1.) In a cold storage plant, it is desired to determine
) An electric cooperative is considering the use of a
whether to use insulation two inches thick or three
inches in insulating the walls of the cold storage
warehouse. Heat absorbed through the walls without
insulation would cost ₱96.00 per year per square meter.
A two-inch insulation will cost ₱30.40 per square meter
and will cut out 89% of the loss. A three-inch insulation
will cut out 92% of the loss and will cost ₱65.00 per
square meter. Using a life of 15 years for the insulation
with no salvage value and a minimum attractive return
of 8%, what thickness of insulation should be used? Ans:
2- in thick insulation.
2.
concrete electric pole in the expansion of its power
distribution lines. A concrete pole costs ₱18,000 each
and will last 20 years. The company is presently using
creosoted wooden poles which cost ₱12,000 per pole
and will last 10 years. If money is worth 12 per cent,
which pole should be used? Assume annual taxes
amount to 1 per cent of first cost and zero salvage value
in both cases. Ans: The creosoted wooden poles should
be used.
3.) An oil company is being offered a special coating for
the gasoline underground tank installation in its service
stations which will increase the life of the tank from the
usual 10 years to 15 years. The cost of the special
coating will increase the cost of the P40,000-tank to
P58,000. Cost of installation for either of the tanks is
P24,000. If the salvage value for both tank is zero and
interest rate is 20%, would you recommend the use of
special coating? Special coating should not be used.
1. Problem Solving and Decision making.
Your friend is considering investing in a two-year MBA
program. Tuition costs will be $60,000 for two years
while living expenses will be $25,000 per year. She has
$10,000 in savings, which she can spend on her
education, and will need to borrow the rest from her
bank. Her annual loan repayment will be $10,500. She
currently works as an analyst and makes $60,000 a year;
after she gets her degree she hopes to work as a
manager
for $150,000 a year.
Refer to the seven-step procedure to answer these
questions:
(a) How should your friend formulate her problem?
(b) What are her projected costs? (Identify all costs)
(c) Suggest alternatives to your friend to reduce the
uncertainty associated with finding a high-income job to
pay off her loan
(d) Select a criterion for discriminating among
alternatives, and use it to
advise your friend on which course of action to pursue.
(e) Attempt to analyze and compare the alternatives in
view of at least one criterion in addition to cost.
(f) What should your friend do based on the information
you and she have?
2. Accounting Concepts
Record the effect of the following transactions on the
accounting equation using a table similar to the
example (page 18).
a. Owen inherited $20,000 and invested the cash in the
business.
b. Performed services for a client and received cash of
$700.
c. Purchased supplies on account, $1,000
d. Invested personal cash of $1,000 in the business.
e. Performed services to clients and received cash of
$2,400
f. Paid office rent expenses, $ 900 and advertising
expense $100.
g. Withdrew cash of $1,800 for personal use.
1. Record the effect of the following transactions on the
accounting equation using a table similar to
the example.
a. Owen inherited $20,000 and invested the cash in the
business.
b. Performed services for a client and received cash of
$700.
c. Purchased supplies on account, $1,000
d. Invested personal cash of $1,000 in the business.
e. Performed services to clients and received cash of
$2,400
f. Paid office rent expenses, $ 900 and advertising
expense $100.
g. Withdrew cash of $1,800 for personal use.
Prepare Income Statement and Balance Sheet.

2. Investing in Electrical Efficiency

Two pumps capable of delivering 100 hp to an
agricultural application are being evaluated in
a present economy study. The selected pump will only
be utilized for one year, and it will
have no market value at the end of the year. Pertinent
data are summarized as follows:

