Cee Bsce 1st Term 1st Sem Cee 109

UNIVERSITY OF MINDANAO
College of Engineering Education

Civil Engineering Program
Physically Distanced but Academically Engaged
Self-Instructional Manual (SIM) for

Self-Directed Learning (SDL)
Course/Subject: CE 109: ENGINEERING ECONOMICS

Name of Author: Engr. CALAQUE, DARIO JR. A.
THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR REPRODUCTION AND
DISTRIBUTION OUTSIDE OF ITS INTENDED USE. THIS IS INTENDED ONLY FOR THE
USE OF THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
2nd Floor, B&E Building
Matina Campus, Davao City
Telefax: (082) 296-1084
Phone No.: (082)300-5456/300-0647 Local 133
TABLE OF CONTENTS
PAGE
Cover Page ………………………………………………………………………………………………. i
Table of Contents………………………………………………………………………………………. 1
Course Outline…………………………………………………………………………………………... 5
Course Outline Policy………………………………………………………………………………… 5
Course Information…………………………………………………………………………………… 8
Topic/ Activity
Unit Learning Outcomes- Unit 1…………………………………………………………………. 8
Big Picture in Focus: ULO-1a…………………………………………………………………..….. 9

Metalanguage…………………………………………………………………………………... 9
Essential Knowledge………………………………………………………………………… 10
Self-Help………………………………………………………………………………………….. 16
Let’s Check ……………………………………………………………………………………….. 16
Let’s Analyze…………………………………………………………………………………….. 17
In a Nutshell…………………………………………………………………………………….. 17
Q & A List ………………………………………………………………………………………… 18
Keywords Index………………………………………………………………………………. 19
Big Picture in Focus: ULO-1b…………………………………………………………………..….. 20

Metalanguage…………………………………………………………………………………... 20
Self-Help………………………………………………………………………………………….. 29
Let’s Check ……………………………………………………………………………………….. 30
Let’s Analyze…………………………………………………………………………………….. 30
In a Nutshell…………………………………………………………………………………….. 32
Q & A List ………………………………………………………………………………………… 33
Keywords Index………………………………………………………………………………. 33
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Big Picture in Focus: ULO-1c…………………………………………………………………..….. 34

Metalanguage…………………………………………………………………………………... 34
Self-Help………………………………………………………………………………………….. 38
Let’s Check ……………………………………………………………………………………….. 39
Let’s Analyze…………………………………………………………………………………….. 39
In a Nutshell…………………………………………………………………………………….. 41
Q & A List ………………………………………………………………………………………… 42
Keywords Index………………………………………………………………………………. 42

Metalanguage…………………………………………………………………………………... 43
Self-Help………………………………………………………………………………………….. 50
Let’s Check ……………………………………………………………………………………….. 51
Let’s Analyze…………………………………………………………………………………….. 51
In a Nutshell…………………………………………………………………………………….. 52
Q & A List ………………………………………………………………………………………… 53
Keywords Index………………………………………………………………………………. 53

Metalanguage…………………………………………………………………………………... 54
Self-Help………………………………………………………………………………………….. 57
Let’s Check ……………………………………………………………………………………….. 57
Let’s Analyze…………………………………………………………………………………….. 58
In a Nutshell…………………………………………………………………………………….. 60
Q & A List ………………………………………………………………………………………… 61
Keywords Index………………………………………………………………………………. 61
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Metalanguage…………………………………………………………………………………... 62
Self-Help………………………………………………………………………………………….. 68
Let’s Check ……………………………………………………………………………………….. 69
Let’s Analyze…………………………………………………………………………………….. 69
In a Nutshell…………………………………………………………………………………….. 71
Q & A List ………………………………………………………………………………………… 72
Keywords Index………………………………………………………………………………. 72

Metalanguage…………………………………………………………………………………... 73
Self-Help………………………………………………………………………………………….. 79
Let’s Check ……………………………………………………………………………………….. 79
Let’s Analyze…………………………………………………………………………………….. 82
In a Nutshell…………………………………………………………………………………….. 83
Q & A List ………………………………………………………………………………………… 84
Keywords Index………………………………………………………………………………. 84

Metalanguage…………………………………………………………………………………... 85
Self-Help………………………………………………………………………………………….. 89
Let’s Check ……………………………………………………………………………………….. 90
Let’s Analyze…………………………………………………………………………………….. 90
In a Nutshell…………………………………………………………………………………….. 91
Q & A List ………………………………………………………………………………………… 92
Keywords Index………………………………………………………………………………. 92
Course Schedules…………………………………………………………………..….. 93
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Page 4 of 95
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Course Outline: CEE 109– Engineering Economics
Course Coordinator: Dario A. Calaque, Jr.

Email: dcalaque@umindanao.edu.ph
Student Consultation: By appointment
Mobile: 0929 893 9547
Phone: Office Contact No. 2961084 local 133.
Effectivity Date: May 25, 2020
Mode of Delivery: Blended (On-line with face to face or virtual sessions)
Time Frame: 108 hours
Student Workload: Expected Self-Directed Learning
Pre-requisite: CEE 102/L – Physics 1 for Engineers (Calculus Based)
CEE 101 – Engineering Calculus 1
Co-requisite: None
Credit: 3.0 units lecture
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled Virtual or face-to-face sessions
Course Outline Policy
Areas of Concern Details

Contact and Non-contact Hours This 2-unit course self-instructional manual is designed
for blended learning mode of instructional delivery
with scheduled face to face or virtual sessions. The
expected number of hours will be 108 including the
face-to-face or virtual sessions. The face-to-face
sessions shall include the summative assessment tasks
(exams) since this course is crucial in the licensure
examination for civil engineers.
Assessment Task Submission Submission of assessment tasks shall be on 3rd, 5th, 7th
and 9th week of the term. The assessment paper shall be
attached with a cover page indicating the title of the
assessment task (if the task is performance), the name
of the course coordinator, date of submission and name
of the student. The document should be emailed to the
course coordinator. It is also expected that you already
paid your tuition and other fees before the submission
of the assessment task.
If the assessment task is done in real time through the

features in the Blackboard Learning Management
System, the schedule shall be arranged ahead of time by
the course coordinator.
Since this course is included in the licensure

examination for civil engineers, you will be required to
take the Multiple-Choice Question exam inside the
University. This should be scheduled ahead of time by
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your course coordinator. This is non-negotiable for all

licensure-based programs.
Turnitin Submission To ensure honesty and authenticity, all assessment
(if necessary) tasks are required to be submitted through Turnitin
with a maximum similarity index of 30% allowed. This
means that if your paper goes beyond 30%, the
students will either opt to redo her/his paper or explain
in writing addressed to the course coordinator the
reasons for the similarity. In addition, if the paper has
reached more than 30% similarity index, the student
may be called for a disciplinary action in accordance
with the University’s OPM on Intellectual and Academic
Honesty.
Please note that academic dishonesty such as cheating

and commissioning other students or people to
complete the task for you have severe punishments
(reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after the
Assignments/Assessments designated time on the due date, without an approved
extension of time, will be reduced by 5% of the possible
maximum score for that assessment item for each day
or part day that the assessment item is late.
However, if the late submission of assessment paper

has a valid reason, a letter of explanation should be
submitted and approved by the course coordinator. If
necessary, you will also be required to present/attach
evidences.
Return of Assignments/ Assessment tasks will be returned to you two (2) weeks
Assessments after the submission. This will be returned by email or
via Blackboard portal.
For group assessment tasks, the course coordinator will

require some or few of the students for online or virtual
sessions to ask clarificatory questions to validate the
originality of the assessment task submitted and to
ensure that all the group members are involved.
Assignment Resubmission You should request in writing addressed to the course
coordinator his/her intention to resubmit an
assessment task. The resubmission is premised on the
student’s failure to comply with the similarity index and
other reasonable grounds such as academic literacy
standards or other reasonable circumstances e.g.
illness, accidents financial constraints.
Re-marking of Assessment You should request in writing addressed to the
Papers and Appeal program coordinator your intention to appeal or
contest the score given to an assessment task. The letter
should explicitly explain the reasons/points to contest
the grade. The program coordinator shall communicate
with the students on the approval and disapproval of
the request.
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If disapproved by the course coordinator, you can

elevate your case to the program head or the dean with
the original letter of request. The final decision will
come from the dean of the college.
Grading System All culled from BlackBoard sessions and traditional
contact
Course discussions/exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%
All culled from on-campus/onsite sessions (TBA):

Final exam – 40%
Submission of the final grades shall follow the usual

University system and procedures.
Referencing Style IEEE
Student Communication You are required to create a umindanao email account
which is a requirement to access the BlackBoard
portal.
Then, the course coordinator shall enroll the
students to have access to the materials and resources
of the course. All communication formats: chat,
submission of assessment tasks, requests etc. shall be
through the portal and other university recognized
platforms.
You can also meet the course coordinator in person

through the scheduled face to face sessions to raise
your issues and concerns.
For students who have not created their student email,

please contact the course coordinator or program
head.
Contact Details of the Dean Dr. Charlito L. Cañesares
Email: clcanesares@umindanao.edu.ph
Phone: (082) 296-1084 or 300-5456 loc. 133
Contact Details of the Program Engr. Showna Lee T. Sales
Head Email: ssales@umindanao.edu.ph
Phone: (082) 296-1084 or 300-5456 loc. 133
Students with Special Needs Students with special needs shall communicate with
the course coordinator about the nature of his or her
special needs. Depending on the nature of the need, the
course coordinator with the approval of the program
coordinator may provide alternative assessment tasks
or extension of the deadline of submission of
assessment tasks. However, the alternative assessment
tasks should still be in the service of achieving the
desired course learning outcomes.
Help Desk Contact Jetron J. Adtoon
Email: jadtoon@umindanao.edu.ph
Phone: 09055267834
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Frida Santa O. Dagatan

Email: cee@umindanao.edu.ph
Phone: 09562082442
Tel: 082-2272902
Library Contact Brigida E. Bacani
Email: library@umindanao.edu.ph
09513766681
Ronadora E. Deala, RPsy, RPm, RGC, LPT

Email: ronadora_deala@umindanao.edu.ph
Phone: 09212122846
Silvino P. Josol
Email: gstcmain@umindanao.edu.ph
Phone: 09060757721
Course Information- see/download course syllabus in the BlackBoard LMS
CC’s Voice: Hello future engineer! Welcome to this course CEE 109: Engineering Economics
By now, I am confident that you really wanted to become an engineer…
CO: Upon completion of the course, you are expected to:
CO 1: Solve problems involving interest and time value of money.

