ENGINEERING ECONOMICS

Engineering Economy – study of the cost factors involved in engineering projects, and using the results of such
study in employing the most efficient cost-saving techniques without affecting the safety and soundness of the project.

INTEREST
Interest – money paid for the use of borrowed money.
Simple Interest – the interest paid on the principal only. In practice, simple interest is paid on SHORT-TERM loans in
which the time of the loan is measured in days. Also known as nominal rate of interest.
(for exact simple interest)
(a) Ordinary Simple Interest
1 month = 30 days January: 31 July: 31
1 year = 360 days February: 28/29 August: 31
(b) Exact Simple Interest March: 31 September: 30
365 days in ordinary year April: 30 October: 31
366 days in leap year May: 31 November: 30
June: 30 December:31
FORMULA:

I = Pin where: P = principal or present value

F=P+I I = interest
F = P(1 +in) F = future value
i = interest rate per period (if not specific, consider per year)
n = number of interest period
Compound Interest – the interest earned by the principal is not paid at the end of each interest period, but is
considered as added to the principal, and therefore will also earn interest for the succeeding periods.

FORMULA:
No. of Interest
F = P(1 + i)n Methods of
Periods in a Year
Compounding
(m)
Rates of Interest:
(a) Nominal Rate of Interest Annually / Yearly 1
𝒓
𝒊= Semi – Annually 2
𝒎
(b) Effective rate of Interest Quarterly 4
𝒓 𝒎
𝒊𝒆 = (𝟏 + ) −𝟏
𝒎 Bi – Monthly 6

where: i = rate of interest per interest period Monthly 12

r = nominal rate of interest
Daily 365
m = number of compounding periods per year
Continuous Compounding of Interest

FORMULA:
where: F = future value
F = Pe rn P = present value
r = rate of compounding interest
n = number of interest period

Discount – difference between the future worth and its present worth.

FORMULA:

D=F–P where: D = discount

𝑫 𝑫 d = discount rate for the period involved
𝒅 = = 𝟏 − (𝟏 + 𝒊)−𝟏 =
𝑭 𝑷𝒏+𝑫
𝑫 𝒅 𝑫 i = rate of interest for the same period
𝒊= = =
𝑷 𝟏 − 𝒅 𝑷𝒏

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
SAMPLE:
1. If 1000 accumulates to 1340 when invested at a simple interest for two years, what is the rate of
interest?
(a) 17.12% (b) 17% (c) 16.81% (d) 17.37%
2. Determine the exact simple interest on P125,000 invested for period from May 6, 2019 to February
29, 2020, if the rate of interest is 7.08%.
(a) P7350.42 (b) P7249.73 (c) P7229.92 (d) P7245.75
3. A man invested P110,000 for 31 days. The net interest after deducting 20% withholding tax is
P890.36. Find the rate of return annually.
(a) 11.50% (b) 11.75% (c) 11.95% (d) 12.32%
4. $5,000 is borrowed 75 days at 16% per annum simple interest. How much will due at the end of 75
days?
(a) 5,166.67 (b) 5,616.67 (c) 5,661.67 (d) 5,666.17
5. Determine the total amount of savings if an account has an initial deposit of P150,000 and the
digital bank offers 4% per annum where the principal and interest were not withdrawn for 10 years.
(a) 210,000 (b) 222,036.64 (c) 60,000 (d) 72,036.64
6. Mr. Dela Cruz borrowed money from a bank. He receives from the bank P1340.00 and promise to
pay P1500.00 at the end of 9 months. Determine the corresponding discount rate often referred to
as the banker’s discount.
(a) 13.13% (b) 13.56% (c) 13.73% (d) 13.93%
7. A price tag of P1200 is specified if paid within 60 days but offers a 3% discount for cash in 30 days.
Find the rate of interest.
(a) 37.11% (b) 38.51% (c) 40.21% (d) 39.31%
8. What nominal rate compounded bi-monthly yields the same amount as 12% compounded
quarterly?
(a) 11.94% (b) 11.49% (c) 12.94% (d) 12.49%
9. By the conditions of a will, the sum of P115,000 is left to a girl to be held in a trust fund by her
guardian until it increases by P250,000. When will the girl receive the money if the fund is invested
at 8% compounded quarterly?
(a) 9.80 years (b) 10.09 years (c) 14.58 years (d) 15.05 years
10. A sum of 1000 is invested now and left for eight years at which time the principal is withdrawn. The
interest accrued is left for another eight years. If effective annual interest is 5.5%, what will be the
withdrawal amount at the end of the 16th year?
(a) 820.58 (b) 805.28 (c) 825.08 (d) 852.08
11. After how many years will an investment triple if invested at 10% per annum net of deductions if it is
compounded quarterly?
(a) 11.12 years (b) 10.6 years (c) 12 years (d) 11.79 years

CASH-FLOW DIAGRAM
A graphical representation of cash flows drawn on a time scale. In economic analysis problems, it is
analogous to that of free body diagram for mechanic problems.

