Lecture notes of Engr Rosalito Juda V.

Eboa
ENGINEERING ECONOMY

COURSE CODE : BES EE c. Effects of Inflation

d. Depreciation and After-Tax Economic Analysis
COURSE NAME : ENGINEERING ECONOMY
e. Replacement Studies
COURSE DESCRIPTION:
5. Decisions Recognizing Risk
This course deals with the study of the concepts of the time value of money
a. Expected Monetary Value of alternatives
and equivalence; basic economic study methods; decisions under certainty;
b. Discounted Decision Tree Analysis
decisions recognizing risk; and decisions admitting uncertainty
6. Decisions Admitting Uncertainty
COURSE OUTCOME:
a. Sensitivity Analysis
After completing this course, the students must be able to: b. Decision Analysis Models
1. Solve problems involving interest and the time value of money;
2. Evaluate project alternative by applying principles and methods and
select the most economically efficient one; and ************************************************************************************************
3. Deal with risk and uncertainty in project outcomes by applying the basic 4. Grading System (p. 50 Student Manual 2015 Edition)
economic decision-making concepts. 4.1 Grading Periods
4.1.1 There will be two grading periods
COURSE OUTLINES: 4.1.2. Academic grades shall be determined using the weight assignments
of the following components
1. Introduction
term examination – 40%
a. Definitions / course orientation
class standing – 60%
b. Principles of Engineering Economics
c. Engineering Economics and Design Process
Class standing may include quizzes, session appraisal, classroom
d. Cost Concepts for Decision Making
participation, projects, final reports, etc.
e. Present Economic Studies
4.1.3 The grade of the midterm period and the tentative final grade will be
2. Money-Time Relationships and Equivalence
added then divided by two (2) to get the final grade.
a. Interest and the Time Value of Money
4.1.4 The lowest passing grade that may given to a student shall be 3.0 after
b. The Concept of Equivalence
transmutation of all the components.
c. Cash Flows
Students who have conditional grades may be given a reexamination / removal
3. Economic Study Methods
one week after the final exam. The list of students who are subjected to
a. The minimum Attractive Rate of Return
reexamination / removal will. be posted in the college / department
b. Basic Economic Study Methods: Present worth, Future Worth,
Annual Worth, Internal Rate of Return, External Rate of Return
c. Other Methods: Discounted Payback Period, Benefit/Cost Ratio

4. Decisions under Certainty

a. Evaluation of Mutually Exclusive Alternatives
b. Evaluation of Independent Projects

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

4.2 Rating Scale

The distribution of grades is shown below ***********************************************************************************************

Grades Percentile Description Grades Percentile Description RULES FOR CLASS DISCUSSION
1.0 95+ Superior 2.1 84 Good
1.1 94 Superior 2.2 83 Good  BE PUNCTUAL
1.2 93 Superior 2.3 82 Good
1.3 92 Superior 2.4 81 Good
 BE COOPERATIVE
1.4 91 Superior 2.5 80 Good  BE PARTICIPATIVE
1.5 90 Superior 2.6 79 Fair  DRESS APPROPRIATELY
1.6 89 Very Good 2.7 78 Fair  TAKE DOWN NOTES
1.7 88 Very Good 2.8 77 Fair
1.8 87 Very Good 2.9 76 Fair
 RAISE HAND WHEN TOPICS ARE NOT CLEAR WITH
1.9 86 Very Good 3.0 75 Fair YOU
2.0 85 Very Good 5.0 -- FAILURE  SUBMIT ALL REQUIREMENTS ON TIME
Supplemental marks
DR - Dropped
INC - Incomplete
IP - In progress
NC - No Credit
RULES FOR ONLINE CLASS / GROUP CHAT
W - Withdrawn with permission

4.3 Grades Allocation Your greetings / comments in the group chat is appreciated, however,
4.3.1 Lecture Class most of the time, the original message will be pushed out every time you
4.3.1.1 Class Standing 60% send some greetings. To avoid such scenario, simply react on the
- Quizzes 30% greetings of the first person.
- Oral 20%
- Projects / Likewise, if you want to comment on the topic please react with the
Assignment 10% original message so that everyone can follow thru
4.3.1.2 Term Examination 40%

5.0 Class Attendance

Total number of weeks per semester = 18 weeks

Note: students will be automatically DROPPED if he/she accumulates 20%

unexcused absences

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

INTRODUCTION 2. Focus on the differences

Engineering Economy is the most practical subject in the Engineering curriculum, yet
it is also one of most challenging and ever-changing discipline. Thus, Engineering
Economics is the analysis, and evaluation of the factors that will affect the economic
success of an engineering projects to the end that a recommendation can be made
which will ensure the best use of capital or simply a collection of techniques that
simplify comparisons of alternatives in an economic basis.
In our personal life for example, we constantly make decisions in our daily lives. Most
of these decisions are done automatically without realizing that we are actually
following somewhat a logical flow.
Consider only the differences in expected future outcomes among the
alternatives that are relevant to their comparison and should be considered in
the decision.
3. Use a consistent viewpoint
The prospective outcomes of the alternatives, economic and other, should be
consistently developed from a defined viewpoint (perspective).
4. Use a common unit of measure
Using a common unit of measurement to enumerate as many of the
prospective outcomes as possible will make easier the analysis and
comparison of alternatives

Same logical flow that we follow in decision-making in problems we encounter our 5. Consider all relevant criteria
workplace or industry. Our solutions on these industry problems are focused on the Selection of a preferred alternative (decision making) requires the use of a
following factors criterion (or several criteria)

a. promote the well-being and survival of an organization 6. Make uncertainty explicit

b. embody creative and innovative technology and ideas
c. permit identification and scrutiny of their estimated outcomes
d. translate profitability to the “bottom line” thru valid and acceptable measures of
merit
The role of the engineers in our workplace is important and our economic analysis
plays a role in many types of solution. A typical example are as follows
Uncertainty is inherent in projecting (or estimating) the future outcomes of the
alternatives and should be recognized in their analysis and comparison
7. Revisit your decisions
Improved decision-making results from an adaptive process; to the extent
practicable, the initial projected outcomes of the selected alternative should
be subsequently compared with actual results achieved

o choosing the best design for a high efficiency gas furnace The fundamental principles are guides for the procedure in making engineering
o selecting the most suitable robot for the operation of an assembly line economy analysis. Every project is guided by the following basic procedure
o making a recommendation about whether a delivery truck for an overnight
delivery service should be purchased or leased 1. Problem recognition, definition, and evaluation
o determining the optimal staffing plan for a new business 2. Define the goal or objectives
3. Define the feasible alternatives
For an engineer to give a sound decision, there seven (7) fundamental principles used 4. Collect all relevant data/information
in Engineering Economy 5. Evaluate each alternative
6. Select the “best” alternative
1. Develop the alternatives 7. Implement and monitor the decision
The final choice (decision) is among alternatives. The alternatives need to be
identified and then defined for subsequent analysis.

