UNIVERSITY OF MINDANAO

College of Engineering Education

Civil Engineering Program

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Self-Directed Learning (SDL)

Course/Subject: CEE 109: ENGINEERING ECONOMICS

Name of Teacher: Engr. ABING, ABIGAIL JOY A.
Author: Engr. CALAQUE, DARIO JR. A.

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY, NOT FOR REPRODUCTION AND
DISTRIBUTION OUTSIDE OF ITS INTENDED USE. THIS IS INTENDED ONLY FOR THE
USE OF THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
 College of Engineering Education
nd
2 Floor, B&E Building
Matina Campus, Davao City
Telefax: (082) 296-1084
Phone No.: (082)300-5456/300-0647 Local 133

Course Outline: CEE 109– Engineering Economics

Course Coordinator: Engr. Abigail Joy Abing

Email: aabing@umindanao.edu.ph
Student Consultation: By appointment
Mobile: 0927-492-9950
Phone: (082) 296 1084 local 133
Effectivity Date: May 25, 2020
Mode of Delivery: Blended (On-line with face to face or virtual sessions)
Time Frame: 54 hours
Student Workload: Expected Self-Directed Learning
Pre-requisite: CEE 102/L – Physics 1 for Engineers (Calculus Based)
CEE 101 – Engineering Calculus 1
Co-requisite: None
Credit: 3.0 units lecture
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled Virtual or face-to-face sessions

Course Outline Policy

Areas of Concern Details

Contact and Non-contact Hours
Assessment Task Submission
This 2-unit course self-instructional manual is
designed for blended learning mode of instructional
delivery with scheduled face to face or virtual sessions.
The expected number of hours will be 108 including
the face-to-face or virtual sessions. The face-to-face
sessions shall include the summative assessment tasks
(exams) since this course is crucial in the licensure
examination for civil engineers.
Submission of assessment tasks shall be on 3rd, 5th, 7th
and 9th week of the term. The assessment paper shall
be attached with a cover page indicating the title of the
assessment task (if the task is performance), the
name of the course coordinator, date of submission
and name of the student. The document should be
emailed to the course coordinator. It is also expected
that you already paid your tuition and other fees
before the submission of the assessment task.

If the assessment task is done in real time through the

features in the Blackboard Learning Management
System, the schedule shall be arranged ahead of time
by the course coordinator.

Since this course is included in the licensure

examination for civil engineers, you will be required to
take the Multiple-Choice Question exam inside the
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 College of Engineering Education
nd
2 Floor, B&E Building
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Telefax: (082) 296-1084
Phone No.: (082)300-5456/300-0647 Local 133

University. This should be scheduled ahead of time by

your course coordinator. This is non-negotiable for all
licensure-based programs.
Turnitin Submission To ensure honesty and authenticity, all assessment
(if necessary) tasks are required to be submitted through Turnitin
with a maximum similarity index of 30% allowed. This
means that if your paper goes beyond 30%, the
students will either opt to redo her/his paper or
explain in writing addressed to the course coordinator
the reasons for the similarity. In addition, if the paper
has reached more than 30% similarity index, the
student may be called for a disciplinary action in
accordance with the University’s OPM on Intellectual
and Academic Honesty.

Please note that academic dishonesty such as cheating

and commissioning other students or people to
complete the task for you have severe punishments
(reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after the
Assignments/Assessments designated time on the due date, without an approved
extension of time, will be reduced by 5% of the
possible maximum score for that assessment item for
each day or part day that the assessment item is late.

However, if the late submission of assessment paper

has a valid reason, a letter of explanation should be
submitted and approved by the course coordinator. If
necessary, you will also be required to present/attach
evidences.
Return of Assignments/ Assessment tasks will be returned to you two (2)
Assessments weeks after the submission. This will be returned by
email or via Blackboard portal.

For group assessment tasks, the course coordinator

will require some or few of the students for online or
virtual sessions to ask clarificatory questions to
validate the originality of the assessment task
submitted and to ensure that all the group members
are involved.
Assignment Resubmission You should request in writing addressed to the course
coordinator his/her intention to resubmit an
assessment task. The resubmission is premised on the
student’s failure to comply with the similarity index
and other reasonable grounds such as academic
literacy standards or other reasonable circumstances
e.g.
illness, accidents financial constraints.
Re-marking of Assessment You should request in writing addressed to the
Papers and Appeal program coordinator your intention to appeal or
contest the score given to an assessment task. The
letter should explicitly explain the reasons/points to
contest the grade. The program coordinator shall