∑↑ = ∑↓

SAMPLE:
1. A man bought a lot worthP1,000,000 if paid in cash. On the installment basis, he paid a down
payment of P200,000; P300,000 at the end of one year; P400,000 at the end of three years and a
final payment at the end of five years. What was the final payment if interest was 20%?
(a) P920,240 (b) P792,576 (c) P875,520 (d) P677,212
2. An entrepreneur applied for a loan of P300,000 at a 12% rate compounded quarterly. At the
beginning of the third year, she made a partial payment of 120,000 and 180,000 at the end of the
fourth year. If she applied for a new loan of P250,000, 3 years after her last transaction, how much
must be paid on the 10th year to clear off her debt?
(a) P660,138.69 (b) P250,000 (c) P630,582.80 (d) P351,232
3. Jones Corp. borrowed P9,000 from Brown Corp. on Jan. 1, 1978 and P12,000 on Jan. 1, 1980.
Jones Corp. made a partial payment of P7,000 on Jan. 1, 1981. It was agreed that the balance of
the load would be amortized by two payments, one on Jan. 1, 1982 and the other on Jan. 1, 1983,
the second being 50% larger than the first. If the interest rate is 12%, what is the amount of the
second payment?
(a) 8,896.00 (b) 22,240.01 (c) 13,705.77 (d) 9,137.18

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
ANNUITY
Annuity – a series of equal payments occurring at equal intervals of time.

Types of Annuities

1. Ordinary Annuity - payments are made at the end of equal period.

FORMULA:

𝟏−(𝟏+𝒊)−𝒏
where: F = future value
𝑷 = 𝑨[ 𝒊
] P = present value
(𝟏+𝒊)𝒏 −𝟏
n = number of periods
𝑭 = 𝑨[ 𝒊
] i = interest rate per period
A = periodic payments

2. Deferred Annuity – first payment is made several periods after the beginning of the annuity.
FORMULA:
𝟏 − (𝟏 + 𝒊)−𝒏
𝑷 = 𝑨[ ] (𝟏 + 𝒊)−𝒎
𝒊
3. Perpetuity – payments are made indefinitely or forever.
FORMULA:
𝑨
𝑷=
𝒊
4. Annuity Due – payment started at the beginning of annuity periods.
FORMULA:
𝟏−(𝟏+𝒊)−(𝒏−𝟏) (𝟏+𝒊)(𝒏+𝟏) −𝟏
𝑷 = 𝑨[ + 𝟏] 𝑭 = 𝑨[ − 𝟏]
𝒊 𝒊

5. Annuity with Continuous Compounding of Interest

FORMULA:
𝟏−𝒆−𝒋𝒏
𝑷 = 𝑨[ 𝒆𝒋 −𝟏
] where: j = rate of interest compounded continuously

𝒆𝒋𝒏 −𝟏
𝑭 = 𝑨 [ 𝒆𝒋 −𝟏 ]

SAMPLE:

1. What is the accumulated value of a payment of P6,000 every 6 months for 16 years with an interest
7% compounded semi-annually?
(a) P312,345 (b) P345,678 (c) P347,898 (d) P344,007
2. Rainer Wandrew borrowed P50,000 from Social Security System, in the form of calamity loan, with
interest at 8% compounded quarterly payable in equal quarterly instalments for 10 years. Find the
quarterly payments.
(a) P1827.79 (b) P1872.79 (c) 1877.79 (d) 1822.79
3. You need P40,000 per year for four years for miscellaneous funds in college. Your father invested
P50,000 in a 7% account when you were born. If your withdraw the P40,000 at the end of the 17 th,
18th, 19th, and 20th years, how much money will be left in your account at the end of your 21st year?
(a) 16,000 (b) 17,000 (b) 18,000 (d) 19,000
4. If money is worth 10% yearly, compounded quarterly, what monthly savings is required monthly in
order to have P200,000 at the end of 10 years?
(a) P978.59 (b) P983.74 (c) P918.82 (d) P878.58