CO 2: Evaluate project alternatives by applying engineering economic principles
and methods and select the one that is economically efficient.
CO 3: Deal with risk and uncertainty in project outcomes by applying the basic
economic decision-making concepts.
Let us begin!
Big Picture
Week 1-3: Unit Learning Outcomes-Unit 1 (ULO-1): At the end of the unit, you are expected to
a. Be able to introduce the basic principles in economy, supply and demand

relationship.
b. Be able to determine the simple interest and compound interest, cash flow
diagrams and their applications to real life situations.
c. Be able to apply concept of cost, annuities and bonds in the decision making
through the present economic studies.
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Big Picture in Focus: ULO-1a. Be able to introduce the basic principles in economy,
supply and demand relationship.
Metalanguage
The most essential terms below are defined for you to have a better understanding of
this section in the course.
1.0 Engineering Economic Analysis

In its simplest form, an engineering economic analysis is a study of the desirability of
making an investment. It is primarily inspired by the work that engineers do in
performing analyses, synthesizing, and coming to a conclusion as they work on projects
of all sizes. Moreover, engineering economy is at the center of making decisions. These
decisions involve the fundamental elements of cash flows of money, time, and interest
rates.
2.0 Cost
The accounting profession has developed special terms for certain group of costs. When
annual costs are incurred due to the functioning of a piece of equipment, they are
known as Operating and Maintenance (O&M) Costs. The annual costs associated with
operating a business (other than the costs directly attributable to production) are
known as General, Selling, and Administrative (GS & A) Expenses.
Direct Labor Costs are costs incurred in the factory, such as assembly, machining, and
painting labor costs. Direct Material Costs are the costs of all materials that go into
production. Typically, both direct labor and direct material costs are given on a per-unit
or per-item basis. The sum of the direct labor and direct material costs is known as the
Prime Costs.
3.0 Expenses
Indirect Manufacturing Expenses (IME) Or Indirect Material and Labor Costs is the
costs of factory supervision, stock- picking, quality control, factory utilities, and
miscellaneous supplies (cleaning fluids, assembly lubricants, routing tags, etc.) that are
not incorporated into the final product.
FACTORY COST is the sum of the per-unit indirect manufacturing expenses and prime
cost.
Research And Development (R&D) Costs and Administrative Expenses are added to the
factory costs to give manufacturing cost of the product.
Selling Expenses or Marketing Expenses is an additional cost are incurred in marketing
the product.
TOTAL COST is the sum of the selling expenses and manufacturing.
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Essential Knowledge
The objective of a cost engineer is to deal with the money and economy. In order to
understand the flow of money, one must know the following economic parameters:
1. Non-Quantifiable Factors
An engineering economic analysis is a quantitative analysis. Some factors cannot be
introduced as numbers into the calculations. Such factors are known as non-
quantitative factors, judgment factors, and irreducible factors. Typical non quantifiable
factors are:
1. Preferences
2. Political ramifications
3. Urgency
4. Goodwill
5. Prestige
6. Utility
7. Corporate Strategy
8. Environmental Effects
9. Health and Safety Rules
10. Reliability
11. Political Risks
Since these factors are not included in the calculations, the policy is to disregard the
issues entirely. Of course, the factors should be discussed in a final report. The factors
are particularly useful in breaking ties between competing alternatives that are
economically equivalent.
2. Economics
Economics is concerned with the well-being of all people, including those with jobs and
those without jobs, as well as those with high incomes and those with low incomes.
Economics acknowledges that production of useful goods and services can create
problems of environmental pollution.
It explores the question of how investing in education helps to develop workers’ skills.
It probes questions like how to tell when big businesses or big labor unions are
operating in a way that benefits society as a whole and when they are operating in a
way that benefits their owners or members at the expense of others.
3. Microeconomics and Macroeconomics
That ground can be divided into two parts:

Microeconomics focuses on the actions of individual agents within the economy, like
households, workers, and businesses;
Macroeconomics looks at the economy as a whole. It focuses on broad issues such as

growth of production, the number of unemployed people, the inflationary increase in
prices, government deficits, and levels of exports and imports.
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Microeconomics and macroeconomics are not separate subjects, but rather

complementary perspectives on the overall subject of the economy.
4. Demand for Goods and Services

Economists use the term demand to refer to the amount of some good or service
consumers are willing and able to purchase at each price. Demand is based on needs
and wants—a consumer may be able to differentiate between a need and a want, but
from an economist’s perspective they are the same thing.
Demand is also based on ability to pay. If you cannot pay for it, you have no effective
demand. What a buyer pays for a unit of the specific good or service is called price. The
total number of units purchased at that price is called the quantity demanded. A rise in
price of a good or service almost always decreases the quantity demanded of that good
or service.
Conversely, a fall in price will increase the quantity demanded. When the price of a
gallon of gasoline goes up, for example, people look for ways to reduce their
consumption by combining several errands, commuting by carpool or mass transit, or
taking weekend or vacation trips closer to home.
5. Supply for Goods and Services

Price is what the producer receives for selling one unit of a good or service. A rise in
price almost always leads to an increase in the quantity supplied of that good or service,
while a fall in price will decrease the quantity supplied.
When the price of gasoline rises, for instance, it encourages profit-seeking firms to take
several actions: expand exploration for oil reserves; drill for more oil; invest in more
pipelines and oil tankers to bring the oil to plants where it can be refined into gasoline;
build new oil refineries; purchase additional pipelines and trucks to ship the gasoline
to gas stations; and open more gas stations or keep existing gas stations open longer
hours.
6. Ceteris Paribus Assumption

A demand curve or a supply curve is a relationship between two, and only two,
variables: quantity on the horizontal axis and price on the vertical axis. The assumption
behind a demand curve or a supply curve is that no relevant economic factors, other
than the product’s price, are changing. Economists call this assumption ceteris paribus,
a Latin phrase meaning “other things being equal.” Any given demand or supply curve
is based on the ceteris paribus assumption that all else is held equal.
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7. Price Ceilings and Price Floors

Laws that government enacts to regulate prices are called Price controls. Price controls
come in two flavors. A price ceiling keeps a price from rising above a certain level (the
“ceiling”), while a price floor keeps a price from falling below a certain level (the
“floor”).
Price ceilings are enacted in an attempt to keep prices low for those who demand the
product. But when the market price is not allowed to rise to the equilibrium level,
quantity demanded exceeds quantity supplied, and thus a shortage occurs. Those who
manage to purchase the product at the lower price given by the price ceiling will benefit,
but sellers of the product will suffer, along with those who are notable to purchase the
product at all. Quality is also likely to deteriorate.
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A price floor is the lowest legal price that can be paid in markets for goods and services,
labor, or financial capital. Perhaps the best-known example of a price floor is the
minimum wage, which is based on the normative view that someone working full time
ought to be able to afford a basic standard of living.
Price ceilings prevent a price from rising above a certain level. When a price ceiling is
set below the equilibrium price, quantity demanded will exceed quantity supplied, and
excess demand or shortages will result. Price floors prevent a price from falling below
a certain level. When a price floor is set above the equilibrium price, quantity supplied
will exceed quantity demanded, and excess supply or surpluses will result. Price floors
and price ceilings often lead to unintended consequences.
8. Consumer, Producer and Social Surplus

Consumer surplus is the gap between the price that consumers are willing to pay, based
on their preferences, and the market equilibrium price. Producer surplus is the gap
between the price for which producers are willing to sell a product, based on their costs,
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and the market equilibrium price. Social surplus is the sum of consumer surplus and
producer surplus. Total surplus is larger at the equilibrium quantity and price than it
will be at any other quantity and price. Deadweight loss is loss in total surplus that
occurs when the economy produces at an inefficient quantity.
9. Fixed and Variable Costs

If a cost is a function of the independent variable, the cost is said to be a VARIABLE
COST. The change in cost per unit variable change (i. e, usually called the slope) is
known as the INCREMENTAL COST. Material and labor costs are examples of variable
costs.
If a function is not a function of the independent variable, the cost is said to be a FIXED
COSTS. Rent and lease payments are typical fixed costs.
10. Accounting Costs and Expenses Terms

The accounting profession has developed special terms for certain group of costs. When
annual costs are incurred due to the functioning of a piece of equipment, they are
known as OPERATING and MAINTENANCE (O&M) Costs. The annual costs associated
with operating a business (other than the costs directly attributable to production) are
known as GENERAL, SELLING, and ADMINISTRATIVE (GS&A) EXPENSES.
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DIRECT LABOR COSTS are costs incurred in the factory, such as assembly, machining,
and painting labor costs. DIRECT MATERIAL COSTS are the costs of all materials that
go into production. Typically, both direct labor and direct material costs are given on a
per-unit or per-item basis. The sum of the direct labor and direct material costs is
known as the PRIME COSTS.
Indirect Manufacturing Expenses (IME) Or Indirect Material and Labor Costs is the
costs of factory supervision, stock- picking, quality control, factory utilities, and
miscellaneous supplies (cleaning fluids, assembly lubricants, routing tags, etc.) that are
not incorporated into the final product.
FACTORY COST is the sum of the per-unit indirect manufacturing expenses and prime
cost.
Research And Development (R&D) Costs and Administrative Expenses are added to the
factory costs to give manufacturing cost of the product.
Selling Expenses or Marketing Expenses is an additional cost are incurred in marketing
the product.
TOTAL COST is the sum of the selling expenses and manufacturing.
SUPPLEMENTARY PROBLEMS:
Example 1.1: In the field of economics, supply and demand are the two basic and
important terms to be fully understood. In terms of economics, the forces of supply and
demand determine our everyday lives as they set the prices of the goods and services
we buy daily. Although, law of supply and demand are introduced separately, it’s the
combination of the two concepts that determine how much of a good and services is to
be produced and consumed in an economy and at what price. These issue can be solve
through the concept of equilibrium price and quantity in a market. Suppose the quantity
demanded of Good Z (𝑄𝑍 𝐷𝐸𝑀𝐴𝑁𝐷 ) depends upon its price (𝑃𝑍 ), monthly income (Y), and
the price of a related Good W (𝑃𝑊 ). The demand for Good Z (𝑄𝑍 ) is expressed by the
equation= 𝑄𝑍 𝐷𝐸𝑀𝐴𝑁𝐷 = 150 − 8𝑃𝑍 + 2𝑌 − 15𝑃𝑊 . The monthly income (Y) is equal to
50 pesos and the price related to Good W (𝑃𝑊 ) is equal to 6 pesos. On the other hand,
the supply for Good Z (𝑄𝑍 𝑆𝑈𝑃𝑃𝐿𝑌 ) is expressed as 𝑄𝑍 𝑆𝑈𝑃𝑃𝐿𝑌 = −20 + 2𝑃𝑍 . In general,
the condition for equilibrium in a market is that the quantity supplied is equal to the
quantity demanded. This equilibrium identity determines the market price P, since
quantity supplied and quantity demanded are both functions of price. However, most
states impose sales tax on some goods and services as a means of generating revenue.
In this event, sales taxes also influence consumer behavior. Now, for instance, suppliers
must pay a tax of 6 pesos per unit of Good Z. Determine the equilibrium price and
quantity.
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Conventional Solution:
Quantity demand = 150 – 8Pz +2Y -15Pw
Where: Pz = price of Good Z
Y = monthly income = 50pesos
Pw = price of related Good W = 6pesos
Quantity supply = -20 + 2Pz
Tax = 6pesos per unit of Good Z
Qz = 150 – 8Pz + 2Y – 15Pw

Qz = 150 – 8Pz + 2(50) – 15(6) = 160 -8Pz ---eq’n (1)
Qz = -20 + 2Pz
Point of Equilibrium: Supply =Demand