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY


ENGINEERING ECONOMY
Basic Terminology Used
 Consumer goods and services
are those products or services that are directly used by the people to satisfy
their wants. Examples of these are food, beverages, clothing, shoes, and
gasoline. Consumer services are intangible products or actions that are
typically produced and consumed like haircuts, auto repairs, and
landscaping.
 Producer goods and services
are used to produce consumer goods and services or other producer goods.
Producer goods are goods that are used by businesses to either produce
other goods, or help in the provision of providing services. An example of a
producer good is machinery or tools, airplanes, buses, and factory buildings
 Necessities
are those products or services that are required to support human life’s
needs and activities. Basic necessities of life means food, water, shelter,
clothing, and medically necessary health care, including but not limited to
health-related treatment or activities, hygiene, oxygen, and medication
 Luxuries
are those products or services that are desired by human and will purchased
only after the required necessities have been satisfied. Luxuries are not
necessary to live, but it is deemed highly desirable within a culture or
society. Demand for luxury goods increases when a person's wealth or
income increases. Typically, the greater the percentage increase in income,
the greater the percentage increase in luxury item purchases.
 Consumption
is the process of buying or using goods and services. It is the satisfaction of
human wants and that the value of goods and services that a family
consumes depends on almost entirely on its income and wealth.
Consumption is an activity in which institutional units use up goods or
services; consumption can be either intermediate or final. It is the use of
goods and services for the satisfaction of individual or collective human
needs or wants
Lecture notes of Engr Rosalito Juda V. Eboa
Lecture notes of Engr Rosalito Juda V. Eboa
 Production
is the creation of goods and is a major step in the series of economic
processes that brings goods and services to the people. Production is the
process of making or manufacturing goods and products from raw materials
or components. In other words, production takes inputs and uses them to
create an output which is fit for consumption – a good or product which has
value to an end-user or customer
 Distribution
is the sharing of the output among the resources used in the production or
simply the division of the value of the output (goods) among the factors (or
agent) in the production such as land, labor, capital and management. It is
to spread the product throughout the marketplace such that a large number
of people can buy it.
 Demand
is the quantity of a certain commodity that is bought at a certain price at a
given place and time. It is simply the willingness and the ability of the buyer
to pay for a product.
 Supply
is the amount of product made available for sale
 Income
is the amount of money that is generated from a variety of sources including
salary (amount of money paid on a regular basis)
 Seller
is an entity which makes product, goods and services available to buyer or
consumer in exchange of monetary consideration
 Buyer
is the basic consuming or demanding unit of a commodity
 Market
Is the area or place where buyer and seller agrees to exchange a well-
defined commodity
ENGINEERING ECONOMY
 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

 Competition
is the number of rival firms competing to sell similar goods or services to
buyers. Perfect competition occurs when there are many sellers of a certain
goods or services and there are many buyers.

 Monopoly
refers to a single seller and having many buyers (it is simply the opposite of
perfect competition)

Bilateral monopoly exist when there is one seller and one buyer
Monopsony is a situation where a product or services is bought and used
by one customer.

 Oligopoly
refers to few suppliers of goods or services and that action by one supplier
will inevitably result in similar action by the others.

Bilateral oligopoly exists when there are few sellers and few buyers
Oligopsony is a situation where a product or services is bought and used
by few buyers and that the action of one buyer can buyer can have a
significant impact on the price and market in general.

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

CHAPTER 1 b. Exact Simple Interest (computed based on exact number of days)

1 year = 365 days for ordinary year
INTEREST AND MONEY-TIME RELATIONSHIPS = 366 days for leap year

Money refers to any medium of exchange that is

widely accepted in the payments of goods or Example 1:
services and/or in settlement of debts.
Determine the interest on $ 700 for 8 months and 15 days if the rate of
Interest is the amount of money paid for the use of interest is 15%
money called capital for a certain period of time or
the income produced by money which has been Solution:
loaned. I = P(i)n
where n = 8(30) + 15 = 255 days

SIMPLE INTEREST I = $ 700(0.15)(255/360)

I = $ 74.38
is the interest to be paid which is proportional to the length of time the principal is
used.

I = P(i)n Example 2:

F=P+I  F = P + P(i)n Determine the interest on $ 700 for the period from Jan 10 to Oct 28, 2008
if the rate of interest is 15%.
F = P [1 + i(n)] Solution:
Jan 10 – 31 = 21 (excluding Jan 10) Since the given is an
February = 29 exact date so we are
where: I = interest
March = 31 calculating the time
P = Principal or present worth
April = 30 based on exact
F = Accumulated amount or future
May = 31 number of days
worth
June = 30
i = rate of interest per interest period
July = 31
n = number of interest periods
August = 31
September = 30
Types of Simple Interest October = 28 (including Oct 28)
292 days
a. Ordinary Simple Interest (computed based on banker’s year)
I = P(i)n
1 banker’s year = 12 months
I = $ 700 (0.15)(292/366)
1 month = 30 days
I = $ 83.77

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Example 3:
Cash Flow Diagram
Determine the interest due on $ 10,000 loan which was made on April 01,
2008 and repaid on September 01, 2012 with a rate of interest is 10% per is a simple graphical representation of cash flows drawn on a time scale. It is used
year using to simplify problems having diverse receipts and disbursements
a. Ordinary Simple Interest
b. Exact Simple Interest
= receipt (cash inflow or positive cash flow)

Solution: = disbursement (cash outflow or negative cash inflow)

a. Ordinary Simple Interest

I = P(i)n
I = $10,000(0.10)(4+5/12) Example 4:
I = $ 4,416.67
A loan of Php 1000 at simple interest of 10% will become Php 15,000 after 5
b. Exact Simple Interest years.

I = P(i)n
1000 1500
I = $10,000(0.10)(4+153/365)
I = $ 4,419.18 5
0
0 1 2 3 4
1 2 3 4 5

1500 1000
Cash flow diagram Cash flow diagram
(Borrower’s Viewpoint) (Lender’s Viewpoint)

PROMISSORY NOTES
is a written promise of a person or business (as maker) to pay another person or
business (payee) within a specified period of time.

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Types of Notes Example 5:

a. Simple Interest Note Mr Roberts was granted a loan of $ 50,000 by the cooperative bank with an
is a note where the value is stated on the note (face value) which interest rate of 6% for 180 days on the principal collected in advance. The
corresponds to the principal amount, the total amount to be repaid bank accepts a promissory note for $ 50,000 non-interest for 180 days. Find
(maturity value of the note), and the date to which the amount is due the proceeds of the note if it is discounted at once.
(maturity date)
Solution:
I = P(i)n
where I = Interest I = P(i)n where n = 1 period (180 days)
P = principal I = $ 50,000(0.06)(1)
n = no of years I = $ 3,000
i = interest rate
Solving for Future Amount
b. Bank Discount Note A=P+I
is a note where the value is stated on the note corresponds to the = $ 50,000 + 3,000
maturing amount to which the interest is being calculated and is deducted A = $ 53,000
in advance. (The amount received by the maker is proceeds)
d = 1 – 1/(1+0.06)
D = A(d)n d = 0.0566
where D = discount (advance interest)
P = principal D = A(d)n
n = no of years = $53,000(0.0566)(1)
d = discount rate D = $2,999.8

Proceeds = $50,000 – 2,999.8

Proceeds = $47,000.2
DISCOUNT
is the difference between the present worth and the future worth

D=A–P Example 6:
D = A(d)n
A = P [1 + i(n)] On July 11, 2011, Engr J Villa received $ 60,000 from a credit cooperative and
promised to pay $ 68,000 on Dec 20, 2011. If the interest was decided in
d = 1 – 1/(1+i) advance, what was the discount rate?
i = d/(1-d)

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Solution: Problem Set 1A: Simple Interest

D=A–P 1. John purchase a computer set from a merchant who asks Php 38,000 at the end
D = 68,000 – 60,000 60 days (cash in 60 days). John wishes to pay it immediately and the merchant
D = $ 8,000 offers to compute the cash price on the assumption that money is worth 8% simple
interest. What was the cash price?
Solving for the discount rate, d
d = D/A(n) 2. Mr Jud borrowed money from the bank. He received from the bank Php 13,400
d = 8000 / 68,000(192/360) and promised to pay the amount Php 15,500 at the end of 9 months. What was
d = 0.2206 or 22.06% the discount rate?

