Engineering Economy

ENGINEERING ECONOMY
1) A man inherited a regular 6) A house and lot costing P2 million

endowment of P100,000 every end of 3 was bought at a down payment of
months for 10 years. However, he may P500,000 and P1 million after one year.
choose to get a single lump sum The remaining balance will be paid at
payment at the end of 4 years. How the end of the fourth year. If the interest
much is this lump sum if the cost of rate is 24% compounded semi-annually,
money is 14% compounded quarterly? what is the required payment?
2) The present value of an annuity of 7) Ten thousand pesos (P10,000) is

R pesos payable annually for 8 years, placed in a time deposit at the end of
with the first payment at the end of 10 each year for 9 years. Cost of money is
years, is P187,481.25. Find the value of 14%.How much money was
R if money is worth 5%. accumulated after the last deposit was
made? How much money was
accumulated eight years after the last
3) Mr. Bean borrowed P100 000 at deposit was made? How much can a
10% effective annual interest rate. He person get annually from the bank
must pay back the loan over 30 years every year for 8 years starting 1 year
with uniform monthly payments due on after the last deposit was made?
the first day of each month. What does
he pay each month?
8) A man wishes to provide a fund
for his retirement such that from his
4) What is the difference between 60th to 70th birthdays he will be able to
the sums an annuity due and an withdraw equal sums of P18, 000 for his
ordinary annuity for the following data: yearly expenses. He invests equal
amount for his 41st to 59th birthdays in
Periodic payment : P4,000 a fund earning 10% compounded
Term : 16 years annually. How much should each of
Interest rate : 10% these amounts be?
compounded quarterly
Payment interval : 3 months
9) A telephone company purchased a
microwave radio equipment for
5) An amount of P200,000 is P6,000,000. Freight and installation
deposited for a period of 8 years. charges Amounted to 3% of the
Compute the interest if, it was made at purchased price. If the equipment shall
18% compounded bi-monthly, it was be depreciated over a period of 8 years
made at 18% compounded with salvage value of 5%, determine the
continuously and if it was made at a following:
simple interest rate of 18%. a.) Annual depreciation charge using the
straight line method.
b.) Depreciation charge during the 5th
year using the sum-of-the year's digits
method.
10) On January 1, 1978, the
purchasing engineer of a Cement Co.
purchased a new machine at a cost of
140,000. Depreciation has been
computed by the straight-line method
based on an estimated useful life of five
years and residual scrap value of
12,800. On January 2, 1981,
extraordinary repairs (which were
almost equivalent to a rebuilding of
machinery) were performed at a cost of
30,400. Because of the thorough going
nature of these repairs, the normal life
of the machinery was extended
materially. The revised estimate of
useful life was four years from January
1. 1981. Determine the annual provision
for depreciation for the years 1978 to
1980 and the adjusted provision for
depreciation on December 31, 1981.
Assume payment in cash for the
machine and extraordinary repairs.
SOLUTIONS TO ENGINEERING ECONOMY: Since the payment is made at the
beginning of each year, the payment will
1) end on the 359th month.
The present worth of all P100,000
payment is: Future worth of P100,000 = Future worth
𝐴[(1 + 𝑖)𝑛 − 1] 0.14 of 360 payments of A
𝑃= 𝑛
;𝑖 = = 0.035;
(1 + 𝑖) 𝑖 4
𝑛 = 10(4) = 40 𝐹
100,000 ( )
𝑃, 0.007974,359
𝐹
= 𝐴( )
100000[(1 + 0.035)40 − 1] 𝐴, 0.007974,360
𝑃=
(1 + 0.035)40 (0.035)
= 𝑷𝟐, 𝟏𝟑𝟓, 𝟓𝟎𝟕. 𝟐𝟑 100,000(1 + 0.007974)359
The present worth of the lump sum after 𝐴[(1 + 0.007974)360 − 1]
=
four years must be equal to 0.007974
𝑷𝟐, 𝟏𝟑𝟓, 𝟓𝟎𝟕. 𝟐𝟑
𝑨 = 𝑷𝟖𝟑𝟗. 𝟐𝟎
2) 4)
Given: A = P14,000.00
n = 16(4) = 64
.10
i = 4 = 0.025
Ordinary Annuity:
𝐹 𝐴[(1+𝑖)𝑛 −1]
𝐹𝑅 = 𝑅 ( ) Sum, 𝐹 = =
𝑅, 0.05, 8 𝑖
14,000[(1+0.025)64 −1]
𝑅[(1 + 0.05)8 − 1] = 𝑷𝟐, 𝟏𝟓𝟗, 𝟔𝟔𝟓
= = 𝟗. 𝟓𝟒𝟗𝟏𝑹 0.025
0.05
Annuity Due:
𝐹
𝑃=( ) 𝑆𝑢𝑚 = (𝐹𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑎𝑛𝑛𝑢𝑖𝑡𝑦 )(1 + 𝑖)
𝑅, 0.05, 17 𝑆𝑢𝑚 = (2,159,665)(1 + 0.025)
9.5491𝑅
187,481.25 = ; = 𝑷𝟐, 𝟐𝟏𝟑, 𝟔𝟓𝟕
(1 + 0.05)17
𝑹 = 𝑷𝟒𝟓, 𝟎𝟎𝟎 𝐷𝑖𝑓𝑓𝑟𝑒𝑛𝑐𝑒 = 2,213,657 − 2,159,665
= 𝑷𝟓𝟑, 𝟗𝟗𝟐
3) 𝐴[(1 + 𝑖)𝑛 − 1]
Solve for I (based on the monthly 𝑂𝑟. 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒 = 𝑖
𝑖
compoundings)
𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑐𝑒
𝐸𝑅𝑚 = 𝐸𝑅8 14,000[(1 + 0.025)64 − 1]
(1 + 𝑖)12 + 1 = (1 + 𝑖)1 − 1 ; = (0.025)
0.025
𝑖 = 0.007974 = 𝑷𝟓𝟑, 𝟗𝟗𝟏. 𝟔𝟐
Total number of payments
= 30(12) = 360
5)
Given: P = P200,000 ; t = 8 years
Part Interest,
1: 𝐼 = 𝐹 − 𝑃 = 𝑃(1 + 𝑖)𝑛 − 𝑃
Interest,
𝐼 = 𝑃[(1 + 𝑖)𝑛 − 1]
0.18
𝑖= = 0.03; 𝑛 = 8(6) = 48
6
Interest,
𝐼 = 200,000[(1 + 0.03)48 − 1] 7)
Interest, 𝑰 = 𝑷𝟔𝟐𝟔, 𝟒𝟓𝟎. 𝟑𝟖
10000[(1 + 0.14)9 − 1]
𝐹1 =
0.014
Part 𝐼 =𝐹−𝑃 𝑭𝟏 = 𝑷𝟏𝟔𝟎, 𝟖𝟓𝟑. 𝟒𝟔
2: 𝐹2 = 160,853.46(1 + 0.14)8
𝐼 = 𝑃𝑒 𝑟𝑡 − 𝑃 = 𝑃(𝑒 𝑟𝑡 − 1) 𝑭𝟐 = 𝑷𝟒𝟓𝟖, 𝟖𝟒𝟖. 𝟒𝟏
𝐼 = 200,000[𝑒 (0.18)(8) − 1]
= 𝑷𝟔𝟒𝟒, 𝟏𝟑𝟗. 𝟏𝟔
Part 𝐼 = 𝑃𝑟𝑡 = 200,00)0.18)(8)

