UNIT 2 EXERCISE

ESM3043 Engineering Economy

Suppose that annual income from a
rental property is expected to start
at ₱65,000 per year and decrease
at a uniform amount of ₱2,500
each year after the first year for the
15-year expected life of the
property. The investment cost is
₱400,000, and interest is 9% per
year. Is this a good investment?
Assume that the investment occurs
at time zero (now) and that the
annual income is first received at
end of year one.
Suppose that annual income
from a rental property is 𝑃𝑉𝑇 > 𝐼 𝑜𝑟 𝑁𝐼 = 𝑃𝑉𝑇 − 𝐼
expected to start at ₱65,000 per
year and decrease at a uniform 𝑃𝑉𝑇 = 𝑃𝐴 + 𝑃𝐺
amount of ₱2,500 each year
after the first year for the 15- 1 − 1.09−15 2,500 1 − 1.09−15 15
year expected life of the 𝑃𝑉𝑇 = 65,000 − −
.09 .09 .09 1.0915
property. The investment cost is
₱400,000, and interest is 9% 𝑃𝑉𝑇 = ₱414,427.59
per year. Is this a good
investment? Assume that the
investment occurs at time zero
(now) and that the annual
income is first received at end of
year one.
You owe your best friend ₱2,000. Because
you are short on cash, you offer to repay
the loan over 12 months under the
following condition. The first payment will
be ₱100 at the end of month one. The
second payment will be ₱100 + G at the
end of month two. At the end of month
three, you will repay ₱100 + 2G. This
pattern of increasing G amounts will
continue for all remaining months.
What is the value of G if the interest rate is
0.5% per month?
You owe your best friend ₱2,000. Because
you are short on cash, you offer to repay
the loan over 12 months under the
following condition. The first payment will
be ₱100 at the end of month one. The
second payment will be ₱100 + G at the
end of month two. At the end of month
three, you will repay ₱100 + 2G. This
pattern of increasing G amounts will
continue for all remaining months.
What is the value of G if the interest rate is
0.5% per month?
𝑃𝑉𝑇 = 𝑃𝐴 + 𝑃𝐺

1 − 1.005−12 𝐺 1 − 1.005−12 12
2,000 = 100 + −
.005 .005 .005 1.00512
𝐺 = ₱13.26
What is the equivalent uniform
monthly payment?

1 − 1.005−12
2,000 = 𝐴
.005

𝐴 = ₱172.13
 Repeat part (a) when the first payment
is ₱150 (i.e., determine G).

1 − 1.005−12 𝐺 1 − 1.005−12 12
2,000 = 150 + −
.005 .005 .005 1.00512

𝐺 = ₱4.07
Suppose that the parents of a young child decide to make annual deposits into a savings
account, with the first deposit being made on the child’s fifth birthday and the last deposit
being made on the 15th birthday. Then, starting on the child’s 18th birthday, the withdrawals
as shown will be made. If the effective annual interest rate is 8% during this period of time,
what are the annual deposits in years 5 through 15? Use a uniform gradient amount (G) in
your solution.

𝐹𝐴1 1 + 𝑖 2 = 𝑃𝐴2 + 𝑃𝐺

1.0811 − 1 2
1 − 1.08−4 20,000 1 − 1.08−4 4
𝐴1 1.08 = 100,000 + −
.08 .08 .08 .08 1.084

𝐴1 = ₱21,849.50

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A retail outlet is being designed in a mall in Baguio. For this
outlet, the installed fiberglass insulation to protect against heat
loss in the cold season and heat gain in the warmer season will
cost an estimated ₱100,000. The annual savings in energy due
to the insulation will be ₱18,000 at end of year one in the 10-year
life of the outlet, and these savings will increase by 12% each
year thereafter. If the annual interest rate is 15%, is the cost of
the proposed amount of insulation justified?

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 𝑃𝑉𝑇 > 𝐼

1 − 1.12 10 1.15 −10

𝑃𝑉𝑇 = 18,000
0.15 − 0.12

𝑃𝑉𝑇 = ₱139,369.09

A retail outlet is being designed in a mall in Baguio. For this

outlet, the installed fiberglass insulation to protect against heat
loss in the cold season and heat gain in the warmer season will
cost an estimated ₱100,000. The annual savings in energy due
to the insulation will be ₱18,000 at end of year one in the 10-year
life of the outlet, and these savings will increase by 12% each
year thereafter. If the annual interest rate is 15%, is the cost of
the proposed amount of insulation justified?

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Start saving for retirement immediately! Even a modest amount will add up in a hurry. Jay decides to
follow this advice and puts away 1% of his annual salary of ₱500,000 per year. This equates to ₱5,000
on his 21st birthday, and his salary will increase by 2% (on average) every year thereafter until Jay
turns 60 years old. What is the worth of Jay’s account at age 60 when the annual interest rate of his
account is 4% per year?

1.0440 − 1.0240
𝐹𝑉𝑇 = 5,000
0.04 − 0.02

𝐹𝑉𝑇 = ₱648,245.24

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