3. Joshua applied for a car loan in a local financing bank which charges a rate of
interest of 18%. Interest in this type of transaction is to be deducted from the loan
at the time the money is released. At the end of one year, the borrower will have
to pay the same amount what was stated in his application for the loan. What was
the actual rate of interest did the financing bank charge him?

4. Rosie borrowed from a bank under a promissory note that he signed in the amount
of Php 25,000 for a period of one year. He received only the amount of Php 21,915
after the bank collected the advance interest and an additional amount of Php
85.00 for notarial inspection fees. What was the rate of interest that the bank
collected in advance?

5. If you borrow money from your friend with simple interest of 12%, find the present
value of Php 20,000 which is due at the end of 10 months.

6. Find the amount due at the end of 15 months whose present value is Php 2,000 at
5% simple discount rate.

7. A loan was made 3 years and 4 months ago at 6% simple interest. The principal
amount of the loan has just been repaid along with Php 800 interest. Compute the
principal amount of the original loan.

8. A bank deposit of Php 6,000 was made one year ago in one of the local banks.
The bank account accumulates now Php 6,392.60. Compute the simple interest
rate charge to the account.

9. Find the discount if Php 2,000 is discounted for 6 months at 8% simple discount.

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

10. A bank charges 12% simple interest on a Php 2,500 loan. How much will be repaid
if the loan is paid back on lump sum after three years? COMPOUND INTEREST
is the interest earned by the principal which is added to the principal to earned an
11. What simple interest rate is equivalent to the simple discount rate of 6% interest in the succeeding period.
discounting an amount of Php 1,000 due at the end of three months?

12. Mr Robert Lee made a money market placement of Php 1,000,000 for 30-days at From F = P + I or A = P + P(i)(n)
7.5% per year. If the withholding tax is 20%, what is the net interest that he will F3
receive at the end of the month? End of first year
I3
F2 F1 = P + P(i)
13. A Php 6,000 is borrowed for 75 days at 16% per annum simple interest. How much F1 = P[1 + i]
will it due at the end of 75 days? F1 i2

i1
End of second year
P
14. A woman borrowed Php 2,500 from a bank and promise to pay the amount for one F2 = F1 + F1 (i)
year. He received only the amount of Php 2,310 after the bank collected an F2 = F1 [1 + i]
advance interest of Php 190. What was the rate of discount and the rate of interest F2 = P[1+i]2
that the bank collected in advance? 0 1 2 3
In General:
15. Mr Jay borrowed money from a bank. He received from the bank Php 1,340 and Fn = P[1+i]n
promised to pay Php 1,500 at the end of 9 months. What was the simple interest
rate?

16. What is the discount if the he received Php 1,650 from a lender for four months at
TYPES OF RATE OF INTEREST
6% interest rate?
a. Nominal Rate of Interest
17. I owe Php 10,000 due at the end of three years without interest. What should my specifies the rate of interest and a number of interest periods in one year
creditor be wiling to accept today he discounts at 7% simple interest?
i = r/m where
18. What will be the future worth of money after 12 months if the sum of Php 25,000 i = rate of interest per interest period
is invested today at simple interest rate of 1% per annum? r = nominal rate of interest
m = mode of compounding
19. A loan of Php 5,000 is made for a period of 16 months at a simple interest rate of
16% per year. What is the future amount due at the end of the loan period? b. Effective Rate of Interest
is the actual or exact rate of interest on the principal during one year
20. If you borrowed Php 10,000 from a bank with 18% interest per annum. What is the
total amount to be repaid at the end of one year? ie = [1 + r/m]m – 1

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Example 7: Example 10:

If P 1.00 is invested at a nominal rate of 15% compounded quarterly, what is By the condition of a will, the sum of P 25,000 is left to a girl to be held in trust
the effective rate of interest by her guardian until it amounts to P 50,000. When will the girl receive the
money if the fund is invested at 8% compounded quarterly?
Solution:
ie = [1 + r/m]m – 1 Solution:
F = P[1 + r/m]nm
ie = [1 + 0.15/4]4 – 1
50,000 = 25,000[1 + 0.08/4]4n
ie = 15.86% n = 8.75 years, say 9 years

Example 8:
In how many years is required for P 8,000 to increase by P 12,000 if the
interest is at 8% compounded semi-annually

Solution:
F = P[1 + r/m]nm

20,000 = 8,000 [1 + 0.08/2]2n

n = 11.68 years, say 12 years

Example 9:
A Mechanical Engineer wished to accumulate a total of P 100,000 in a savings
account at the end of 15 years. If the bank pays only 4% compounded
quarterly, what should be the initial deposit?

Solution:
F = P[1 + r/m]nm

100,000 = P[1 + 0.04/4](15)4

P = Php 55,044.96

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

EQUATION VALUE Example 12:

is obtained by setting the sum of the values of a certain comparison / data to a
single date point (known as the time reference). Compare the accumulated amounts after 5 years of Php 1,000 invested at a
rate of 10% per year compounded (a) annually, (b) semi-annually, (c) quarterly,
Example 11: (d) monthly, (e) daily, and (f) continuously.

Solution:
A man bought a lot worth Php 1,000,000 if paid in cash. On an instalment
basis, he paid a downpayment of Php 200,000; Php 300,000 at the end of one
Using the formula: F = P ( 1 + i)
year; Php 400,000 at the end of three years and a final payment at the end of
five years. What was the final payment if the interest was 20%?
a) F = 1000 ( 1 + 0.10) = 1,610.51
Solution: 0.10 10
b) F = 1000 1 + = 1,628.89
800,000 Ref point
0.10 20
c) F = 1000 1 + = 1,638.62

1 2 3 4 5 0.10 60
d) F = 1000 1 + = 1,645.31
12
0
0.10 1825
300.000
e) F = 1000 1 + = 1,648.61
365

400.000
f) F = 1000 (𝑒)0.10(50 = 1,648.72

Using the ref point (today), the equation value is: Example 13:
300,000 400,000 𝐷 A nominal interest of 3% compounded continuously is given on the account.
800,000 = + +
(1 + 0.20) (1 + 0.20) (1 + 0.20) What is the accumulated amount on Php 10,000 after 10 years?

D = Php 792,560.00 Solution:

( )
F = P 𝑒

CONTINUOUS COMPOUNDING AND DISCRETE PAYMENTS F = 10,000 𝑒 0.03(10)

In discrete compounding, the interest is compounded at the end of each finite – F = Php 13,489.59
length period such as month, quarter or a year. It is assumed that cash payment
is done once a year but the compounding is continuous throughout the year.

