ENGINEERING ECONOMONY

Engineering Economy Supply

- analysis and evaluation of the - The quantity of a certain
monetary consequences by commodity that is offered for
using the theories and sale at a certain price at a
principles of economics to given place and time.
engineering applications,
designs and projects Law of Supply and Demand
“Under conditions of perfect
Terms & Definitions competition, the price at which a
given product will be supplied
Consumer goods and services and purchased is the price
- those products or services that will result in the supply
that are directly used by and the demand being equal.”
people to satisfy their wants.
Law of Diminishing Return
Producer goods and services “When the use of one of the factors
- used to produce consumer of production is limited, either in
goods and services. increasing cost or by absolute
quantity, a point will be reached
Necessities beyond which an increase in the
- those products and services variable factors will result in a less
that are required to support than proportionate increase in
human life and activities, that output.”
will be purchased in
somewhat the same quantity Types of Economic/Market
even though the price varies Situations
considerably.
Perfect Competition
Luxuries - a product is traded freely by
- those products or services buyers and sellers in
that are desired by humans large numbers without
and will be purchased if any individual transaction
money is available after the affecting the price.
required necessities have
been obtained. Monopoly
- only a single seller or producer
Demand supplies a commodity or a
- The quantity of a certain service.
commodity that is bought at a
certain price at a given place Oligopoly
and time. - there are so few suppliers of a
particular product that one
supplier’s actions significantly
impact prices and supply.
ENGINEERING ECONOMY WITH PASION 1
 ENGINEERING ECONOMONY

Monopsony 1. What is the ordinary simple

- there are many sellers or interest of P3000 for 6 months and
producers and has only one 15 days if the rate of interest is 10%?
buyer.
A. P663.22
Oligopsony B. P233.25
- There are many sellers or C. P162.5
producers and have so few D. P128.12
sellers/suppliers
2. A loan of P6000 is made for a
Interest period of 10 months, at a simple
- is the amount of money paid interest rate of 10%, what future
for the use of borrowed amount is due at the end of the
capital or the income loan period?
produced by money which
has been loaned. A. P6500
B. P5600
Simple Interest C. P3500
D. P7500
𝐼 = 𝑃𝑖𝑛
Exact Simple Interest
𝐹 = 𝑃 + 𝐼 - the interest is based on the
𝐹 = 𝑃(1 + 𝑖𝑛) exact number of days of the
years, where there are 365
Where: days for an ordinary year and
I = interest 366 days for leap years.
P = principal
!
i = interest per period 𝑖= for ordinary year
i = r/m "#$
r = interest in one year
!
n = number of periods 𝑖= for leap year
F = Future Worth "##

Ordinary Simple Interest NOTE:

- the interest is computed Leap year occurs every four years,
based on one banker’s year. which means the years that are
One banker’s year is equal to exactly divisible by four are leap
360 days or 12 months, each years except for the years that are
with 30 days. ending in 00 (e.g. 1900, 2000) that
are not divisible by 400.
𝑟
𝑖 =
360
ENGINEERING ECONOMY WITH PASION 2
 ENGINEERING ECONOMONY

3. Calculate for the exact simple Effective Rate of Interest (ERI)

interest on P 20 000 for the period - the actual interest earned in
from January 8 to May 24, 2014 if a one-year period.
the rate of simple interest is 14%.
𝐸𝑅𝐼 = (1 + 𝑖)% − 1
A. P2245
B. P1332
C. P1058 ERI for CONTINUOUS
D. P655 COMPOUNDING

Nominal Rate of Interest (NRI) 𝐸𝑅𝐼 = 𝑒 ! − 1

- It specifies the rate of interest Equivalent Rates:
and the number of interest For two nominal rates to be equal,
periods per year. their effective rates must be equal.
𝑟 4. What is the effective rate
𝑖 =
𝑚 corresponding to 18% compounded
Where: daily? Take 1 year is equal to 360
i = interest per period days.
m = number of periods in a year
A. 13.56%
NOTE: B. 16.77%
For compound interest, the rate of C. 19.72%
interest usually quoted is the NRI. D. 21.25%