ABC Pump XYZ Pump

Purchase price $2,900 $6,200
Maintenance cost $170 $510
Efficiency 80% 90%
1.) If electric power costs $0.10 per kWh and the pump
will be operated 4,000 hours per year, which pump
should be chosen? Recall that 1 hp = 0.746 kW.
a) State the expanded accounting equation.
b) Explain the meaning of each term in the equation
a) Purchased office supplies.
2. Ramon opened the Quarantine Gym in August. The
Following transactions occurred during the first month
of the business:
a) Ramon invested P100,000 in cash and 30,000 in gym
equipment in the business.
b) Paid P10,000 for the first month’s rent.
c) Purchased supplies costing P4,000 on credit.
d) Purchased exercise equipment costing P25,000.
e) Recorded income for the first half of the month of
P6,500 in cash and P3,500 on account.
f) received payment from a customer on account for
P1600.
g) Ramon withdrew P500 for a graduation gift.
h) Paid aerobics instructor her salary, P3,000.
i) Paid miscellaneous expense P1,500
j) Recorded income for the second half of the month of
P5,600 in cash.
Use the double-entry method in the accounting
equation to record each of the above
transactions. Summarize the final value of each account
under Assets, Liabilities and
Capital. Prepare a Balance Sheet of Quarantine Gym as
of August 31.
 select, and what is the difference in unit costs? 1 pound
= 16 ounce

3. In the design of an automobile engine part, an

engineer has a choice of either steel casting or an
aluminum alloy casting. Either machine provides the
same service. However, the steel casting weighs 8
ounces, compared with 5 ounces for the aluminum
casting. Every pound of extra weight in the automobile
has been assigned a penalty of $6 to account for
increased fuel consumption during the life cycle of the
car. The steel casting costs $3.20 per pound, while the
aluminum allow can be cast for $7.40 per pound.
Machining cost per casting are $5.00 for steel and $4.20
for aluminum. Which material should the engineer
1. What is the annual rate of interest if ₱265 is earned 4. Determine the exact simple interest on ₱5,000 for the
in four months on an investment of ₱15,000? Ans: 5.3% period from Jan. 15 to Nov. 28, 1992, if the rate of
interest is 22%. Ans: ₱955.74

2. A loan of ₱2,000 is made for a period of 13 months,

from January 1 to January 31 the following year, at a
simple interest rate of 20%. What future amount is due
at the end of the loan period? Ans: ₱2,433.33
5. A man wishes his son to receive ₱200,000 ten years
from now. What amount should he invest if it will earn
interest of 10% compounded annually during the first 5
years and 12% compounded quarterly during the next 5
years? Ans: ₱68,758.67

3. If you borrow money from your friend with simple

interest of 12%, find the present worth of ₱20,000,
which is due at the end of nine months. Ans: ₱18,348.62

6. By the conditions of a will, the sum of ₱25,000 is left

to a girl to be held in trust by her guardian until it
amounts to ₱45,000. When will the girl receive the
money if the fund is invested at 8% compounded
quarterly? Ans: 7.42 years
 12%, what is the amount of each payment? Ans:
₱9,136.91; ₱13,705.36

7. At a certain interest rate compounded semiannually,

₱5,000 will amount to ₱20,000 after 10 years. What is
the amount at the end of 15 years? Ans: ₱40,029.72

8. Jones Corporation borrowed ₱9,000 from Brown

Corporation on Jan. 1, 1978 and ₱12,000 on Jan. 1,
1980. Jones Corporation made a partial payment of
₱7,000 on Jan. 1, 1981. It was agreed that the balance
of the loan would be amortized by two payments, one
of Jan. 1, 1982 and the other on Jan. 1, 1983, the second
being 50% larger than the first. If the interest rate is
1. A young woman, 22 years old, has just graduated
from college. She accepts a good job and desires to
establish her own retirement fund. At the end of each
year thereafter she plans to deposit ₱2,000 in a fund at
15% annual interest. How old will she be when the fund
has an accumulated value of ₱1,000,000? Ans: 53 years
old
2. M purchased a small lot in a subdivision, paying
₱200,000 down and promising to pay ₱15,000 every 3
months for the next 10 years. The seller figured interest
at 12% compounded quarterly.
(a) After making 8 payments, M wished to discharge his
remaining indebtedness by a single payment at the time
when the 9th regular payment was due, what must he
pay in addition to the regular payment then due?
(b) If M missed the first 10 payments, what must he pay
when the 11th payment is due to discharge his entire
indebtedness? Ans: (a) ₱300,006; (b) ₱479,948
3. A new office building was constructed 5 years ago by
a consulting engineering firm. At the time the firm
obtained the bank loan for ₱10,000,000 with a 20%
annual interest rate, compounded quarterly. The terms
of the loan called for equal quarterly payments for 10-
year period with the right of prepayment at any time
without penalty. Due to the internal changes in the firm,
it is now proposed to refinance the loan through an
insurance company. The new loan is planned for a 20-
year term with an interest rate of 24% per annum,
compounded quarterly. The insurance company has a
one-time service charge of 5% of the balance. This new
loan also calls for equal quarterly payments.
(a) What is the balance due on the original mortgage
(principal) if all payments have been through a full five
years?
(b) What will be the difference between the equal
quarterly payments in the existing arrangement and the
revised proposal? Ans: (a) ₱7,262,733; (b) ₱120,862
 14% compounded annually, what was the equivalent
uniform
annual cost for the 12-year period? Ans. ₱79,245

