{

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 Engineering Economy

process of determining whether an

engineering project is to undertaken or
modified with the objective of
obtaining the best utilization of capital
resources taken into account some
pertinent facts.
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 Basic terms and
Principles of
Economics:
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The success of engineering and
business project is more
commonly measured in terms of
financial efficiency than in any
other way.

Rate of Return is a measure of

the effectiveness of an
investment of a capital.
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There are two types of life,
namely:

Physical life the time it takes for

the machine to function normally

Economic life a function that has

something to do with revenue
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 VALUE it designates the
worth that a person
attaches to an object or
service.

UTILITY is the power to

satisfy human wants.
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Two types of Goods:

Luxuries necessities varies from

person to person.

Necessities - products that are

required to support human life.
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Demand - is the quantity of a
certain commodity that is bought at a
certain price at a given place and
time.

Law of Demand - states that the

demand for a commodity varies
inversely as the price of commodity.
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Supply - is the quantity of a certain
commodity that is offered for sale at a
certain price at a given place and
time.

Law of Supply - states that the

supply of a commodity varies directly
as the price of commodity.
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Market - is the place where the vendors
or the sellers and buyers come together.
Types of Marketing Strategies:
Perfect competition many sellers,
many buyers
Monopoly one seller, many buyers
Monopsony many sellers, one buyer
Duopoly two sellers, many buyers
Duopsony many sellers, two buyers
Oligopoly few sellers, many buyers
Oligopsony many sellers, few buyers
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Five Types of Costs

Fixed costs are those costs which remain constant,

whether or not a given change in operations or policy is
adopted.

Variable costs are those which vary with output or any

change in the activities of the business.

Increment cost are those that arise as a result of a change

in operations or policy.

Marginal cost is an additional cost of producing one more

unit of a product.

Sunk cost money which has been spent and cannot be

recovered due to certain reasons.
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 Four Major Reasons for
Replacement:

Physical impairment
Inadequacy
Obsolescence
Rental or lease possibilities
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 TIME-MONEY
RELATIONSHIP

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 Interest

defined as the amount of

money paid for the use of borrowed
capital (borrowers viewpoint).

is the income generated by

money which has been lent
(lenders view point)
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 Types of Interest

SIMPLE INTEREST the interest to be paid

upon repayment of a loan is proportional to the
length of time the principal has been borrowed.

I = Pin F = P (1 + in)
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 Two Classification of
Simple Interest
Ordinary simple interest
is computed on the basis of one bankers year
which is equivalent to 360 days or 30 days per
month.

Exact simple interest

is computed on the basis of exact number of
days in a year 365 days for ordinary year
366 days for leap09/10/17
year
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Note:
for a certain year to be leap year, the
following conditions apply:
(i) the year must be divisible by 4
and not by 100 or
(ii) the year must be divisible by
400.

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Rates of Interest
Nominal rate of interest this specifies
the rate of interest and the number of interest
periods per year.
The nominal rate of interest is:
i = r/m
where: i = rate of interest per interest period
r = nominal interest rate
m = no. of compounding periods / year
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Compounding rate m
annually 1
semi-annually 2
quarterly 4
monthly 12
semi-monthly 24
bi-monthly 6
weekly 52
bi-weekly 26
daily 365
Effective interest rate is the actual
or exact rate of interest earned on the
principal during one year

Effective rate = (1+r/m)m 1

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 TYPES OF COMPOUNDING

Discrete compounding
Interest is compounded at the end of discrete
periods of time

Continuous Compounding
Continuous compounding assumes that cash
flow occurs at discrete intervals but
compounding is continuous throughout the
21 interval.
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 Consider a nominal interest rate of
interest per year r, if the interest is
compounded m times a year, with one
unit of principal invested at a year.

F = Pern P = Fe-rn
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 COMPOUND INTEREST
the interest is said to be compound whenever the
interest change for any interest period is based on the
remaining principal amount plus any accumulated
interest charges up to the beginning of that period,
also defined as interest on top of interest

F = P (1 + r/m)mn P = F (1 + r/m)-mn

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 SAMPLE
BOARD
PROBLEMS:
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 Determine the exact and ordinary
simple interest on P10,500 for the
period from Nov. 10, 2099 to
December 15, 2100, if the rate of
interest is 22%?

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 If you borrowed money from your
friend with simple interest of 12%,
find the present worth of
P50, 000 which is due at the end of 7
months.

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 Find the exact interest if the
ordinary interest is P333.36.

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 Find the present worth of a future
payment of P100, 000 to be made
in 10 years with an interest of
12% compounded quarterly.

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 ANNUITY
An annuity consists of a series of equal
payments made at equal intervals of time.

TYPES OF ANNUITY
Ordinary Annuity is one where the equal payments are made at the end of each period starting from the first period.
future worth given A:
29 F = A ((1+i) n 1)/i
present worth given A: 09/10/17
P= A (1- (1+i)-n) /i
 Annuity due is one where the payments are
made at the beginning of each period.

eferred Annuity annuity wherein the first period payment is made several periods after
e beginning of annuity.

P = A [(1- (1+i)-n)/ i] (1+i)-m

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Perpetuity annuity where the payments
continue indefinitely.

