Problem 1

It is estimated that a certain piece of equipment can save

a company $22,000 per year in labor and material costs.
However, it will need to undergo maintenance costing
$1,000 after every 2 years of operation. The equipment
has an expected life of five years and no salvage value
(i.e. the equipment will be worthless at the end of its
useful life). If the company must earn a 15% annual
return on such investments, how much could be justified
now for the purchase of this piece of equipment? Only
set up the cash-flow diagram from the company’s
viewpoint.

Modified from Engineering Economy 13th ed.

 Problem 1

22000 22000 22000 22000 22000

1000 1000

i = 15%

P
Problem 2

Suppose a child opens a savings account with simple

interest rate of 0.5% per year and deposits the
minimum amount of Php 1,000. The child wants to
purchase a backpack estimated to be worth Php
2,500 one year from now. How much is the minimum
amount that the child must deposit at the end of
every month for the next eleven months to be to be
able to buy the backpack by the end of one year?
Round up to the nearest peso.
 Problem 2

1000 + 1000(0.005) + A(11) + A(0.005)(11/12 + 10/12 + 9/12 +

8/12 + 7/12 + 6/12 + 5/12 + 4/12 + 3/12 + 2/12 + 1/12) = 2500

2500

Month Month Month Month Month Month Month Month Month Month Month Month
1 2 3 4 5 6 7 8 9 10 11 12
A A A A A A A A A A A

1
1000
i = 0.5% simple interest
 Problem 2

1005 + A(11.0275) = 2500

A = 135.5701655 ≈ Php 136

2500

Month Month Month Month Month Month Month Month Month Month Month Month
1 2 3 4 5 6 7 8 9 10 11 12
A A A A A A A A A A A

1
1000
i = 0.5% simple interest
Problem 3

100k 100k

F=?
80K 80K

60K 60K

40K

1 2 3 4 5 6 7 8 9 10 11 12

i = 10%
Problem 3
F1
40K 40K 40K 40K 40K 40K 40K

1 2 3 4 5 6 7 8 9 10 11 12

60K 60K 60K + F2

1 2 3 4 5 6 7 8 9 10 11 12

60K
+
40K F3

20K

1 2 3 4 5 6 7 8 9 10 11 12
20K
40K
i = 10%
Problem 3

F1 = 40000(P/A,10%,7)(F/P,10%,12)
= 40000(4.8684)(3.1384)
= 611159.4624

F1
40K 40K 40K 40K 40K 40K 40K

1 2 3 4 5 6 7 8 9 10 11 12

i = 10%
Problem 3

F2 = 60000(P/A,10%,3)(F/P,10%,12)
= 60000(2.4869)(3.1384)
= 468293.2176

60K 60K 60K F2

1 2 3 4 5 6 7 8 9 10 11 12

i = 10%
Problem 3

F3 = (-20000)(P/G,10%,3)(F/P,10%,12) +
20000(P/G,10%,4)(F/P,10%,10)
= 20000(2.329)(3.1384) + 20000(4.378)(2.5937)
= 80917.7 60K
40K F3

20K

1 2 3 4 5 6 7 8 9 10 11 12
20K
40K
i = 10%
Problem 3

F = F 1 + F2 + F3
= 611159.4624 + 468293.2176 + 80917.7
= 1,160,370.38
100k 100k

F
80K 80K

60K 60K

40K

1 2 3 4 5 6 7 8 9 10 11 12

i = 10%
Problem 4

An individual is borrowing $10,000 at 8% interest

compounded quarterly. The loan is to be repaid in
equal annual payments over 10 years. However just
after the fifth payment is made, the lender allows
the borrower to pay off the remainder of the loan in
one lump-sum payment on the end of the sixth year.
How much is the lump-sum amount to be paid off at
the end of the sixth year?

Modified from Engineering Economy 13th ed.

 Problem 4
10K

1 2 3 4 5 6 7 8 38 39 40

10K A1 A1 A1

1 2 3 4 5 6 7 8 21 22 23 24

A1 A1 A1
r = 8% compounded quarterly
A2
or
i = 2%
 Problem 4

A’ = A1(A/F,2%,4)
= A1(0.2426)

10K

1 2 3 4 5 6 7 8 38 39 40

A1 A1 A1
A’ A’ A’ A’

i = 2%
 Problem 4

A’ = A1(A/F,2%,4)
= A1(0.2426)

10K

1 2 3 4 5 6 7 8 38 39 40

A1 A1 A1
A’ A’ A’ A’ A’ A’ A’ A’ A’ A’ A’

i = 2%
 Problem 4

10000 = A’(P/A,2%,40)
10000 = A1(0.2426)(27.3555)
A1 = 1506.831
10K

1 2 3 4 5 6 7 8 38 39 40

A’ A’ A’ A’ A’ A’ A’ A’ A’ A’ A’ A’

i = 2%
 Problem 4

10000 = A’(P/A,2%,40)
10000 = A1(0.2426)(27.3555)
A1 = 1506.831
10K

1 2 3 4 5 6 7 8 21 22 23 24

A1 A1 A1

A2

i = 2%
 Problem 4

A’ = A1(A/F,2%,4)
= (1506.831)(0.2426)
= 365.5572006
10K

1 2 3 4 5 6 7 8 21 22 23 24

A’ A’ A’ A’ A’ A’ A’ A’ A’

A2

i = 2%
 Problem 4

10000 = (365.5572006)(P/A,2%,20) + A2(P/F,2%,24)

10000 = (365.5572006)(P/A,2%,20) + A2(P/F,2%,24)
10000 = (365.5572006)(16.3514) + A2(0.6217)
10K A2 = 6470.3368329 ≈ $6470.34

1 2 3 4 5 6 7 8 21 22 23 24

A’ A’ A’ A’ A’ A’ A’ A’ A’

A2

i = 2%