( )
F = P 𝑒

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY


ENGINEERING ECONOMY
Problem Set 1B: Compound Interest
1. How long will it take money to double itself if invested at 5% compounded
annually?
2. John borrowed Php 150,000 from a bank at 15% compounded semi-annually.
What is the equivalent effective rate of interest?
3. A company invests Php 10,000 today to be repaid in 8 years in one lump sum at
8% compounded semi-annually. How much profit in present day is realized over
8 years?
4. The sum of Php 52,000 was deposited in a fund earning an interest rate 0f 8% per
annum compounded quarterly. What was the amount of fund at the end of 4
years?
5. You had Php 15,000 invested in your personal bank account and is currently
earning at 12% interest compounded annually. Determine how many years your
savings will be doubled.
6. Accumulates Php 45,000 for 9 years at 6% compounded quarterly. What was the
compound interest earned?
7. If $25,000 is invested at 8% compounded quarterly, how many years will it take for
this amount to accumulate $45,000?
8. Five years ago, you paid Php3,400,000 for a house. If you sold it today at
Php5,000,000, what would be your annual appreciation?
9. Ten years ago, the value of money is Php125,000 and now it is worth Php183,000.
What was the interest rate charge per year compounded annually?
10. Php200,000 was deposited for a period of 5 years and 9 months and bears an
interest of Php 95,698.35. What was the rate of interest if it is compounded
quarterly?
11. Find the nominal rate which if compounded quarterly is equivalent to 6.5%
compounded semi-annually.
Lecture notes of Engr Rosalito Juda V. Eboa
Lecture notes of Engr Rosalito Juda V. Eboa
12. JR and JJ borrowed P5,000 from a lending company for 5 years at 12%. At the
end of 5 years, they renew the loan for the amount due plus Php 4000 more for 3
years at 12%. What was the lump sum amount due?
13. John and Rosie borrowed money of Php20,000 in 2018, Php 15,000 in 2019 and
Php 23,000 in 2020. How much are they going to pay in 2022 if the interest charge
is 6% compounded annually?
14. Judie wants to have Php 500,000 four years from now? What amount should be
invested now if it is to earned 6% compounded quarterly for the first two years and
8% compounded semi-annually during the next two years?
15. A certain credit company charges 1.5% interest per month compounded
continuously on the unpaid balance purchases made on his credit card. Compute
the effective rate of interest.
16. Mr JD borrowed Php 1,000 and was able to signed a promissory note that he would
pay Php 2,032.79 after 4 years. How much is the nominal rate of interest and the
corresponding effective rate if money is compounded bi-monthly.
17. Find the present worth of a future payment of Php 300,000 to be made in five years
with interest rate of 8% per annum.
18. What is corresponding effective interest rate of 18% compounded semi-annually.
19. If Php 5,000 shall accumulate for ten years at 8% compounded quarterly. Find the
compounded interest rate at the end of ten years.
20. By condition of a will, the sum of Php 20,000 is left to a son to be held in trust fund
by her guardian until it amounts to Php 100,000. When will the son received the
money if the fund earns 12% compounded quarterly?
ENGINEERING ECONOMY
 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

CHAPTER 2 b. Deferred Annuity

Is an annuity whose first payment is deferred to a certain number of
ANNUITY period.

P
ANNUITY F
is a series of equal payments made at equal interval of time. Reference time
R

TYPES OF ANNUITY 0 1 2 3 4 5

a. Ordinary Annuity A A
is one where the payments are made at the end of each payments P  F/ ( 1  i)1 A A
1
P  A/ ( 1  i)
P Reference time F
d, deferred P  A/ ( 1  i)2
period P  A/ ( 1  i)3

0 1 2 3 n-1 n P  A/ ( 1  i)4

P  A/ ( 1  i)A1 A A A A
2 P = A[(1 + i)n-d – 1] / [(1 + i)n(i)] and
P  A/ ( 1  i)
P  A/ ( 1  i)3
F = A[(1 + i)n-d – 1] / (i)
P  A/ ( 1  i)n-1
P  A/ ( 1  i)n

In general,
P = A[(1 + i)n – 1] / [(1 + i)n(i)] and

F = A[(1 + i)n – 1] / (i)

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

c. Annuity Due d. Perpetuity

Is an annuity whose first payment is made at the start of each period. is an annuity whose payment periods continues indefinitely

P
P Reference time

0 1 2 3 n-1
0 1 2 3 n-1 n
A A A A A
1
A P  A/( 1  Ai) A A A A
P  A/ ( 1  i)2 P = A/(i)
P  A/ ( 1  i)3
P  A/ ( 1  i)n-1
P  A/( 1  i)n Example 14:
Deposits at the end of each year are made by a father to his son starting from
his son’s first birthday until the son’s 20th birthday. The son will have to
withdraw equal amounts of Php 20,000 for each year starting from his 21st
In general, birthday to his 24th birthday from the deposits’ his father made. How much was
the yearly deposit the father made if money is worth 8% compounded
P = A + A[(1 + i)n – 1] / [(1 + i)n(i)] annually?

Given:

Analyze using time plot Reference time

P F
withdrawal,w = 20,000
i = 8% compounded annually
1 5 10 15 20
0

deposit ,d = ??

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Reqd: Example 16:

d, annual deposit
Mr. John buys a car and paid Php 108,000 cash and agreed to pay Php 30,000
Solution: at the end of 6 months for 10 years. He failed to make the first 5 payments at
Php 30,000 each. At the end of three years, he desires to pay the car by a
P20 = W[(1+i)4 – 1] / (1 + i)4(i) single payment which will cancel both his accumulated liabilities and his future
liabilities. Calculate the amount needed if money is worth 6% per annum
P20 = 20,000[(1+0.08)4 – 1] / (1 + 0.08)4(0.08) compounded semi-annually?

P20 = Php 66,242.54 Solution:

Calculating the previous liability:
But P20 = F20
F = A[(1 + i)n – 1]/ (i)
20
F20 = A[(1+i) – 1] / (i)
F6 = 30,000[(1 + (0.06/2))3(2) – 1]/ (0.06/2)
20
66,242.54 = A[(1+0.08) – 1] / (0.08)
F6 = Php 194,052.29
A = Php 1,447.55
Calculating the future liability:

Example 15: P = A[(1 + i)n – 1]/ (1 + i)n(i)

Engr Lozada bought a car with a cash value of Php 340,000 on an instalment
plan under the following terms: Php 40,000 cash upon delivery and the
balance payable in 12 equal monthly payments, each payment combining an
amortization instalment and 2% interest on the remaining unpaid balance.
What is his monthly payment?
P6 = 30,000[(1 + (0.06/2))7(2) – 1]/ (1 + (0.06/2))7(2)(0.06/2)
P6 = Php 338,882.19
Therefore, solving for the total liability

Solution: T = F6 + P6
P = CASH VALUE – DOWNPAYMENT
P = 340,000 – 40,000 T = Php 532,934.48
P = 300,000

Solving the monthly payment

P = A[(1 + i)n – 1]/ (1 + i)n(i)

300,000 = A[(1 + 0.02)12 – 1]/ (1 + 0.02)12(0.02)

