ENGINEERING

ECONOMY
 BOND
 DEPRECIATION
Straight Line Method
Sinking Fund Method
Declining Balance Method
Sum of Years Digit Method
 BREAK EVEN ANALYSIS`

Alaban, Kimberly G.
BSCE 4B
BOND
Bond – is an IOU where you agree to
𝑽=𝑪+𝑫
lend the bond issuer money for a
specified length of time. In return, you
receive periodic interest from the Future worth,
issuer plus a promise to return the face 𝒏
𝟏+𝒊 𝒏−𝟏
𝑽𝒏 (𝟏 + 𝒊) = 𝑪 + 𝑫
value of the bond when it matures. 𝒊

𝑪 𝟏+𝒊 𝒏−𝟏
𝑽𝒏 = + 𝑭𝒓
(𝟏 + 𝒊)𝒏 𝒊 𝟏+𝒊 𝒏

𝑉𝑛 = value of the bond n periods before redemption

F = par value of the bond
C = amount paid to the bondholder at maturity of the bond, which is usually equal to F
n = number of rate interest on the bond per period
r = rate of interest on the bond per period
i = actual rate of interest on the amount invested in the bond, usually called yield
BOND Sample Problem:

A bond with a par value of P1,000 and with a bond rate of 9% payable
annually is to be redeemed at P1,050 at the end of 6 years from now. If
it sold now, what should be the selling price to yield 8%?
Solution:
𝐹 = 1,000; 𝐶 = 1,050; 𝑟 = 9%; 𝑖 = 8%; 𝑛 = 6; 𝑉𝑛 =?

𝐶 1+𝑖 𝑛−1
𝑉𝑛 = + 𝐹𝑟
(1 + 𝑖)𝑛 𝑖 1+𝑖 𝑛

1,050 1 + 0.08 6 − 1
𝑉6 = + 1,000(0.09)
(1 + 0.08)6 0.08 1 + 0.08 6

𝑽𝟔 = 𝑷𝟏, 𝟎𝟕𝟕. 𝟕𝟒
 DEPRECIATION
Depreciation - is defined as the decrease in the value of a property due to
the passage of time

FC = First Cost of the property

𝑑𝑛 = 𝐹𝐶 − 𝑆𝑉
SV = Salvage Value/ Scrap Value
BV = Book Value 𝑑𝑚 = 𝐹𝐶 − 𝐵𝑉
DEPRECIATION
Uniform Method Non Uniform Method

 Straight Line Method  Declining Balance Method

 Sinking Fund Method  Sum of Years Digit
Method
 A contractor imported a bulldozer for his job, paying
P250,000 to the manufacturer. Freight and insurance
charges amounted to P18,000; custom’s, broker’s fees
and arrastre services, P8,500; taxes, permits, and other
expenses, P25,000.
If the contractor estimates the life of the bulldozer to be
DEPRECIATION 10 years with a salvage value of P20,000, determine the
Straight Line Method book value at the end of 6 years, using the straight line
method.

In this method, the loss in value is 𝐹𝐶 = 250,000 + 18,000 + 8,500 + 25,000 = 301,500;
considered to be directly proportional to
𝑆𝑉 = 20,000; 𝑛 = 10; 𝑚=6
the age of property.
𝐹𝐶 − 𝑆𝑉
𝑑=
𝑑𝑛 = 𝐹𝐶 − 𝑆𝑉 𝑛
𝑑𝑚 = 𝐹𝐶 − 𝐵𝑉 𝑑𝑚 = 𝐹𝐶 − 𝐵𝑉
301,500 − 20,000
𝐹𝐶 − 𝑆𝑉 𝑑= 28,150 6 = 301,500 − 𝐵𝑉
𝑑= 𝐷𝑚 = 𝐹𝐶 − 𝐵𝑉 10
𝑛
𝒅 = 𝑷𝟐𝟖, 𝟏𝟓𝟎 𝑩𝑽 = 𝑷𝟏𝟑𝟐, 𝟔𝟎𝟎
 using the sinking fund method at 8%.

𝐹𝐶 = 250,000 + 18,000 + 8,500 + 25,000 = 301,500;

𝑆𝑉 = 20,000; 𝑛 = 10; 𝑚 = 6; 𝑖 = 8%
1+𝑖 𝑛−1
𝑑 = 𝐹𝐶 − 𝑆𝑉
DEPRECIATION 𝑖

Sinking Fund Method 𝑑

1 + 0.08 10 − 1
= 301,500 − 20,000
0.08

In this method, it is assumed that a 𝒅 = 𝑷𝟏𝟗, 𝟒𝟑𝟏. 𝟖𝟎

sinking fund is established in which
funds will accumulate for replacement 1+𝑖 𝑚
−1
𝑑 = 𝐹𝐶 − 𝐵𝑉
purposes and will bear interest 𝑖