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Grading System
Referencing Style
Student Communication
Contact Details of the Dean
Contact Details of the Program
Head
Students with Special Needs
College of Engineering Education
nd
2 Floor, B&E Building
Matina Campus, Davao City
Telefax: (082) 296-1084
Phone No.: (082)300-5456/300-0647 Local 133
communicate with the students on the approval and
disapproval of the request.
If disapproved by the course coordinator, you can
elevate your case to the program head or the dean
with
the original letter of request. The final decision will
come from the dean of the college.
All culled from BlackBoard sessions and traditional
contact
Course discussions/exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%
All culled from on-campus/onsite sessions (TBA):
Final exam – 40%
Submission of the final grades shall follow the usual
University system and procedures.
IEEE
You are required to create a umindanao email
account which is a requirement to access the
BlackBoard portal.
Then, the course coordinator shall enroll the
students to have access to the materials and resources
of the course. All communication formats: chat,
submission of assessment tasks, requests etc. shall be
through the portal and other university recognized
platforms.
You can also meet the course coordinator in person
through the scheduled face to face sessions to raise
your issues and concerns.
For students who have not created their student email,
please contact the course coordinator or program
head.
Dr. Charlito L. Cañesares
Email: clcanesares@umindanao.edu.ph
Phone: (082) 296-1084 or 300-5456 loc. 133
Engr. Showna Lee T. Sales
Email: ssales@umindanao.edu.ph
Phone: (082) 296-1084 or 300-5456 loc. 133
Students with special needs shall communicate with
the course coordinator about the nature of his or her
special needs. Depending on the nature of the need,
the course coordinator with the approval of the
program coordinator may provide alternative
assessment tasks or extension of the deadline of
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
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 College of Engineering Education
nd
2 Floor, B&E Building
Matina Campus, Davao City
Telefax: (082) 296-1084
Phone No.: (082)300-5456/300-0647 Local 133

outcomes.
Help Desk Contact Jetron J. Adtoon
Email: jadtoon@umindanao.edu.ph
Phone: 09055267834

Frida Santa O. Dagatan

Email: cee@umindanao.edu.ph
Phone: 09562082442
Tel: 082-2272902
Library Contact Brigida E. Bacani
Email: library@umindanao.edu.ph
09513766681

Ronadora E. Deala, RPsy, RPm, RGC, LPT

Email: ronadora_deala@umindanao.edu.ph
Phone: 09212122846

Silvino P. Josol
Email: gstcmain@umindanao.edu.ph
Phone: 09060757721

Course Information- see/download course syllabus in the BlackBoard LMS

CC’s Voice: Hello future engineers! Welcome to this course CEE 109: Engineering
Economics. Imparting self-directed learning through on-line delivery is very
challenging but timely as we start this new educational system. Engineering
Economics specifically deals with the concept of basic economy. This course
will generally help you with the decision making and manage the cash flow of
money, time, interest rates and some related discussions.

CO: Upon completion of the course, you are expected to:

CO 1: Solve problems involving interest and time value of money.

CO 2: Evaluate project alternatives by applying engineering economic
principles and methods and select the one that is economically efficient.
CO 3: Deal with risk and uncertainty in project outcomes by applying the basic
economic decision-making concepts.

Let us begin!

Big Picture

Week 1-3: Unit Learning Outcomes-Unit 1 (ULO-1): At the end of the unit, you are expected to

a. Be able to introduce the basic principles in economy, supply and demand

relationship.
b. Be able to determine the simple interest and compound interest, cash flow
diagrams and their applications to real life situations.

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c. Be able to apply concept of cost, annuities and bonds in the decision

making through the present economic studies.

Big Picture in Focus: ULO-1a. Be able to introduce the basic principles in economy,
supply and demand relationship.

Metalanguage

The most essential terms below are defined for you to have a better understanding of
this section in the course.

1.0 Engineering Economic Analysis

In its simplest form, an engineering economic analysis is a study of the desirability of
making an investment. It is primarily inspired by the work that engineers do in
performing analyses, synthesizing, and coming to a conclusion as they work on
projects of all sizes. Moreover, engineering economy is at the center of making
decisions. These decisions involve the fundamental elements of cash flows of money,
time, and interest rates.

2.0 Cost
The accounting profession has developed special terms for certain group of costs.
When annual costs are incurred due to the functioning of a piece of equipment, they
are known as Operating and Maintenance (O&M) Costs. The annual costs associated
with operating a business (other than the costs directly attributable to production)
are known as General, Selling, and Administrative (GS & A) Expenses.

Direct Labor Costs are costs incurred in the factory, such as assembly, machining, and
painting labor costs. Direct Material Costs are the costs of all materials that go into
production. Typically, both direct labor and direct material costs are given on a per-
unit or per-item basis. The sum of the direct labor and direct material costs is known
as the Prime Costs.

3.0 Expenses
Indirect Manufacturing Expenses (IME) Or Indirect Material and Labor Costs is the
costs of factory supervision, stock- picking, quality control, factory utilities, and
miscellaneous supplies (cleaning fluids, assembly lubricants, routing tags, etc.) that
are not incorporated into the final product.

FACTORY COST is the sum of the per-unit indirect manufacturing expenses and prime
cost.

Research And Development (R&D) Costs and Administrative Expenses are added to the
factory costs to give manufacturing cost of the product.
Selling Expenses or Marketing Expenses is an additional cost are incurred in marketing
the product.

TOTAL COST is the sum of the selling expenses and manufacturing.