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
 5. How much should be deposited by the man at a rate of 12% per annum in order to pay
the following: P4,000 per year for the first five years, P6,000 per year on the next 6 years,
and P9,000per year thereafter?
(a) P49, 977.35 (b) P49,797.35 (c) P47,997.35 (d) P49,779.35
6. Find the future worth of the annuity due paying P1,000 per month for 3 years at a rate
of 12%compounded monthly.
(a) P43,507.65 (b) P43,057.65 (c) P43,075.65 (d) P43,705.65
7. Today, an entrepreneur borrowed money to be paid in 10 equal payments in 10 quarters.
If theinterest rate is 10% compounded quarterly and the quarterly payment is $200, how
much did heborrow?
(a) $1,539.20 (b) $1,689.20 (c) $1,750.41 (d) $1,228.91
8. If money is worth 8% compounded annually, determine the annual dues of a loan of P115,000
paidindefinitely with the first payment at the end of 5 years.
(a) 9,200 (b) 13,517.82 (c) 12,516.50 (d) 11,821.87
9. A man paid 10% down payment of 200,000 for a house and lot and agreed to pay the 90%
balanceon monthly instalment for 60 months at an interest rate of 15% compounded
monthly. Compute the monthly payment.
(a) 44,980.56 (b) 42,864.90 (c) 43,849.56 (d) 42,821.87
10. Maintenance cost of equipment is 20,000 for 2 years, 40,000 at the end of 4 years and
80,000 atthe end of 8 years. Compute the semi-annual amount that will be set aside for
this equipment. Money is worth 10% compounded annually.
(a) 7108.43 (b) 7219.12 (c) 7312.78 (d) 7426.19
11. A farmer bought a tractor costing 25,000 payable in 10 semi-annual payments, each
instalment payable at the beginning of each period. If the rate of interest is 26%
compounded semi-annually,determine the amount of each instalment. (A)
(a) 4077.20 (b) 4607.24 (c) 3890.30 (d) 2248.49
12. To maintain a bridge, 5000 will be required at the end of 3 years and annually
thereafter. If themoney worth 8%, determine the capitalized cost of all future
maintenance. (B)
(a) 62,500 (b) 53,583.68 (c) 49,615.52 (d) 50,516.13

APPLICATION OF ANNUITY
1. Capitalized Cost – the sum of the first cost (FC) and the present worth of the following:
(a) Annual maintenance and operation cost (MC)
(b) Cost of repair (CR)
(c) Renewal Cost (RC)
where: k = interval of repair
FORMULA:
L = useful life
𝑴𝑪 𝑪𝑹 𝑹𝑪 RC = FC – CR – SV, if not given
𝑪𝑪 = 𝑭𝑪 + 𝒊
+ (𝟏+𝒊)𝒌 −𝟏 + (𝟏+𝒊)𝑳−𝟏 SV = salvage value

2. Bond Value – present worth or cost of a bond.

FORMULA: where: I = Fr, if not given
F = face value or par value
𝟏−(𝒊+𝟏)−𝒏
𝑷 = 𝑰[ 𝒊
]+ 𝑪(𝟏 + 𝒊)−𝒏 r = bond rate per period
i = yield of investment (rate of interest per period)
n = maturity period
C = F, if not given
C = redemption cost
3. Arithmetic Gradient – payments have
common difference.
FORMULA:
𝟏 − (𝒊 + 𝟏)−𝒏 𝑮 𝟏 − (𝒊 + 𝟏)−𝒏
𝑷 = 𝑷𝑨 + 𝑷𝑮 𝑷𝑨 = 𝑨 [ ] 𝑷𝑮 = [ − 𝒏(𝟏 + 𝒊)−𝒏 ]
𝒊 𝒊 𝒊
(𝒊+𝟏)𝒏 −𝟏 𝑮 (𝒊+𝟏)𝒏 −𝟏
𝑭 = 𝑭𝑨 + 𝑭𝑮 𝑭𝑨 = 𝑨 [ 𝒊
] 𝑭𝑮 = 𝒊 [ 𝒊
− 𝒏]

where: G = common difference

EECON Reviewer by: Engr. Nadine Alex C. Bravo
University of Batangas
4. Geometric Gradient – payments have common ratio.

FORMULA:

𝑨 𝟏 − 𝒘𝒏 𝟏+𝒓 where: r = percent change

𝑷= [ ]; 𝒘=
𝟏+𝒊 𝟏−𝒘 𝟏+𝒊
𝑨𝒏
𝑷= ; 𝒊𝒇 𝒊 = 𝒓
𝟏+𝒓

SAMPLE:
1. A generator costs P60,000 and its salvage value is P10,000 after 10 years. Find the
capitalized cost ifannual maintenance and operational costs is P4,000, cost of repair is P5,000
every two years and money is worth 12%.
(a) P134,356.48 (b) P143,356.48 (c) P134,653.48 (d) P143,653.48
2. How much are you going to pay for a bond whose par value is P10,000. Bond rate of 12%
compoundedsemi-annually and maturity period is 10 years, if the expected yield of investment is
14% compounded semi-annually?
(a) P8,940.60 (b) P8,409.60 (c) P8,904.60 (d) P8,490.60
3. A bond with a par value of P1,000 will mature in 7 years with a bond rate of 8% payable annually.
It isto be redeemed at par at the end of this period. If it is sold at P1,050, determine the yield at
this price.
(a) 7.07% (b) 6.07% (c) 5.07% (d) 8.07%
4. A local university has initiated a logo-licensing program with the brand Holister, Inc. Estimated fees
are $80,000 for the first year with uniform increases of $15,000 every year for 9 years.
Determine an equivalent uniform annual fund set-up to pay for the licensing agreement.
Money is worth 5%.
(a) 135,136.78/yr (b) 75,220.40/yr (c) 112,323.45/yr (d) 143,333.33/yr
5. A capitalized cost of P245.3M must be prepared to initiate a bridge that will last for 20 years
at whichtime a partial rebuild would cost P100M. Determine the original cost of the bridge at
6%.
(a) 215M (b) 195M (c) 210M (d) 200M
6. Annual maintenance cost for a machine is 1500 this year and are estimated to increase 10%
each yearevery year. What is the present worth of the maintenance cost for six years if interest
is 8%?
(a) 8,728.80 (b) 8,782.80 (c) 8,788.80 (d) 8,722.80
7. A community wishes to purchase an existing utility at valued at P500,000 by selling 5% bonds
that willmature in 30 years. The money to retire the bond will be raised by paying equal annual
amounts into asinking fund that will earn 4%. What will be the total annual cost of the bonds until
they mature?
(a) 44,667.98 (b) 37,345.38 (c)34,515.05 (d) 33,915.05

