ENGINEERING ECONOMY

MIDTERM EXAMINATION

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.
2. A machine has been purchased and installed at a total cost of P18,000.00. The machine will be retired at the
end of 5 years, at which time it is expected to have a scrap value of P2,000.00 based on current prices. The
machine will then be replaced with an exact duplicate. The company plans to establish a reserve funds to
accumulate the capital needed to replace the machine. If an average annual rate of inflation of 3% is
anticipated, how much capital must be accumulated?
3. A rich man put up a trust fund in the bank with instructions to give his son the earnings of P400,000.00 at
the end of every four (4) years and to continue until the twentieth (20th) year of the deposit when the son
could get the P400,000.00 earning and the principal. What is the amount of money placed in the trust fund if
guaranteed interest is 16% per year?
4. A man purchased a car with a cash price of P350,000. He was able to negotiate with the seller to allow him
to pay only a down payment of 20% and the balance payable in in equal 48 end of the month installment at
1.5% interest per month. On the day he paid the 20th installment, he decided to pay the remaining balance.
How much is the monthly payment and what is the remaining balance that he paid?
5. A manufacturer desires to set aside a certain sum of money to provide funds to cover the yearly operating
expenses and the cost of replacing every year the dies of a stamping machine used in making radio chassis as
model changes for a period of 10 years.
Operating cost per year = P500.00
Cost of die = P1,200.00
Salvage value of die = P600.00
The money will be deposited in a savings account which earns 6% interest. Determine the sum of money that
must be provided, including the cost of the initial
6. A mechanical engineer is faced with the prospect of fluctuating future budget due to the country's economic
condition for the maintenance of a particular machine. During each of the five years P1000 per year will be
budgeted. During the second five years the annual budget will be P1,500 per year. In addition, P3,500 will be
budgeted for an overhaul at the end of eight year. The mechanical engineer wonders what uniform annual
expenditures would be equivalent to these fluctuating amounts assuming compound interest at 6% per
annum. Compute the equivalent uniform annual expenditures for the 10 years’ period.
7. A group of Filipino Mechanical Engineers formed a corporation and the opportunity to invest P8,000,000 in
either of the two situations. The first is to expand a domestic operation. It is estimated that this investment
would return a net year end cash flow of P2,000,000 each year for 10 years and at the end of that time the
physical assets, which would no longer be needed, could be sold for P5,000.000. The alternative opportunity
would involved building and operating a plant in a foreign country. This operation would involved no net
cash flow during the first 3 years, but it is believed that, beginning with the end of the fourth year. an annual
flow of P4,000,000 would be received, running through the end of the tenth year. After that time it is
believed that the operation and facilities might be expropriated with little, if any, compensation being paid.
Which investment, if either, would you recommend?
8. An engineer bought an equipment for P500,000. He spent an additional amount of P30000 for installation
and other expenses. The salvage value is 10% of the first cost. If the book value at the end of 5 yrs. will be
P291,500 using straight line method of depreciation, compute the useful life of the equipment in years.
9. A piece of earth-moving machine equipment was purchased at a cash price of P25,000. The life of this
equipment was estimated at 6 years with no salvage value. However, at the end of 4 years, the machine had
become so inefficient, because of waring of parts, that is was replaced Depreciation was allowed on the
company books by the sinking fund method with 2 4% interest. Balance in the depreciation fund at the end
of 4 years.
10. A company purchased a microwave radio equipment for P6M. Freight and installment charges amounted to
3% of the purchased price. If the equipment shall be depreciated over a period of 8 years with a salvage
value of 5%. Determine the depreciation charge during the 5th year using the sum of the year’s digit
method.
11. A certain office equipment has a first cost of P20,000 and a salvage value of P1000 at the end of 10 years.
Determine its book value at the end of 6 years using declining balance method.
12. A car company purchased machinery for P100,000.00 on July 1. 1979. It is estimated that it will have a useful
life of 10 years, scrap value of P4000. production of 400,000 units and working hours of 120,000. The
company uses the machinery for 14,000 hours in 1979, and 18,000 hours in 1980. The machinery produces
36.000 units in 1979 and 44,000 units, in 1980,0 Compute the depreciation for 1980 using working hours
method.
13. A certain machine cost P40,000 and has a life of 4 years and a salvage value of P5,000. The production
output of this machine in units per year for first year. 1800 units, second year 2200 units third year 3000
units, fourth year 4000 units. If the units produced are of uniform quality. what are the annual depreciation
charges?
14. An equipment has a first cost of P500,000 and the cost of installation is P30,000. If the salvage value is 10%
of the equipment cost at the end of its useful life of 5 yrs. Compute the book value at the end of 3rd year.
Using modified acceleration cost recovery system method.
15. A company purchased machinery for P100,000.00 on July 1, 1979. It i estimated that it will have a useful life
of 10 years, scrap value of P4000, production of 400,000 units and working hours of 120,000. The company
uses the machinery for 14,000 hours in 1979, and 18,000 hous in 1980. The machinery produces 36,000 units
in 1979 and 44,000 units, in 1980 Compute the depreciation for 1980 using output method.