Name: Michael John D.

Naral Year & Section: 2ECE-B

SAQ:

1. An engineer purchased a bond for ₱1M. This pays an interest of ₱50,000.00 each year for 20 years,
thereafter on the maturity, will return the original investment. If there is a 2% annual inflation during
this period, what rate of return will the engineer receive after considering the effect of inflation?

Given:

Bond = 1,000,000

Interest for 20 years = 50,000

Annual Inflation = 2%

Solution:

50,000
ROR= ×100=5 %
1,000,000

Inflatio n adjusted returnannually=5−2=3 %

Inflation adjusted ROR ∈20 years =3 ×20=60 %

2. A machine cost ₱2M today. If inflation is 6% per year and the interest is 10% per year, what will be the
appropriate future worth of the machine adjusted for inflation in 5 years.

Real interest rate=Nominal Interest rate – Inflation=10 %−6 %=4 %

5
Futureworth=2,000,000 ( 1+0.04 ) =2,443,305.81

3. The future amount of ₱10,000.00 for a period of 8 years is equal to ₱34,165.55 considering money’s
worth of 10% per year and with an unknown inflation rate per year. What must be the value of f to
support this ?
n
F=P(1+i)

34,165.55=10,000 (1+ i)8

i=16.60 %
 (1+i)
( 1+r )=
(1+ f )

(1+16.60 %)
( 1+10 % )=
(1+f )

f =6 %

Student Assessment Question:

1. At 6% interest rate, find the capitalized cost of a building whose cost is ₱250M with a life of 20 years.
The building must be partially rebuilt at a cost of ₱130M at the end of each 20 years.

C 0−C n
Capitalized cost=C0 +
( 1+ i )n −1

130,000,000
Capitalized cost=250,000,000+ =308,899,873.4
( 1+6 % )20−1

2. A new boiler was installed by a textile plant at a cost of ₱3,000,000 and projected to have a useful life
of 15years. At the end of its useful life, it is estimated to have a salvage value of ₱300,000. Determine its
capitalized cost if interest is 18% compounded annually.

A=P(1+i)n

A=3,000,000(1+18 %)15 =35,921,243.66

A−300,000
Capitalized cost=
( 1+ i )n

35,921,243.66−3 00,000
Capitalized cost= =29 ,74945.19
( 1+18 % )15
3. A machine cost P1,500,000 and will have a scrap value of P150,000 when retired at the end of 15
years. If money is worth 4.8%, find the annual investment and the capitalized cost of the machine.

[ ]
n
Scrap i ( 1+i )
A= −Cost + n
[ n
]
( 1+ i ) ( 1+i ) −1

[ ][ ]
15
150,000 4.8 % ( 1+ 4.8 % )
A= −1,500,000+ 15
=−135,509.7546
( 1+ 4.8 % ) ( 1+ 4.8 % )15−1

A+ A
Capitalized cost=
( 1+i )n−1

−135,509.7546−135,509.7546
Capitalized cost= =268,321.35
( 1+4.8 % )15−1

4. A bridge that was constructed at a cost of ₱75,000,000 is expected to last 30 years, at the end of
which time its renewal cost will be P40,000,000. Annual repairs and maintenance are P3,000,000. What
is the capitalized cost of the bridge at an interest of 6%?

5. An asset was purchased for ₱1,000,000.00 to be retired at the end of 15 years with a salvage value of
₱40,000. The annual operating cost was ₱180,000. Determine the capitalized cost of the asset if money
is worth of 8%.

Given:

Asset was purchased = ₱1,000,000.00

Annual operating cost = ₱180,000

Salvage value = ₱40,000

( 1+i )15 −1 1
Capitalized cost=Purchased + Annual cost × 15
−S alvage value × 15
i ( 1+i ) ( 1+i )

( 1+8 % )15−1 1
Capitalized cost=1,000,000.00+180,000 × 15
−40,000 × 15
8 % (1+ 8 % ) ( 1+8 % )

Capitalized cost=2,528,096.496