a given time interval are referred to as
cash flow
B. The assumptions that all cash flows occur at the end of the interest period, is
known as the end of period convention
C. The cash flow diagram represents the statement of the problem and also
includes what is given and what is to be found
D. All of the above
A. Engineering economy is a collection of mathematical techniques which
simplify economic comparisons
B. Engineering economy is a decision assistance tool by which one method will
be chosen as the most economically one
C. For understanding the engineering economy, one should be able to classify
the basic terminology and fundamental concepts of economy
D. All of the above
24. Choose the main purpose of project cost control from the following:
A. To signal immediate warning of uneconomic operations
B. To provide a feed back to the estimator
C. To promote cost consciousness
D. All of the above
A. A NPV profile graph shows the curvilinear relationship between the net
present value of the project and discount rate employed
B. In a NPV profile, if discount rate is zero, then net present value is simply total
cash inflows less the total cash outflows of the project
C. As the discount rate increases, the net present value profile slopes downward
to the right
D. All of the above
26. First Benchmark Publishing’s gross margin is 50% of sales. The operating costs
of the publishing are estimated at 15% of sales. If the company is within the
40% tax bracket, determine the percent of sales is their profit after taxes?
A. 21% B. 20% C. 19% D. 18%
27. A farmer selling eggs at 50 pesos a dozen gains 20%. If he sells the eggs at the
same price after the costs of the eggs rises by 12.5%, how much will be his new
gain in percent?
A. 6.89% B. 6.65% C. 6.58% D. 6.12%
28. A feasibility study shows that a fixed capital investment of P10,000,000 is