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Telefax: (082) 296-1084
Phone No.: (082)300-5456/300-0647 Local 133

Essential Knowledge

The objective of a cost engineer is to deal with the money and economy. In order to
understand the flow of money, one must know the following economic parameters:

1. Non-Quantifiable Factors
An engineering economic analysis is a quantitative analysis. Some factors cannot be
introduced as numbers into the calculations. Such factors are known as non-
quantitative factors, judgment factors, and irreducible factors. Typical non
quantifiable factors are:

1. Preferences
2. Political ramifications
3. Urgency
4. Goodwill
5. Prestige
6. Utility
7. Corporate Strategy
8. Environmental Effects
9. Health and Safety Rules
10. Reliability
11. Political Risks

Since these factors are not included in the calculations, the policy is to disregard the
issues entirely. Of course, the factors should be discussed in a final report. The factors
are particularly useful in breaking ties between competing alternatives that are
economically equivalent.

2. Economics
Economics is concerned with the well-being of all people, including those with jobs
and those without jobs, as well as those with high incomes and those with low
incomes. Economics acknowledges that production of useful goods and services can
create problems of environmental pollution.

It explores the question of how investing in education helps to develop workers’ skills.
It probes questions like how to tell when big businesses or big labor unions are
operating in a way that benefits society as a whole and when they are operating in a
way that benefits their owners or members at the expense of others.

3. Microeconomics and Macroeconomics

That ground can be divided into two parts:

Microeconomics focuses on the actions of individual agents within the economy, like
households, workers, and businesses;

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Phone No.: (082)300-5456/300-0647 Local 133

Macroeconomics looks at the economy as a whole. It focuses on broad issues such as

growth of production, the number of unemployed people, the inflationary increase in
prices, government deficits, and levels of exports and imports.
Microeconomics and macroeconomics are not separate subjects, but rather
complementary perspectives on the overall subject of the economy.

4. Demand for Goods and Services

Economists use the term demand to refer to the amount of some good or service
consumers are willing and able to purchase at each price. Demand is based on needs
and wants—a consumer may be able to differentiate between a need and a want, but
from an economist’s perspective they are the same thing.

Demand is also based on ability to pay. If you cannot pay for it, you have no effective
demand. What a buyer pays for a unit of the specific good or service is called price.
The total number of units purchased at that price is called the quantity demanded. A
rise in price of a good or service almost always decreases the quantity demanded of
that good or service.

Conversely, a fall in price will increase the quantity demanded. When the price of a
gallon of gasoline goes up, for example, people look for ways to reduce their
consumption by combining several errands, commuting by carpool or mass transit, or
taking weekend or vacation trips closer to home.

5. Supply for Goods and Services

Price is what the producer receives for selling one unit of a good or service. A rise in
price almost always leads to an increase in the quantity supplied of that good or
service, while a fall in price will decrease the quantity supplied.

When the price of gasoline rises, for instance, it encourages profit-seeking firms to
take several actions: expand exploration for oil reserves; drill for more oil; invest in
more pipelines and oil tankers to bring the oil to plants where it can be refined into
gasoline; build new oil refineries; purchase additional pipelines and trucks to ship the
gasoline to gas stations; and open more gas stations or keep existing gas stations open
longer hours.

6. Ceteris Paribus Assumption

A demand curve or a supply curve is a relationship between two, and only two,
variables: quantity on the horizontal axis and price on the vertical axis. The
assumption behind a demand curve or a supply curve is that no relevant economic
factors, other than the product’s price, are changing. Economists call this assumption
ceteris paribus, a Latin phrase meaning “other things being equal.” Any given demand
or supply curve is based on the ceteris paribus assumption that all else is held equal.

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Telefax: (082) 296-1084
Phone No.: (082)300-5456/300-0647 Local 133

7. Price Ceilings and Price Floors

Laws that government enacts to regulate prices are called Price controls. Price
controls come in two flavors. A price ceiling keeps a price from rising above a certain
level (the “ceiling”), while a price floor keeps a price from falling below a certain level
(the “floor”).

Price ceilings are enacted in an attempt to keep prices low for those who demand the
product. But when the market price is not allowed to rise to the equilibrium level,
quantity demanded exceeds quantity supplied, and thus a shortage occurs. Those who
manage to purchase the product at the lower price given by the price ceiling will
benefit, but sellers of the product will suffer, along with those who are notable to
purchase the product at all. Quality is also likely to deteriorate.

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Phone No.: (082)300-5456/300-0647 Local 133

A price floor is the lowest legal price that can be paid in markets for goods and
services, labor, or financial capital. Perhaps the best-known example of a price floor is
the minimum wage, which is based on the normative view that someone working full
time ought to be able to afford a basic standard of living.

Price ceilings prevent a price from rising above a certain level. When a price ceiling is
set below the equilibrium price, quantity demanded will exceed quantity supplied,
and excess demand or shortages will result. Price floors prevent a price from falling
below a certain level. When a price floor is set above the equilibrium price, quantity
supplied will exceed quantity demanded, and excess supply or surpluses will result.
Price floors and price ceilings often lead to unintended consequences.