-20+2Pz = 160 – 8Pz
Pz = 18pesos (answer)
Qz = 160 -8Pz = 16units
Or Qz = -20+2Pz = 16units (answer)
Self-Help
You can also refer to the sources below to help you and guide you further understand
the lesson:
Park, Chan S. (2011), Contemporary Engineering Economics (5th Edition), New Jersey: Pearson
Education, Chapters 8, 9, 11
Blank, L T., (2012), Engineering Economy (7th Edition), New York: McGraw Hill, Chapter 9, 10,
11, 12, 13, 16, 17
Sta. Maria, H., Engineering Economy (3th Edition), National Book Store
Panneerselvam, R., (2012), Engineering Economics (Eastern Economy Edition), New Delhi: PHI
Learning Private Limited
Lindeburg, M., (2014), Civil Engineering Reference Manual for the PE Exam (14th Edition),
California: Professional Publications, Inc.
Let’s Check
Activity 1: Now that you review the most essential principles in engineering economy. Let us
try to check your understanding by solving the following cost problems:
Situation 01. What is law of supply and demand? Cite an example.
Situation 02: How shortage and surplus affect the economy?
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Let’s Analyze
Activity 1: Getting acquitted with the essential terminology and basic concepts in the study of
engineering economy is not enough, one should be able to analyze and solve complex cost
problems involving interest, cash flow analysis, annuities and decision making methods.
At this juncture, you will be required to elaborate your answers about the following questions:
1. In the field of economics, supply and demand are the two basic and important terms to be
fully understood. In terms of economics, the forces of supply and demand determine our
everyday lives as they set the prices of the goods and services we buy daily. Although, law of
supply and demand are introduced separately, it’s the combination of the two concepts that
determine how much of a good and services is to be produced and consumed in an economy
and at what price. These issue can be solve through the concept of equilibrium price and
quantity in a market. Suppose the quantity demanded of Good Z (𝑄𝑍 𝐷𝐸𝑀𝐴𝑁𝐷 ) depends upon its
price (𝑃𝑍 ), monthly income (Y), and the price of a related Good W (𝑃𝑊 ). The demand for Good
Z (𝑄𝑍 ) is expressed by the equation= 𝑄𝑍 𝐷𝐸𝑀𝐴𝑁𝐷 = 150 − 8𝑃𝑍 + 2𝑌 − 15𝑃𝑊 . The monthly
income (Y) is equal to 60 pesos and the price related to Good W (𝑃𝑊 ) is equal to 12 pesos. On
the other hand, the supply for Good Z (𝑄𝑍 𝑆𝑈𝑃𝑃𝐿𝑌 ) is expressed as 𝑄𝑍 𝑆𝑈𝑃𝑃𝐿𝑌 = −20 + 2𝑃𝑍 . In
general, the condition for equilibrium in a market is that the quantity supplied is equal to the
quantity demanded. This equilibrium identity determines the market price P, since quantity
supplied and quantity demanded are both functions of price. However, most states impose sales
tax on some goods and services as a means of generating revenue. In this event, sales taxes also
influence consumer behavior. Now, for instance, suppliers must pay a tax of 6 pesos per unit of
Good Z. Determine the following requirements:
a. How much should the consumers pay for any Good Z considering tax in pesos?
b. Due to tax, the quantity diminished by how much in units?
c. How much is the tax revenue for Good Z in pesos?
d. What is the equilibrium price without tax in pesos?
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In a Nutshell
Activity 1: Based from the definition of the most essential terms in the study of curriculum and
the learning exercises that you have done, please feel free to write your arguments or lessons
learned below. I have indicated my arguments or lessons learned.
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1. A demand curve or a supply curve is a relationship between two, and only two,
variables: quantity on the horizontal axis and price on the vertical axis.
2. Both direct labor and direct material costs are given on a per-unit or per-item
basis.
Your Turn
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Q & A List
List 1: After series of discussion and exercises, kindly list down your questions or issues in
conjunction with the topics. Write the answers after clarification under the column provided.
This portion helps you in the review of concepts and essential knowledge.
Do you have any questions for clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
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Keywords Index
Index: The keywords presented here will help you remember the concepts and essential
knowledge. Here are the few subject index.
A C D F
Administrative Ex. Cost Direct Material Costs Factory Cst.
Cost Of Miscellaneous Direct Labor Costs Fixed Costs
Ceteris Paribus Depreciation
Consumer Expense
Cleanup Expenses Demand
Ceilings Development Costs
G J I L
General Expenses Janitorial Service Expense Indirect Labor Costs
General Burden Manufacturing
Goods Expenses (IME)
Indirect Material
Interest On Loans
Insurance
Income Taxes
Incremental Costs
M N O P
Marketing Expenses Non-Quantifiable Factors Operating Costs Prime Costs
Marketing Costs Overhead Costs Property
Microeconomics Payroll
Macroeconomics Price
Maintenance Costs Price Floors
Producers
R S T U
Research Costs Selling Expenses Total Cost Utility costs
Rent Selling Costs Tooling Expense
Setup Expenses Tear-Down Expenses
Supervision Costs Taxes
Services
Supply
Surplus
V
Variable costs
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Big Picture in Focus: ULO-1b. Be able to determine the simple interest and
compound interest, cash flow diagrams and their applications to real life situations.
Metalanguage
1. INTEREST
Interest is the charge paid for the use of borrowed capital or the income produced by
money which has been loaned.
2. TYPES OF INTEREST
Interest can be applied to loan in two types: Simple and Compound. Simple interest is
an interest relative to the principal amount only while compound interest is an interest
on interest. Simple interest works in favor with the borrower because it keeps the
accumulated amount that you pay lower than it would be with the compound interest.
Compound interest, on the other hand, works in favor with the investor because it
returns to compound as much as possible to get the most of the investment.
3. SIMPLE INTEREST
Simple Interest is a quick method of calculating interest charged on a loan. It is
determined by multiplying the interest rate by the principal by the number of periods.
These type of interest benefits consumers who pay loans on time or early each month.
Auto loans and short-term personal loans are common examples of simple interest
loans.
4. COMPOUND INTEREST
Compound interest is an interest on top of interest. The general formula in solving the
future amount after “n” periods is expressed as follows:
5. DISCOUNT
Discount is a deduction from the usual cost of products or services, typically given from
prompt or advance payment. Discount is an interest on loaned amount immediately
deducted from the loan upon release of it considering a 1 year end period. It is an
interest paid in advance.
6. INFLATION
Inflation is the increase in the prices for goods and services from one year to another
thus decreasing the purchasing power of the money
7. CASH FLOW DIAGRAM ANALYSIS

A cash flow diagram is a graphical representation of cash flows on a time scale. Receipt
is taken as the positive cash flow and disbursement as a negative cash flow. Cash flow
diagram can be viewed in two different perspective: By the investor and by the
borrower.
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Essential Knowledge
1. SIMPLE INTEREST
Simple Interest is a quick method of calculating interest charged on a loan. It is
determined by multiplying the interest rate by the principal by the number of periods.
These type of interest benefits consumers who pay loans on time or early each month.
Auto loans and short-term personal loans are common examples of simple interest
loans.
The general formula in solving the future amount after “n” periods is expressed as
follows:
F=P+I
F = P(1 + in)
Where:
F = Accumulated amount, future worth, amount after “n” periods
P = Present worth, money loaned, money received, money deposited made for “n”
periods, money invested
I = interest
2. TYPES OF SIMPLE INTEREST

Simple interest can be divided into two types:
2.1 Ordinary simple interest – based on 30 days per month or 360 days per year (also
known as the banker’s year)
𝐼 = 𝑃𝑖𝑛
Where:
I – Interest
P – Present value, principal amount
i –Interest rate
n – Number of periods = 𝑑/360 (banker’s year)
2.2 Exact simple interest – based on 365 days per year or 366 days for a leap year.
𝐼 = 𝑃𝑖𝑛
Where:
I – Interest
P – Present value, principal amount
i –Interest rate
n – Number of periods = 𝑑/365 (ordinary year)
n – Number of periods = 𝑑/366 (leap year)
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Note: A year is a leap year if it is divisible by 4 provided it doesn’t end with ’00. If it
ends with ’00, it is only a leap year when it is divisible by 400.
LEAP YEAR MATRIX YEAR NOT ENDING WITH '00

1989 1993 1997 2001 2005 2009 2013 2017
1990 1994 1998 2002 2006 2010 2014 2018
1991 1995 1999 2003 2007 2011 2015 2019
1992 1996 2000 2004 2008 2012 2016 2020
CENTURY YEAR
1300 1700 2100 2500 2900 3300 3700 4100
1400 1800 2200 2600 3000 3400 3800 4200
1500 1900 2300 2700 3100 3500 3900 4300
1600 2000 2400 2800 3200 3600 4000 4400
3. Inclusion-Exclusion Dates Rule:

Take for example, the interest for the period from January 10 to October 28 of the same
year.
4 COMPOUND INTEREST
Compound interest is an interest on top of interest. The general formula in solving the
future amount after “n” periods is expressed as follows:
F = P(1 + i)n (From Present to Future)
P = F(1 + i)−n (From Future to Present)
Where:
F = Future worth
P = Present worth
i = Compound interest rate
n = Number of compounding periods = 𝑚 𝑡
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m = Number of compounding periods per year

t = Time in year(s)
(1 + i)n = Single payment compound future amount factor
(1 + i)−n = Single payment compound present worth factor
5 Types of Compound Interest Rate

5.1 Effective interest rate, 𝑖𝑒𝑓𝑓 = % per year compounded yearly, % per annum
compounded annually
5.2 Nominal interest rate, 𝑖 = % per year compounded not yearly
𝑗
𝑖=
𝑚
Where:
𝑗 = Nominal interest rate, % per year compounded not yearly, % compounded not
yearly.
𝑗/𝑚 = %per not yearly compounded not yearly.
m = Number of compounding periods per year
Note: For several compounding periods per year in a specific scenario, the calculation
for compound interest is as follows:
𝐹 = 𝑃[(1 + 𝑖)𝑛𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦 (1 + 𝑖)𝑛𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦 (1 + 𝑖)𝑛𝑚𝑜𝑛𝑡ℎ𝑙𝑦 … ]
6. Interest rate conversion formula

This conversion formula is one of the power tool in engineering economic analysis since
it can calculate the interest rate depending on the payment modes and convert to its
equivalent effective interest rate.
By 1Peso- 1 Year Analysis:

1 𝑦𝑒𝑎𝑟 𝑗 (𝑚)(𝑡)
(1 + 𝑖𝑒𝑓𝑓 ) = (1 + )
𝑚
(𝑚)(𝑡)
1 𝑦𝑒𝑎𝑟 𝑗
(𝑖𝑒𝑓𝑓 ) = (1 + ) −1
𝑚
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7. Continuous Compound Interest

𝐹 = 𝑃𝑒 𝑟𝑡
𝑃 = 𝐹𝑒 −𝑟𝑡
Where:
F = Future worth, amount after “n” periods
P = Present worth
r = nominal interest rate
t = Number of interest period, time in year(s)
8. DISCOUNT
Discount is a deduction from the usual cost of products or services, typically given from
prompt or advance payment. Discount is an interest on loaned amount immediately
deducted from the loan upon release of it considering a 1 year end period. It is an
interest paid in advance.
9. INFLATION
Inflation is the increase in the prices for goods and services from one year to another
thus decreasing the purchasing power of the money
𝐹𝐶 = 𝑃𝐶(1 + 𝑓)𝑛
Where:
FC = Future cost of the same commodity
PC = Present cost of a commodity
f= annual inflation rate
n= number of years
In an inflationary economy, the buying power of money decreases as costs increases

Case 1: If interest is not compounded at the time inflation is occurring
𝑃
𝐹=
(1 + 𝑓)𝑛
Case 2: If interest is being compounded at the same time that inflation is occurring
𝑃(1 + 𝑖)𝑛 1+𝑖 𝑛
𝐹= = 𝑃( )
(1 + 𝑓)𝑛 1+𝑓
Where:
F = Future worth measured in today’s pesos
P = Present amount
10. CASH FLOW DIAGRAM ANALYSIS

A cash flow diagram is a graphical representation of cash flows on a time scale. Receipt
is taken as the positive cash flow and disbursement as a negative cash flow. Cash flow
diagram can be viewed in two different perspective: By the investor and by the
borrower.
Example 1.1 State whether the following year is an ordinary or a leap year.
a. 1994
b. 1992
c. 2100
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d. 2020
e. 2000
Conventional Solution (Using Formula):

Note: A year is a leap year if it is divisible by 4 provided it doesn’t end with ’00. If it ends
with ’00, it is only a leap year when it is divisible by 400.
a.) 1994
1994÷4 = 498.5 (Ordinary Year)
b. 1992
1992÷4 = 498 (Leap Year)
c. 2100
2100÷4 = 525 (Not accepted since 2100 is a century year, ends with ’00)
2100÷400 = 5.25 (Ordinary Year)
d. 2020
2020÷4 = 505 (Leap Year)
e. 2000
2000÷4 = 500
2000÷400 = 5 (Leap Year)
Example 1.2 Find the future amount and the ordinary simple interest on ₱1,000 for
8months and 20 days at an interest rate of 10%.
Step 1: Determine what type of interest (if simple or compound)

“Simple Interest”
Step 2: If simple interest, determine if ordinary or exact.