A = Php 28,367.88

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY


ENGINEERING ECONOMY
Problem Set 2: ANNUITY
1. If you invest $ 2,000 now and it will become $ 6,000 at the end of 4 years,
determine the nominal rate of interest and the corresponding effective rate of
interest if the interest is compounded quarterly
2. A man borrowed P 20,000 from a bank which has a simple interest of 16% but the
interest is to be deducted from the loan at the time that the money was borrowed,
and the loan is payable at the end of one year. What is the actual rate of interest?
3. The sum of $ 26,000 was deposited in a fund earning interest at 8% per annum
compounded quarterly. What was the principal in the fund at the end of 3 years?
4. Joyce buys a television set from a merchant who asks P 18,750 at the end of 60
days (cash in 60 days). Joyce wishes to pay immediately and the merchant offers
to compute the cash price on the assumption that money is worth 8% simple
interest. What is the cash price today?
5. Find the amount due at the end of 15 months whose present value is $ 2,000 at
5% simple interest.
6. If $ 1,000 becomes $ 1,126.49 after 4 years invested at a certain nominal rate of
interest compounded semi-annually, determine the effective rate.
7. On his sixth birthday, the boy was left with inheritance. The inheritance will be paid
in a lump sum of P 25,000 on his 21st birthday. What is the present value of the
inheritance, if it is invested at 6% annually?
8. How long will it take the money to triple itself if invested at 8% compounded
annually?
9. Accumulate $ 300 for nine years at 6% compounded quarterly. What is the
compound interest earned?
10. Five years ago, you paid P 3,400,000 for the house and lot. If you sold it today for
P 5,000,000, what would be your annual rate of appreciation.
11. What is the value of the bank account at the end of 25 years if the initial deposit is
$ 25,000 at a rate of interest of 7% per annum.
Lecture notes of Engr Rosalito Juda V. Eboa
Lecture notes of Engr Rosalito Juda V. Eboa
12. How long will it take $ 50 to be four times its value if invested at the rate of 7%
compounded semi-annually.
13. A businessman invested $ 1,000 and after 4 years, it becomes $ 1,608.44 invested
at a certain interest compounded bi-monthly. Determine the effective rate.
14. A businessman borrows money of $ 200,000 from the bank to be repaid in three
years at a rate on interest 12% compounded annually. If the rate of inflation is 7%,
what is the real rate of return.
15. Find the present value of the following instalment payments; $ 1,000 now, $ 2,000
at the end of the first year; $3,000 at the end of the second year; $4,000 at the end
of third year; and $ 5,000 at the end of 4th year if money is worth 10% compounded
annually.
16. Mr John Week borrowed $ 2,400 at 1% per month payable in 24 equal end-of-the
month payments. How much money of the loan remains unpaid immediately after
he has paid the 12th payment?
17. A man wishes to prepare the future of his 10 years old son. Determine the monthly
savings that the man should make with an interest rate of 5.41% per annum to
amount P 120,000 at the time his son will be 18 years old.
18. A firm is considering the installation of an automatic data processing unit to handle
some of its accounting operations. Machines for that purpose may be purchased
for P20,000 or maybe leased P8,000 for the first year and P1,000 every year now
and then until the 4th year. Is it advisable to rent or buy the machine if money is
worth 15%?
19. A fund for replacement of a machinery in a plant must have P 30,000 at the end of
9 years. An equal deposit of P2965 was made on the fund at the end of each 6
months for 4 years only. How much is the rate of the fund invested if it is
compounded semi annually.
20. A man wishes to prepare the future of his 10 year old son. Determine the monthly
savings that the man should make with interest of 5.41% per annum to amount
P120,000 at the time his son will be 18.
ENGINEERING ECONOMY

ENGINEERING ECONOMY
21. Find the annual payments to extinguish a debt of P 10,000 – payable in 5 years at
12%
22. A businessman borrowed P 10,000 with interest rate of 5% payable annually. The
debt will be including interest by equal instalment at the end of each year for three
years. Compute the annual payment.
23. Engr Mazon borrows P 100,000 at 10% effective annual interest. He must ay back
the loan over 30 years with a uniform monthly payment due on the fist day of the
month. How much will he pays every month?
24. A man wishes to have P35,000 when he retires 15 years from now. If he expect
to receive 4% annual interest, how much will he set aside in each of the 15 equal
annual beginning of the year deposits?
25. Under a factory savings plan, a workman deposits P 50 at the beginning of each
month for four years and the management guarantees accumulation at 6%
compounded monthly. How much stands to the work man’s credit at the end of 4
years.
26. An old boiler cost P 2,400 a year to maintain. What expenditures for a new boiler
is justified if no maintenance will be required for the first three years, P600 per year
for the next 7 years and P2,400 a year thereafter. Assume money to cost 4%
annually and no other cost to be considered.
27. A businessman borrowed P300,000 and agrees to discharge his obligation by
paying a series of 8 equal payments of P 57,434.78 the first being due at the end
of 5 ½ years. Find the rate of interest he is paying if it is compounded semi-
annually.
28. A commercial building can be acquired at a downpayment of P 500,000 and a
yearly payment of P 100,000 at the end of each year for a period of 10 years
starting at the end of five years from the date of purchase. If money is worth 12%
compounded yearly, what was the cash price of the commercial bldg?
29. If money is worth 5% compounded semi-annually, find the, present value of a
sequence of 12 semi-annual payments at P 500 each, the first of which is due at
the end of 4 ½ years.
Lecture notes of Engr Rosalito Juda V. Eboa
Lecture notes of Engr Rosalito Juda V. Eboa
30. Roy borrowed a certain amount on June 2000 from Roland. Two years later, Roy
borrowed again from Roland an amount of P 5,000. Roy paid P 1,000 on June
2003 and discharged his balance by paying P 7,500 on June 2005. What was the
amount borrowed by Roy on June 2000 if the interest rate is 8% compounded
annually?
31. P 1,500.00 was deposited in a bank account, 20 years ago. Today it is worth P
3,000.00 interest is paid semi-annually. Determine the interest rate paid on this
account.
32. A young engineer borrowed P 10,000 at 12% interest and paid P 2,000 per annum
for the last 4 years. How much does he have to pay at the end of the fifth year in
order to pay off his loan?
33. A man purchased on monthly instalment at P 100,000 worth of load. The interest
rate is 12% nominal and payable in 20 years. What is the monthly amortization?
34. An instructor plans to retire in exactly one year and want an account that will pay
him P 25,000 a year for the next 15 years. Assuming a 6% annual effective interest
rate, what is the amount he would need to deposit now?
35. Mr. Robles plans a deposit of P 500 at the end of each month for 10 years at 12%
annual interest, compounded monthly. What will be the amount that will be
available in four years?
36. If a low cost house and lot worth P 87,000 were offered at 10% down payment and
P 500 per month for 25 years, what is the effective monthly interest rate on the
diminishing balance?
37. If you obtain a loan of P 1,000,000 at the rate of 12% compounded annually in
order to build a house, how much must you pay monthly to amortize the loan within
a period of ten years?
38. A car dealer advertises the sale of a car model for a cash price of P 280,000. If
purchased on instalment, the regular downpayment is 15% and balance payable
in 18 equal monthly instalments at an interest rate of 1.5% per month. How much
will be required monthly payments?
ENGINEERING ECONOMY
 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

39. If P 10,000 is deposited each year for 9 years, how much annuity can a person get Capitalized Cost (is simply the sum of the first cost and the present worth of all
annually from the bank every year for 8 years starting 1 year after the 9th deposit costs of replacement, operation and maintenance on a certain periods or forever).
is made. Cost of money is 14%. This is an important application of annuity.
40. A debt of P 12,000 with interest of 20% compounded quarterly is to be amortized CC = FC + Preplacement + Poperation + Pmaintenance
by equal semi-annual payments over the next three years, the first due in 6 months.
How much is the semi-annual payments?
Example 17:
41. The nominal interest rate is 4%. How much is my P 10,000.00 worth in 10 years in
a continuously compounded account?
Determine the capitalized cost of a structues that requires an initial
investment of Php 1,500,000 and an annual maintenance of Php 150,000
42. Find the present value of P 25,000 due in 5 years if money is worth 8% converted
assuming an interest rate of 15%
continuously

Solution:

CC = FC + Preplacement + Poperation + Pmaintenance

P = A/(i)   P = 150,000 / 0.15

P = Php 1,000,000

CC = 1,500,000 + 1,000,000

CC = Php 2,500,000

Amortization (any method of repaying a debt, including the principal and interest
and is usually by a series of equal payments at equal interval of time.

Example 18:
A debt of Php 10,000 with an interest rate of 20% compounded semi-annually
is to be amortized by 5 equal payments at the end of each 6 months and the
first payment will be made after 3 years. Calculate the semi-annual payments
and construct an amortization table.