8. Consumer, Producer and Social Surplus

Consumer surplus is the gap between the price that consumers are willing to pay,
based on their preferences, and the market equilibrium price. Producer surplus is the
gap between the price for which producers are willing to sell a product, based on their
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costs, and the market equilibrium price. Social surplus is the sum of consumer surplus
and producer surplus. Total surplus is larger at the equilibrium quantity and price
than it will be at any other quantity and price. Deadweight loss is loss in total surplus
that occurs when the economy produces at an inefficient quantity.

9. Fixed and Variable Costs

If a cost is a function of the independent variable, the cost is said to be a VARIABLE
COST. The change in cost per unit variable change (i. e, usually called the slope) is
known as the INCREMENTAL COST. Material and labor costs are examples of variable
costs.

If a function is not a function of the independent variable, the cost is said to be a FIXED
COSTS. Rent and lease payments are typical fixed costs.

10. Accounting Costs and Expenses Terms

The accounting profession has developed special terms for certain group of costs.
When annual costs are incurred due to the functioning of a piece of equipment, they
are known as OPERATING and MAINTENANCE (O&M) Costs. The annual costs
associated with operating a business (other than the costs directly attributable to

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production) are known as GENERAL, SELLING, and ADMINISTRATIVE (GS&A)

EXPENSES.

DIRECT LABOR COSTS are costs incurred in the factory, such as assembly, machining,
and painting labor costs. DIRECT MATERIAL COSTS are the costs of all materials that
go into production. Typically, both direct labor and direct material costs are given on a
per-unit or per-item basis. The sum of the direct labor and direct material costs is
known as the PRIME COSTS.

Indirect Manufacturing Expenses (IME) Or Indirect Material and Labor Costs is the
costs of factory supervision, stock- picking, quality control, factory utilities, and
miscellaneous supplies (cleaning fluids, assembly lubricants, routing tags, etc.) that
are not incorporated into the final product.

FACTORY COST is the sum of the per-unit indirect manufacturing expenses and prime
cost.

Research And Development (R&D) Costs and Administrative Expenses are added to the
factory costs to give manufacturing cost of the product.
Selling Expenses or Marketing Expenses is an additional cost are incurred in marketing
the product.

TOTAL COST is the sum of the selling expenses and manufacturing.

SUPPLEMENTARY PROBLEMS:

Example 1.1: In the field of economics, supply and demand are the two basic and
important terms to be fully understood. In terms of economics, the forces of supply
and demand determine our everyday lives as they set the prices of the goods and
services we buy daily. Although, law of supply and demand are introduced separately,
it’s the combination of the two concepts that determine how much of a good and
services is to be produced and consumed in an economy and at what price. These
issue can be solve through the concept of equilibrium price and quantity in a market.
Suppose the quantity demanded of Good Z ( ) depends upon its price ( ),
monthly income (Y), and the price of a related Good W ( ). The demand for Good Z
( ) is expressed by the equation= . The
monthly income (Y) is equal to 50 pesos and the price related to Good W ( ) is equal
to 6 pesos. On the other hand, the supply for Good Z ( ) is expressed
as . In general, the condition for equilibrium in a market is that
the quantity supplied is equal to the quantity demanded. This equilibrium identity
determines the market price P, since quantity supplied and quantity demanded are
both functions of price. However, most states impose sales tax on some goods and
services as a means of generating revenue. In this event, sales taxes also influence
consumer behavior. Now, for instance, suppliers must pay a tax of 6 pesos per unit of
Good Z. Determine the equilibrium price and quantity.

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Conventional Solution:
Quantity demand = 150 – 8Pz +2Y -15Pw
Where: Pz = price of Good Z
Y = monthly income = 50pesos
Pw = price of related Good W = 6pesos
Quantity supply = -20 + 2Pz
Tax = 6pesos per unit of Good Z

Qz = 150 – 8Pz + 2Y – 15Pw

Qz = 150 – 8Pz + 2(50) – 15(6) = 160 -8Pz ---eq’n (1)

Qz = -20 + 2Pz

Point of Equilibrium: Supply =Demand

-20+2Pz = 160 – 8Pz
Pz = 18pesos (answer)
Qz = 160 -8Pz = 16units
Or Qz = -20+2Pz = 16units (answer)

Self-Help

You can also refer to the sources below to help you and guide you further understand
the lesson:

Park, Chan S. (2011), Contemporary Engineering Economics (5th Edition), New Jersey: Pearson
Education, Chapters 8, 9, 11

Blank, L T., (2012), Engineering Economy (7th Edition), New York: McGraw Hill, Chapter 9, 10,
11, 12, 13, 16, 17

Sta. Maria, H., Engineering Economy (3th Edition), National Book Store

Panneerselvam, R., (2012), Engineering Economics (Eastern Economy Edition), New Delhi: PHI
Learning Private Limited

Lindeburg, M., (2014), Civil Engineering Reference Manual for the PE Exam (14th Edition),
California: Professional Publications, Inc.