DEPRECIATION
Depreciation – the decrease in worth of a property due to passage of time.
Salvage Value – the worth of a property when sold as 2nd hand within its useful life.
Book Value – the worth of the property listed in the book of accounts of an enterprise.
Scrap Value / Junk Value – worth of a property when sold at the junk.

Methods of Calculation

1. Straight Line Method (SLM)

- Simplest method
- Depreciation charge is constant

FORMULA:

𝑪𝑶 − 𝑪𝑳 𝑪𝑶 − 𝑪𝑳
𝒅= 𝑫𝒏 = 𝒏𝒅 = 𝒏 ( ) 𝑪𝒏 = 𝑪𝑶 − 𝑫𝒏
𝑳 𝑳

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
2. Sinking Fund Method (SFM)
- Depreciation charge is constant
- Interest is included where: d = constant depreciation charge per year
dn = depreciation charge at the nth year
FORMULA: Dn = total depreciation after n years
(𝑪𝑶 − 𝑪𝑳 )𝒊 Cn = book value after n years
𝒅=
(𝟏 + 𝒊)𝑳 − 𝟏 CO = original cost
CL = salvage value
(𝟏 + 𝒊)𝒏 − 𝟏 L = useful life
𝑫𝒏 = 𝒅 [ ]
𝒊

𝑪 𝒏 = 𝑪 𝑶 − 𝑫𝒏

3. Sum of the Year’s Digit Method (SYDM)

- Depreciation charge varies from year to year

FORMULA:

𝟐(𝑳 − 𝒏 + 𝟏) 𝒏(𝟐𝑳 − 𝒏 + 𝟏)
𝒅𝒏 = (𝑪𝑶 − 𝑪𝑳 ) 𝑫𝒏 = (𝑪𝑶 − 𝑪𝑳 ) 𝑪 𝒏 = 𝑪 𝑶 − 𝑫𝒏
𝑳(𝑳 + 𝟏) 𝑳(𝑳 + 𝟏)

4. Declining Balance Method (DBM)

- Constant percentage method
- Matheson’s formula

𝒅𝒏 = 𝑪𝑶 𝒌(𝟏 − 𝒌)(𝒏−𝟏)
where: k = constant percentage in the declining
𝑪𝒏 = 𝑪𝑶 (𝟏 − 𝒌)𝒏 book value
𝑫𝒏 = 𝑪𝑶 [𝟏 − (𝟏 − 𝒌)𝒏 ]
NOTE: DBM is not applicable if CL = 0
𝑪𝑳 = 𝑪𝑶 (𝟏 − 𝒌)𝑳

𝑳 𝑪𝑳 𝒏 𝑪𝒏
𝒌=𝟏− √ =𝟏− √
𝑪𝑶 𝑪𝑶

5. Double-Declining Balance Method (DDBM)

- Similar to DBM, simply replace k by 2/L

6. Service – Output Method

(a) Service Method – number of operating hours is the reference.

𝑪𝑶 − 𝑪𝑳
𝒅𝒏 = 𝑯𝒏 ( ) where: H = total operating hours within the useful life
𝑯
Hn = number of operating hours at the nth year
(a) Output Method –
number of units produced is the reference

𝑪𝑶 − 𝑪𝑳
𝒅𝒏 = 𝑻𝒏 ( ) where: T = total number of units produced within the useful life
𝑻 Tn = number of units produced at the nth year
SAMPLE:
1. A generator costs P60,000 and the salvage value is P10,000 after 10 years. If money worth 12% per
annum, find:
(a) The depreciation by SLM, SFM.
(a) P6,000, P2,948.21 (b) P5,000, P2,948.21
(c) P6,000, P2849.21 (d) P5,000, P2,849.21
(b) The depreciation at the 4th year by SYDM, DBM, DDBM.
(a) P6363.64, P5947.29, P6414.00
(b) P6336.64, P5749.29, P6441.00
(c) P6363.64, P5749.29, P6144.00
(d) P6633.64, P5479.29, P6144.00