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Solution: Uniform Arithmetic Gradient (is an instance where the disbursement or

receipts involves is uniformly increasing or decreasing amount on each period)
10,000 F5 = P5 Reference time
Start of 4G
payment 3G
2G
0 2 4 6 8 10 1G

A A A A A 0

1 2 3 4 5
F = P [1 + (r/m)]nm
𝐺 (1 + i) - 1 1
F5 = 10,000 [1 + (0.20/2)]2.5(2) P = - n
𝑖 𝑖 (1 + i )
F5 = 16,105.10

Solving for A: (Students should derive this equation based on the above learning)
P = A[(1 + i)n – 1]/ (1 + i)n(i)

16,105.10 = A[(1 + (0.20/2))5 – 1]/ (1 + (0.20/2))n(0.20/2) Example 19:

A = Php 4,248.48 A loan of $ 8,000 was agreed to be amortized in four years forming an
ascending arithmetic progression. Calculate the initial amount to be paid if
Outstanding Interest Due at Repaid the interest rate of the loan is 15%.
Period Principal at the the end of Payments Principal at end
beginning of period period of period Solution:
1 10,000.00 1,000.00
2 11,000.00 1,100.00 𝐺 (1 + i) - 1 1
P = - n
3 12,100.00 1,210.00 𝑖 𝑖 (1 + i )
4 13,310.00 1,331.00
5 14,641.00 1,464.10 𝐺 (1 + 0.15) - 1 1
6 16,105.10 1,610.51 4,248.48 2,637.97 8000 = - 4
0.15 0.15 (1 + 0.15)
7 13,467.13 1,346.71 4,248.48 2,901.77
8 10,565.36 1,056.54 4,248.48 3,191.94 G = $ 2,112.80
9 7,373.42 737.34 4,248.48 3,511.14
10 3,862.28 386.20 4,248.48 3,862.28

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

CHAPTER 3 BV = book value at the certain number of years

dm = total depreciation up to m years
DEPRECIATION & DEPLETION
1. STRAIGHT LINE METHOD (assumes that the loss in value is directly
Depreciation proportional to the life span of the property)
is the decrease in the value of physical property with the passage of time annual depreciation cost
FC
Purpose of Depreciation
a. to provide for the recovery of the capital which has been invested Future
in physical property value
(FC-SV)
b. to enable the cost of depreciation to be charged to the cost of
producing products or services that results from the use of the
property SV

Types of Depreciation n
a. Physical Depreciation (deterioration caused by various chemical and
mechanical factors on the materials composing a property) d = [FC – SV]/n

b. Functional Depreciation(deterioration caused by the decrease in total depreciation cost up to m years

demand for the equipment for which it was designed) dm = [FC – SV](m/n)
;
book value at the end of m years
Requirements of a Depreciation Method BV = FC – dm
a. It should be simple
b. It should recover capital
c. The book value will be reasonably close to the market value at any time Example 21:
d. Methods should be accepted by the BIR
An electronic balance costs Php 90,000 and has an estimated
salvage value of Php 8,000 at the end of its 10 years life span. What
Methods of Computing Depreciation would be the book value after three years using the straight line
The following symbols will be used for the different depreciation methods method?
n = useful life of the property (years)
FC = first cost or original cost
SV = value at the end of its live; salvage value; scrap value
d = annual depreciation cost

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Solution: Solution:
d = [FC – SV]/n  d = [90000 – 8000]/10  d = Php 8,200
d = [54,500-5,000](0.065) / [(1+0.065)10 – 1]
Σdm = m(d)  dm = 3(8,200)  dm = Php 24,600 d = Php 3,668.18

BV = FC – dm  BV = 90000 – 24600  BV = Php 65,400 dm = 3,668.18[(1+0.065)6 – 1]/(0.065)

dm = 25,911.02

2. SINKING FUND METHOD (assumes that a sinking fund is established in BV = 54,500 – 25,911.02
which funds will accumulate for replacement) BV = 28,588.98

FC
3. DECLINING BALANCE METHOD (assumes that the annual cost of
Future depreciation is a fixed percentage of the salvage value at the beginning of
value the year)
(FC-SV)
k = ratio of depreciation in any one year to the book value at the beginning
of that year
SV
FC
n Future
d = [FC-SV](i) / [(1+i)n – 1] value
(FC-SV)
Σdm = d[(1+i)n – 1] / (i)
SV
BV = FC – dm

Example 22: n

A broadcasting company purchased an equipment for Php 53,000 and k = 1 -

𝒏 SV
paid 1,500 for freight and delivery charges to the job site. The FC
equipment has a natural life of 10 years with a trade in value of Php
5,000 at the end of life. Calculate the annual depreciation cost using d@m = FC (k)(1 – k)m-1  depreciation @ mth year
sinking fund method assuming an interest rate 6.5 % compounded
annually. What is the book value at the end of six years?

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

BVm = FC (1 – k)m or FC
BVm = FC [ SV/FC]m/n Future
value
Note that this method is NOT applicable when the salvage value is zero (FC-SV)
as k value will be equal to one.
SV
Example 23:
n
A certain type of machine loses 10% of its value each year. The
machine costs Php 2,000.00 originally. Make out a schedule showing Note that when the DBB method is used, the salvage value should not be
the yearly depreciation, the total depreciation and the book value at subtracted from the first cost when calculating the depreciation charge.
the end of each year for 5 years.

Solution: Example 24:

Book Value at Depreciation Total Book Value at A plant bought a calciner for Php 220,000 and used it for 10 years, the
Year

the beginning of during the Depreciation at the end of the life span of the equipment. What is the book value of the calciner after
year year (10%) the end of the year 5 years of use assuming a scrap value of Php 20,000 for double
year declining balance method?
1 Php 2,000.00 Php 200.00 Php 200.00 Php 1,800.00
2 Php 1,800.00 Php 180.00 Php 380.00 Php 1,620.00 Solution:
3 Php 1,620.00 Php 162.00 Php 542.00 Php 1,458.00 BVm = FC [1 – (2/n)]m
4 Php 1,458.00 Php 145.80 Php 687.80 Php 1,312.20
5 Php 1,312.20 Php 131.22 Php 819.22 Php 1,180.98 BV5 = 220000 [1 – (2/10)]5

BV5 = Php 72,090.00

4. DOUBLE DECLINING BALANCE (same as declining balance except that
the rate of depreciation, k, is replaced by 2/n
5. SUM-OF-THE-YEARS-DIGITS (SYD) METHOD
depreciation at a certain year
d = [reverse digit/sum of digit] (FC - SV)
d@m = FC [2/n][1 – (2/n)]m-1 depreciation @ mth year
depreciation at any m years (m<n)
BV = FC[1 – (2/n)]m
Σdm = [sum of reverse digit/sum of digits] (FC - SV)

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Book value at any period m Example 26:

BVm = FC - Σdm
A television company purchased a machinery for Php 100,000 on July
1, 1979. It is estimated that it will have a useful life of 10 years, scrap
Example 25: value of Php 4,000; production of 400,000 units and working hours of
120,000. The company uses the machinery for 14,000 hours producing
A structure costs Php 12,000. It is estimated to have a life of 5 years 36,000 units in 1979 and 18,000 hours producing 44,000 in 1980.
with a salvage value of Php 1,000 at the end of life. Determine the Calculate the depreciation in 1980 using SO Method.
book value at the end of each year using SYD Method.
Solution:
Solution:
d80 = ([FC – SV]/T )(Qn)
Year in
Book Value at
YEAR

reverse d80 = ([100000 – 4000]/400000 )(44000)

Depreciation during the year the end of the
order
year d80 = Php 10,560
1 5 (5/15)(12000-1000) = 3,666.67 Php 8,333.33
2 4 (4/15)(12000-1000) = 2,933.37 Php 5,400.00
3 3 (3/15)(12000-1000) = 2,200.00 Php 3,200.00 Example 27:
4 2 (2/15)(12000-1000) = 1,466.67 Php 1,733.33
5 1 (1/15)(12000-1000) = 733.33 Php 1,000.00 A machine costs $ 7,000 last 8 years and has a salvage value at the
end of life of $350. Determine the depreciation charge during the 4th
year and the book value at the end of four years using
6. THE SERVICE OUTPUT METHOD (assumes that the total depreciation (a) SL Method;
that has taken place directly proportional to the quantity of the output of the (b) DB Method; and
property up to that time.) (c) SYD Method.

