ENGINEERING ECONOMY • CAPITAL RECOVERY

Capital recovery =
• SIMPLE INTEREST (!-+./)[ (#())% #
+(S.V.)i
I = Prt (Simple Interest) (#())% +)
F=P+I • ANNUAL INVESTMENT COST
F = P + Prt Annual Cost = Annual interest +
F = P(1 + rt) Annual depreciation + Annual
t = is based on 360 days operating cost
(!-+./))
• COMPOUND INTEREST A.C. = (FC) + (#())% + ) +O.C.
1. F = P(1 + i)n
• BOND
where: F = compound amount after [!0 (#())$ +#] -
n years Vn = (#())$ )
+ (#())$
P = present worth or principal Vn = value of bond certificate
(1 + i)n = single payment compound r = dividend rate of bond
amount factor i = rate of investment
n = number of periods Fr = periodic dividend of bond
2. Effective rate of interest C = F (redemption price)
Ie = (1 + i)n – 1 • DEPRECIATION
• INTEREST COMPOUNDED Annual depreciation =
!-+./
CONTINOUSLY 2
1. Present worth: Total depreciation after 5 yrs =
! (!-+./)
P = "! 2
(5)
P = present worth Book value = F.C – total
F = future worth depreciation
r = rate of continuous compound • DEPRECIATION BY DECLINING
interest BALANCE METHOD
n = no. of periods 1. Annual rate of depreciation:
2. Future worth: SV = FC (1 – K)n
F = P er n SV = Salvage Value
3. Compound amount factor: FC = First Cost
er n = compound amount factor K = annual rate of depreciation
4. Present worth factor: n = life in years
#
= present worth factor 2. Book Value:
" " $ BV = FC (1 – K)m
5. Effective annual interest: m = the mth year
ie = er – 1 BV = book value
ie = effective annual interest rate 3. Depreciation at the nth year:
r = nominal rate of interest Dep = FC (1 – K)m-1 K
compounded continuously 4. Total Depreciation
Note: For a given effective rate, the smallest
nominal rate is when it is compounded
Total dep = FC – SV
continuously
• DEFFERED ANNUITY
1. Present worth:
$[ (#())% +#
P1 = (#())% )
,&
P1 = (#())'
2. Future worth
$[ (#())( +#
F1 =
)
F = F1(1 +i)4
• DEPRECIATION USING SUM OF • RATE OF INFLATION
YEARS DIGIT METHOD (SOYD) Corrected Interest Rate Considering
2
Sum of years = (n+1) Inflation
3
If n = 10, i’ = I + if + f
#4 i’ = corrected rate of inflation
Sum = 3 (11) = 55 i = rate interest
Sum = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 f = rate of inflation
+ 9 + 10 = 55 • CAPITALIZED COST
Year Depreciation Capitalized Cost
#4 (!-+./) J.-.
1st (FC – SV) 55 = FC + (#())$ + ) + )
6
2nd (FC – SV) 55 Annual Cost
7 (!-+./))
3rd
(FC – SV) 55 = (FC)i + (#())$ + ) +O.C.
8 J.-.
4th (FC – SV) 55 Capitalized Cost = FC + )
8
Dep. of the 4th year = (FC – SV) 55 • BENEFIT COST RATIO
Total depreciation at the end of the Benefit cost ratio
KGLHLB? M>G?E >D NLBLDI?H
4th year =
(#4(6(7(8)
(FC – SV) =
KGLHLB? M>G?E >D :>H?
55
Book value at the end of the 4th year • RATE OF RETURN
BV = FC – total dep. at the end of Rate of Return
KG>DI?
the 4th year = 9IOLP :@QI?@A(R>GSIBT :@QI?@A
• DEPRECIATION BY SINKING UL? IBV>WL
FUND METHOD Rate of Return = :@QI?@A
Annual depreciation • PAYOUT PERIOD IN YEARS
(!-+./)) Payout period
A = (#())$ +#
9IOLP :@QI?@A
Total depreciation after x years: =
XBBF@A KG>DI?(XBBF@A PLQGLVI@?I>B
$[(#())) +#] • RECOVERY PERIOD IN YEARS
Total dep = ) 9IOLP :@QI?@A(R>GSIBT :@QI?@A
BV = FC – Total depreciation = XBBF@A KG>DI?
• DEPRECIATION USING WORKING • PRESENT WORTH OF
HOURS METHOD PERPETUITY
Depreciation per hour $
P=
(9:+;<) )
= =>?@A B>.>D E>FGH A = Annual perpetuity
• DEPRECIATION USING i = rate of compounded interest
CONSTANT UNIT METHOD
(9:+;<)
Depreciation per unit = =>?@A B>.>D FBI?H
• ANNUITY DUE
1. Present Worth of Annuity Due
𝐴[(1 + 𝑖)2+# − 1]
P= +𝐴
(1 + 𝑖)2+# 𝑖]
2. Future Worth of Annuity Due
𝐴[(1 + 𝑖)2+# − 1]
P= −𝐴
𝑖
3. Difference Between the Sums of
an Annuity Due and an Ordinary
Annuity
Difference = 𝐴[(1 + 𝑖)2+# − 1]