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
 (c) The book value after 8 years by SLM, SFM, SYDM, DBM, DDBM.
(a) P20500, P24559.61, P12727.27, P14315,33, P10066.33
(b) P20000, P24955.61, P12727.27, P14315,33, P10066.33
(c) P21000, P24559.61, P12772.27, P14315,33, P10066.33
(d) P21500, P24559.61, P12727.27, P14315,33, P10066.33
2. An asphalt and aggregated mixing plant having a capacity of 50 cu. m. every hour costs P2,500,000. It
is estimated to process 800,000 cu m during its life. During a certain year it processed 60,000 cu m. If
its scrap value is P100,000, determine
(a) The total depreciation during the year
(a) P180,000 (b) P181,000 (c) P182,000 (d) P183,000
(b) The depreciation cost chargeable to each unit batch of 50 cu m.
(a) P3,500 (b) P3,600 (c) P3,700 (d) P3,800
3. The cost of equipment is P500,000 and the cost of installation is P30,000. If the salvage value is 10%
of the cost of equipment at the end of 5 years, determine the book value at the emnd of the fourth year.
Use straight line method.
(a) P155,000 (b) P140,000 (c) P146,000 (d) P132,600
4. A telephone company purchased a microwave radio equipment for P6M. Freight and instalment
charges amounted to 3% of the purchased price. If the equipment shall be depreciated over a period of
8 years with a salvage value of 5%. Determine the depreciation charge during the 5th year using the
sum of the year’s digit method.
(a) P756,632.78 (b) P957,902.56 (c) P652,333.33 (d) P845,935.76
5. An equipment costs P480,000 and has a salvage value of 10% of its cost at the end of its economic life
of 35,000 operating hours. In the first year, it was used for 4,000 hours. Determine its book value at the
end of the first year.
(a) P430,629.00 (b) P380, 420.00 (c) P418,460.00 (d) P376,420.00

SUNK COST
Sunk Cost – cost which cannot be recovered due to certain reasons.

FORMULA:
SC = Cn – Trade-in Value(or resale value)

DEPLETION
Depletion – decrease in worth of a natural resource such as timber lands, oil and gas wells, etc.

Methods of Calculation

1. Unit or Factor Method 𝑪𝑶 − 𝑪𝑳

- Similar to service output method 𝒅 𝒏 = 𝑻𝒏 ( )
𝑻
2. Percentage or Depletion Allowance Method
a. Gross Income Basis b. Net Income Basis

𝒅 = (𝒇𝒊𝒙𝒆𝒅 %𝒂𝒍𝒍𝒐𝒘𝒂𝒏𝒄𝒆)(𝑮𝒓𝒐𝒔𝒔 𝒊𝒏𝒄𝒐𝒎𝒆) 𝒅 = (𝟓𝟎 %)(𝑵𝒆𝒕 𝒊𝒏𝒄𝒐𝒎𝒆)

SAMPLE:
1. A generator costs P60,000 4 years ago and the salvage value is P10,000 6 years from now. If it is to be
replaced by a new one and the resale value is P25,000, find the sunk cost if money is worth 12%.
(a) P22,832.70 (b) 21,832.70 (c) P21,382.70 (d) P22,382.70
2. To develop an oil well containing 2,000,000 barrels of oil required and initial investment of P30M. In
certain years, 400,000 barrels of oil were produced from this well. Determine the depletion charge
during this year.
(a) P6,000,000 (b) P6,001,000 (c) P6,100,000 (d) P6,101,000
3. A mining company has a gross income of P3,200,000 per month from the production of copper. The
monthly expenses, excluding depletion amount to P2,600,000. If fixed depletion rate for copper is 15%,
what is the monthly depletion allowance?
(a) P480,000 (b) P420,000 (c) P300,000 (d) P380,000

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
BREAK-EVEN ANALYSIS
(a) Break-even Point (BEP) – it is a point in economic study where the sales volume or income is just
enough to pay the cost of production, hence, no profit.
FORMULA:

Sales = Fixed Cost + Variable Cost

Variable Costs: material costs, labor costs, and others

(b) Unhealthy Point (UHP) – it is a point in economic study where the sales volume is just enough to pay
the dividends.
FORMULA:

Sales = Fixed Cost + Variable Cost + Dividends

(c) Profit Calculation

FORMULA:

Sales = Fixed Cost + Variable Cost + Dividends + Profit

INFLATION
Inflation – decrease of money’s purchasing power due to increase in material cost and services
FORMULA:

F = P(1 + f)n
f = rate of inflation

SAMPLE:
1. A company manufacturing calculator has a fixed cost of P150,000 per month. If the variable
cost isP1,000 per unit and the average selling price is P2,500 per unit, find:
(a) The number of units needed to be produced per month
at BEP.(a) 50 (b) 100 (c) 150 (d) 200
(b) If the company pays P12 per share annually for 30,000 shares, find the number of units
needed toproduce per month at unhealthy point.
(a) 120 (b) 130 (c) 140 (d) 150
2. XYZ Corporation manufactures book cases that it sells for P65.00 each. It costs XYZ P35,000
per yearto operate its plant. This sum includes rent, depreciation charges on equipment and
salary payments. Ifthe cost to produce one bookcase is P50.00, how many cases must be sold
each year for XYZ to avoidtaking any loss?
(a) 2334 (b) 539 (c) 750 (d) 2233
3. Based on the report of the Finance Dept., the average rate of inflation for the succeeding 10 years
will be 8.5% per annum. If a house and lot costs P4.5M now, how much will be its cost 10 years
from now?
(a) 10.17 (b) 10.71 (c) 11.7 (d) 11.07
4. A man invested P10,000 at an interest rate of 10% compounded annually. What will be the final
amountof his investment, in terms of today’s pesos, after five years, if inflation remains the same
at the rate of 8% per year?
(a) 8573.45 (b) 10960.86 (c) 11254.71 (d) 9235.32