4. An asphalt road requires no upkeep until the end of 2

years when P60,000 will be needed for repairs. After
this P90,000 will be needed for repairs at the end of
each years for the next 5 years, then P120,000 at the
end of each year for the next 5 years. If money is worth
1. Sam Salverri is planning to retire in 15 years. Money
can be deposited by 8% compounded quarterly. What
quarterly deposit must be made at the end of each
quarter until he retires so that he can make a
withdrawal of P25,000 monthly over 10 years after his
retirement? Assume that his first withdrawal occurs at
the end of one
month after his retirement.
3. Your rich uncle has just offered you to make you
wealthy! For every amount you save in an insured bank
account during the next 10 years, he will give you the
total amount (excluding interest) that you saved to
match it. Because your modest income permits you to
save P2,000 per month for the next 10 years, your uncle
will be willing to give you 240,000 at the end of the 10th
year. If you desire a total of P1,00,000 10 years from
now, what effective interest rate would you have to
earn on your insured bank account to make your goal
possible?

2. A woman arranges to repay a P10,000 bank loan in 10

equal payments at a 10% effective annual interest rate.
Immediately after her third payment she borrows
another P5000, also at 10%. When she borrows the
P5,000, she talks the banker into letting her repay the
remaining debt of the first loan and the entire amount
of the second loan in 12 equal annual payments. The
first of these 12 payments would be made 1 year after
she receives the P5,000. Compute the amount of each
of the 12 payments.
 2. A tax- and duty-free importation of a 30 HP sand mill
(for paint manufacturing) cost ₱360,000, CIF Manila.
Bank charges, arrastre ₱25,000. Other incidental
expenses amounted to ₱20,000. Salvage value of the
mill is estimated to be ₱60,000 after 20 years. Find the
appraisal value of the mill, using straight-line
depreciation, at the end of (a) 10 years and (b) 15
years? Ans: (a) ₱235,000 (b) ₱147,500

1. A machine shop purchased 10 years ago a milling

machine for ₱60,000. A straight- line depreciation
reserve had been provided on a 20-year life of the
machine. The owner of the machine shop desires to
replace the old milling machine with a modern unit of
many advantages costing ₱100,000. It can sell the old
unit for ₱20,000. How much new capital will be required
for the purchase? Ans: ₱50,000