Let’s Check

Activity 1: Now that you review the most essential principles in engineering economy. Let us
try to check your understanding by solving the following cost problems:

Situation 01. What is law of supply and demand? Cite an example.

Situation 02: How shortage and surplus affect the economy?

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Let’s Analyze

Activity 1: Getting acquitted with the essential terminology and basic concepts in the study of
engineering economy is not enough, one should be able to analyze and solve complex cost
problems involving interest, cash flow analysis, annuities and decision making methods.

At this juncture, you will be required to elaborate your answers about the following questions:

1. In the field of economics, supply and demand are the two basic and important terms to be
fully understood. In terms of economics, the forces of supply and demand determine our
everyday lives as they set the prices of the goods and services we buy daily. Although, law of
supply and demand are introduced separately, it’s the combination of the two concepts that
determine how much of a good and services is to be produced and consumed in an economy
and at what price. These issue can be solve through the concept of equilibrium price and
quantity in a market. Suppose the quantity demanded of Good Z ( ) depends upon its
price ( ), monthly income (Y), and the price of a related Good W ( ). The demand for Good
Z ( ) is expressed by the equation= . The monthly
income (Y) is equal to 60 pesos and the price related to Good W ( ) is equal to 12 pesos. On
the other hand, the supply for Good Z ( ) is expressed as . In
general, the condition for equilibrium in a market is that the quantity supplied is equal to the
quantity demanded. This equilibrium identity determines the market price P, since quantity
supplied and quantity demanded are both functions of price. However, most states impose
sales tax on some goods and services as a means of generating revenue. In this event, sales
taxes also influence consumer behavior. Now, for instance, suppliers must pay a tax of 6 pesos
per unit of Good Z. Determine the following requirements:

a. How much should the consumers pay for any Good Z considering tax in pesos?
b. Due to tax, the quantity diminished by how much in units?
c. How much is the tax revenue for Good Z in pesos?
d. What is the equilibrium price without tax in pesos?

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In a Nutshell

Activity 1: Based from the definition of the most essential terms in the study of curriculum
and the learning exercises that you have done, please feel free to write your arguments or
lessons learned below. I have indicated my arguments or lessons learned.

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1. A demand curve or a supply curve is a relationship between two, and only two,
variables: quantity on the horizontal axis and price on the vertical axis.
2. Both direct labor and direct material costs are given on a per-unit or per-item
basis.

Your Turn

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Q & A List

List 1: After series of discussion and exercises, kindly list down your questions or issues in
conjunction with the topics. Write the answers after clarification under the column provided.
This portion helps you in the review of concepts and essential knowledge.

Do you have any questions for clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.

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Keywords Index

Index: The keywords presented here will help you remember the concepts and essential
knowledge. Here are the few subject index.

A C D F
Administrative Ex. Cost Direct Material Costs Factory Cst.
Cost Of Miscellaneous Direct Labor Costs Fixed Costs
Ceteris Paribus Depreciation
Consumer Expense
Cleanup Expenses Demand
Ceilings Development Costs

G J I L
General Expenses Janitorial Service Expense Indirect Labor Costs
General Burden Manufacturing
Goods Expenses (IME)
Indirect Material
Interest On Loans
Insurance
Income Taxes
Incremental Costs
M N O P
Marketing Expenses Non-Quantifiable Factors Operating Costs Prime Costs
Marketing Costs Overhead Costs Property
Microeconomics Payroll
Macroeconomics Price
Maintenance Costs Price Floors
Producers

R S T U
Research Costs Selling Expenses Total Cost Utility costs
Rent Selling Costs Tooling Expense
Setup Expenses Tear-Down Expenses
Supervision Costs Taxes
Services
Supply
Surplus
V
Variable costs

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Big Picture in Focus: ULO-1b. Be able to determine the simple interest and
compound interest, cash flow diagrams and their applications to real life situations.

Metalanguage

The most essential terms below are defined for you to have a better understanding of
this section in the course.

1. INTEREST
Interest is the charge paid for the use of borrowed capital or the income produced by
money which has been loaned.

2. TYPES OF INTEREST
Interest can be applied to loan in two types: Simple and Compound. Simple interest is
an interest relative to the principal amount only while compound interest is an
interest on interest. Simple interest works in favor with the borrower because it keeps
the accumulated amount that you pay lower than it would be with the compound
interest. Compound interest, on the other hand, works in favor with the investor
because it returns to compound as much as possible to get the most of the investment.

3. SIMPLE INTEREST
Simple Interest is a quick method of calculating interest charged on a loan. It is
determined by multiplying the interest rate by the principal by the number of periods.
These type of interest benefits consumers who pay loans on time or early each month.
Auto loans and short-term personal loans are common examples of simple interest
loans.

4. COMPOUND INTEREST
Compound interest is an interest on top of interest. The general formula in solving the
future amount after “n” periods is expressed as follows:

5. DISCOUNT
Discount is a deduction from the usual cost of products or services, typically given
from prompt or advance payment. Discount is an interest on loaned amount
immediately deducted from the loan upon release of it considering a 1 year end
period. It is an interest paid in advance.