“Ordinary simple interest”
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Step 3: If ordinary simple interest, solve for n in terms of year

n = 8months and 20days = 8mos. (30days/1mo) + 20days = 260days
n= 260days (1yr/360days) = 0.7222yr
Step 4: Solve for interest

I = Pin = ₱1000*0.10*0.7222 = ₱72.22
Step 5: Solve for the future amount

F = P + I = ₱1000+ ₱72.22 = ₱1072.22
Example 1.3 Determine the future amount and exact simple interest on 500 for the
period from January 10 to October 28, 1996 at 16%interest.

“Simple Interest”
Step 2: If simple interest, determine if ordinary or exact.

“Exact simple interest”
Step 3: If ordinary simple interest, solve for n in terms of year

Month/Date Days Remarks
January 10- 21 (Excluding January
31 10)
February 29
March 31
April 30
May 31
June 30
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July 31
August 31
September 30
28 (Including October
October 28)
TOTAL 292
n = 292days (1leap yr. /366days) = 0.7978yr
Step 4: Solve for interest
I = Pin = ₱500*0.16*0.7978 = ₱63.824
Step 5: Solve for the future amount

F = P + I = ₱500+ ₱63.824 = ₱563.824
Example 1.4 Which of the following gives the highest annual income? Lowest annual
income?
a.) 12.25% compounded quarterly
b.) 12% compounded monthly
c.) 12.75% compounded annually
d.) 12.5% compounded semi-annually
1 𝑦𝑒𝑎𝑟 𝑗 (𝑚)(1)
(1 + 𝑖𝑒𝑓𝑓 ) = (1 + )
𝑚
(𝑚)(1)
1 𝑦𝑒𝑎𝑟 𝑗
(𝑖𝑒𝑓𝑓 ) = (1 + ) −1
𝑚
Where:
𝑖𝑒𝑓𝑓 - Effective interest rate, % per year compounded yearly, % per annum compounded
annually
𝑗 – Nominal interest rate, % per year compounded not yearly, % compounded not
yearly.
𝑗/𝑚 - %per not yearly compounded not yearly.
a.) 12.25% compounded quarterly

12.25% 4
𝑖𝑒𝑓𝑓 = (1 + ) − 1 = 12.82%
4
b.) 12% compounded monthly

12% 12
𝑖𝑒𝑓𝑓 = (1 + ) − 1 = 12.68%
12
c.) 12.75% compounded annually

12.75% 1
𝑖𝑒𝑓𝑓 = (1 + ) − 1 = 12.75%
1
d.) 12.5% compounded semi-annually

12.5% 2
𝑖𝑒𝑓𝑓 = (1 + ) − 1 = 12.89%
2
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Thus,
The highest annual income is 12.5% compounded semi-annually
The lowest annual income is 12% compounded monthly
Example 1.5 A nominal interest of 3% compounded continuously is given on the

account. What is the accumulated amount of ₱10,000 after 10 years?
“Compound Interest”
Step 2: If compound interest, determine what type of interest rate

“Continuous Compounding”
Step 3: Use formula

𝐹 = 𝑃𝑒 𝑟𝑡
𝐹 = ₱10,000𝑒 0.03(10)
F = ₱13,498.588
Example 1.6 A month borrowed ₱5000 from a bank and agreed to pay the loan at the
end of 9months. The bank discounted the loan and gave him ₱4000 in cash.
a. What was the rate of discount?
b. What was the rate of interest?
c. What was the rate of interest for one year?
a.) d = Discount/Principal = 1000/5000 = 0.20 or 20%
b.) i = Interest/Present Worth = 1000/4000 = 0.25 or 25%
c. I = Pin
1000 = 4000 𝑖 (9/12)
𝒊 = 0.3333 or 33.33%
Example 1.7 A man invested ₱10,000 at an interest rate of 10% compounded annually.
What will be the final amount of his investment, in terms of today’s pesos, after five
years, if inflation remains the same at the rate of 8% per years?
1+𝑖 𝑛 1 + 0.10 5
𝐹 = 𝑃( ) = ₱10,000 ( ) = ₱𝟏𝟎𝟗𝟔𝟎. 𝟖𝟔
1+𝑓 1 + 0.08
Example 1.8 A ₱2000 loan was originally made at 8% simple interest for 4 years. At the
end of this period the loan was extended for 3 years, without the interest being paid,
but the new interest rate was made 10% compounded semi-annually. How much
should the borrower pay at the end of 7 years?
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Step 1: Draw cash flow diagram
Step 2: Formulate equation of value

Reference Period @ 7 years
2(3)
0.10
[F7 ]COMPOUND = [₱2000(1 + (4𝑥0.08))] (1 + ) = ₱𝟑𝟓𝟑𝟕. 𝟖𝟓
2
Alternate Solution:
Do necessary conversion so that payments and rate are uniform
Convert Semi-annual nominal rate to Annual rate
0.10 2
[(1 + ) ] = [(1 + 𝑖)1 ]𝑎𝑛𝑛𝑢𝑎𝑙
2 𝑠𝑒𝑚𝑖−𝑎𝑛𝑛𝑢𝑎𝑙
𝑖 = 10.25% 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
[F7 ]COMPOUND = [₱2000(1 + (4𝑥0.08))](1 + 0.1025)3) = ₱𝟑𝟓𝟑𝟕. 𝟖𝟓
Self-Help
the lesson:
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11, 12, 13, 16, 17
Let’s Check
1. How many years will it take for an investment to double, if the interest rate is 8% per
year, compounded annually?
2. How much money will be required four years from today to repay a ₱2,000 loan that
is made today at 8% interest compounded annually?
3. How much money will be required four years from today to repay a ₱2,000 loan that
is made today at 8% simple interest?
4. At what rate of interest, compounded annually will an investment triple itself in 8

years?
5. If ₱300 is earned in three months on an investment of₱12,000, what is the annual

rate of simple interest?
Let’s Analyze
1. On the first day of the year, a man deposits ₱1,000 in a bank at 8% per year
compounded annually. He withdraws ₱80 at the end of the first year, ₱90 at the end of
the second year, and the remaining balance at the end of the third year. How much does
he withdraw at the end of the third year?
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2. What amount of money is equivalent to receiving ₱5,000 two years from today, if
interest is compounded quarterly at the rate of 2.5% per quarter?
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the second year, and the remaining balance at the end of the third year. How much
better off, in terms of net cash flow, would he have been if he had not made the
withdrawals at the ends of years one and two?
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4. A person lends ₱2,000 for five years at 10% per annum simple interest; then the
entire proceeds are invested for 10 years at 9% per year, compounded annually. How
much money will the person have at the end of the entire 15-year period?
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the second year, and the remaining balance at the end of the third year. What is the net
cash flow?
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In a Nutshell
1. There are two types of simple interest; ordinary and exact simple interest.
2. Ordinary simple interest is based on 360 banker days per year.
Your Turn
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6. ____________________________________________________________________________________________________
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7. ____________________________________________________________________________________________________
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8. ____________________________________________________________________________________________________
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9. ____________________________________________________________________________________________________
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10. ____________________________________________________________________________________________________
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11. ____________________________________________________________________________________________________
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12. ____________________________________________________________________________________________________
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13. ____________________________________________________________________________________________________
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14. ____________________________________________________________________________________________________
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Q & A List

1.
2.
3.
4.
5.
Keywords Index
C D E I
Compound interest Discount Exact simple Interest
interest Inflation
Effective interest
rate
N O R S
Nominal interest Ordinary simple Rate of return Simple Interest
rate interest
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Big Picture in Focus: ULO-1c. Be able to apply concept of cost, annuities and bonds
in the decision making through the present economic studies.
Metalanguage
1. ANNUITY
An annuity is a series of payments made at equal periods of time or equal end of year
payments. This may occur in the payment of debt, accumulation, substitution of series
of equal amounts and other financial activities such as installment payments, monthly
rentals, life insurance premium and monthly retirement benefits.
2. BONDS
A bond is a piece of contract giving the buyer an assurance that he will be able to collect
all income due to him. It is a method of long-term financing commonly used by
governments, states, municipalities, and very large corporations. The bond represents
a contract to pay the bondholder specific amounts of money at specific times. The
holder purchases the bond in exchange for specific payments of interest and principal.
Typical municipal bonds call for quarterly or semi-annual interest payments and a
payment of the face value of the bond on the date of maturity (end of bond period). Due
to the practice of discounting in the bond market, a bond’s face value and its purchase
price generally will not coincide.
Essential Knowledge
1. ANNUITY
An annuity is a series of payments made at equal periods of time or equal end of year
payments. This may occur in the payment of debt, accumulation, substitution of series
of equal amounts and other financial activities such as installment payments, monthly
rentals, life insurance premium and monthly retirement benefits.
2. TYPES OF ANNUITY
2.1. Ordinary Annuity – payment are made at the end of each period.
2.2. Deferred Annuity – one where the payment of the first amount is deferred a certain
number of periods after the first.
2.3. Annuity Due – one where the payments are made at the start of each period,
beginning from the first period.
2.4. Perpetuity – annuity where the payment periods extend forever on which the
periods payments continue indefinitely.
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3. INCOME DERIVED FROM BONDS
3.1. Periodic Dividend, d

It is an amount regularly received by an investor (i.e. buyer of bond every period
specified in the contract.)
𝑑=𝑟𝑝
Where:
r= bond paying rate or bond rate
p= face value or par value of bond
3.2. Redemption price