1 + 0.08 6 − 1
𝑑𝑛 = 𝐹𝐶 − 𝑆𝑉 𝑑𝑚 = 𝐹𝐶 − 𝐵𝑉 19,431.80107 = 301,500 − 𝐵𝑉
𝐷𝑛 = 𝐹𝐶 − 𝑆𝑉 0.08
𝐷𝑚 = 𝐹𝐶 − 𝐵𝑉
𝑩𝑽 = 𝑷𝟏𝟓𝟖, 𝟗𝟒𝟗. 𝟔𝟗
Future worth, Future worth,
𝑚
1+𝑖 𝑛 −1 1+𝑖 −1
𝐷𝑛 = 𝑑[ ] 𝐷𝑚 = 𝑑[ ]
𝑖 𝑖
 𝐹𝐶 = 250,000 + 18,000 + 8,500 + 25,000 = 301,500;

𝑆𝑉 = 20,000; 𝑛 = 10; 𝑚 = 6;

DEPRECIATION
Declining Balance Method
𝑆𝑉 = 𝐹𝐶(1 − 𝑘)𝑛

10 20,000
In this method, assumes that the annual 𝑘 =1−
301,500
cost of depreciation is a fixed percentage 𝒌 = 𝟎. 𝟐𝟑𝟕𝟔𝟏𝟓𝟏𝟑𝟏𝟕
of the book at the beginning of the year.
𝐹 = 𝑃(1 + 𝑖)𝑛
𝐵𝑉 = 𝐹𝐶(1 − 𝑘)𝑚
𝑆𝑉 = 𝐹𝐶(1 − 𝑘)𝑛 𝐵𝑉 = 𝐹𝐶(1 − 𝑘)𝑚
𝐵𝑉 = 301,500(1 − 0.2376)6
𝑆𝑉 𝐵𝑉
= (1 − 𝑘)𝑛 = (1 − 𝑘)𝑚
𝐹𝐶 𝐹𝐶 𝑩𝑽 = 𝑷𝟓𝟗, 𝟐𝟎𝟏. 𝟓𝟑
𝑛 𝑆𝑉 𝑚 𝐵𝑉
𝑘 =1− 𝑘 =1−
𝐹𝐶 𝐹𝐶
 𝐹𝐶 = 250,000 + 18,000 + 8,500 + 25,000 = 301,500;

𝑆𝑉 = 20,000; 𝑛 = 10; 𝑚 = 6;

𝑑1 = 10 − 1 + 1 = 10
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 = 10 + 9 + 8 + 7 + 6 + 5
DEPRECIATION
𝑑2 = 10 − 2 + 1 = 9
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑙𝑖𝑓𝑒 = 45
𝑑3 = 10 − 3 + 1 = 8
Sum of Years Digit Method 𝑑4 = 10 − 4 + 1 = 7
𝑑5 = 10 − 5 + 1 = 6 𝑆𝑌𝐷 =
10
10 + 1 = 55
𝑑6 = 10 − 6 + 1 = 5 2
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑐𝑜𝑠𝑡 = ∗ 𝐷𝑛
𝑆𝑌𝐷
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
𝐷𝑚 = (𝐹𝐶 − 𝑆𝑉)
𝑆𝑌𝐷
𝑛 45
𝑆𝑌𝐷 = 𝑛+1 𝐷6 = 301,500 − 20,000
2 55
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑢𝑠𝑒𝑓𝑢𝑙 = 𝑛 − 𝑚 + 1
𝑫𝟔 = 𝑷𝟐𝟑𝟎, 𝟑𝟏𝟖. 𝟏𝟖

𝐷𝑚 = 𝐹𝐶 − 𝐵𝑉
230,318.1818 = 301,500 − 𝐵𝑉

𝑩𝑽 = 𝑷𝟕𝟏, 𝟏𝟖𝟏. 𝟖𝟐
 Two companies are engaged in the manufacture of
shirts. Company A, using partly handwork, has a fixed
monthly expense of P45,000 and a variable cost of
P15.00 per shirt. Company B has been able to
mechanize most of its operations, and it finds that its
fixed monthly expenses are P80,000 and the variable
cost per shirt is P12.50.

BREAK-EVEN ANALYSIS a) How many shirts should be manufactured by each

company each month so that the total costs will
be the same for the two companies?
In this case will involve the determination b) If each shirt sells for P32.00 to the retailers,
of the break-even cost, which is the cost at determine the monthly gross profit for each
company.
which all the methods will be equal.
Company A Company B
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡
Fixed Cost = P45,000 Fixed Cost = P80,000
Where, Variable Cost = 15.00N Variable Cost = 12.50N
Total Cost = 45,000+15N Total Cost = 80,000+12.5N
𝐶𝑜𝑠𝑡 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 + 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡
45,000 + 15𝑁 = 80,000 + 12.5𝑁

𝑵 = 𝟏𝟒, 𝟎𝟎𝟎 𝒔𝒉𝒊𝒓𝒕𝒔

 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝐶𝑜𝑠𝑡

BREAK- Where,

EVEN 𝐶𝑜𝑠𝑡 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 + 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡

ANALYSIS
N=14,000; P=32.00 each

Cost = 14,000(32) = P448,000

Company A Company B

Revenue = 45,000+15N Revenue = 80,000+12N

Revenue = 45,000+15(14,000)= P255,000 Revenue = 80,000+12.5(14,000)= P255,000

Profit=Revenue-Cost

Profit=255,000-448,000= P193,000
Company A Company B

Revenue=Cost Revenue=Cost
45,000+15N=32N 80,000+12.5N=32N

N=2,647 shirts N=4102 shirts

THANK YOU!