3. An industrial plant bought a generator set for

₱90,000. Other expenses including installation
amounted to ₱10,000. The generator set is to have a life
of 17 years with a salvage value at the end of life of
₱5,000. Determine the depreciation charge during the
13th year and the book value at the end of 13 years by
the (a) declining balance method, (b) double declining
balance method, (c) sinking fund method at 12% and
(d) SYD Method. Ans: (a) ₱1,949; (b) ₱2,620; ₱19,649;
(c) ₱1,943; ₱45,539; (d) ₱3,105; ₱11,209
1. A young mechanical engineer is considering
establishing his own small company. An investment of
₱400,000 will be required, which will be recovered in 15
years. It is estimated that sales will be ₱800,000 per
year and that operating expenses will be as follows:
Materials ₱360,000 per year
Labor ₱280,000 per year
Overhead ₱40,000 + 10% of sales per year
Selling Expense ₱60,000 per year
The man will give up his regular job paying ₱216,000 per
year an devote full time to the operation of the
business; this will result in decreasing labor cost by
₱40,000 per
year, material cost by ₱28,000 per year and overhead
cost by ₱32,000 per year. If the man expects to earn at
least 20% of his capital, should he invest? Ans: The man
should not invest.
2. A food processing plant consumed 600,000 kwh of
electric energy annually and pays an average of ₱2.00
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 ₱2,000,000. Annual
operation and maintenance, ₱800,000. Other expenses,
₱100,000
per year. Life of power plant is 15 years; salvage value
at the end of life is ₱200,000; annual taxes and
insurance, 6% of first cost; and rate of interest is 15%.
Using the sinking fund method for depreciation,
determine if the power plant is justifiable? Ans: Rate of
return is 7.11%, the power plant is not a good
investment.
3. A fixed capital investment of ₱10,000,000 is required
for a proposed manufacturing plant and an estimated
working capital of ₱2,000,000. Annual depreciation is
estimated to be 10% of the fixed capital investment.
Determine the rate of return on the total investment
and the payout period if the annual profit is ₱2,500,000.
Ans:
12.50%, 4.8 years
1. It is estimated that insulation of steam pipes in a
factory will reduce fuel bill by as much as 20%. The cost
of insulation is P9,000 and the cost of taxes and
insurance is 5% of the initial cost. Without the
insulation, the annual fuel bill is P18,000. If the
insulation is worthless after 6 years and a minimum of
12% is desired, would it be worthwhile to invest in the
insulation?
2. The ABC company is considering constructing a plant
to manufacture a proposed new product. The land costs
P15,000,000, the building costs P30,000,000, the
equipment costs P12,500,000, and P5,000,000 working
capital is required. At the end of 12 years, the land can
be sold for P25,000,000, the building for P12,000,000,
the equipment for P250,000 and all of the working
capital recovered. The annual disbursements for labor,
materials, and all other expenses are estimated to costs
P23,750,000. If the company requires a minimum return
of 25%, what should the minimum annual sales for 12
years to justify the investment?
1. In a cold storage plant, it is desired to determine
whether to use insulation two inches thick or three
inches in insulating the walls of the cold storage
warehouse. Heat absorbed through the walls without
insulation would cost ₱96.00 per year per square meter.
A two-inch insulation will cost ₱30.40 per square meter
and will cut out 89% of the loss. A three-inch insulation
will cut out 92% of the loss and will cost ₱65.00 per
square meter. Using a life of 15 years for the insulation
with no salvage value and a minimum attractive return
of 8%, what thickness of insulation should be used? Ans:
2-
in thick insulation
2. An electric cooperative is considering the use of a
concrete electric pole in the expansion of its power
distribution lines. A concrete pole costs ₱18,000 each
and will last 20 years. The company is presently using
creosoted wooden poles which cost ₱12,000 per pole
and will last 10 years. If money is worth 12 per cent,
which pole should be used? Assume annual taxes
amount to 1 per cent of first cost and zero salvage value
in both cases. Ans: The creosoted wooden poles should
be used.
3. An oil company is being offered a special coating for
the gasoline underground tank installation in its service
stations which will increase the life of the tank from the
usual 10 years to 15 years. The cost of the special
coating will increase the cost of the P40,000-tank to
P58,000. Cost of installation for either of the tanks is
P24,000. If the salvage value for each tank is zero and
interest rate is 20%, would you recommend the use of
special coating? Special coating should not be used.
1. A firm must decide between two silicon layer chip
designs from Intel. Their effective income tax rate is
40%, and Straight-Line depreciation method is used. If
the desired after-tax return on investment is 10% per
year, which design should be chosen? State your
assumptions.
Design A Design B
Capital Investment $1,000,000 $2,000,000
Salvage Value at end of life $1,000,000 $1,100,000
Annual revenue less expenses $200,000 $400,000
Useful Life 7years 6 years
2. A start-up biotech company is considering making an
investment of $100,000 in a new filtration system. The
associated estimates are summarized below:
Annual receipts $75,000
Annual expenses $45,000
Useful life 8 years
Salvage value $20,000
Straight line depreciation will be used, and the effective
income tax rate is 20%. The After-tax MARR is 15% per
year. Determine whether this investment is an
attractive option for the company.
3. Two alternatives, A and B, are under consideration.
Both have a life of five years. Alternative A needs an
initial investment of $17,000 and provides a net
revenue of $4,000 per year for five years. Alternative B
requires an investment of $19,000 and has an annual
net revenue of $5,000. All estimates are in actual
dollars. Inflation is expected to be 2% per year for the
next five years, and the inflation-free (real) MARR is
9.8% per year. Which alternative should be chosen?