depreciation per unit output Solution:

do = [FC – SV]/T
a. SL Method
depreciation per any unit output d = [FC-SV]/n  d = [7000 – 350]/8  d = $ 831.25
dn = ([FC – SV](Qn/ T)
BVm = FC -d(m)  BV4 = 7000 – 831.25(4)  BV = $ 3,675
where: Qn = quantity of produced units
T = Total quantity to be produced

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

DEPLETION
b. DB Method is an annual charge that is made for the maintenance of investment
in wasting assets such as mines, oil and gas well.
SV 350
k = 1 - ⇒ k = 1 -
FC 7000 Let:
k = 0.3123 C = Capital Investment
Ap = Annual Profit
dm = FC (k)(1 – k)m-1 SV = Salvage Value
dm = 7000 (0.3123)(1 – 0.3123)4-1 n = number of years of the business venture
dm = $ 710.99 r = rate of return on the investment
i = interest rate earned on sinking fund
BVm = FC (1 – k)m C(r) = annual return on investment
BVm = 70000 (1 – 0.3123)4 Ad = annual deposit in sinking fund
= Ap – C(r)
BVm = $ 1,563.83
From the relation (annuity equation)
F = A[(1+i)n – 1] / (i)
c. SYD Method
dm = [sum of reverse digit/sum of digits] (FC - SV) where: F = C - SV
A = Ap – C(r)
dm = [26 / 36] (7000- 350)
dm = $ 4,802.78 Substituting and simplifying

BVm = FC – dm Ap((1 + i) - 1) + SV (𝑖)

C =
BVm = $ 2,197.22 i + r((1 + i) - 1)

Example 28:

It is estimated that a mine will yield an annual profit of $ 36,000 for 10

years at the end of which time it will have a salvage value of $ 4,000.
Assuming that the recovery capital can be reinvested at 3%, what is the
purchase price required to yield an investment rate of 8%.

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Solution: Problem Set 3: DEPRECIATION AND DEPLETION

Ap((1 + i) - 1) + SV (𝑖) 1. A house is purchased for Php 500,000 and has a salvage value of Php
C = 80,000 after 20 years. Calculate the depreciation and the book value after
i + r((1 + i) - 1)
eight years using
36,000((1 + 0.03) - 1) + 4,000 (0.03) a. Straight line Method
C = b. Sinking Fund Method if money is worth 8% per annum
0.03 + 0.08((1 + 0.03) - 1)
c. Declining Balance Method
C= d. Double Declining Balance Method
e. Sum of Years Digit Method

2. A certain office equipment has a first cost of Php 25,000 and a salvage
value of Php 1,400 at the end of nine years. Determine its book value at
the end of six years using Sinking Fund Method at 4% interest

3. A building is constructed at a cost of Php 10,000.000 with an estimated

salvage value of Php 220,000 at the end of 20 years. What is the appraisal
value at the end of 12 years using Sinking Fund Method at an interest rate
of 5%.

4. A certain machine cost Php 40,000 and has a life span of 4 years and a
salvage value of Php 6,600. The production output of this machine in units
per year for first year 1,900 units; second year 2,350 units; third year 3,200
units and fourth year 4,300 units. What is the annual depreciation charges
if the unit produced are of uniform quality?

5. A machine shop purchased an equipment 10 years ago for Php 60,000. A

straight-line depreciation reserved had been provided on a 20-year life of
the machine. The owner of the machine shop desires to replace the old
equipment with a modern unit of many advantages costing Php 100,000. It
can sell the old unit for Php 20,000. How much new capital will be required
for the purchase?

6. A service panel truck initially cost Php 58,000. Its resale value at the end
of the fifth year of the useful life is estimated at Php 15,000. By means of

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY


ENGINEERING ECONOMY
the declining balance method, what is the depreciation charge on the
second year?
7. A canteen is constructed at a first cost of Php 8,000,000 with an estimated
salvage value of Php 250,000 at the end of 25 years. What is the appraisal
value at the end 15 years using Sinking Fund Method assuming an interest
rate of 8%?
8. An asset costing Php 20,000 was purchased three years ago. At he same
time, it was estimated that it would have a five-year span with a salvage
value of Php 5,000. Consideration is being given to replacing it with a new
asset costing Php 25,000 and a trade-in of Php 6,000 will be allowed on the
old unit. If straight-line depreciation has been used for accounting purpose,
what is the sunk cost?
9. A certain company installed a 10,000 kW electric generating plant at a cost
of Php 4.30 per kW. The amount of the total cost of the plant were sold to
the public and were to mature in 20 years. The estimated life of the plant is
15 years and the salvage value is conservatively set at 5% of the first cost,
interest rate on bond is 4%and on sinking fund deposit at 3.5%. What is the
annual payment on the investment?
10. The annual income from the mine is Php 100,000 and the life of the mine
is 20 years. Find the price that an investor is willing to pay for the mine if
he considers the mine is worth 5% and if he is to accumulate a sinking fund
of 8% in order to replace the capital on investment.
11. An asset is purchased for Php 9,000 and is estimated life is ten years after
which it will be sold for Php 1,000. Find the book value during the second
year if the sum of years digit depreciation method is used.
12. A machine cost Php 7,350 has a life span of eight years and has a salvage
value of Php 350 at the end of eight years. Determine its book value at the
end of four years using:
a. Sum of years Digit Method
b. Declining Balance Method
Lecture notes of Engr Rosalito Juda V. Eboa
Lecture notes of Engr Rosalito Juda V. Eboa
13. A certain company makes it the policy that for any new piece of equipment
the annual depreciation cost should not exceed 10% of the original cost at
any time with no salvage value. Determine the length of service life
necessary if the depreciation method used is Straight Line Method
14. A certain company makes it the policy that for any new piece of equipment
the annual depreciation cost should not exceed 10% of the original cost at
any time with no salvage value. Determine the length of service life
necessary if the depreciation method used is Sinking Fund method:
15. A certain company makes it the policy that for any new piece of equipment
the annual depreciation cost should not exceed 10% of the original cost at
any time with no salvage value. Determine the length of service life
necessary service life necessary if the depreciation method used is the Sum
of the Years Digit Method.
16. A resistor has a selling price of P 400. It it's selling price is expected to
decline at a certain rate of 10% per annum due to obsolescence, what will
be it's selling price after 5 years?
17. A CPU costs P 8,000 and an estimated life of 10 years with a salvage value
of P 500. What is its book value after 8 years using straight method?
18. A certain corporation makes it a policy that for any new equipment
purchased, the annual depreciation cost should not exceed 20% of the first
cost at any time with no salvage value. Determine the length of service life
necessary if the depreciation used is the SYD method.
19. A motor cycle has an initial cost of P 50,000.00 and a salvage value of P
10,000.00 after 10 years. What is the straight line method depreciation rate
as a percentage of the initial cost?
20. A computer machine initially worth P 50,000 depreciates in value each year
by 20% of its value at the beginning of that year. Find its book value when
it is 9 year old.
ENGINEERING ECONOMY
 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

