MANILA: Room 206, JPD Building, CM Recto Avenue, Manila

CEBU: 4/F J. Martinez Bldg., Osmeña Blvd., Cebu City

Telephone Number: (02) 516-7559 (Manila) E-Mail: buksmarquez1 @yahoo.com
(032) 254-9967 (Cebu)
Refresher MODULE –Engineering Economy
MODULE PROBLEMS INTEREST RATE FACTORS (10%)
COMPOUND INTEREST Single Payment Equal Payment Series Gradient Series
Compound Present Compound Sinking Present Capital Gradient Gradient
1. A nominal annual rate of interest of 14%, compounded continuously, has Amount Worth Amount Fund Worth Recovery Uniform Present
an effective annual interest rate of: Factor Factor Factor Factor Factor Factor Series Worth
N (F/P,i,N) (P/F,i,N) (F/A,i,N) (A/F,i,N) (P/A,i,N) (A/P,i,N) (A/G,i,N) (P/G,i,N)
ANS. 15.03% 5 1.6105 0.6209 6.1051 0.1638 3.7908 0.2638 1.8101 6.8618

ANNUITY ANS. Electric panels at $12,504

2. An engineer promised to pay P36,000 at the end of 90 days. He was
DEPLETION
offered a 10% discount if he pays in 30 days. Find the rate of interest.
9. An investor pays P1,100,000 for a mine which will yield a net income of x
ANS. 66.67%
pesos at the end of each year for 10 years and then will become valueless.
PERPETUITY He accumulates a replacement fund to recover his capital by annual
3. An engineering school has just completed a new engineering complex investments at 4.5%. Find x if he desires 11.5% return on his investment.
worth $50 million dollars. A campaign targeting alumni, is planned to raise ANS. P216,000
funds for the future maintenance costs, estimated at $2 million per year. Any
BOND
unforeseen above $2 million per year would be obtained by raising tuition.
10. A man wants to make 14% nominal interest compounded semi-annually
Assuming that the school can create a trust fund that earns 8% interest
on a bond investment. How much should the man be willing to pay now for a
annually, how much has to be raised now to cover the perpetual string of $2
12%, P40,000 bond that will mature in 10 years and pays interest semi-
million annual costs? [Hint: P = A/i]
annually?
ANS. $25,000,000
ANS. P35,762
DEPRECIATION
BREAKEVEN ANALYSIS
4. A truck for hauling coal has an estimated net cost of $50,000 and is
11. A local company assembling stereo radio cassette produces 300 units
expected to give service for 250,000 miles, resulting in a zero salvage value.
per month at a cost of P800 per unit. Each stereo radio cassette sells for
Compute the allowed depreciation amount for the truck usage of 30,000
P1,200. If the firm makes a profit of 10% on its 10,000 shares with a per value
miles.
of P200 per share and the total cost per month is P20,000. Which of the
ANS. $6,000
following gives the break-even point?
5. Given: Original cost = P5000 ANS. 92 units
Salvage value = P500
PRESENT ECONOMY
Life n = 5
12. An equipment installation job of Dakay Construction in the completion
Compute the depreciation of the equipment on the 3rd year only using
stage can be completed in 40 days of 8 hours per day of work with 40 men
MARCS Method.
working. With contract expiring in 30 days, the contractor decided to add 10
ANS. 960
men on the job, overtime not being permitted. If the liquidated damages is
6. A machine is to be purchased for P155,000; it has an estimated life of 8 P20,000 per day of delay and the men are paid P580 per day, compute the
years and a salvage value of P6,000. A sinking fund is to be established so total cost if he will add 10 more men to finish the job.
money will be available to purchase a replacement when the first machine ANS. P 968,000
wears out at the end of 8 years. An amount of P13,030 is to be deposited at
RECOVERY PERIOD
the end of each year during the lifetime of the first machine into the sinking Fixed Capital + Working Capital
fund. The interest rate (%) this fund must earn to produce sufficient fund to Recovery Period =
purchase the replacement machine at the end of eight years is closest to: Net Annual Profit
13. A fixed capital investment of P10,000,000 is required for a proposed
ANS. 10%
manufacturing plant and an estimated working capital of P2,000,000. Annual
ANNUAL COST / CAPITALIZED COST / COMPARISON OF depreciation is estimated to be 10% of the fixed capital investment. Which of
ALTERNATIVES the following gives the recovery period in years?
7. A bridge just constructed costs $1,000,000. It is estimated that the same ANS. 4.8 yrs.
bridge should be renovated every 50 years at a cost of $800,000. Annual
RATE OF RETURN
repairs and maintenance are estimated to be $30,000 per year. If interest Profit
rate is 5%, determine the capitalized cost of the bridge. Rate of return =
[HINT: Note that the effective interest rate for a 50-year cycle is (1.05)50 – 1 Fixed Capital + Working Capital
Net income
= 10.4674] Rate of return =
ANS. $1,676,428 Capital
Fixed Capital
Payout Period =
8. Jones Construction Company needs a temporary office building at a Annual Profit + Annual Depreciation
construction site. Two types of heating schemes are considered. The first 14. A fixed capital investment of P10,000,000 is required for a proposed
method is to use “bottled gas” for floor type furnaces. The second method is manufacturing plant and an estimated working capital of P2,000,000. Annual
to install electric radiant panels in the walls and ceiling. This temporary depreciation is estimated to be 10% of the fixed capital investment. If the
building will be used for 5 years before being dismantled. annual profit is P2500000. What is the rate of return?
Bottled Gas Electric Panels ANS. 20.83%
Investment Cost $6000 $8500
Service Life 5 years 5 years BENEFIT COST RATIO
Salvage Value 0 $1000 Present Worth of Benefits
Benefit Cost Ratio (B/C Ratio) =
Annual O&M cost $2000 $1000 Present Worth of Costs
Estimated extra expenses for 15. A small entrepreneur invested a capital of P80,000 for a buy and sell
$220 business. He estimated to have a gross income of P25,000 annually and an
income taxes
Compare the alternatives based on the present value worth criterion at i = operating cost of P6000 annually. It is assuming the business to have a life
10%. Which is the best option? [Hint: Please see table below.] of 10 years. If the rate of interest is 12%. Compute the benefit cost ratio.
ANS. 1.34
 MANILA: Room 206, JPD Building, CM Recto Avenue, Manila
CEBU: 4/F J. Martinez Bldg., Osmeña Blvd., Cebu City
Telephone Number: (02) 516-7559 (Manila) E-Mail: buksmarquez1 @yahoo.com
(032) 254-9967 (Cebu)
Refresher MODULE –Engineering Economy
PRACTICE PROBLEMS
1. Find the value after 20 years, in pesos, of an annuity of P20,000 pesos
payable annually for 8 years with the first payment at the end of 2 years if
money is worth 5%.
ANS. P326,644