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
COMPARISON OF ALTERNATIVES
Methods of Calculation:

1. Annual Worth Cost Method (AWCM) Where:

𝑨𝑾𝑪 = 𝑰𝑶𝑰 + 𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 + ∑ 𝑨𝑨𝑬 IOI = interest on investment = Coi

2. Present Worth Cost Method (PWCM) AAE = actual annual expenses

𝟏 − (𝟏 + 𝒊)−𝑳
𝑷𝑾𝑪 = 𝑪𝒐 + ∑ 𝑨𝑨𝑬 { } − 𝑪𝑳 (𝟏 + 𝒊)−𝑳 1. Maintenance cost
𝒊
2. Taxes/insurance
3. Future Worth Cost Method (FWCM) 3. Labor cost
(𝟏 + 𝒊)𝑳 − 𝟏 4. Power cost
𝑭𝑾𝑪 = 𝑪𝒐 (𝟏 + 𝒊)𝑳 + ∑ 𝑨𝑨𝑬 { } − 𝑪𝑳
𝒊 AC = annual cost
= Depreciation + ΣAAE
4. Equivalent Uniform Annual Cost Method (EUACM)
𝑪𝑶 𝒊 𝑪𝑳 𝒊
𝑬𝑼𝑨𝑪 = −𝑳
+ ∑ 𝑨𝑨𝑬 −
𝟏 − (𝟏 + 𝒊) (𝟏 + 𝒊)𝑳 − 𝟏

5. Rate of Return Method (RORM)

𝑵𝒆𝒕 𝑨𝒏𝒏𝒖𝒂𝒍 𝑺𝒂𝒗𝒊𝒏𝒈𝒔 𝒐𝒓 𝑷𝒓𝒐𝒇𝒊𝒕 𝑫𝒊𝒇𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝒊𝒏 𝑨𝑪
𝑹𝑶𝑹 = 𝒙𝟏𝟎𝟎% = 𝒙𝟏𝟎𝟎%
𝑨𝒅𝒅𝒊𝒕𝒊𝒐𝒏𝒂𝒍 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕 𝑫𝒊𝒇𝒇𝒆𝒓𝒆𝒏𝒄𝒆 𝒊𝒏 𝑪𝒐

6. Capitalized Cost Method (CCM)

𝑴𝑪 𝑪𝑹 𝑹𝑪
𝑪𝑪 = 𝑭𝑪 + + +
𝒊 (𝟏 + 𝒊) − 𝟏 (𝟏 + 𝒊)𝑳 − 𝟏
𝒌

7. Payback (Payout) Period (PPM)

𝑪𝑶 − 𝑪𝑳 𝑪𝑶 − 𝑪𝑳
𝑷𝑷 = =
𝑨𝒏𝒏𝒖𝒂𝒍 𝑷𝒓𝒐𝒇𝒊𝒕 𝒐𝒓 𝑺𝒂𝒗𝒊𝒏𝒈𝒔 𝑨𝑰 − 𝑨𝑪

8. Application of Break Even

𝑪𝟏 (𝒙) = 𝑪𝟐 (𝒙)
Where cost functions are obtained using AWC

1. Talisay City is considering a new P50000 street cleaner. The new machine will operate at a savings of
P600 per day compared to the present equipment. Assume the MARR is 12% and the machine life is
10 years with zero resale value at that time. How many days per year must the machine be used to
justify the investment? (CE Board Nov. 2017)

2. To connect two barangays on both sides of a river, a bridge is to be constructed. There are two
proposals for the bridge material to be used. These are as follows:
Timber Steel
First Cost P60,000 P140,000
Annual Maintenance Cost P10,000 P2,500
Life in years 12 36
If money is worth 10%, which bridge material should be adopted? Use RORM.

3. The following data shows the different sizes of pipes which a company wishes to use as a replacement
for the old pipe system that they are using.

Diameter 100 mm 150 mm 250 mm

Cost of pipe P1,800,000 P1,120,000 P1,000,000
Annual Maintenance cost P88,000 P136,000 P60,000
Operating cost/hr P480 P500 P620

Total number of operating hours per year = 500

Replacement is done every 10 years.
Money is worth 10% annually.
a. Compute the present worth of the 150 mm pipe.
b. Compute the equivalent annual cost of the 100 mm pipe.
c. Which pipe should you preferably use as a replacement?