It is an amount received by the bond buyer upon surrender of matured or expired bond.
Example 1.1 An engine costing ₱40,000 may be purchased on installment plan by

paying ₱10,000 down payment, ₱5,000 at the end of the first year and 5 equal end of
year payments starting at the end of 2nd year. Determine the amount of these payments
if money is worth 10% effective.
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Example 1.2 A loan may be paid by 10 equal end of year payments of ₱1,000 each. If
interest rate is 10% effective. What 5 equal end of year payments will equitably repay
the said loan if the first payment falls at the end of 6th year?
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interest rate is 10% effective.
What 5 equal end of year payments will equitably repay the said loan if the first
payment falls at the end of the 3rd year?
interest rate is 10% effective. What 10 equal and consecutive semi-annual payments
starting at the end of 3rd year that will also equitably repay the said loan?
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Example 1.5 A ₱1,000 bond will mature in 10 years and with a bond rate of 10% payable
annually is to be redeemed at ₱1,040 at the end of this period. If it is sold now for ₱1,120,
determine the yield at this price.
Self-Help
the lesson:
11, 12, 13, 16, 17
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Let’s Check
1. ABC Corporation has decided to sell ₱1000 bonds which will pay semiannual
dividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at
₱830, but after brokers' fees and other expenses the company ends up receiving ₱760.
What is the company's cost of the capital raised through the sale of these bonds?
2. ABC Corporation has decided to sell ₱1000 bonds which will pay semiannual
dividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at
₱830, but after brokers' fees and other expenses the company ends up receiving ₱760.
Is the bond a good buy for an investor who expects a 9% return on his investments?
3. A student deposits ₱1,000 in a savings account that pays interest at the rate of 6%
per year compounded annually. If all the money is allowed to accumulate, how much
money will the student have after 12 years?
4. A certain sum of money will be deposited in a savings account that pays interest at
the rate of 6% per year compounded annually. If all the money is allowed to accumulate,
how much must be deposited initially so that ₱5000 will have accumulated after 10
years?
5. A student plans to deposit ₱600 each year in a savings account, over a period of 10
years. If the bank pays 6% per year compounded annually, how much money will have
accumulated at the end of the 10-year period?
Let’s Analyze
1. An engineer who is planning his retirement has decided that he will have to withdraw
₱10 000 from his savings account at the end of each year. How much money must the
engineer have in the bank at the start of his retirement, if his money earns 6% per year,
compounded annually, and he is planning a 12-year retirement (say 12 annual
withdrawals)?
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2. An engineer is planning for a 15-year retirement. In order to supplement his pension

and offset the anticipated effects of inflation, he intends to withdraw₱5000 at the end
of the first year, and to increase the withdrawal by ₱1000 at the end of each successive
year. How much money must the engineer have in his savings account at the start of his
retirement, if money earns 6% per year, compounded annually?
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3. How much money must initially be deposited in a savings account paying 5% per
year, compounded annually, to provide for ten annual withdrawals that start at ₱6000
and decrease by ₱500 each year?
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4. A man has deposited ₱50 000 in a retirement income plan with a local bank. This
bank pays 9% per year, compounded annually, on such deposits. What is the maximum
amount the man can withdraw at the end of each year and still have the funds last for
12 years
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5. A man has deposited ₱50 000 in a retirement income plan with a local bank. This
bank pays 8.75 % per year, compounded annually, on such deposits. What is the
maximum amount the man can withdraw at the end of each year and still have the funds
last for 12 years?
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In a Nutshell
1. Annuities is an end of year equal payments.
Your Turn
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6. ____________________________________________________________________________________________________
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Q & A List

1.
2.
3.
4.
5.
Keywords Index
A B C D
Annuity Bond Costs Deferred annuity
Annuity Due Capital Dividends
O P R
Ordinary Annuity Perpetuity Redemption price
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Big Picture
a. Be able to apply several depreciation methods in a real life applications such

as straight line method, sum of year’s digit method, declining balance
method, double declining balance method and sinking fund method.
b. Be able to introduce the basic economic study methods such as the present
worth, future worth, annual worth, internal and external rate of return
methods.
Big Picture in Focus: ULO-2a. Be able to apply several depreciation methods in a

real life applications such as straight line method, sum of year’s digit method,
declining balance method, double declining balance method and sinking fund
method.
Metalanguage
The most essential terms below are defined for you to have a better
understanding of this section in the course.
1. DEPRECIATION
The capital investments of a corporation in tangible assets—equipment, computers,
vehicles, buildings, and machinery—are commonly recovered on the books of the
corporation through depreciation. Although the depreciation amount is not an actual
cash flow, the process of depreciating an asset on the books of the corporation accounts
for the decrease in an asset’s value because of age, wear, and obsolescence. Even though
an asset may be in excellent working condition, the fact that it is worth less through
time is taken into account in after-tax economic evaluation studies.
2. IMPORTANCE OF DEPRECIATION TO ECONOMY

Why is depreciation important to engineering economy? Depreciation is a tax-allowed
deduction included in tax calculations in virtually all industrialized countries.
Depreciation lowers income taxes via the general relation
Taxes = (income - deductions) (tax rate)
3. DEPRECIATION METHOD
Depreciation is a book method (noncash) to represent the reduction in value of a
tangible asset. The method used to depreciate an asset is a way to account for the
decreasing value of the asset to the owner and to represent the diminishing value
(amount) of the capital funds invested in it. The annual depreciation amount is not an
actual cash flow, nor does it necessarily reflect the actual usage pattern of the asset
during ownership.
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Essential Knowledge
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7. SINKING FUND METHOD

(1 + 𝑖)𝑛 − 1
𝐷𝑛 = 𝑑 ( )
𝑖
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Example 1.1 A Xerox machine costing ₱75,000 with salvage value of ₱10,000 at the end
of its life can print 3,000,000 sheets in its entire life. If it has already printed 500,000
sheets, determine the total depreciation of the Xerox machine at that time.
Example 1.2 A machine costing ₱3,000,000 has a salvage value of ₱0.1M at the end of
its useful life, 20 years. It can be used for 5,000 hours in its entire life. Find the
accumulated depreciation after using it for 1,000 hours.
Example 1.3 A tax and duty free importation of a 30hp sand mill (for paint
manufacturing) cost ₱360,000. CIP Manila Bank charges, arrester and brokerage cost
₱5000. Foundation and installation cost were ₱25,000. Other incidental expenses
amounted to ₱20,000. Salvage value of the mill is estimated to be ₱60,000 after 20
years. Determine the appraisal value of the mill using straight line method of
depreciation at the end of 10 years.
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Example 1.4 A contractor imported a bulldozer for his manufacturer paying P250 000.
Freight and insurance amounted to P18 000, broker’s fees and arrester services, P8500.
Taxes, permits and others is P25000. If the contractor estimates the life of the bulldozer
to be 10 years with a salvage value of P20 000, determine the book value at the end of
6 years using sinking fund method.
Example 1.5 A machine is purchase for ₱100,000 with an estimated useful life of
10years, after which it will be sold for ₱2000. Find the book value at the end of the third
year using sum of year’s digit method (SYDM).
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Example 1.6 A machine costing P720 000 is estimated to have a book value of P40
545.73 when retired at the end of 10 years. Depreciation cost is computed using a
constant percentage method or declining balance method. What is the annual rate of
depreciation in %?
𝐿 𝑆𝑉
𝑘 =1− √
𝐹𝐶
10 40545.73
𝑘 =1− √ = 0.25 𝑜𝑟 𝟐𝟓%
720000
Example 1.7 Erectors Corporation owns earth moving equipment that cost ₱90,000.
After 8 years, it will have estimated salvage value of ₱18,000. Compute the depreciation
charge using double declining balance method at the end of 2nd year and the book value
at the end of 5th year.
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Self-Help
the lesson:
11, 12, 13, 16, 17
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Let’s Check
1. A certain equipment costs ₱7000 has an economic life of “n” years and a salvage value
of ₱350 at the end of “n” years. If the book value at the end of 4 years is equal to
₱2197.22, compute the economic life of the equipment using SYDM.
2. ABC Corporation makes its policy that for every new equipment purchased, the
annual depreciation cost should not exceed 20% of the first cost at any time without
salvage values. Determine the length of service if the depreciation used is SYDM.
3. A consortium of international communications companies contracted for the

purchase and installation of a fiber optic cable linking two major Asian cities at a total
cost of ₱960,000,000. This amount includes freight and installation charges at 10% of
the above total contract price. If the cable depreciated over a period of 15 years with
zero salvage value, what is the depreciation charge during the 5th year using SYDM?
4. The corporation purchased a machine for ₱1 million. Freight and installation charges
amounted to 3% of the purchase price. If the machine shall be depreciated over a period
of 8 years with a salvage value of 12%. Determine the depreciation charge during the
5th year using sum of year’s digit method.
5. A machine that cost ₱1,230,000 has estimated life of 10 years. If the predetermine
salvage value is ₱80,000. Compute the annual rate of depreciation charge using
declining balance method.
Let’s Analyze
1. A radio service panel truck initially cost ₱56,000. Its resale value at the end of the 5th
year of the useful life is estimated at ₱15,000. By means of the declining balance
method, determine the depreciation charge for the 2nd year.
2. An asset is purchase for ₱9000. Its estimated life is 10 years after which it will be sold
for ₱1000. Find the book value during the first year using sum of year’s digit method
(SYDM).
3. A motor cost ₱100,000 has an estimated life of 10 years and can be sold at ₱20,000
at the end of 10 years. Calculate the book value at the end of 8 years using sum of year’s
digit method (SYDM).
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4. The original cost of a certain machine is ₱150,000 has an economic life of 8 years with
a salvage value of ₱9000 at that time. If the depreciation of the first year is equal to
₱44475, what method is used in the calculation of depreciation?
5. A certain office equipment has a first cost of ₱20,000 and a salvage value of ₱1,000 at
the end of 10 years. Determine the book value at the end of 6 years using SYDM.
In a Nutshell
1. Straight line method is mostly used in equipment estimates.

Your Turn
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Q & A List

1.
2.
3.
4.
5.
Keywords Index
C D F M
Constant Depreciation Fixed value Mattheson formula
percentage of depr. Double declining
balance method
Declining balance
method
S U W
Sinking fund Unit production Working hours
method method method
Sum of years digit
method
Scrap value
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Big Picture in Focus: ULO-2b. Be able to introduce the basic economic study
methods such as the present worth, future worth, annual worth, internal and external
rate of return methods.
Metalanguage
The most essential terms below are defined for you to have a better
understanding of this section in the course.
1. Economic Factors
In a day to day scenario in somebody’s personal life or even in a business events, there
are a large number of economic decision making that an individual may involve. One
can be manage by using simple economic analysis. For instance, an industrial plant can
source out its materials from a places nearest to them or far-off places. The following
factors will affect the decision:
i. The price of the materials needed
ii. Delivery cost of the materials
iii. Availability of the materials
iv. Quality of the materials
2. Nearby Place Factors

Now, if the source is from nearby place, the following conditions may be put into
considerations:
i. The materials is more costly in the nearby area
ii. The availability may not be sufficient enough
iii. The material may requires pre-processing procedure which will certainly
result to additional cost
iv. The cost of delivery is minimal
3. Far-Off Place Factors

However, considering the source is the far-off place, the following conditions may be
put into considerations:
i. The material is less costly than the nearby area
ii. The delivery cost is very high
iii. The material may not require pre-processing procedure before using it for
production
iv. The availability is abundant.
Under such characteristics and factors, the procurement of the material to be use by the
plant should be decided in such a way that the overall cost is minimized.
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Essential Knowledge
1. Simple Economic Analysis

The concept of simple economic analysis is best defined using the suitable examples in
the following areas:
i. Material Selection for a product
ii. Design Selection for a product
iii. Design Selection for a process industry
iv. Building Material Selection for Construction Activities
v. Process Planning or Process Modification
2. Material Selection
The cost of a product can be reduced greatly by substitution of raw materials. Raw
material cost is the most beneficial and it represents a major portion of the total cost of
any product. So, in most cases, finding raw material from several suppliers will bring a
reduction in the total cost in any of the following ways:
i. Cheaper raw material price
ii. Reduced machining/Process Time
iii. Enhanced Durability of the Product
In the process, if a material provides an additional benefits, then it should be treated as
its welcoming feature.
3. Design Selection
The design modification of product may result in reduced raw material requirements,
increased machinability of the materials and reduced labor cost. Design is an important
factor which decides the cost of the product for a specified level of performance of that
product.
4. Building Material Selection