6. INFLATION
Inflation is the increase in the prices for goods and services from one year to another
thus decreasing the purchasing power of the money

7. CASH FLOW DIAGRAM ANALYSIS

A cash flow diagram is a graphical representation of cash flows on a time scale.
Receipt is taken as the positive cash flow and disbursement as a negative cash flow.
Cash flow diagram can be viewed in two different perspective: By the investor and by
the borrower.

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Essential Knowledge

The objective of a cost engineer is to deal with the money and economy. In order to
understand the flow of money, one must know the following economic parameters:

1. SIMPLE INTEREST
Simple Interest is a quick method of calculating interest charged on a loan. It is
determined by multiplying the interest rate by the principal by the number of periods.
These type of interest benefits consumers who pay loans on time or early each month.
Auto loans and short-term personal loans are common examples of simple interest
loans.

The general formula in solving the future amount after “n” periods is expressed as
follows:
P
P( in)
Where:
Accumulated amount, future worth, amount after “n” periods
P Present worth, money loaned, money received, money deposited made for “n”
periods, money invested
I = interest

2. TYPES OF SIMPLE INTEREST

Simple interest can be divided into two types:

2.1 Ordinary simple interest – based on 30 days per month or 360 days per year (also
known as the banker’s year)

Where:
I – Interest
P – Present value, principal amount
i –Interest rate
n – Number of periods = (banker’s year)

2.2 Exact simple interest – based on 365 days per year or 366 days for a leap year.

Where:
I – Interest
P – Present value, principal amount
i –Interest rate
n – Number of periods = (ordinary year)
n – Number of periods = (leap year)

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Note: A year is a leap year if it is divisible by 4 provided it doesn’t end with ’ . f it

ends with ’ , it is only a leap year when it is divisible by 4 .

LEAP YEAR MATRIX YEAR NOT ENDING WITH '00

1989 1993 1997 2001 2005 2009 2013 2017
1990 1994 1998 2002 2006 2010 2014 2018
1991 1995 1999 2003 2007 2011 2015 2019
1992 1996 2000 2004 2008 2012 2016 2020
CENTURY YEAR
1300 1700 2100 2500 2900 3300 3700 4100
1400 1800 2200 2600 3000 3400 3800 4200
1500 1900 2300 2700 3100 3500 3900 4300
1600 2000 2400 2800 3200 3600 4000 4400

3. Inclusion-Exclusion Dates Rule:

Take for example, the interest for the period from January 10 to October 28 of the
same year.

4 COMPOUND INTEREST
Compound interest is an interest on top of interest. The general formula in solving the
future amount after “n” periods is expressed as follows:
P( i) (From Present to Future)
P ( i) (From Future to Present)
Where:
F = Future worth
P = Present worth
i = Compound interest rate
n = Number of compounding periods =
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m = Number of compounding periods per year

t = Time in year(s)
( i) = Single payment compound future amount factor
( i) = Single payment compound present worth factor

5 Types of Compound Interest Rate

5.1 Effective interest rate, = % per year compounded yearly, % per annum
compounded annually
5.2 Nominal interest rate, = % per year compounded not yearly

Where:
= Nominal interest rate, % per year compounded not yearly, % compounded not
yearly.
= %per not yearly compounded not yearly.
m = Number of compounding periods per year

Note: For several compounding periods per year in a specific scenario, the calculation
for compound interest is as follows:
( ) ( ) ( )

6. Interest rate conversion formula

This conversion formula is one of the power tool in engineering economic analysis
since it can calculate the interest rate depending on the payment modes and convert
to its equivalent effective interest rate.

By 1Peso- 1 Year Analysis:

( )( )
( ) ( )
( )( )
( ) ( )
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7. Continuous Compound Interest

Where:
uture worth, amount after “n” periods
P = Present worth
r = nominal interest rate
t = Number of interest period, time in year(s)

8. DISCOUNT
Discount is a deduction from the usual cost of products or services, typically given
from prompt or advance payment. Discount is an interest on loaned amount
immediately deducted from the loan upon release of it considering a 1 year end
period. It is an interest paid in advance.

9. INFLATION
Inflation is the increase in the prices for goods and services from one year to another
thus decreasing the purchasing power of the money
( )
Where:
FC = Future cost of the same commodity
PC = Present cost of a commodity
f= annual inflation rate
n= number of years

In an inflationary economy, the buying power of money decreases as costs increases

Case 1: If interest is not compounded at the time inflation is occurring

( )
Case 2: If interest is being compounded at the same time that inflation is occurring
( )
( )
( )
Where:
uture worth measured in today’s pesos
P = Present amount

10. CASH FLOW DIAGRAM ANALYSIS

A cash flow diagram is a graphical representation of cash flows on a time scale.
Receipt is taken as the positive cash flow and disbursement as a negative cash flow.
Cash flow diagram can be viewed in two different perspective: By the investor and by
the borrower.