In order to accurately reflect 5. What nominal rate, compounded

time-value considerations, NRI semi-annually, yields the same
must be converted into amount as 16% compounded
ERI before applying the quarterly?
formulas for compound interest.
A. 15.43%
B. 12.75%
C. 16.32%
D. 17.46%

ENGINEERING ECONOMY WITH PASION 3

 ENGINEERING ECONOMONY

Continuous Compounding
Compound Interest - The concept is based on the
- Interest of loan or principal assumption that cash
which is based not only on the payments occur once per year
original amount but the but compounding is
amount of loan plus continuous throughout the
the previous accumulated year.
interest.
𝐹 = 𝑃𝑒 !'
𝐹 = 𝑃(1 + 𝑖 )&
Values of ‘n’, ‘I’, and ‘t’ for different
𝑟 modes of compounding (m):
𝐹 = 𝑃(1 + )%'
𝑚 Annually (every 12 months)
m = 1, i = r, n = t
Where:
F = Future Worth Semi-annually (every 6 months)
P = Present Worth m = 2, i = r / 2, n = 2t
i = Effective Interest Rate per
interest period (per month, per Quarterly (every 3 months)
quarter, per year, etc.) m = 4, i = r / 4, n = 4t
n = total number of compounding
periods Bimonthly (every 2 months)
m = mode of compounding m = 6, i = r / 6, n = 6t
r = specified nominal rate
t = number of years Semi-quarterly (every 1.5 months)
m = 8, i = r / 8, n = 8t
NOTE:
In the compound interest formula, Monthly (every month)
the quantities: m = 12, i = r / 12, n = 12t
( 1 + i )n is known as the Single
Payment Compound Amount Semi-monthly (every 0.5 months)
Factor (SPCAF) m = 24, i = r / 24, n = 24t
while
( 1 + i )-n is known as the Single
Payment Present Worth Factor
(SPPWF)

ENGINEERING ECONOMY WITH PASION 4

 ENGINEERING ECONOMONY

6. The amount of P25 000 was 10. How long will it take for an
deposited in the bank earning an investment to triple its amount if
interest of 8.3% per annum. invested at an interest rate of 12%
Determine the total amount at the compounded semi-annually?
end of 15 years if the principal and
interest were not withdrawn during A. 18.36 years C. 4.71 years
the period. B. 9.43 years D. 6.6 years

A. P42 587 C. P82 674 Annuity

B. P93 548 D. P67 842 - is a series of equal payments
(A) made at equal intervals of
7. A sum of P1000 is invested now time.
and left for eight years, at which
time the principal is withdrawn. The Annuity Certain
interest has accrued is left for - when an annuity has a fixed
another eight years. If the effective time span.
annual interest rate is 5%, what will
be the withdrawal amount at the Ordinary Annuity
end of the 16th year? - type of annuity where the
payments are made at the
A. P356.85 C. P835.12 end of each period.
B. P562.35 D. P705.42
FUTURE WORTH
8. If the nominal interest rate is 5%,
how much is P3000 worth in 15 𝐴
years in a continuously 𝐹= [(1 + 𝑖 )& − 1]
compounded account? 𝑖
A. P6351 C. P6117 PRESENT WORTH
B. P6250 D. P6562
𝐴
9. How long will it take money to 𝑃 = [1 − (1 + 𝑖 )(& ]
double itself if invested at 5% 𝑖
compounded annually?
Where:
A. 13 years C. 15 years A = periodic equal payments
B. 14 years D. 16 years n = number of periods (equal to the
number of payments)
i = interest rate per payment

ENGINEERING ECONOMY WITH PASION 5

 ENGINEERING ECONOMONY

Annuity Due Perpetuity

- type of annuity where the - type of annuity in which the
payment is made at the periodic payments continue
beginning of each period. indefinitely.