required for a proposed construction firm and an estimated working capital of
P2,000,000. Annual depreciation is estimated to be10% of the fixed capital
investment. Determine the rate of return on the total investment if the annual
profit is P3,500,000.
A. 28.33% B. 29.17% C. 30.12% D. 30.78%
29. The monthly demand for ice cans being manufactured by Mr. Camus is 3200
pieces. With a manual operated guillotine, the unit cutting cost is P25.00. An
electrically operated hydraulic guillotine was offered to Mr. Camus at a price of
P275,000.00 and which cuts by 30% the unit cutting cost. Disregarding the
cost of money, how many months will Mr. Camus be able to recover the cost
of the machine if he decides to buy now?
A.10 months B. 11 months C. 12 months D. 13 months
30. Engr. Trinidad loans from a loan firm an amount of P100,000 with a rate of
simple interest of 20% but the interest was deducted from the loan at the time
the money was borrowed. If at the end of one year, she has to pay the full
amount of P100,000, what is the actual rate of interest?
A. 23.5% B. 24.7% C. 25.0% D. 25.8%
31. A loan of P5,000 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?
A. 5,937.50 B. 5,873.20 C. 5,712.40 D. 5,690.12
32. Mr. Bacani borrowed money from the bank. He received from the bank P1,842
and promised to repay P2,000 at the end of 10 months. Determine the rate of
simple interest.
A. 12.19 % B. 12.03 % C. 11.54 % D. 10.29 %
33. A college freshman borrowed P2,000 from a bank for his tuition fee and
promised to pay the amount for one year. He received only the amount of
P1,920 after the bank collected the advance interest of P80.00. What was the
rate of discount?
34. It is the practice of almost all banks in the Philippines that when they grant a
loan, the interest for one year is automatically deducted from the principal
amount upon release of money to a borrower. Let us therefore assume that
you applied for a loan with a bank and the P80,000 was approved at an interest
rate of 14% of which P11,200 was deducted and you were given a check of
P68,800. Since you have to pay the amount of P80,000 one year after, what
then will be the effective interest rate?
A. 16.02 % B. 16.28 % C. 16.32 % D. 16.47 %
35. A man invested P110,000 for 31 days. The net interest after deducting 20%
withholding tax is P890.36. Find the rate of return annually.
A. 11.50 % B. 11.75 % C. 11.95 % D. 12.32 %
36. A investor wishes to earn 7% on his capital after payment of taxes. If the income
from an available investment will be taxed at an average rate of 42%, what
minimum rate of return, before payment of taxes, must the investment offer to
be justified?
A. 12.07 % B. 12.34 % C. 12.67 % D. 12.87 %
37. Mr. Jun Ramos was granted a loan of P20,000 by his employer Excel First Review
and Training Center, Inc. with an interest of 6% for 180 days on the principal
collected in advance. The corporation would accept a promissory note for
P20,000 non-interest for 180 days. If discounted at once, find the proceeds of
the note.
A. P18,000 B. P18,900 C. P19,000 D. P19,100
38. Miss Evilla borrowed money from a bank. She receives from the bank P1,340.00
and promised to pay P1,500.00 at the end of 9 months. Determine the
corresponding discount rate or often referred to as the “banker’s discount”.
A. 13.15 % B. 13.32 % C. 13.46 % D. 13.73 %
39. The exact simple interest of P5,000 invested from June 21, 1995 to December
25, 1995 is P100. What is the rate of interest?
A. 3.90 % B. 3.92 % C. 3.95 % D. 3.98 %
40. What is the ordinary interest on P1,500.50 for 182 days at 5.2%?
A. P39.01 B. P39.82 C. P39.45 D. P39.99
41. A loan for P50,000 is to be paid in 3 years at the amount of P65,000. What is
the effective rate of money?
A. 9.01 % B. 9.14 % C. 9.31 % D. 9.41 %
42. What is the effective rate corresponding to 18% compounded daily? Take 1 year
is equal to 360 days.
A. 19.61 % B. 19.44 % C. 19.31 % D. 19.72 %
43. What rate of interest compounded annually is the same as the rate of interest
of 8% compounded quarterly?
A. 8.07 % B. 8.12 % C. 8.16 % D. 8.24 %
44. Which of these gives the lowest effective rate of interest?
A. 12.35% compounded annually C. 12.20% compounded annually
B. 11.90% compounded annually D. 11.60% compounded annually
45. An amount of P1,000 becomes P1,608.44 after 4 years compounded bimonthly.
Find the nominal interest.
A. 11.89 % B. 12.00 % C. 12.08 % D. 12.32 %
46. How long will it take money to double itself if invested at 5% compounded
annually?
47. By the condition of a will, the sum of P20,000 is left to a girl to be held in trust
fund by her guardian until it amounts to P50,000. When will the girl receive the
money if fund invested at 8% compounded quarterly?
48. A sum of P1,000 is invested now and left for eight years, at which time the
principal is withdrawn. The interest has accrued is left for another eight years.
If the effective annual interest rate is 5%, what will be the withdrawal amount
at the end of the 16th year?
A. P693.12 B. P700.12 C. P702.15 D. P705.42
49. Mandarin Bank advertises 9.5% account that yields 9.84% annually. Find how
often the interest is compounded.
A. Monthly B. Bimonthly C. Quarterly D. Annually
50. A student plans to deposit P1,500 in the bank now and another P3,000 for the
next 2 years. If he plans to withdraw P5,000 three years from after his last
deposit for the purpose of buying shoes, what will be the amount of money left
in the bank after one year of his withdrawal? Effective annual interest rate is
10%.
A. P1,549.64 B. P1,459.64 C. P1,345.98 D. P1,945.64
REFERENCES:
• Engineering economy questions and answers - set 04. ObjectiveBooks. (n.d.).
Retrieved October 23, 2021, from
https://www.objectivebooks.com/2016/10/engineering-economy-questions-
and.html?m=1.
• Pinoybix. (2021, July 22). MCQ in engineering economics part 1: ECE Board exam.
Pinoybix Engineering. Retrieved October 18, 2021, from
https://pinoybix.org/2014/10/mcqs-in-engineering-economics-part1.html.
• Blank, L. T., & Tarquin, A. J. (2012). Engineering economy. McGraw-Hill.
• Shakya, N. (n.d), Manual of Engineering Economy retrieved from
http://civil.pcampus.edu.np/wp-content/uploads/2019/07/06082019123-
MANUAL-OF-ENGINEERING-ECONOMY.pdf
• J. Dutton (2020). “Discounting and Compounding,”https://www.e-
• Tiong; Rojas; Capote (2004). “2001 Solved Problems: Engineering Science and
Allied Subjects,” Benchmark Publishing. Chapter 18.
• Continuous compounding formula - derivation, examples. Cuemath. (n.d.).
Retrieved October 22, 2021, from https://www.cuemath.com/continuous-
compounding-formula/.
• Math help from Learning Centre: Nominal and Effective Interest Rates. Centennial
College Libraries. (n.d.) Retrieved October 22, 2021, from
https://libraryguides.centennialcollege.ca/c.php?g=645085&p=5133406
• Geometric Gradient. (2020, October 19). [Video]. YouTube.
https://www.youtube.com/watch?v=vhsfdwL4uTE
• Chapter 18 Engineering Economics. Page 16-18. 2001 Solved Problems in ESAS-
Excel Review Center.
• NDIAFREENOTES. (2020, February 7). Break Even Point: Meaning, Features, and
Significance. https://indiafreenotes.com/break-even-point-meaning-features-
and-significance/
• Garcia, M. M. (Writer). (2021, April 22.). Break-even Analysis (Engineering
Economics) - Tagalog [TV series episode].
https://www.youtube.com/watch?v=sKDjMFKrKRc&t=1171s