SUPPLEMENTARY PROBLEMS:
Example 1.1 State whether the following year is an ordinary or a leap year.
a. 1994
b. 1992
c. 2100
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d. 2020
e. 2000

Conventional Solution (Using Formula):

Note: A year is a leap year if it is divisible by 4 provided it doesn’t end with ’ . f it
ends with ’ , it is only a leap year when it is divisible by 4 .
a.) 1994
1994 4 = 498.5 (Ordinary Year)

b. 1992
1992 4 = 498 (Leap Year)
c. 2100
2100 4 = 525 (Not accepted since 2100 is a century year, ends with ’ )
2100 400 = 5.25 (Ordinary Year)

d. 2020
2020 4 = 505 (Leap Year)

e. 2000
2000 4 = 500
2000 400 = 5 (Leap Year)

Example 1.2 Find the future amount and the ordinary simple interest on ₱1,000 for
8months and 20 days at an interest rate of 10%.

Conventional Solution (Using Formula):

Step 1: Determine what type of interest (if simple or compound)

“Simple nterest”

Step 2: If simple interest, determine if ordinary or exact.

“Ordinary simple interest”

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Step 3: If ordinary simple interest, solve for n in terms of year

n = 8months and 20days = 8mos. (30days/1mo) + 20days = 260days
n= 260days (1yr/360days) = 0.7222yr

Step 4: Solve for interest

I = Pin = ₱1000*0.10*0.7222 = ₱72.22

Step 5: Solve for the future amount

F = P + I = ₱1000+ ₱72.22 = ₱1072.22

Example 1.3 Determine the future amount and exact simple interest on 500 for the
period from January 10 to October 28, 1996 at 16%interest.

Conventional Solution (Using Formula):

Step 1: Determine what type of interest (if simple or compound)
“Simple nterest”

Step 2: If simple interest, determine if ordinary or exact.

“Exact simple interest”

Step 3: If ordinary simple interest, solve for n in terms of year

Month/Date Days Remarks
January 10- 21 (Excluding January
31 10)
February 29
March 31
April 30
May 31
June 30

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July 31
August 31
September 30
28 (Including October
October 28)
TOTAL 292
n = 292days (1leap yr. /366days) = 0.7978yr
Step 4: Solve for interest
I = Pin = ₱500*0.16*0.7978 = ₱63.824

Step 5: Solve for the future amount

F = P + I = ₱500+ ₱63.824 = ₱563.824

Example 1.4 Which of the following gives the highest annual income? Lowest annual
income?
a.) 12.25% compounded quarterly
b.) 12% compounded monthly
c.) 12.75% compounded annually
d.) 12.5% compounded semi-annually

Conventional Solution:
( )( )
( ) ( )
( )( )
( ) ( )
Where:
- Effective interest rate, % per year compounded yearly, % per annum
compounded annually
– Nominal interest rate, % per year compounded not yearly, % compounded not
yearly.
- %per not yearly compounded not yearly.

a.) 12.25% compounded quarterly

.
( ) .
4

b.) 12% compounded monthly

( ) .

c.) 12.75% compounded annually

.
( ) .

d.) 12.5% compounded semi-annually

.
( ) .
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Thus,
The highest annual income is 12.5% compounded semi-annually
The lowest annual income is 12% compounded monthly

Example 1.5 A nominal interest of 3% compounded continuously is given on the

account. What is the accumulated amount of ₱10,000 after 10 years?

Conventional Solution:
Step 1: Determine what type of interest (if simple or compound)
“Compound nterest”

Step 2: If compound interest, determine what type of interest rate

“Continuous Compounding”

Step 3: Use formula

. ( )
₱ ,
₱ ,4 .

Example 1.6 A month borrowed ₱5000 from a bank and agreed to pay the loan at the
end of 9months. The bank discounted the loan and gave him ₱4000 in cash.
a. What was the rate of discount?
b. What was the rate of interest?
c. What was the rate of interest for one year?

Conventional Solution:
a.) d = Discount/Principal = 1000/5000 = 0.20 or 20%
b.) i = Interest/Present Worth = 1000/4000 = 0.25 or 25%
c. I = Pin
1000 = 4000 (9/12)
= 0.3333 or 33.33%

Example 1.7 A man invested ₱10,000 at an interest rate of 10% compounded annually.
What will be the final amount of his investment, in terms of today’s pesos, after five
years, if inflation remains the same at the rate of 8% per years?

Conventional Solution:
.
( ) ₱ , ( ) ₱ .
.

Example 1.8 A ₱2000 loan was originally made at 8% simple interest for 4 years. At
the end of this period the loan was extended for 3 years, without the interest being
paid, but the new interest rate was made 10% compounded semi-annually. How much
should the borrower pay at the end of 7 years?

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Conventional Solution:
Step 1: Draw cash flow diagram

Step 2: Formulate equation of value

Reference Period @ 7 years
( )
.
[₱ ( (4 . ))] ( ) ₱ .