FUTURE WORTH FUTURE WORTH

𝐴 𝐹=∞
𝐹= [(1 + 𝑖 )& − 1]
𝑖 PRESENT WORTH
PRESENT WORTH
𝐴
𝐴 𝑃=
𝑃= [1 − (1 + 𝑖)"# ](1 + 𝑖) 𝑖
𝑖
Deferred Annuity 11. A businessman borrowed money
- type of annuity where the first today to be paid in 10 equal
payment is made later than payments for 10 quarters. If the
the first or is made several interest rate is 10% compounded
periods after the beginning of quarterly and the quarterly
the annuity. payment is P2000, how much did
he borrow?
FUTURE WORTH
A. P16 350.2 C. P13 436.8
𝐴 B. P10 852.5 D. P17,504.1
𝐹 = [(1 + 𝑖 )& − 1]
𝑖 12. ECE BOARD EXAM QUESTION
APR 2015: A man bought an
PRESENT WORTH equipment costing P30 000
payable in 12 quarterly payments,
𝐴 each period. The rate of interest is
𝑃= [1 − (1 + 𝑖 )!" ](1 + 𝑖)!# 32% compounded quarterly. What
𝑖 is the amount of each payment?
or
𝐴
𝑃= [1 − (1 + 𝑖 )!" ](1 + 𝑖)#!$ A. P1700 C. P3700
𝑖 B. P2700 D. P4700

Where:
m = number of periods before the
beginning of the first payment
d = delay

ENGINEERING ECONOMY WITH PASION 6

 ENGINEERING ECONOMONY

13. A person buys a piece of lot for CASE 2: No maintenance, only

P100 000 down payment and 10 replacement
deferred semi-annual payments of
P8000 each, starting three years 𝑃
from now. What is the present 𝐶𝐶 = 𝐹𝐶 +
value of the investment if the rate (1 + 𝑖)& − 1
of interest is 12% compounded Where:
semi-annually? CC = capitalized cost
FC = first or original cost
A. P144 000 C. P135 000 P = the amount needed to replace
B. P156 000 D. P187 000 the property every n periods

Capitalized Cost CASE 3: Replacement and

- refers to the present worth of maintenance every period
a property that is assumed to
last forever. 𝐴 𝑃
𝐶𝐶 = 𝐹𝐶 + +
The capitalized cost of any property 𝑖 (1 + 𝑖)& − 1
is the “sum of the first cost and
the present costs of perpetual 14. An equipment is purchased for
replacement, operation, and P50 000. If the annual maintenance
maintenance.” cost is P1500, determine the
capitalized cost of perpetual service
CASE 1: No replacement, only with an interest rate of 6%.
maintenance
A. P100 000 C. P25 000
𝐴 B. P75 000 D. P58 333.33
CC = FC +
𝑖 15. At 6%, find the capitalized cost of
a bridge whose cost is P250 Million
Where: and life is 20 years, if the bridge
CC = capitalized cost must be partially rebuilt at a cost of
FC = first or original cost P100 Million at the end of each 20
A = annual maintenance cost years.

A. P315.2 Million C. P295.3 Million

B. P275.8 Million D. P135.6 Million

ENGINEERING ECONOMY WITH PASION 7

 ENGINEERING ECONOMONY

Depreciation Sinking Fund Method (SFM)

- is the decrease in the value of
physical property due to ANNUAL DEPRECIATION CHARGE
passage of time. (𝐹𝐶 − 𝑆𝑉 )𝑖
𝑑 =
Symbols used and their (1 + 𝑖)) − 1
meanings:
DEPRECIATION AFTER “N” YEARS
d = annual depreciation charge 𝑑
dn = depreciation charge during the 𝐷& = [(1 + 𝑖 )& − 1]
nth year 𝑖
Dn = total depreciation after “n”
years BOOK VALUE AFTER “N” YEARS
FC = first or original cost 𝐵𝑉& = 𝐹𝐶 − 𝐷&
SV = estimated salvage value after
“L” years
L = expected depreciable life of the Declining Balance Method (DBM)
property - also known as the constant
n = number of years before L percentage method or the
Mateson Formula.
Methods of Computing
Depreciation DEPRECIATION CHARGE DURING
THE nth YEAR
Straight Line Method (SLM) 𝑑& = 𝑘𝐹𝐶(1 − 𝑘)&(*
- assumes that the loss in value
of the property is directly SALVAGE VALUE AT THE END OF
proportional to the age of the ITS USEFUL LIFE
property.
𝑆𝑉 = 𝐹𝐶(1 − 𝑘))
ANNUAL DEPRECIATION CHARGE
𝐹𝐶 − 𝑆𝑉 BOOK VALUE AT THE END OF n
𝑑 = YEARS
𝐿 𝑆𝑉 #
#
𝐵𝑉 = 𝐹𝐶(1 − 𝑘) = 𝐹𝐶( ) $
DEPRECIATION AFTER “N” YEARS 𝐹𝐶
𝐹𝐶 − 𝑆𝑉 RATE OF DEPRECIATION
𝐷& = A B 𝑛
𝐿
𝐷& = 𝑑𝑛 𝐵𝑉&
% & 𝑆𝑉
𝑘 = 1 − E =1− E
𝐹𝐶 𝐹𝐶
BOOK VALUE AFTER “N” YEARS
𝐵𝑉& = 𝐹𝐶 − 𝐷&