2. If money is invested at a nominal rate of interest of 8% for a period of 4

yrs., what is the value of the compound amount factor if it is compounded
continuously?
ANS. 1.377

3. Compute the interest for an amount of P200,000 for a period of 8 yrs. if it

was made at 16% compounded continuously.
ANS. 519,328

4. With interest rate of 9% compounded continuously, what is the present

worth of perpetuity of P8,000 payable monthly?
ANS. P1,062,699

5. A contractor has 50 men of the same capacity at work on a job. They can
complete the job in 30 days, the working day being 8 hours but the contract
expires in 20 days. He decided to put 20 additional men. If all the men get P3
per day for a full or part day and the liquidated damages are P100 for every
full or part day he requires over his contract, how many days could he finish
the job?
ANS. 22 days

6. The cost of equipment is P500,000 and the cost of installation, labor, taxes,
and miscellaneous expenses is P30000. If the salvage value is 10% of the
cost of equipment at the end of its life of 5 years, compute the book value at
the end of the 3rd year using MARCS Method.
ANS. 152,640

7. A broadcasting corporation was formed duly approved by the Securities

and Exchange office has a working capital of P20 M and a fixed capital of
P80 M. Annual depreciation amounts to P5 M and expected annual profit is
P16 M. Determine the recovery period in years.
ANS. 6.25

8. A businessman wishes to earn 7% on his capital after payment of taxes. If

the income from an available investment will be taxed at an average rate of
42% what minimum rate of return before payment of taxes must the
investment offer to be justified?
ANS. 12.1%

9. An equipment cost P480,000 and has a salvage value of 10% of its cost
at the end of its life of 36,000 operating hours in a period of 5 yrs. In the first
year of service, it was used for 12,000 hours. If at the end of the 2nd year, it
was used for 15,000 hours, find the depreciation at the end of the 2nd year.
ANS. 180,000

10. A construction firm is considering establishing an engineering computing

center. This center will be equipped with three engineering workstations that
would cost $50,000 each, and each has a service life of 5 years. The
expected salvage value of each workstation is $5000. The annual operating
and maintenance cost would be $12,000 for each workstation. At a MARR of
20%, determine the equivalent annual cost for operating the engineering
center.
ANS. $84,141

11. A telephone company purchased a microwave equipment for P6 million

with a salvage value of P600,000 over a period of 5 years and pay a lump
sum of P400,000 for the maintenance cost. Minimum attractive rate of return
is 16% annually. Compute the annual cost of investment of purchasing the
microwave equipment.
ANS. 1,870,000