Alternate Solution:
Do necessary conversion so that payments and rate are uniform
Convert Semi-annual nominal rate to Annual rate
.
*( ) + ( )

[₱ ( (4 . ))]( . ) ) ₱ .

Self-Help

You can also refer to the sources below to help you and guide you further understand
the lesson:

Park, Chan S. (2011), Contemporary Engineering Economics (5th Edition), New Jersey: Pearson
Education, Chapters 8, 9, 11
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Blank, L T., (2012), Engineering Economy (7th Edition), New York: McGraw Hill, Chapter 9, 10,
11, 12, 13, 16, 17

Sta. Maria, H., Engineering Economy (3th Edition), National Book Store

Panneerselvam, R., (2012), Engineering Economics (Eastern Economy Edition), New Delhi: PHI
Learning Private Limited

Lindeburg, M., (2014), Civil Engineering Reference Manual for the PE Exam (14th Edition),
California: Professional Publications, Inc.

Let’s Check

Activity 1: Now that you review the most essential principles in engineering economy. Let us
try to check your understanding by solving the following cost problems:

1. How many years will it take for an investment to double, if the interest rate is 8%
per year, compounded annually?

2. How much money will be required four years from today to repay a ₱ , loan
that is made today at 8% interest compounded annually?

3. How much money will be required four years from today to repay a ₱ , loan
that is made today at 8% simple interest?

4. At what rate of interest, compounded annually will an investment triple itself in 8

years?

5. If ₱ is earned in three months on an investment of₱ , , what is the annual

rate of simple interest?

Let’s Analyze

Activity 1: Getting acquitted with the essential terminology and basic concepts in the study of
engineering economy is not enough, one should be able to analyze and solve complex cost
problems involving interest, cash flow analysis, annuities and decision making methods.

At this juncture, you will be required to elaborate your answers about the following questions:

1. On the first day of the year, a man deposits ₱1,000 in a bank at 8% per year
compounded annually. He withdraws ₱80 at the end of the first year, ₱ at the end
of the second year, and the remaining balance at the end of the third year. How much
does he withdraw at the end of the third year?
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________

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________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________

2. What amount of money is equivalent to receiving ₱ , two years from today, if

interest is compounded quarterly at the rate of 2.5% per quarter?
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________________________________________________________________________________________________________

3. On the first day of the year, a man deposits ₱1,000 in a bank at 8% per year
compounded annually. He withdraws ₱80 at the end of the first year, ₱ at the end
of the second year, and the remaining balance at the end of the third year. How much
better off, in terms of net cash flow, would he have been if he had not made the
withdrawals at the ends of years one and two?
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________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
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________________________________________________________________________________________________________
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________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________

4. A person lends ₱2,000 for five years at 10% per annum simple interest; then the
entire proceeds are invested for 10 years at 9% per year, compounded annually. How
much money will the person have at the end of the entire 15-year period?
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
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________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________

5. On the first day of the year, a man deposits ₱1,000 in a bank at 8% per year
compounded annually. He withdraws ₱80 at the end of the first year, ₱ at the end
of the second year, and the remaining balance at the end of the third year. What is the
net cash flow?

________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________
________________________________________________________________________________________________________

In a Nutshell

Activity 1: Based from the definition of the most essential terms in the study of curriculum
and the learning exercises that you have done, please feel free to write your arguments or
lessons learned below. I have indicated my arguments or lessons learned.

1. There are two types of simple interest; ordinary and exact simple interest.
2. Ordinary simple interest is based on 360 banker days per year.

Your Turn

3. ____________________________________________________________________________________________________
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4. ____________________________________________________________________________________________________
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5. ____________________________________________________________________________________________________
____________________________________________________________________________________________________
____________________________________________________________________________________________________
6. ____________________________________________________________________________________________________
____________________________________________________________________________________________________
____________________________________________________________________________________________________
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7. ____________________________________________________________________________________________________
____________________________________________________________________________________________________
____________________________________________________________________________________________________
8. ____________________________________________________________________________________________________
____________________________________________________________________________________________________
____________________________________________________________________________________________________
9. ____________________________________________________________________________________________________
____________________________________________________________________________________________________
____________________________________________________________________________________________________
10. ____________________________________________________________________________________________________
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11. ____________________________________________________________________________________________________
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12. ____________________________________________________________________________________________________
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13. ____________________________________________________________________________________________________
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14. ____________________________________________________________________________________________________
____________________________________________________________________________________________________
____________________________________________________________________________________________________

Q & A List

List 1: After series of discussion and exercises, kindly list down your questions or issues in
conjunction with the topics. Write the answers after clarification under the column provided.
This portion helps you in the review of concepts and essential knowledge.

Do you have any questions for clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.

Keywords Index

Index: The keywords presented here will help you remember the concepts and essential
knowledge. Here are the few subject index.

C D E I
Compound interest Discount Exact simple Interest
interest Inflation
Effective interest
rate
N O R S
Nominal interest Ordinary simple Rate of return Simple Interest
rate interest
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