Engineering Economics

Engineering Economics is the process of determining

whether an engineering project is to undertaken or
modified with the goal of obtaining the best utilization of
capital resources taken into account some pertinent facts

SIMPLE INTEREST
Ordinary Simple Interest





Exact Simple Interest





Determine the ordinary simple interest on P5,000 for 9
months and 10 days if the rate of interest is 12%.
A. 857.14
B. 547.67
C. 687.33
D. 466.67
Jeffrey buys an electric fan from a merchant who asks
P1,250 at the end of 60 days (cash in 60 days). Jeffrey
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?
A. 1,233.55 C. 987.56
B. 1,225.56 D. 1,325.56
A man borrowed P10,000 from a loan firm at a simple
interest of 15%. If the interest is to be deducted from the
loan at the time the money is borrowed and at the end of
1 year he has to pay back P10,000. Calculate the actual
rate of interest.
A. 15.26% C. 12.14%
B. 17.65% D. 11.23%
Determine the exact simple interest on P10,000 for the
period from January 15 to June 20, 2004, if the rate of
simple interest is 14%.
A. 600.54
B. 500.57
C. 850.54
D. 700.45

RATES OF INTEREST

Nominal Rate of Interest (NRI):
Nominal rate of interest specifies the rate of interest and
the number of interest periods per year.

Effective Rate of Interest (ERI):



Find the nominal rate compounded monthly which is
equivalent to 12% compounded quarterly.
A. 11.89%
B. 10.57%
C. 12.78%
D. 12.67%
If a nominal interest rate per year is 12%,and
compounding is continuous, what is the effective interest
rate per year?
A. 0.127% B. 11.275%
C. 1.000% D. 12.75%
By the conditions of a will, the sum of P25,000 is left to a
girl to be held in trust by her guardian until it amounts to
P45,000. When will the girl receive the money if the fund
is invested at 8 percent compounded quarterly.
A. 6
th
birthday C. 7
th
birthday
B. 8
th
birthday D. 9
th
birthday
What is the future worth of P12,000 deposited in an
account earning interest at the rate of 9% compounded
quarterly for 8 years.
A. 20,500.23
B. 25,400.56
C. 24,457.24
D. 23,642.56
A man possesses a promissory note whose maturity value
is P6700, due in 3 years hence. If the rate of interest is 10%
compounded semi-annually, what is the value of this note
now?
A. 4,000
B. 3,000
C. 6,000
D. 5,000
A P2,000 loan was originally made at 8% simple interest
for 4 years. At the end of this period, the loan was
extended for three years without the interest being paid,
this time at a rate of 10% compounded semi-annually.
How much should the borrower pay at the end of 7 years?
A. 3,574 C. 2,537
B. 3,537 D. 2,573
If the nominal interest rate is 3 percent, how much is
P5000 worth in 10 years in a continuously compounded
account?
A. P6,350
B. P7,650
C. P8,500
D. P6,750
How long will it take for an investment to double its
amount if invested at an interest rate of 6% compounded
monthly?
A. 10 years
B. 12 years
C. 13 years
D. 14 years

ANNUITY

Annuity is a series of equal payments A made at equal
intervals of time..

Ordinary Annuity
- the type of annuity where the payments are made at
the end of each period



Deferred annuity
- is the type of annuity where the first payment is made
later than the first or is made several periods after the
beginning of the annuity.



Annuity Due
- is the type of annuity where the payment is made at the
beginning of each period



Perpetuity
- is an annuity in which the periodic payments continue
indefinitely.


How much money you invest today in order to withdraw
P2000 annually for 10 years if the interest rate is 9%?
A. 12,835.32
B. 12,785.45
C. 12,563.25
D. 12,586.47
An employee obtained a loan of P10,000 at the rate of 6%
compounded annually to repair a house. How much must
he pay monthly to amortize the loan within a period of ten
years?
A. 110.22 C. 112.02
B. 125.25 D. 121.22
Ernest invests P10,000 now for the college education of his
2- year old son. If the fund earns 14% effective, how much
will the son get each year starting from his 18th to the
22nd birthday?
A. 20, 894.23 C. 20,567.98
B. 20,791.64 D. 20,587.43
A farmer bought a tractor costing P25,000 payable in 10
semi-annual payments starting at the beginning of each
period. If the interest rate is 26% compounded semi-
annually, determine the amount of each installment.
A. 5,047.30 C. 4,077.20
B. 4,654.21 D. 5,066.25


CAPITALIZED COST

Capitalized Cost refers to the present worth of a property
that is assumed to last forever. The capitalized cost of any
property is the sum of the first cost and the present costs
of perpetual replacement, operation and maintenance.


A telephone company installed a new equipment that cost
P150,000 and is estimated to have a useful life of 10 years.
It is estimated to have a scrap value at the end of its useful
life of P5,000. If the interest is 12% compounded annually,
determine its capitalized cost.
A. P310,254.67 C. P281,425.76
B. P218,855.87 D. P301,425.76
A machine is purchased for P100, 000. If the annual
maintenance cost is P18,000, determine the capitalized
cost of perpetual service with an interest rate of 8%.
A. P325,000
B. P523,000
C. P235,000
D. P532,000


DEPRECIATION

Depreciation is the decrease in the value of physical
property due to passage of time.

Straight Line Method
Straight line method of depreciation assumes that the loss
in value of the property is directly proportional to the age
of the property.




Sinking Fund Method


Declining Balance Method








Double Declining Balance Method



Sum of the - years digits Method (SYD)


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
using straight line method.
A. 430,629 C. 340,296
B. 403,269 D. 304,629
A printing equipment costs P 73,500 has a life expectancy
of 8 yrs. and has a salvage value of P 3500 at the end of its
life. The book value at the end of x years is equal to P
38,500. Using straight line method of depreciation, solve
for the value of x.
A. 5 years C. 4 years
B. 6 years D. 3 years
A broadcasting corporation purchased an equipment that
costs P7,000, last 8 years and has a salvage value of P350.
determine the book value during the 4th using declining
balance method.
A. P1,711 C. P1,566
B. P5,166 D. P1,645
A telephone company purchased a microwave radio
equipment for P6M. Freight and installation charges
amounted to 3% of the purchase 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
fifth year using the sum of the years digit method.
A. 563,444.33 C. 635,333.33
B. 653,333.33 D. 536,444.44