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
SUPPLEMENTARY PROBLEMS IN ENGINEERING ECONOMY

1. If the sum of P15000 is deposited in an account earning interest at the rate 12% compounded quarterly, what will
be at the end of 10 years?
a. P 43,980.57 b.P48,390.57 c. P 48,930.57 d.P34,390.57
2. A man inherited a regular endowment of P100,000 every 3 months for x years. However, he may choose to get a
single lump sum of P3702939.8 at the end of 4 years. If the rate of interest was 14% compounded quarterly, what
is the value of x?
a. 8 years b.9 years c. 10 years d. 11 years
3. A fund is to be donated by a wealthy man to provide annual scholarships to deserving students. The fund will
grant P5,000 for each of the first 5 years, P8,000 for each of the next 5 years, and P10,000 each year thereafter.
The scholarships will start one year after the fund is established. If the fund earns 8% interest, what is the amount
of donation?
a. P 69,901.71 b.P 96,701.91 c. P 99,601.71 d. P99,106.17
4. Find the present value of a perpetuity of P15,000 payable semi-annually if money is worth 8% compounded
quarterly.
a. P 371287 b.P 371827 c. P 317287 d. P317827
5. If the sum of P15000 is deposited in an account earning interest at the rate 12% compounded quarterly, what will
be at the end of 10 years?
a. P 43,980.57 b.P 48,390.57 c. P 48,930.57 d. 34,390.57
6. A certain ref is available on an easy installment plan. The down payment is P3000 and the installment payments
are P500 each payable at the end of every three months for three years. If interest is 6% compounded quarterly,
what is the equivalent cash price of the ref?
a. P 8453.75 b.P 6453.75 c. P 7453.75 d. 5453.75
7. A debt of P100,000 is to be discharged by ten semi-annual payments, the 1st being made 6 months after the loan
is given. The deb will be discharged by 5 equal payments each of P10,000 and by 5 other equal payments of
such amount that the final payment will liquidate the debt. If interest is 12% compounded semi-annually, what is
the amount of the last 5 payments?
a. P 18337.45 b.P 18437.45 c. P 18737.54 d. P18,373.45
8. A bond with a par value of P1000 and with a bond rate of 10% payable annually is sold now for P1080. If the yield
is to be 12%, how much should be the redemption price at the end of 8 years?
a. P 1444.07 b.P 1446.07 c. P 1445.07 d. P1447.07
9. The original cost of a certain piece of equipment is P150,000 and it is depreciated by 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 depreciated at P14,000 each year by the straight line formula.
a. P 8784.36 b.P 8478.63 c. P 8874.36 d. P8847.63
10. A back-pay certificate is offered for sale on which the yearly payments are P996, partly interest. There are 8
annual payments still due, the first of these due one year from now. How much should one pay for this note in
order to get 5% interest, compounded annually, on the investment?
a. P 6,347.36 b.P 6,334.67 c. P 6,437.36 d. P6,734.63
11. An employee obtained a loan of P10,000 at the rate of 6% compounded annually in order to build a house. How
much must he pay monthly to amortize the loan within a period of 10 years?
a. P 111.24/mo. b.P112.20/mo. c. P 121.20/mo. d. P110.24/mo.
12. A factory operator bought a diesel generator for P10,000 and agreed to pay the dealer uniform sum at the end of
each year for 5 years at 8% interest compounded annually so that final payment will cancel the debt for principal
and interest. What is the annual payment?
a. P 2,504.56 b.P 2,045.63 c. P 5,405.81 d. P5,504.88
13. The Infinitely Trading Corp. Sells engines worth P4000 cash. If paid on the installment basis, a downpayment of
P1000 is required and the balance interest is 12% compounded quarterly.
A. If equal payments are to be made at the end of each quarter for 3 years, find the amount of each payment.
a. P 310.04 b.P 302.40 c. P 301.40 d. P311.30
B. If after making four quarterly payments, the buyer decide to pay the balance in one lump sum at the end of the
fifth quarter, what is the amount of this lump sum payment?
a. P 2791.05 b.P 2197.50 c. P 2971.50 d. P2179.05
14. The VCP Trading Co. Sets aside P200,000 each year for expansion. If the fund earns 8% compounded annually,
how long will it take before the new building costing P2,500,000 can be built?
a. 6 years b.7 years c. 8 years d. 9 years
15. An irrigation pump costing P10,000 is to be paid equal at the end of the year with payments for 5 years, with 8%
interest compounded annually. What must be the annual payment?
a. P 2,054.56 b.P 2,540.86 c. P 2,045.65 d. P2,504.56
16. Today is September 2,1978. Ten years ago, you deposited P10 per month. You made the deposit continuously
for 6 years and then stopped. In September 2, 1982, you established a belts and nuts factory. Starting September
2, 1982 you withdraw P100 monthly for advertisement. How many months can you withdraw before money is
exhausted? Interest is 6% compounded monthly.
a. 13 b.14 c. 15 d. 16