ENGINEERING ECONOMY WITH PASION 8

 ENGINEERING ECONOMONY

Double Declining Balance Method 16. An engineer bought a machine

(DDBM) for P500 000. Other expenses
- just like the declining balance including installation amounted to
method that used 2 / L to P30 000. At the end of its estimated
replace the rate of useful life of 10 years, the salvage
depreciation k. value will be 10% of the first cost.
Using straight line method of
DEPRECIATION CHARGE DURING depreciation, what is the book
THE nth YEAR value after 5 years?
2
2(𝐹𝐶)(1 − )&(* A. P256 400 C. P350 250
𝑑& = 𝐿 B. P291 500 D. P450 500
𝐿
17. A machine worth P250 000 has
SALVAGE VALUE AT THE END OF an estimated life of 15 years with a
ITS USEFUL LIFE book value of P30 000 at the end of
2 the period. Compute the
𝑆𝑉 = 𝐹𝐶(1 − )) depreciation charge and its book
𝐿 value after 10 years using declining
balance method.
BOOK VALUE AT THE END OF n
YEARS
A. P60 822 C. P65 344
2 B. P63 455 D. P54 632
𝐵𝑉 = 𝐹𝐶(1 − )#
𝐿
18. ECE BOARD EXAM QUESTION
Sum-of-the-Year’s-Digit Method SEP 2014: Someone bought a
(SYD) machine for P200 000 and used it
for 10 years, the life span of the
DEPRECIATION CHARGE DURING equipment. What is the book value
THE nth YEAR of the machine after 5 years of use?
𝐿−𝑛+1 Assume a scrap value of P20 000.
𝑑& = (𝐹𝐶 − 𝑆𝑉) Use double declining balance
𝑆𝑌𝐷 method.

TOTAL DEPRECIATION AFTER n A. P43 648 C. P65 536

YEARS B. P59 425 D. P70 923
𝑛(2𝐿 − 𝑛 + 1
𝑆𝑉 = (𝐹𝐶 − 𝑆𝑉)
2(𝑆𝑌𝐷)
SUM OF YEARS DIGIT
𝑛
𝑆𝑌𝐷 = (𝑛 + 1)
2
ENGINEERING ECONOMY WITH PASION 9
 ENGINEERING ECONOMONY

19. An asset is purchased for COMPONENTS of COSTS

P120 000. Its estimated economic
life is 10 years, after which it will be Fixed Costs (FC) includes costs
sold for P12 000. Find the such as buildings, insurance, fixed
depreciation for the 3rd year using overhead or indirect costs, some
the sum-of-the-year’s digit (SYD) minimum level of labor, and capital
method. recovery.

A. P19 636 C. P15 710 Variable Costs (VC) includes costs

B. P21 352 D. P12 345 such as direct labor,
materials, contractors, marketing,
Bond advertisement and warranty
- is a certificate of indebtedness
of a corporation usually for a 20. A manufacturer produces
period not less than ten years certain items at a labor cost per
and guaranteed by a unit of P315, material cost per unit
mortgage on certain assets of of P100, and a variable cost of P3.00
the corporation or its per unit. If the item has a selling
subsidiaries. price of P995, how many units must
be manufactured each month for
Break-Even Analysis the manufacturer to break even if
the monthly overhead is P461 600?
Break-even
- is the condition for which A. 588 C. 632
revenues and costs are equal. B. 711 D. 796