In a building material selection, the souring of raw materials will have a beneficial effect
on the cost of any product. Hence, it is assumed that the price of raw material is
dependent to its location. While sourcing a raw material, the cost of transportation is to
be considered in conjunction with the price of the raw material.
Example 1.1 In the design of a jet engine part, the designer has a choice of specifying
either an aluminum alloy casting or a steel casting. Either material will provide equal
service, but the aluminum casting will weigh 1.2 kg as compared with 1.35 kg for the
steel casting. The aluminum can be cast for ₱80.00 per kg. And the steel one for ₱35.00
per kg. The cost of machining per unit is ₱150.00 for aluminum and ₱170.00 for steel.
Every kilogram of excess weight is associated with a penalty of ₱1,300 due to increased
fuel consumption. Which material should be specified and what is the economic
advantage of the selection per unit?
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Example 1.2 The making of rivets holes in structural steel members can be done by two
methods. The first method consists of laying out the position of the holes in the
members and using a drill press costing ₱30,000. The machinist is paid ₱35 per hour
and he can drill 30 holes per hour. The second method makes use of a multiple-punch
machine costing ₱27500. The punch operator is paid ₱30 an hour and he can punch out
4 holes every minute. The method also requires an expense of ₱1.75 per hole to set the
machine. (a) If all other costs are assumed equal, what is the total cost for each machine
for 6000 holes, assuming the total cost of each machine to be charged to these holes?
(b) For how many holes will the costs be equal?
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Self-Help
the lesson:
11, 12, 13, 16, 17
Let’s Check
1. Two alternatives are under consideration for a tapered fastening pin. Either design
will serve the purpose and will involve the same material and manufacturing cost
except for the lathe and grinder operations. Design A will require 16 hours of lathe time
and 4.5 hours of grinder time per 1,000 units. Design B will require 7 hours of lathe time
and 12 hours of grinder time per 1,000 units. The operating cost of the lathe including
labor is ₱200 per hour. The operating cost of the grinder including labor is ₱150per
hour. Which design should be adopted if 100,000 units are required per year and what
is the economic advantage of the best alternative?
2. A cement kiln with production capacity of 130 tons per day(24 hours) of clinker has
at its burning zone about 45 tons of magnesite chrome bricks being replaced
periodically, depending on some operational factors and the life of the bricks. If locally
produced bricks costs ₱25,000 per ton and have a life of 4 months, while certain
imported bricks costing ₱30,000 per ton and have a life of 6 months, determine the
more economical bricks and by how much?
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3. A cement grinding mill “A” with capacity of 50 tons per hour utilizes forged steel
grinding balls costing ₱12000 per ton, which have a wear rate of 100 grams per ton
cement milled. Another cement mill “B” of the same capacity uses high chrome steel
grinding balls costing ₱50,000 per ton with wear rate of 20 grams per ton cement
milled. Determine the more economical grinding mill, considering other factors to be
the same.
Let’s Analyze
SITUATION 01. A company manufactures dining tables which mainly consist of a

wooden frame and a table top. The different materials used to manufacture the tables
and their costs are tabulated as follows:
Description Quantity Cost

Wood for frame and legs 0.1 cu. m ₱12,000/cu. m
Table top with sun-mica finish 1 ₱3000
Leg bushes 4 ₱10/bush
Nails 100g ₱300/kg
Total Labor 15hr ₱50/hr.
In view of the growing awareness towards deforestation and environmental

conservation, the company feels that the use of wood should be minimal. The wooden
top therefore could be replaced with a granite top. This would require additional wood
for the frame and legs to take extra weight of the granite top. The materials and labor
requirements along with cost details to manufacture a table with granite top are
tabulated as follows:
Description Quantity Cost

Wood for frame and legs 0.15 cu. m ₱12,000/cu. m
Table top with Granite 1.62 ₱800/sq. m
Leg bushes 4 ₱25/bush
Nails 50g ₱300/kg
Total Labor 8hr ₱50/hr.
If the cost of the dining table with granite top works out to be lesser than the table with
wooden top, the company is willing to manufacture dining tables with granite tops.
1. Compute the cost of manufacture of the table with wooden top.
2. Compute the cost of manufacture of the table with granite top.
3. Which of the following is the best alternative?
4. Find the economic advantage of the best alternative.
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SITUATION 02. The chief engineer of refinery operations is not satisfied with the
preliminary design for storage tanks to be used as part of a plant expansion program.
The engineer who submitted the design was called in and asked to reconsider the
overall dimensions in the light of an article in the Chemical Engineer, entitled “How to
size future process vessels?” .The original design submitted called for 4 tanks 5.2 m in
diameter and 7 min height. From a graph of the article, the engineer found that the
present ratio of height to diameter of 1.35 is 111% of the minimum cost and that the
minimum cost for a tank was when the ratio of height to diameter was 4:1. The cost for
the tank design as originally submitted was estimated to be ₱900,000.
5. What are the optimum tank dimensions if the volume remains the same as for the
original design?
6. What total savings may be expected through their design?
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SITUATION 03. In the design of buildings to be constructed in Alpha State, the designer
is considering the type of window frame to specify. Either steel or aluminum window
frames will satisfy the design criteria. Because of the remote location of the building site
and lack of building materials in Alpha State, the window frames will be purchased in
Beta State and transported for a distance of 2,500 km to the site. The price of window
frames of the type required is ₱1,000 each for steel frames and ₱1,500 each for
aluminum frames. The weight of steel window frames is 75 kg each and that of
aluminum window frame is 28 kg each. The shipping rate is ₱1 per kg per 100 km. What
is the economic advantage of the selection?
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In a Nutshell
1. The materials is more costly in the nearby area

2. The material may not require pre-processing procedure before using it for
production.
Your Turn
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Q & A List

1.
2.
3.
4.
5.
Keywords Index
B D M S
Building Material Design Selection Material Selection Simple Economic
Selection Analysis
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Big Picture
a. Be able to apply replacement studies and alternative study methods such as

present worth, future worth, annual worth. ROR in a real life scenario.
b. Be able to formulate benefit/cost ratio analysis and break-even analysis
through graphical representation and calculations.
Big Picture in Focus: ULO-3a. Be able to apply replacement studies and alternative
study methods such as present worth, future worth, annual worth. ROR in a real life
scenario.
Metalanguage
1. Methods of Making Economic Feasibility Studies:

If the annual income is greater than the annual cost then it would be feasible.
2. Selection between Alternatives and Replacement Studies

If the annual cost of equipment A is less than the annual cost of equipment B,
regardless of life, equipment A is more economical.
3. Capitalized Cost Method

The capitalized cost method is a variation of the present worth cost pattern. This
method is used for alternatives having long lives. To use this method, determine
the capitalized cost of all the alternatives and choose that one with the least
capitalized cost.
Essential Knowledge
1. Present Worth/Cost Method:

To be feasible: PI > PC
Where:
PI = Present Income
PC = Present Cost
2. Future Worth/Cost Method:

To be feasible: FI > FuC
Where:
FI = Future Income
FuC = Future Cost
Note: The author used FuC (Future cost) to avoid misconception with FC (First cost)
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3. Annual Worth/Cost Method:

To be feasible: AI > AC
Where:
AI = Annual Income
AC = Annual Cost = All annual expenses + Annual depreciation charge + Minimum
required profit (OCC)
OCC =Opportunity cost of capital (also known as min. required profit)= 𝑖FC
Annual Worth = AI –AC
4. ROR Method
To be feasible: ROR > 𝑖
Where:
ROR = Rate of Return = Net Annual Profit/First Cost
𝑖= Rate of Interest
Net Annual Profit, NAP = AI – AC
AC = Annual Cost = All annual expenses + Annual depreciation charge
(Note: Minimum required Profit (OCC) is not included in the computation of the AC for
ROR Method)
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Example 1.1 A machine cost ₱100,000 with salvage value of ₱10,000 after 10 years. If
the annual maintenance and operation amounts to ₱10,000, annual tax and insurance
amounts to ₱2,000. If the machine will deliver an annual revenue of ₱30,000, is it
profitable? Take 𝑖=15%.
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Example 1.2 Equipment A was purchased four years ago at an original cost of ₱12,000.
It has 3 more years before it can be scrapped at an estimated salvage value of ₱4,000. It
can now be sold at ₱6,000. Its annual operation cost is ₱3,000 and ₱1,200 for
maintenance. It is proposed to replace this with equipment B whose first cost is ₱18,000
having a useful life of 9years and a salvage value of ₱6,000. Operating cost is ₱800 and
for maintenance is ₱2,400 per year. Yield on investment is to be at least 6%. Should
equipment A be replaced?
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Self-Help
the lesson:
11, 12, 13, 16, 17
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Let’s Check
Situation 01.
A machine that is not equipped with a brake “coasts” 30 seconds after the power is
turned off upon completion of each piece, thus preventing removal of the work from the
machine. The time per piece, exclusive of this stopping time is 2 minutes. The machine
is used to produce 40,000 pieces per year. The operator receives P35 per hour and the
machine overhead rate is 20 per hour. How much could the company afford to pay for
a brake that would reduce the stopping time to 3 seconds, if it would have a life of 5
years? Assume zero salvage value, capital worth 18% and that repairs and maintenance
would total not over P300, 000 per month
Situation 02:
National Homebuilders, Inc., plans to purchase new cut-and-finish equipment. Two
manufacturers offered the estimates below.
Vendor Vendor
A B
FC -15000 -18000
OC -3500 -3100
SV 1000 2000
L 6 9
a. Determine which vendor should be selected on the basis of a present worth

comparison, if the MARR is 15% per year.
b. National Homebuilders has a standard practice of evaluating all options over a 5-year
period. If a study period of 5 years is used and the salvage values are not expected to
change, which vendor should be selected?
Let’s Analyze
1. A small business purchased now for P50, 000 will lose P9, 600 each year for the
first 4 years. An additional investment of P30, 000 in the business will required at
the end of the fourth year. After 15 years, the business can sold for P70, 000. What
should be the profit each year from the fifth through the fiftieth year to obtain a rate
of return of 25%.
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2. A British food distribution conglomerate purchased a Canadian food store chain

for £75 million 3 years ago. There was a net loss of £10 million at the end of year 1
of ownership. Net cash flow is increasing with an arithmetic gradient of £5 million
per year starting the second year, and this pattern is expected to continue for the
foreseeable future. This means that breakeven net cash flow was achieved this year.
Because of the heavy debt financing used to purchase the Canadian chain, the
international board of directors expects a MARR of 25% per year from any sale. The
British conglomerate has just been offered £159.5 million by a French company
wishing to get a foothold in Canada. Use FW analysis to determine if the MARR will
be realized at this selling price.
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3. A fixed capital investment of P10, 000, 000 is required for a proposed manufacturing
plant and an estimated working capital of P2, 000, 000. Annual depreciation is
estimated to be 10% of the fixed capital investment.
a. Determine the rate of return on the total investment.
b. Payout period if the annual profit is P2, 500, 000.
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In a Nutshell
1. It is more advisable to use ROR and AWM for faster calculation.