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EE CORRELATION COURSE 1: ENGINEERING ECONOMICS

PRE-TEST Time Allotment: 2 hours Score:______

1. In a cash flow series:

B. Direct labour D. All of these

22. Choose the correct statement from the following:

28. A feasibility study shows that a fixed capital investment of P10,000,000 is

- involves the systematic evaluation of the economic merits of proposed

Fig.1: Blank, L. T., &amp; Tarquin, A. J. (2012). Engineering economy. McGraw-Hill.

Interest I=Pin Period

Thus, F=P (1+in)

Two Types of Simple Interest

Ordinary Simple Interest

- based on one baker’s year. A banker year is composed of 12 months of 30

𝒅 number of days the

Principal amount (P) is $15,000.

72 days x (1year/360days) = 72/360 yr

Using the formula for solving the simple interest;

I = $15,000 x 0.06 x 72/360 = $180

Exact Simple Interest

- Under this method of computation of interest, it must be noted that under

October 24−31 is 7 days Total days in 1987 is 68 days

November = 30 days Total days in 1988 is 366 days

December = 31 days Total days in 1989 is 365 days

January 1−7 is 7 days Total days in 1990 is 7 days

Number of interest days =68+366+365+7=806 days

Number of days from 1987 to 1990 is =365+366+365+365=1461 days

Using the formula for solving the simple interest;

I = 1,000,000 (0.17) (806/1461) = 93,785.079

𝐃𝐢𝐬𝐜𝐨𝐮𝐧𝐭 = 𝐅𝐮𝐭𝐮𝐫𝐞 𝐰𝐨𝐫𝐭𝐡 − 𝐏𝐫𝐞𝐬𝐞𝐧𝐭 𝐰𝐨𝐫𝐭𝐡

Let d= rate of discount

-frequently used in commercial practice than simple interest, more especially

The future amount of principal may be derived by the following tabulation:

Period Principal Interest Total Amount

It is also observed that the compound interest is based on the principles of

First term: a1= P(1+i)

Second term: a1= P(1+i)2

Third term: a1= P(1+i)3 and so on.

Solving for the common ratio,

Using the formula for nth term of a G. P.

an = a1 r n−1 = P(1 + i)(1 + i)n−1

interest per period

Fig.2: J. Dutton (2020). “Discounting and Compounding,”https://www.e-

Given: P = $20,000 i = 4% or 0.04 n = 10

Solution: F = P(1 + i)n = 20,000(1 + 0.004)10 = $ 29604.89

So the bank will pay you $29,604.89 after 10 years

Fig.3: J. Dutton (2020). “Discounting and Compounding,”https://www.e-

Given: F= $500 i=25% or 0.25 n= 2

Fig.4: J. Dutton (2020). “Discounting and Compounding,”https://www.e-

The concept of compounding and discounting are similar. Discounting brings

The continuous compounding formula should be used when they mention

Continuous Compounding Formula

Sage invested $3000 in a bank that pays an annual interest rate of 7%

To find: The amount after 5 years.

The initial amount is P = $3000.

The interest rate is, r = 7% = 7/100 = 0.07.

Time is, t = 5 years.

Substitute these values in the continuous compounding formula,

Answer: The amount after 5 years = $4,257.

NOMINAL INTEREST RATE

Formula 1: (compound interest formula)

Formula 2: (finding effective rate and nominal rate)

EFFECTIVE INTEREST RATE

A credit card company charges 21% interest per year,

Given: m = 12 (months per year) j = 21% or 0.21

Fig.1: Blank, L. T., & Tarquin, A. J. (2012). Engineering economy. McGraw-Hill.