Break-even point REVIEW QUESTIONS

- the quantity of a variable at
which revenues and costs are 1. It is defined as the production
equal in order to estimate the and consumption of goods and
amount of profit or loss. services of a community regarded
as a whole.
To Break-even:
A. Engineering Economy
𝐼𝑁𝐶𝑂𝑀𝐸 = 𝐸𝑋𝑃𝐸𝑁𝑆𝐸𝑆 B. Economy
C. Market
𝑝𝑁 = 𝐹𝐶 + 𝑉𝐶 D. Market Situation

Where:
p = price per unit
N = number of units (quantity)

ENGINEERING ECONOMY WITH PASION 10

 ENGINEERING ECONOMONY

2. You loan from a loan firm an

amount of P100 000 with a rate of A. P5 552.64 C. P5 352.25
simple interest of 20% but the B. P5 504.50 D. P5 981.57
interest was deducted from the
loan at the time the money was 6. ECE BOARD EXAM QUESTION
borrowed. If at the end of one year, SEP 2014: In Engineering Economy,
you have to pay the full amount of what do you call the method of
P100 000, what is the actual rate of repaying a debt, the principal and
interest? interest included, usually by a series
of equal payments at periodic
A. 15% C. 23% intervals of time?
B. 25% D. 18%
A. Amortization
3. The sum of P20 000 is left to B. Depreciation
Robert as a will, however, with a C. Annuity
condition that the sum will be held D. Deflation
in a trust fund until it amounts to
P50 000. When will Robert receive 7. A printing equipment costs
the money if the fund is invested at P73 500. It has a life expectancy of 8
8% compounded quarterly? yrs. and has a salvage value of
P3 500 at the end of its life. The
A. 11 years C. 13 years book value at the end of “x” years is
B. 12 years D. 14 years equal to P38 500. Using straight
line method of depreciation, solve
4. What would be the present value for the value of “x”.
of instalment payments of P1000
now, P2000 at the end of the first A. 3 years C. 5 years
year, P3000 at the end of the B. 4 years D. 6 years
second year, P4000 at the end of
the third year, and P5000 at the 8. Passion Corporation
end of the fourth year, if money is manufactures book cases that sell
worth 10% compounded annually. for P65 each. It costs Passion
P35 000 per year to operate its
A. P12 315.87 C. P11 717.85 plant. This sum includes rent,
B. P14 115.76 D. P10 550.25 depreciation charges on
equipment and salary payments. If
5. On his 6th birthday, a boy is left an the cost to produce one bookcase
inheritance. The inheritance will be is P50, how many bookcases must
paid in a lump sum of P10 000 on be sold each year for Passion to
his 21st birthday. What is the present avoid taking a loss?
value of the inheritance as of the
boy’s 6th birthday if the interest is A. 2334 C. 3234
compounded quarterly? B. 3243 D. 2344
Assume i = 4%
ENGINEERING ECONOMY WITH PASION 11
 ENGINEERING ECONOMONY

9. An engineer bought a new 13. It is a market condition in which

model of Audi R8 for P10M. Other a product is traded freely by buyers
extra charges amounted to P3M. At and sellers in large numbers
the end of its estimated useful life without any individual transaction
of 10 years, the salvage value will be affecting the price.
10% of the first cost. Using straight
line method of depreciation, what A. Perfect Competition
is the book value after 5 years? B. Monopoly
C. Oligopoly
A. P7.15M C. P3.5M D. Monopsony
B. P5.85M D. P10.2M
14. A plant bought a machine for
10. An elevator system for a 20-yr P200 000 and used it for 10 years,
old high-rise office building cost the life span of the equipment.
P400 000 when first installed. The What is the book value of the
system was designed to last 30 machine after 5 years of use?
years, with a salvage at 10% of initial Assume a scrap value of P20 000.
cost. If depreciation is of straight Use double declining balance
line, find the allowable depreciation method.
charge per year.
A. P43 648 C. P65 536
A. P12 000 C. P18 000 B. P59 425 D. P70 923
B. P13 333 D. P20 000
15. Find the effective rate if interest
11. If the rate of interest is 12% is compounded monthly at the
compounded annually, find the nominal rate of 12% per annum.
equivalent rate of interest if it is
compounded quarterly. A. 11.32% C. 13.57%
B. 10.75% D. 12.68%
A. 11.49% C. 12.75%
B. 13.53% D. 10.25% 16. Suppose that you make 12 equal
annual deposits of P2000 each into
12. How many years will it take for a bank account paying 8% interest
an investment to double itself at per year. The first deposit will be
the rate of 4% compounded made one year from today. How
annually? much money can be withdrawn
from this bank account
A. 10 years C. 18 years immediately after the 12th deposit?
B. 15 years D. 28 years
A. P35 492 C. P37 954
B. P36 218 D. P38 755