2. The PWM and FWM make use of cash flow diagrams in calculation.
Your Turn
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Q & A List

1.
2.
3.
4.
5.
Keywords Index
A C F P
Alternative studies Capitalized Future worth Present worth
Cost method method
Future cost method Present cost
method
R
Rate of Return
Replacement Studies
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Big Picture in Focus: ULO-3b. Be able to formulate benefit/cost ratio analysis and
break-even analysis through graphical representation and calculations.
Metalanguage
1. BENEFIT-COST RATIO METHOD

The benefit-cost ratio method is often used in municipal project evaluations where
benefits and cost accrue to different segments of the community. With this method, the
present worth of all benefits (irrespective of the beneficiaries) is divided by the present
worth of all costs. The project is considered acceptable if the ratio equals or exceeds 1.0,
that is, if B/C≥ 1.0.
When the benefit-cost ratio method is used, disbursements by the initiators or sponsors
are costs. Disbursements by the users of the project are known as dis-benefits. It is often
difficult to determine whether a cash-flow is a cost or a dis-benefit (whether to place it
in the numerator or denominator of the benefit-cost ratio calculation).
Regardless of where the cash flow is placed, an acceptable project will always have a
benefit-cost ratio greater than or equal to 1.0, although the actual numerical result will
depend on the placement. For this reason, the benefit-cost ratio method should not be
used to rank competing projects.
2. BREAK –EVEN ANALYSIS

Break-even analysis is performed to determine the value of a variable or parameter of
a project or alternative that makes two elements equal, for instance, the sales volume
that will equate revenues and costs.
Costs, which may be linear or nonlinear, usually include two components:

2.1. Fixed Cost (FC) – these include costs such as buildings, insurance, fixed overhead,
and some minimum level of labor, equipment capital recovery, and information
systems.
2.2. Variable Cost (VC) – these include costs such as labor costs, materials, indirect
costs, contractors, marketing, advertisements and warranty.
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Essential Knowledge
1. BENEFIT-COST RATIO APPLICATIONS

The benefit-cost ratio method of comparing alternatives is used EXTENSIVELY in
transportation engineering where the ratio is often (but not necessarily) written in
terms of annual benefits and annual costs instead of present worth’s. Another
characteristics of highway benefit-cost ratios is that the route (road, highway, etc.) is
usually already in place and that various alternative upgrades are being considered.
There will be existing benefits and cost associated with the current route. Therefore,
the change (usually an increase) in benefits and costs is used to calculate the benefit-
cost ratio.
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5. LINEAR ANALYSIS
The main goal of a business company is to MAXIMIZE its profits.
Profit = area bounded between income curve and the cost curve = Income – Expenses
Loss = area bounded between the cost curve and the income curve, where Expenses >
Income
Break even = an equilibrium point where Income = Expenses
P=R–C
P’ = R’ – C’
R’ = marginal revenue
C’ = marginal cost
6. NON-LINEAR ANALYSIS
Point of Intersection: Break -Even

Demand/Revenue/Saving/Income =Supply/Cost
Consumer’s Surplus
𝑏
CS = ∫𝑎 (D(x)) − (f(x)) 𝑒𝑞𝑢𝑖𝑙𝑖𝑏𝑟𝑖𝑢𝑚
dx
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Producer’s Surplus
3
PS = ∫0 (2340.5) − (2300 + 5.65X 2 ) dx
7. Total Net Savings
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Example 1.1 By building a bridge over a ravine, a state department of transportation

can shorten the time it takes to drive through a mountainous area. Estimates of costs
and benefits (due to decreased travel time, fewer accidents, reduced gas usage, etc.)
have been prepared. Should the bridge be built? Use benefit-cost ratio method of
comparison.
Terms Millions
Initial Cost 40
Capitalized cost of perpetual annual 12
maintenance
Capitalized value of annual user benefits 49
Residual value 0
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Example 1.2 The National Government intends to build a dam and hydroelectric project
in the Cagayan Valley at a total cost of ₱455,500,000. The project will be financed by
soft foreign loan with a rate of interest of 5% per year. The annual cost for operation,
maintenance, distribution facilities and others would total ₱15,100,000. Annual
revenues and benefits are estimated to be ₱56,500,000. If the structure are expected to
last for 50 years with no salvage value, determine the B/C ratio of the project.
By the equivalent uniform annual cost method
Annual benefit = 56,500,000
EUAC = 455,500,000(A/P, 5%, 50) + 15,100,000 = 40,061,400
B/C = 56,500,000/40,061,400 = 1.41
This is a good project, since B/C > 1.0
Example 1.3 A plywood manufacturer produces a piece of plywood at a labor cost of

₱0.50 and material at ₱3.00. The fixed charges on business are ₱50, 000 a month and
the variable cost is ₱0.50 per piece. If one plywood sells for ₱6.00 each. How many
pieces must be produced each month for the manufacturer to breakeven?
Example 1.4 A local company assembling air conditioners produces 300 units per
month at a cost of ₱800 per unit. Each air conditioner sells for ₱1206. If the company
makes a profit of 10% on its 10,000 shares with a par value of ₱200.00 per share and
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the total fixed costs are ₱20000 per month. How much is the loss or profit if only 100
units are produced and sold in a given month?
Self-Help
the lesson:
11, 12, 13, 16, 17
Let’s Check
1. In the past, the Afram Foundation has awarded many grants to improve the living
and medical conditions of people in war-torn and poverty-stricken countries
throughout the world. In a proposal for the foundation’s board of directors to construct
a new hospital and medical clinic complex in a deprived central African country, the
project manager has developed some estimates. These are developed, so she states, in
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a manner that does not have a major negative effect on prime agricultural land or living
areas for citizens.
Award amount: $20 million (end of) first year, decreasing by $5 million per year for 3
additional years; local government will fund during the first year only
Annual costs: $2 million per year for 10 years, as proposed
Benefits: Reduction of $8 million per year in health-related expenses for citizens
Dis-benefits: $0.1 to $0.6 million per year for removal of arable land and commercial
districts
Use the conventional and modified B/C methods to determine if this grant proposal is
economically justified over a 10-year study period. The foundation’s discount rate is
6% per year.
2. For a given project information:

Project cost = ₱80,000
Gross Income = ₱30,000 per year
Operating Cost = ₱6,000 per year
The life of project is 8 years. Money is worth 8%
Compute the benefit ratio of the following project.
3. Two alternatives are being considered for a certain project:

Alternative - Alternative -
A B
Initial Cost ₱10,000 ₱15,000
Uniform Annual ₱2,500 ₱3,800
Benefits
Useful Life 6 6
If money is worth 12% annually, compute the benefit ratio of the difference between
the alternatives.
4. A company has a production capacity of 500 units per month and its fixed costs are
₱250, 000 a month. The variable costs per unit are ₱1, 150 and each unit can be sold for
₱2, 000. Economy measures are institutes to reduce the fixed costs by 10% and the
variable costs by 20%.
1. Determine the old breakeven points.
2. Determine the new breakeven points.
3. What are the old profit at 100% capacity?
4. What are the new profit at 100% capacity?
5. The ASIAN Transmission company makes and sells certain automotive parts present
sales volume is 500,000 units per year at selling price of fifty centavos (₱0.50) per unit.
Fixed expenses total ₱80, 000 per year.
5. What is the present total profit for a year?
6. What is the breakeven units of productions?
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Let’s Analyze
1. A businessman invest in a medium scale business which cost him ₱57,000. The net
annual return is estimated at ₱14,000 for each of the next 8 years. Compute the benefit
ratio if the annual rate of interest is 18%.
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2. For a given project information:

Project Cost = ₱80,000
Gross Income = ₱25,000/year
Operating Cost = ₱6,000/year
Salvage Value = 0
Life of project = 10 years
Rate of interest = 12%
Calculate the benefit cost ratio of the following project.
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3. There are five alternatives for improvement of a road are tabulated as follows:
Alternative Annual Annual
Benefits Costs
A ₱900,000 ₱1,000,000
B ₱1,300,000 ₱1,400,000
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C ₱2,800,000 ₱2,100,000
D ₱3,300,000 ₱2,700,000
E ₱4,200,000 ₱3,400,000
Determine which of the following alternative should be chosen if the highway
department is willing to invest money as long as there is B/C ratio of at least 1.0
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4. Company ABC can produce a certain transistor at a cost of ₱1.20 for labor, ₱2 for
material and a variable cost of ₱0.50 for each transistor. The corresponding company’s
fixed cost in running the business is ₱300,000 per month. Determine the minimum level
of production per month that should be attained in order not to incur any loss if the
selling price per transistor is ₱4.
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5. A company is considering two alternatives with regards to an equipment which it

needs. The alternatives are as follows:
Alternative A: Purchase
Cost of equipment = ₱700,000
Salvage value = ₱100,000
Daily Operating cost = ₱500
Economic life, years = 10
Alternative B. Rental at ₱1500 per day
At 18% interest, how many days per year must the equipment be in use if Alternative A
is to be chosen.
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In a Nutshell
1. The main goal of a business company is to MAXIMIZE its profits.
Your Turn
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13. ____________________________________________________________________________________________________
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Q & A List

1.
2.
3.
4.
5.
Keywords Index
B F V W
Benefit-Cost Ratio Fixed Costs Variable cost Winfrey Method
Break Even Analysis
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Big Picture
a. Be able to perform a sensitivity analysis of parameters; use expected values

to evaluate staged funding options.
Big Picture in Focus: ULO-4a. Be able to perform a sensitivity analysis of

parameters; use expected values to evaluate staged funding options.
Metalanguage
1. Sensitivity Analysis
Sensitivity analysis determines how a measure of worth; namely Present worth, Annual Worth,
Future Worth, Rate of Return, Benefit-Cost Ratio analysis is altered when one or more
parameters vary over a specific range of values.
2. Parameters
The term parameter used to represent aby variable for which an estimate or state value is
essential. Example are the first cost, salvage value, Opportunity cost, estimated useful life,
production rate and material costs.
3. Decision Tree
Alternative evaluation may require a series of decisions in which the outcome from one stage
is important to the next stage of decision making. When each alternative is clearly defined and
probability estimates can be made to account for risk, it is helpful to perform the evaluation
using a decision tree.
Essential Knowledge
1. Sensitivity Analysis
Sensitivity analysis determines how a measure of worth; namely Present worth, Annual Worth,
Future Worth, Rate of Return, Benefit-Cost Ratio analysis is altered when one or more
parameters vary over a specific range of values.
2. Parameters
The term parameter used to represent aby variable for which an estimate or state value is
essential. Example are the first cost, salvage value, Opportunity cost, estimated useful life,
production rate and material costs.
3. Spider Graph
Spider graph is a graph percentage change for each parameter versus the measure of worth.
This graph is helpful when the sensitivity of several parameters is considered for one methods
using a single method of measure of worth.
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4. Three Estimates Sensitivity Analysis

In project scheduling, the concept of making three estimates for each parameter is useful. This
concept can also be used for economic analysis by determining the advantages and
disadvantages among two or more alternatives. This three estimates are pessimistic, most
likely and optimistic estimates.
5. Expected Value
Expected value is a long –run average observation if the project is repeated many times. For a
single occurrence, the expected value is a substantial value
6. Point Estimates
Point estimates is an expected value if a particular alternative or methods is evaluated or
implemented only once.
7. Decision Tree
A decision tree includes the following conditions:
a. More than one stage of alternative selection
b. Selection of an alternative at one stage that leads to another stage
c. Expected results from a decision at each stage
d. Probability estimates for each outcome
e. Estimates of economic value (cost or revenue) for each outcome
f. Measure of worth as the selection criterion such as the expected value of the present worth
E(PW)
The decision tree is constructed from LEFT to RIGHT and includes each possible decision and
outcome.
1. A square represents a DECISION NODE with the possible alternatives indicated on the
branches from the decision node
2. A circle represents a PROBABILITY NODE with the possible outcomes and estimated
probabilities on the branches
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3. The tree like structure results with outcome following a decision.
Usually each branch of a decision tree has some estimated economic value (often referred to as
PAYOFF) in cost, revenue, saving or benefit. These cash flows are expressed in terms of PW, AW
or FW values.
The cash flow and probability estimates on each outcome branch are used in calculating the
expected economic value of each decision branch. This process, called SOLVING THE TREE or
ROLLBACK.
Example 1.1
A civil engineer is evaluating 3 methods for new equipment at Electronic Company. He has
made three estimates for the salvage value, annual operating cost, and a useful life. The
estimates are presented on an alternative by alternative basis as shown in the Table. For
example, alternative B has pessimistic estimates of 500 pesos, AOC = -4000pesos and a useful
life of 2 years. The first costs are known so they have the same value.
Strategy 3 Estimates FC SV AOC Life

