ESci 134m – Engineering Economy

1st Semester, AY 2020 – 2021

MIDTERM OUTPUT

Name: JOHN MIKO M. JAVIER Due Date: 12 March 2021

Course & Year: BSME – 4 Date Submitted: 12 March 2021

I. Terminology, Symbols and Cash Flow Diagrams

1. Identify the four engineering economy symbols and their values from the following problem
statement. Use a question mark with the symbol whose value is to be determined.

Thompson Mechanical Products is planning to set aside 7.5 million pesos now for possibly replacing its
large synchronous refiner motors whenever it becomes necessary. If the replacement is not needed for
7 years, how much will the company have in its investment set-aside account, provided it achieves a rate
of return of 11% per year?

Ans:

P = 7,500,000
t = 7 years
i = 11%
F=?

2. The symbol 𝑃 represents an amount of money at a time designated as present. The following symbols
also represent a present amount of money and require similar calculations. Explain what each symbol
stands for: 𝑃𝑊, 𝑃𝑉, 𝑁𝑃𝑉, 𝐷𝐶𝐹, and 𝐶𝐶.

Ans:
PW – Present Worth
PV – Present Value
NPV – Net Present Value
DCF – Discounted Cash Flow
CC – Capitalized Cost
3. Construct a cash flow diagram for the following cash flows: Php 1.25 million outflow at time 0, Php
450,000 inflow in year 1 through 5 at an interest rate of 10% per year, and an unknown future amount
in year 5.

4. Construct a cash flow diagram that represents the amount of money that will be accumulated in 15
years from an investment of 2 million pesos now at an interest rate of 8% per year.
III. Simple and Compound Interest

1. Iselt Welding has extra funds to invest for future capital expansion. If the selected investment pays
simple interest, what interest rate would be required for the amount to grow from Php 300,000 to
Php450,000 in five years?

2. To finance a new product line, a company that makes high-temperature ball bearings borrowed 90
million pesos at 10% per year interest. If the company repaid the loan in a lump sum after 2 years, what
was the (a) amount of the payment and (b) the amount of interest?

3. Because market interest rates were near all-time lows at 4% per year, a hand tool company decided
to call (i.e. payoff) the high-interest bonds that it issued 3 years ago. If the interest rate on the bonds
was 9% per year, how much does the company have to pay the bond holders? The face value (principal)
of the bond is 30 million pesos.
4. A solid waste disposal company borrowed money at 10% pe year interest to purchase new haulers
and other equipment needed at the company-owned landfill site. If the company got the loan 2 years
ago, and paid it off with a single payment of 230 million pesos, what was the principal amount of the
loan?

5. If interest is compounded at 20% per year, how long will it take for 2.5 million pesos
to accumulate to 4.32 million pesos?
6. To make Certificate of Deposits look more attractive than they really are, some banks
advertise that their rates are higher than their competitors’ rates; however, the fine print
says that the rate is a simple interest rate. If a person deposits 500,000 pesos at 10%
per year simple interest, what compound interest rate would yield the same amount of
money in 3 years?

7. Ordinary simple interest is based on a banker’s year of 12 months at 30 days (360

days a year) while exact simple interest is based on the actual calendar days of the
year, 365 days for an ordinary year and 366 days for a leap year. Determine the
ordinary and exact simple interests on P5,000 for the period January 14- June 20, 1993
if the rate of simple interest is 14%. (Note: 1993 is an ordinary year)
IV. Interest Rate Statements

Interest Rate Statement Nominal or Effective Compounding Time Period

Interest Period

1. 12% per year Nominal annually year

Interest
2. 8% per year Nominal monthly year
compounded monthly Interest

3. Effective 10% per Effective monthly year

year compounded Interest
monthly
4. 1% per month Nominal monthly month
Interest
5. 4% per quarter Nominal monthly year
compounded monthly Interest
6. Effective 6% per Effective quarterly quarter
quarter Interest
7. 3% per quarter Nominal Quarterly quarter
Interest

8. 14% per year Nominal Semi-annually year

compounded Interest
semiannually
9. Effective 1% per Effective Daily month
month compounded Interest
daily
2. Three different bank load rates for electric generation equipment are listed below. Determine
the effective rate based on the compounding period for each rate.

(a) 9% per year compounded quarterly.

(b) 9% per year compounded monthly.
(c) 4.5% per 6 months, compounded weekly.

V. Discount

1. A businessman borrowed money from a bank to start up his dying business due to the pandemic. He
received Php 134,200 and agreed to pay Php 150,000 at the end of nine months. Determine the
discount rate and interest rate in this transaction.
2. While looking for a scholarship, a student applied of a Php 100,000 loan to finance the first year of
graduate studies. The loan firm approved his loan ang gave him Php 85,000. The student agreed to pay
the principal after one year. What is the interest rate in this case?

3. University tuition and fees can be paid by using one of two plans.

Early-bird: Pay total amount due 1 year in advance and get a 10% discount.
On-time: Pay total amount due when classes start.
The cost of tuition and fees is Php 250,000 per year. (a) How much is paid in the early-bird plan? (b)
What is the equivalent amount of the savings compared to the on-time payment at the time that the on-
time payment is made?
4. During a recession, the price of goods and services goes down because of low demand. A company
that makes. Ethernet adapters is planning to expand its production facility at a cost of 50 million pesos
one year from now. However, a contractor who needs work has offered to do the job for 39.5 million
pesos if the company will do the expansion now instead of 1 year from now. If the interest rate is 15%
per year, how much of a discount is the company getting?

VI. Inflation

1. Based on news report, it is predicted that there will be an average annual inflation of 8.20% in
the prices of commodities in the next ten years. Assuming this prediction to be accurate, a home
currently costing 5.1 million pesos will be how much ten years from now?
2. A real estate agent said that a house he sold in 1980 for 3.7 million pesos was sold by the
buyer for 9 million pesos in 1990. If the increase in price is solely due to inflation, determine the
rate of inflation between 1980 and 1990.

3. On his son’s fifth birthday, the father deposited a certain amount of money which will become
Php 280,000 (in today’s purchasing power) on his son’s eighteenth birthday for his college
education. If the bank pays 5.50% while inflation is 8.70%, how much did the father deposited
on his son’s fifth birthday?
4. A man wishes to set aside some money in a fund for his retirement at 60 years old which will
have an amount equivalent to Php 500,000 in today’s purchasing power. The estimated inflation
rate is 6.50%. If the fund will earn 9% compounded semi-annually, how much should he invest if
he is still 45 years old?