ENGINEERING ECONOMY WITH PASION 12

 ENGINEERING ECONOMONY

17. What is the book value of an 20. A loan of P5 000 is made for a
equipment purchased 3 years ago period of 15 months, at a simple
for P15 000 if it is depreciated using interest rate of 15%. What future
the sum-of-year’s-digit (SYD) amount is due at the end of the
method? The expected life is 5 loan period?
years.
A. P5 397.50 C. P5 840.50
A. P3000 C. P6000 B. P3 456.25 D. P4 115.75
B. P4000 D. P9000
21. A bank is advertising 9.5%
18. On the day his grandson was accounts that yield 9.84% annually.
born, a man deposited to a trust How often is the interest
company a sufficient amount of compounded?
money so that the boy could
receive five annual payments of A. Daily C. Bimonthly
P20 000 each for his college tuition B. Monthly D. Quarterly
fees, starting with his 18th birthday.
Interest at the rate of 12% per 22. The amount of P20 000 was
annum was to be paid on all deposited in a bank earning an
amounts on deposit. There was also interest of 6.5% per annum.
a provision that the grandson could Determine the total amount at the
elect to withdraw no annual end of 7 years if the principal and
payments and receive a single interest were not withdrawn during
lump amount on his 25th birthday. this period.
The son chose this option. How
much did the grandfather deposit? A. P30 000 C. P32 000
B. P31 000 D. P33 000
A. P9 500 C. P11 500
B. P10 500 D. P12 500 23. These are activities that people
do for themselves or for other
19. A compressor can be purchased people to satisfy their wants.
with a down payment of P8000
and equal installments of 600 each A. Supply C. Goods
paid at the end of every month for B. Demand D. Services
the next 12 months. If the money is
worth 12% compounded monthly, 24. It is the decrease in the value of
determine the equivalent cash physical property due to the
price of the compressor. passage of time.

A. P14 753.05 C. P11 020.50 A. Bond C. Capitalized Cost

B. P12 273.25 D. 13 880.50 B. Depreciation D. Collateral

ENGINEERING ECONOMY WITH PASION 13

 ENGINEERING ECONOMONY

25.Refers to the present worth of a 29. An economic or market

property that is assumed to last situation in which there are many
forever. sellers or producers that supplies a
commodity or a service to very few
A. Bond C. Capitalized Cost consumers.
B. Amortization D. Collateral
A. Oligopsony C. Oligopoly
26. Series of equal payments made B. Monopoly D. Monopsony
at equal interval of time.
30. Calculate for the exact simple
A. Mortgage interest on P15 000 for the period
B. Compound Interest from February 12 to August 15, 2004
C. Annuity if the rate of simple interest is 12%.
D. Amortization
A. P1333.32 C. P909.84
27. A telecommunications B. P1058.85 D. P655.23
company purchased an equipment
for P53 000 and paid P1 500 for
freight and delivery charges to the
job site. The equipment has a
normal life of 10 years with a
trade-in value of P5 000 against the
purchase of a new equipment at
the end of its life. Determine the “Forget failures.
annual depreciation cost by the Forget past mistakes.
sinking fund method. Assume
interest at 6.5% compounded Forget everything
annually. except for what you
A. P2 543 C. P4 215 are going to do now
B. P3 668 D. P5 956 and do it!”
28. Year 1805 is considered? ~William Durant

A. An ordinary year
B. A leap year
C. A lucky year
D. An unlucky year

ENGINEERING ECONOMY WITH PASION 14