Alternative A
P -20 000 0 -11 000 3
ML -20 000 0 -9 000 5
O -20 000 0 -5 000 8
Alternative B
P -15 000 500 -4 000 2
ML -15 000 1000 -3 500 4
O -15 000 2000 -2 000 7
Alternative C
P -30 000 3000 -8 000 3
ML -30 000 3000 -7 000 7
O -30 000 3000 -3 500 9
Perform a sensitivity analysis and determine the most economical alternative, using Annual
Worth analysis at a MARR of 12% interest per year.
Calculate all AW value of costs using Annual worth method (see lessons week 6-7)
Estimates Alternative A Alternative B Alternative C
P -19 327 -12 640 -19 601
ML -14 548 -8 229 -13 276
O -9 026 -5 089 -8 927
Thus, Alternative B is economically better than Alternative A and Alternative C in all three
estimates
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Example 1.2
There are a many government incentives to build a more energy – efficient. Installation
of solar panels on homes, buildings and any dwelling is one of their proposal. The owner
pays a portion of the total installation costs, and the government agency pays the rest.
Anna works for the Department of Energy and is responsible for the approval of solar
panel incentive payouts. She has exceeded the annual budgeted amount of 50 million
pesos per year in each of the previous 2 years. Disappointed with this situation, Anna
together with her boss decided to gather data to determine the size increase in annual
budget this incentive program need in the near future. Over the last 36 months, the
amount of the mean monthly payout and the number of months are shown in the figure
below.
Level Average Payout (Million/mos) Months Over past 3 yr
VH 6.5 15
H 4.7 10
M 3.2 7
L 2.9 4
VH - Very high
H – High
M – Medium
L – Low
She classified by level the monthly averages according to her expertise with the said
program. Provided the same pattern continues, what is the expected value of the pesos
increase in annual budget that is needed to meet the requests?
Use the 36 months of payouts to estimate the probability for each level and make sure
the total is 1.0
Level, j Probability of Payout Level, P (Po_j)
Very High (VH) 15/36 = 0.417
High 10/36 = 0.278
Moderate 7/36 = 0.194
Low 4/36 = 0.111
The expected monthly payout, E(PO)
E(PO) = 6.5(0.417)+4.7(0.278)+3.2(0.194)+2.9(0.111) = 4.961M pesos
For an annual expected budget

E (Annual) = 12 x 4.961 = 59.532M pesos (answer)
Example 1.30
A decision is needed to either market or sell a new invention. If the product is marketed, the
next decision is to take it international or national. Assume the details of the outcome branches
result in the decision tree as shown below. The probabilities for each outcome and PW of CFBT
(cash flow before taxes) are indicated. These payoffs are in millions of dollars. What is the best
decision at the decision node D1?
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International E = 12(0.5) +16(0.5) = 14
14
D2
High 0.20 National
Market Decision
E =4(0.4) -3(0.4) -1(0.2) = 0.2

E = 14(0.2) +4.2(0.8) =6.16
4.2 International E = 6(0.8)-3(0.2) = 4.2
Low 0.80
D3
9 National E =6(0.4)-2(0.4) +2(0.2)=2

D1
1.00
Sell Decision
E = 9(1.0) =9.00
Based on the decision tree diagram as shown above, the expected present worth (PW) for the
two D1 branches: Market decision and Sell decision
E (market decision) = 6.16

E (sell decision) = 9.00
The expected value for the sell decision is simple since the one outcome has a payoff of 9.00
The sell decision yields the larger expected PW of 9.00
Thus, the largest expected present worth (PW) is to SELECT the SELL branch at D1 for a
guaranteed 9Million pesos. (Answer)
Self-Help
the lesson:
11, 12, 13, 16, 17
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Let’s Check
1. A company has an essential investment in tubular steel bending equipment. A new

equipment cost 5000pesos and has a useful life of 3 years. Estimated cash flows
depend on the economic conditions classified as receding stable, stable or
expanding.
Annual; Cash flow Estimates

Year Receding(p=0.4) Stable(p = 0.4) Expanding(p=0.2)
0 -5000 -5000 -5000
1 +2500 +2500 +2000
2 +2000 +2500 +3000
3 +1000 +2500 +3500
A probability is estimated that each of the economic conditions will prevail during
the 3 year period. Apply expected value and PW analysis to determine if the
equipment should be purchased. Take 15% MARR per year.
Let’s Analyze
1. Easley Hill is president and CEO of a Philippines based food processing company,
Hill products and services. He was recently approached by an international
supermarket chain that wants to market in-country its own brand of frozen
microwaveable dinners. The offer made to Easley by the supermarket corporation
requires that a series of two decisions be made, now and 2 years hence. The current
decision involves two alternatives:
i) Lease a facility in the Philippines from the supermarket chain, which has agreed
to convert a current processing facility for immediate use by Easley’s company.
ii) Build and own a processing and packaging facility in the Philippines. Possible
outcomes of this first decision stage are good market or poor market depending
upon the public’s response.
The decision choices 2 years hence are dependent upon the lease – or – own decision
made now. If Hill decides to lease, good market response means that the future
decision alternatives are to produce at twice, equal to, or one-half of the original
volume. This will be a mutual decision between the supermarket chain and Easley’s
company. A poor market response will indicate a one half level of production, or
complete removal from the Philippines’ market. Outcomes for the future decisions
are again, good and poor market responses.
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As agreed by the supermarket company, the current decision for Easley to own the
facility will allow him to set the production level 2 years hence. If market response
is good, the decision alternatives are four or two times original times. The reaction
to poor market response will be production at the same level or no production at
all.
Construct the tree of decisions and outcomes for Hill Products and Services
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In a Nutshell
1. When several parameters are expected to vary over a predictable range, the measure of
worth is plotted and computed using three estimates namely, pessimistic, most likely
and optimistic.
2. Delaying an investment decision and considering the risks of the future can improve the
overall expected value of the present worth , E(PW) of a project.
Your Turn
3. ____________________________________________________________________________________________________
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8. ____________________________________________________________________________________________________
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9. ____________________________________________________________________________________________________
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10. ____________________________________________________________________________________________________
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Q & A List

1.
2.
3.
4.
5.
6.
Keywords Index
E M O P
Expected value Most likely Optimistic Pessimistic
estimate Estimates estimates
Point estimates
S
Sensitivity Analysis
Spider Graph
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Part 3: Course Schedules
This section calendars all the activities and exercises, including readings and lectures, as well
as time for making assignments and doing other requirements, in a programmed schedule by
days and weeks, to help the students in SDL pacing, regardless of mode of delivery (OBD or
DED). Note: Reading assignments can be calendared for 3 days or for week with performance
tasks (essay or reflection paper).
Activity Date Where to submit

ULO - 1
Big Picture A: Let’s Check Activities BB’s assignment feature
Big Picture A: Let’s Analyze Activities BB’s assignment feature
Big Picture A: In a Nutshell Activities BB’s forum feature
Big Picture A: QA List BB’s discussion feature
Big Picture B: Let’s Check Activities BB’s assignment feature

Big Picture B: Let’s Analyze Activities BB’s assignment feature
Big Picture B: In a Nutshell Activities BB’s forum feature
Big Picture B: QA List BB’s discussion feature
Big Picture C: Let’s Check Activities BB’s assignment feature

Big Picture C: Let’s Analyze Activities BB’s assignment feature
Big Picture C: In a Nutshell Activities BB’s forum feature
Big Picture C: QA List BB’s discussion feature
First Exam Sept 4, 2020 CF’s email

ULO - 2


Second Exam Sept 18, 2020 CF’s email

ULO - 3
Page 93 of 95
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Third Exam Oct 2, 2020 CF’s email

ULO - 2
Final Exam October 15- CF’s email

16, 2020
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- END OF MANUAL - - - - - - - - - - - - - - - - - - - - - - - - - - -
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Cee Bsce 1st Term 1st Sem Cee 109

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UNIVERSITY OF MINDANAO

College of Engineering Education

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Course/Subject: CE 109: ENGINEERING ECONOMICS

Big Picture in Focus: ULO-1a…………………………………………………………………..….. 9

Big Picture in Focus: ULO-1b…………………………………………………………………..….. 20

Big Picture in Focus: ULO-1c…………………………………………………………………..….. 34

Unit Learning Outcomes- Unit 2…………………………………………………………………. 43

Big Picture in Focus: ULO-2a…………………………………………………………………..….. 43

Big Picture in Focus: ULO-2b…………………………………………………………………..….. 54

Unit Learning Outcomes- Unit 3…………………………………………………………………. 62

Big Picture in Focus: ULO-3b…………………………………………………………………..….. 73

Unit Learning Outcomes- Unit 4…………………………………………………………………. 85

This page is intentionally left blank

Course Outline: CEE 109– Engineering Economics

Course Coordinator: Dario A. Calaque, Jr.

Course Outline Policy

Areas of Concern Details

If the assessment task is done in real time through the

Since this course is included in the licensure

your course coordinator. This is non-negotiable for all

Please note that academic dishonesty such as cheating

However, if the late submission of assessment paper

For group assessment tasks, the course coordinator will

If disapproved by the course coordinator, you can

All culled from on-campus/onsite sessions (TBA):

Submission of the final grades shall follow the usual

You can also meet the course coordinator in person

For students who have not created their student email,

Frida Santa O. Dagatan

Ronadora E. Deala, RPsy, RPm, RGC, LPT

Course Information- see/download course syllabus in the BlackBoard LMS

CO: Upon completion of the course, you are expected to:

CO 1: Solve problems involving interest and time value of money.

a. Be able to introduce the basic principles in economy, supply and demand

1.0 Engineering Economic Analysis

TOTAL COST is the sum of the selling expenses and manufacturing.

3. Microeconomics and Macroeconomics

That ground can be divided into two parts:

Macroeconomics looks at the economy as a whole. It focuses on broad issues such as

Microeconomics and macroeconomics are not separate subjects, but rather

4. Demand for Goods and Services

5. Supply for Goods and Services

6. Ceteris Paribus Assumption

7. Price Ceilings and Price Floors

8. Consumer, Producer and Social Surplus

9. Fixed and Variable Costs

10. Accounting Costs and Expenses Terms

TOTAL COST is the sum of the selling expenses and manufacturing.

Qz = 150 – 8Pz + 2Y – 15Pw

Point of Equilibrium: Supply =Demand

Situation 01. What is law of supply and demand? Cite an example.

Situation 02: How shortage and surplus affect the economy?

Do you have any questions for clarification?

7. CASH FLOW DIAGRAM ANALYSIS

2. TYPES OF SIMPLE INTEREST

LEAP YEAR MATRIX YEAR NOT ENDING WITH '00

3. Inclusion-Exclusion Dates Rule:

m = Number of compounding periods per year

5 Types of Compound Interest Rate

6. Interest rate conversion formula

By 1Peso- 1 Year Analysis:

7. Continuous Compound Interest