21. The original cost of modem equipment is P 300,000 and it is depreciated by CHAPTER 4
a 10% sinking fund method. Determine the annual depreciation charge if
the book value of the equipment after 10 years is the same as if it had been SELECTIONS IN PRESENT ECONOMY
depreciated at P 28,000 each year by straight line method.
Some problems encountered in engineering economics studies does consider
22. The certain publisher purchased a machine for P 30,000, used it for 5 years interest as a factor. These problems usually involve selections between
and then sold it for P 10,000. If capital I worth 8%, determine the annual alternative designs, materials, or methods.
cost of depreciation and interest using the sinking fund depreciation and
interest on first cost. Profit means that income > expenses
Loss means that income < expenses
23. A welding machine cost P 45,000 with an estimated life of 5 years. Its
salvage value is P 2,500. Find its depreciation rate by straight line method Profit = Income – Expense

24. An Engineer bought an equipment for Php 500,000. He spent an additional
amount of Php 3,000 for installation and other expenses. The salvage value
is 10% of the first cost. If the book value at the end of five years will be Php
291,500 using a straight-line method, determine the useful life of the
equipment in years
25. A student canteen is constructed at a cost of Php 12,000,000 with an
estimated salvage value of Php 220,000 at the end of 20 years. What is the
appraisal value at the end of 12 years using Sum of Years Digit Method.
Example 29:
In a new gold mining in Davao, the ore contains on the average one
ounce of gold per ton. Two methods are being considered in processing
this ore. Method A costs Php 1,500 per ton and can recover 90% of gold.
Method B costs Php 1,200 per ton and can recover 80% of gold. If gold
can be sold at Php 4,000 per ounce, which method is better and by how
much?
Solution:

Profit = Income – Expense

Method A:
Profit = (4000/oz)(0.90 oz/ton)– 1500/ton = P 2,100 / ton

Method B:
Profit = (4000/oz)(0.80 oz/ton)– 1200/ton = P 2,000 / ton

Therefore, Method A is better than Method B by P 100 per ton of ore processed

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

BASIC METHODS FOR MAKING ECONOMIC STUDIES
a. Rate of Return Method (ROR Method)
measures of the effectiveness of an investment, thus the rate of
return is being considered to justify the investment
Rate of Return = net annual profit / capital investment
e. Payback (Payout) Period Method (PP Method)
is defined as the length of time required to recover the first cost of
an investment from the net cash flow generated by the investment
with an interest rate of zero.
Payback Period = (investment – salvage value) / net annual
cashflow

net annual profit = annual income – annual expense Example 30:

A project needs an investment of P 500,000 that will produce a uniform

b. Annual Worth Method (AW Method) annual revenue of P 354,800 for 5 years. Out of pocket costs for
considers a single initial investment of capital and a uniform operation and maintenance will be P 158,300 per year. Taxes and
revenue and cost throughout the life of the investment thus, in AW insurance will be 4% of the first cost. The company expects the
method, the annual cash inflow should be greater than the cash investment to earn not less than 25% before income tax. Salvage value
outflow to justify investment. will be 10% of the investment. Is this a desirable project investment?
What is the payback period?
AW = Annual income – {(FC-SV)(i) / [(1+i)n – 1] + annual expense}
Solution:
A. ROR Method
c. Present Worth Method (PW Method) Rate of Return = net annual profit / capital investment
reflects all revenues and expenses in the present time, where net
cash flow should be greater than zero to consider the project I. Annual income
economically justified. 354,800.00
(This is a very flexible method and can be used in any type
economy study) II. Less : Expense
233.131.03
PW INFLOW > PW OUTFLOW a. Opn &maint 158,300
b. Tax&ins (4%FC) 20,000
d. Future Worth Method (FW Method) c. Depreciation
same as PW method only that all cash inflow and cash outflow are d = (FC-SV)(i) / [(1+i)n – 1]
computed based on the future reference time, thus the future worth d = (500,000-50,000)(0.25) / [(1+0.25)5 – 1]
of net cash flow should be greater than zero to economically justify d = 54,831.03
a project.
III. Net income: 121,668.97

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Rate of Return = (121,668.97 / 500,000) x 100%  24.33% C. PW Method

Convert all annual cost in operation to its present value with interest of
Since the rate of return is less than 25%, the investment is NOT 25%
justified.
50,000
1 2 3 4 5
0
B. AW Method
354,800
AW = Annual Income – Annual Expense 178,300
0
Solving for annual expense
a. Opn &maint 158,300.00 1 2 3 4 5 500,000
b. Tax&ins (4% FC) 20,000.00 Cash flow diagram for cash Cash flow diagram for cash
c. Depreciation 54,831.03 inflows outflows
d = (FC-SV)(i) / [(1+i)n – 1]
d = (500,000-50,000)(0.25) / [(1+0.25)5 – 1]
d = 54,831.03 PW for Cash Inflow > PW for Cash outflow

d. Interest on capital (25% FC) 125,000 PW INFLOW = A[(1+i)n – 1] / (1+i)n(i) + SV/ (1+i)n
PW INFLOW = 354,800[(1+0.25)5 – 1] / (1+0.25)5(0.25) + 50,000/
Total Annual expense: 358,131.03 (1+0.25)5
PW INFLOW = 970,540.54
AW = Annual Income – Annual Expense
AW = 354,800.00 - 358,131.03 PW OUTFLOW = A[(1+i)n – 1] / (1+i)n(i) + FC
AW = (3,331.02) this is negative, so it is a loss PW OUTFLOW = 178,300[(1+0.25)5 – 1] / (1+0.25)5(0.25) + 500,000
PW OUTFLOW = 979,498.62
Since cash outflow is greater than cash inflow, the investment is NOT
justified. Since PW outflow is greater than PW inflow, the investment is NOT
justified

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

D. FW Method E. PB PERIOD
Convert all annual cost in operation to its future value with interest Payback Period = (investment – salvage value) / net annual
of 25% cashflow

Net annual cash flow = annual income – opn &maint – tax&ins)

50,000
1 2 3 4 5 Payback Period = (500,000 – 50,000) / (354,800 – 178,300)
0
Payback Period = 2.6 years
354,800
178,300
Note that payback period is dependent to the management standpoint therefore
0 payback period is not advisable to be the basis in making investment decisions
as it may give a misleading result.
1 2 3 4 5 500,000
Cash flow diagram for cash Cash flow diagram for cash Example 30:
inflows outflows
A firm is considering purchasing an equipment that will reduce costs by P
40,000. The equipment costs P 300,000 and has a salvage value of P
50,000 and a life of 7 years. The annual maintenance cost is P 6,000.
FW for Cash Inflow > FW for Cash outflow to be justifiable While not in used by the firm, the equipment can be rented to others to
generate an income of P 10,000 per year. If money can be invested for an
FW INFLOW = A[(1+i)n – 1] / (i) + SV 8% return, is the firm justified in buying the equipment?
FW INFLOW = 354,800[(1+0.25)5 – 1] / (0.25) + 50,000
FW INFLOW = 2,961,854.69 Solution:
Annual savings
FW OUTFLOW = A[(1+i)n – 1] / (i) + FC(1+i)n Reduction in annual cost 40,000.00
FW OUTFLOW = 178,300[(1+0.25)5 – 1] / (0.25) + 500,000 (1+0.25)5 Rental 10,000.00
FW OUTFLOW = 2,989,192.58 TOTAL ANNUAL SAVINGS 50,000.00

Since FW outflow is greater than FW inflow, the investment is NOT Annual Expense
justified Depreciation 28,018.10
Maintenance 6,000.00
TOTAL ANNUAL COSTS 34,018.10

Net Annual Savings 15,981.90

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY

 Lecture notes of Engr Rosalito Juda V. Eboa
ENGINEERING ECONOMY

Rate of Return = net annual profit / capital investment

ROR = (15,981.90 / 300,000) x 100% 5.33 %

Since the rate of return is less than 8%, the purchase of the equipment is
NOT justified.

Lecture notes of Engr Rosalito Juda V. Eboa ENGINEERING ECONOMY