Civil Engineering May 2021 Review Innovations Engineering Economy 3

Capitalized Cost and Annual Cost 8. What is the present profit or loss in million pesos? Recovery Period and Payout Period
1. Compute the capitalized cost of a new car worth 16. It is estimated that insulation of steam pipes in a
9. What is the break-even quantity?
P800,000 if it is estimated that it requires P20,000 per factory will reduce the fuel bill by as much as 20%.
year to maintain and must be replaced at the same 10. If the production is increased to 80% of its full The cost of the insulation is P90,000 installed and the
amount with a salvage value of P300,000 after 5 years capacity, what is the profit or loss in million pesos? annual cost of taxes and insurance is 5% of the initial
if the interest rate is 12% per annum cost. Without insulation, the annual fuel bill is
P180,000. If the insulation is worthless after 6 years’
2. A contractor can buy dump trucks for P800,000 each
Benefit – Cost Ratio use, determine the recovery period. i=12%
or rent them for P1200 per day. The truck has a
salvage value of P100,000 at the end of its useful life 11. A small entrepreneur invested a capital of P80,000 17. A company has a working capital of P20M and a
of 5 years. The annual cost of maintenance is P20,000. for a buy and sell business. He estimated to have a fixed capital of P80M. Annual depreciation amounts
Using the annual cost method and 14% interest rate, gross income of P25,000 annually and an operating of P5M and the expected annual net profit is P16M.
determine the number of days per year that the truck cost of P6000 annually. It is assumed the business to Compute the payout period in years.
must be used to warrant its purchase. have a life of 10 years. If the rate of interest is 12%.
Compute the benefit cost ratio.
Situation - A proposed manufacturing plant will require
Situation - A manufacturing plant installed a new boiler at 12. P180,000 was spent in a project that yields annual
a total cost of P150,000. It is estimated to have a useful life a fixed capital investment of P8 M and an estimated
benefit of P60,000 for a period of 8 years without any working capital of P1.5 M. If the net annual profit is P2
of ten years with the scrap value of P5,000. Annual salvage value. Determine the benefit cost ratio
maintenance cost is P10,000. If the interest is 12% M and annual depreciation is estimated to be 8% of the
considering the cost of money of 7%. fixed capital investment,
compounded annually;

3. determine the equivalent present worth of the annual 18. Compute the rate of return on the total investment.
Rate of Return
maintenance cost. 13. It is estimated that insulation of steam pipes in a 19. Compute the payout period.
4. determine the equivalent annual cost of the net factory will reduce the fuel bill by as much as 20%.
20. Compute the recovery period.
amount required to replace the boiler. The cost of the insulation is P90,000 installed and the
annual cost of taxes and insurance is 5% of the initial
5. determine its capitalized cost. cost. Without insulation, the annual fuel bill is
Bond
P180,000. If the insulation is worthless after 6 years’
21. What is the maximum amount an investor should
use, what would be the rate of return? i=12%
Break-even Analysis pay for a 25-year bond with a P20,000 face value and
6. The labor cost per unit is P20, cost of materials per 14. An investment of P275,000 in a new machine could 8% coupon rate (interest only paid semiannually)?
unit is P64, and other variable cost per unit is P5.25. reduce the annual cost of operations by P80,000. It The bond will be kept to maturity. The investor’s
The fixed charges on business is P175,000/mo. If the would cost P12,000 per year to maintain the machine effective annual interest rate for economic decision is
unit selling price is P215, determine the number of which would last for 10 years with negligible scrap 10%.
units to be produced monthly to break-even. value. A constant annual deposit in a fund is made at
22. Determine the approximate size of an annual
an interest of 8% per annum to accumulate and
7. Steel drum manufacturers incur a yearly fixed payment needed to retire Php70,000,000 in bonds
recover the first cost of the machine in 10 years. Find
operating cost of P200,000. Each drum manufactured issued by a city to build a dam. The bonds must be
the rate of return on the investment in percent.
costs P160 to produce and sells P200. What is the repaid over a 50-year period, and they earn interest at
manufacturer’s break-even sales volume in drums 15. A new engine will cost P12,000 with an estimated life an annual rate of 6% compounded annually.
per year? of 15 years and a salvage value of P800 and
guaranteed to have an operating cost of P3500 per
Situation - A telephone company have a production year. The new engine is considered as a replacement Stock Valuation
capacity of 500,000 units per month. At its present of the old one. The old engine had a total annual cost 23. ABC Corporation has preferred stock outstanding.
capacity of 350,000 units per month, the company have of P5200 to operate. Determine the rate of return of This stock pays an annual dividend of P2.5. If the next
a total monthly income of P350,000,000. The company the new investment using 6% sinking fund to cover dividend is paid 1 year from now and the annual
has a fixed cost of P100,000,000 per month and a depreciation, if the old engine could be sold now for required return is 10%, what should be the value of
variable cost of P200 per unit. P2,000. the preferred stock?

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Civil Engineering May 2021 Review Innovations Engineering Economy 3
24. DEF Corporation just paid a P1.57 dividend and
investors expect that dividend to grow by 5% each
year. If the required return on the stock investment is
14%, what should be the price of the stock today.
25. GHI Corporation’s stock which currently sells at
Php50 per share, will pay a Php3 annual dividend per
share and will increase in value at an average rate of
5% per year. It is expected that the company’s stock
will maintain this performance. What is the
company’s cost of the capital raised through the
selling of this stock?

Comparing Alternatives
26. RI is planning to put up its own building.
The two proposals being considered are:
Proposal A: Construction of the building now, to cost
P4,000,000.
Proposal B: Construction of a smaller building now, to
cost P3,000,000 and at the end of 5 years an extension
to be added to cost P2,000,000.
Which is more economical if the interest rate is 20%
and depreciation to be neglected?

Situation – The annual cost of a certain machine was

determined to be P1,800. The following alternatives is
being considered for a lifetime business. Interest rate is
8%.
Machine A B
First Cost 5,000 10,000
Annual Maintenance Cost 500 200
Economic Life (years) 5 10
Salvage Value 600 1,000

27. Which of the following most nearly gives the

equivalent uniform annual cost of machine A.
28. Which of the following most nearly gives the
equivalent capitalized cost of machine B.
29. Which of the alternatives is more economical?

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Civil Engineering May 2021 Review Innovations Engineering Economy 3

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