3:
𝐼 = 288,000.00
6)
8)
Given: 𝐴1 = 𝑃18,000
Balance = 2,000,000 – 500,000
𝑛1 = 11
Balance = P1,500,000.00
0.24 𝑛2 = 19
𝑖= = 0.12 𝑖 = 10% 𝑎𝑛𝑛𝑢
2 Required:
𝑃
𝑃1 = 1,000,000 ( ) 𝐴2 = equal amount invested from 41st to
𝐹, 𝑖, 𝑛
1,000,000 59th birthday
𝑃1 =
(1 + 0.12)2
Using 40 as focal date, the equation of
𝑃1 = 𝑃797,193.88
value is:
𝑃
𝑃2 = 𝑥 ( )
𝐹, 𝑖, 𝑛 1 − (1 + 𝑖)−𝑛1
𝑥 𝐴1 [ ]
𝑃2 = = 0.4039𝑥 𝑖
(1 + 0.12)8
1 − (1 + 𝑖)−𝑛2
= 𝐴2 [ ] (1 + 𝑖)−𝑛2
𝑃1 + 𝑃2 = 1,500,000 𝑖
𝑃797,193.88 + 0.4039𝑥 = 1,500,000

𝒙 = 𝑷𝟏, 𝟕𝟒𝟎, 𝟏𝟐𝟐
1 − (1 + 0.10)−19 depreciation cost from 1978-1981 which
𝐴1 [ ] is three years, plus the depreciation of the
0.10
1 − (1 + 0.10)−11 new machine with a useful of 5 years.
= 18,000 [ ] (1 + 0.10)−19
0.10
𝐶𝐿 = 𝑃25,440(3) + 12,800 = 𝑃89,120
𝐴1 = 2,285.00 Therefore the new machine with 4 years
of useful life has an adjusted depreciation
Answer: P2.285 of
9) 𝑃170,400 − 𝑃89,120
Straight Line Method 𝑑= = 𝑷𝟐𝟎, 𝟑𝟐𝟎
4
The original cost of microwave radio
equipment having a life span of 8 years is
𝐶𝑜 = 𝑃6,000,000 + (0.03)6,000,000 =
𝑃6,180,00 and a salvage value of 𝐶𝐿 =
(0.05)6,180,000
𝐶𝑜 − 𝐶𝐿
𝑑=
𝐿
𝑃6,180,000 − 𝑃6,180,000(0.05)
𝑑=
8
𝑑 = 733.875.00
a.) SYD Method:

Depreciation charge during the 5th year
Solution:
𝑟𝑒𝑣𝑒𝑟𝑠𝑒 𝑑𝑖𝑔𝑖𝑡
𝑑5 = 𝑠𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑑𝑖𝑔𝑖𝑡𝑠 (𝐶𝑜 − 𝐶𝐿 )
4
𝑑5 = (6,180,000 − 6,180,000(0.05))
36
𝑑5 = 652,333.32 𝑜𝑟 652,333.00
Answer: (a) 733,875.00; (b) 652,333.00
10)
For the depreciation of the new
machine costing P140,000 and having a
scrap value of P12,000 from 1978-1980
with a useful life of 5 years
𝑃140,000 − 𝑃12,000
𝑑= = 𝑃25,000
5
On December 31, 1981, a total cost of
𝐶𝑜 = 𝑃140,000 + 𝑃30,400 = 𝑃170,400

And the total book value after the useful
life would be three times the annual

Engineering Economy

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ENGINEERING ECONOMY

1) A man inherited a regular 6) A house and lot costing P2 million

2) The present value of an annuity of 7) Ten thousand pesos (P10,000) is

Part 𝐼 = 𝑃𝑟𝑡 = 200,00)0.18)(8)

𝑃797,193.88 + 0.4039𝑥 = 1,500,000

a.) SYD Method:

Answer: (a) 733,875.00; (b) 652,333.00

On December 31, 1981, a total cost of

𝐶𝑜 = 𝑃140,000 + 𝑃30,400 = 𝑃170,400

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