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas
17. A corporation purchased a machine for P1 M. Freight and installation charges amounted to 3% of the purchased
price. If the machine shall be depreciated over a period of 8 years with a salvage value of 12%. Determine the
depreciation charged during the 5th year using SYDM.
a. P 100,171.17 b.P 101,701.11 c. P 100,711.11 d.P 100,177.77
18. A company employs salesmen to sell products. If a salesman uses his car, the company will pay him P9.50 per
km for the use of his car. However, for the car furnished by the company, the following data apply: first cost of car,
P400,000; life of the car, 4 years; trade in value at the end of 4 years, P50,000; car insurance per year, P12500;
storage cost of car, P500/mo.; cost of fuel, oil, tires and maintenance, P4.25/km. If money is worth 12% to the
company, determine the number of km each must travel in one year for the two methods of providing
transportation to break even.
a. 26,611 km b. 25,552 km c. 26,616 km d. 26, 558 km
19. Mr. W borrowed P2,000 on June 1, 1928 and P500 on June 1, 1930, agreeing that money is worth 5%
compounded annually. Mr. W paid P500 on June 1, 1931, P400 on June 1, 1932 and P700 on June 1, 1993.
What additional sum should he pay on June 1, 1936 to discharge all remaining liability?
a. P 1690.28 b.P 1510.14 c. P 1588.88 d. P1666.67
20. How long will it take money to quadruple if it earns 7% compounded semi-annually?
a. 19.82 years b.20.15 years c. 21.25 years d. 22.3 years
21. A price tag of P1200 is payable in 60 days but if paid within 30 days it will have a 3% discount. Find the rate of
interest.
a. 21.23% b.37.11% c. 3.09% d.4. 51%
22. A man borrowed from a bank under a promissory note that he signed in the amount of P25,000 for a period of
one year. He receive only the amount P21,915 after the bank collected the advance interest and additional
amount of P85 for inspection fees. What was the rate of interest that the bank collected in advance?
a. 3.63% b.13.64% c. 6.33% d.15.81%
23. A series of year end payments extending over 8 years are as follows: P10,000 for the first year, P20,000 for the
second year, P50,000 for the third year and P40,000 for each year from the fourth through the eighth year. Find
the equivalent annual worth of these payments if the annual interest is 8%.
a. P 33561.85 b.32563.85 c. P 33568.63 d.P 33563.85
24. A man borrowed P300,000 from a lending company which will be paid after 10 years at an interest rate of 12%
compounded annually. If the money is worth 8% per annum how much should he deposit to a bank monthly in
order to discharge his debt 10 years hence.
a. P 5901.29 b.P 5091.92 c. P 9510.29 d.P 9512.09
25. Find the present worth of all the cash disbursement if money is worth 15% per annum. Annual cash
disbursements increase by P1,000 every year thereafter, until the fourth year. The first being P5000.
a. P 6622.51 b.P 6262.55 c. P 7735.24 d.P 7375.42
26. A telephone switchboard 100 pair cable can be made up with either enameled wire or tinned wire. There will be
400 soldered connections. The cost of soldering a connection on the enameled wire will be P1.65, on the tinned
wire, it will be P1.15. A 100 pair cable made up enameled wire cost P0.55 per linear foot and those made up with
tinned wire cost P0.75 per linear foot. Determine the length of cable run in ft. so that the cost of each installation
would be the same.
a. 1001.25 ft b.1121.06 ft c. 952.38 ft d.864.92 ft
27. P45,000 is deposited in a savinsg account that pays 5% interest compounded semi-annually. Each annual
withdrawals are to be made from the account, beginning one year from now and continuing forever. Compute the
maximum amount of the equal annual withdrawal.
a. P 2278.13 b.P 2274.15 c. P 2216.52 d.P 2157.12
28. An apartment house consisting of 10 independent units was built at a cost of P20,000 per unit. The lot on which it
was built was bought at a cost of P60,000. The investment in the apartment house is expected to be recovered in
10 years. From similar houses built, it was found that the average maintenance cost per year was 2000 for the 10
units. Insurance on the building is 3% of the first cost and real estate taxes on the building and lot is 3.5%
annually on the total assessed valuation of 120,000. Income tax on the rental amounts to 10% on the gross
revenue. The lot is expected not to decrease in value. If money is worth 12% to the owner and the average
occupancy is 90%, determine the average monthly rental for each units so that the income and expenses will
break even.
a. P 510.25 b.P 524.50 c. P 563.75 d.P 581.00
29. A contractor can purchase a heavy-duty truck for P500,000. Its estimated life is 8 years and is estimated salvage
value of P60,000. Maintenance is estimated to be P2,500 annually including the cost of driver and fuel
maintenance. The contractor can hire a similar unit and its driver for P750 a day. If interest is taken at 8%, how
many days per year must services of a dump truck be required to justify the purchase of a truck?
a. 112 days b. 121 days c. 111 days d. 211 days
30. CE Board May 2001. The first cost of a machine is P1,800,000 with a salvage value of P300,000 at the end of its
life of 5 years. Determine the book value after 3 years, using
a. Straight Line Method
b. Double Declining Balance Method
c. Sum of the Years Digit Method

EECON Reviewer by: Engr. Nadine Alex C. Bravo

University of Batangas