P = A/i

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 How much money must you
invest today in order to withdraw
P2,000 annually for 10 years if
the interest rate is 9%?

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 DEPRECIATION

defined as the decrease in value of physical

properties with the passage of time and use.

in an accounting aspect, it is known as the

allocation of an asset over its useful life.

it is the amount aside to compensate for the loss

in value as a result of usage and obsolescence.
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 09/10/17

DEPRECIATION METHOD

N useful life if the property (in years)

n age of property at any time less than or
equal to N (in years)
Co original cost or first cost of the property
BVn book value of the property at the end of n
years
SV the value at the end of life also known as
the salvage value
d the annual cost of depreciation
34 Dn total depreciation after n years
 DEPRECIATION METHOD

1. SLM Straight Line Method

2. SFM Sinking Fund Method
3. DBM Declining Balance Method
4. DDBM Double-Declining
Balance Method
5. SYD Sum of the Years Digit
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 Straight-line Method (SLM)

Basic Formula:
(annual depreciation cost)
d = (Co-SV) / N

(total depreciation after n years)

Dn = nd

(book value after n years)

BVn = C0 - Dn
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 Sinking Fund Method (SFM)
it is assumed that a sinking fund is established where
in the periodic deposit to the sinking fund is equal to
the annual cost of depreciation.

Basic Formula:
d= i (Co - SV) / ((1+i) N-1)

Dn = d ((1+i) n-1) / i

BVn = Co - Dn
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 Declining Balance Method (DBM)
the basic assumption is that the annual cost of
depreciation is a constant percentage of the salvage
value at the beginning of the year.

Let k = ratio of the depreciation in any one year to

the book value at the beginning of that year.

SV Basic Formula:
k =1 N
Co
BVn = Co (1-k) n
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 Double-Declining
Balance Method (DDBM)
the depreciation cost in any year is a constant ratio
of the book value at the beginning of the year.
The book value for this method can never be zero.

Basic Formula:
All formula for DDBM is the same with DBM
except for the computation of k.

k= 2/N
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Sum of the Years-Digit (SYD)
this provides a very rapid depreciation during
the early years of life of the property, and
therefore enables faster recovery of capital.

Basic Formula:
Sum of the years = N (N+1)/2
Reverse digit = n (N- n/2 +0.5)

Dn = (Co-Sv) (reverse digit/ sum of the digits)

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 A firm bought equipment for P56,000.
Other expenses including installation
amounted to P4, 000. The equipment is
expected to have a life of 16 years with a
salvage value of 10% of the original cost.
Determine the book value at the end of 12
years using SFM at 12% interest.

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 BREAK-EVEN ANALYSIS
when two or more alternatives are a function of
the same variable, it may be desirable to find the
value of the variable that will result in equal cost
for the alternatives being considered. This value
is known as break-even point.

Break-even point is also defined as the level of

production where the total income is equal to the
total expenses.
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In symbol
TR = TC nS = nV + F

where: TR = total revenue

TC = total cost
n = number of units produced/sold
S = price per unit
V = variable cost per unit
F = annual fixed cost

note: if TR > TC, there is a profit

TR < TC, there is deficit, no profit
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TR = TC, break-even 09/10/17
 The cost of producing a small transistor
radio set consists of P23 for labor and P37
for materials. The fixed charges in
operating the plant are P100, 000 per
month. The variable cost is P1.00 per set.
The radio set can be sold for P75 each.
Determine how many sets must be
produced per month to break-even.
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45
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 QUESTION #1

What will be the future amount of

P10,000 after a year at 8% simple
interest considering the witholding tax
imposed on savings deposit in the
Phillippines.
a. P10,875 c. P10,640
b. P10,740 d.P10, 800
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 QUESTION #2
If you invest money, which of the
following interest rates gives the
highest annual income.
a. 12.25% cpd quarterly
b. 12% cpd monthly
c. 12. 75% cpd anually
d. 12.5% cpd semi annualy
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 QUESTION # 3

What interest rate compounded

monthly is equivalent to10%
effective rate?
a. 10.58% c. 9. 57%
b. 9. 75% d. 8.9 %

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 QUESTION # 4
A father of a boy deposited to a trust
company a sufficient amount of money on
the day his son was born so that the boy
could received five annual payments of
P 10,000 each of his college tuition fees
starting with his eighteenth birthday . How
much did the father deposited? i = 12%
a. P 10,500 c. P50,000
b. P 5,250
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d. P13,550
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 QUESTION # 5
A father of a boy deposited to a trust company a
sufficient amount of money on the day his son was
born so that the boy could received five annual
payments of P 10,000 each of his college tuition fees
starting with his eighteenth birthday . What if the son
elect not to withdraw the annual payments and
decided to withdraw a single lump sum amount on
his 25th birthday. How much did the boy received
as the single payment ? i = 12%
a. P 95,550 c. P100,000
b. P 89,250 d. P75,480 09/10/17
 QUESTION # 6

A vacant lot has been leased at P 20,000 per

year with an annual increase of P 1500 for 8
years. Payment are to be made at the end of
each year. What lump sum should be paid
today would be equivalent to the 8 year
lease payment plan? i = 7%
a. P 205,524 c. 99,999.5
b. P155,250
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d. 147,609
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 QUESTION # 8

What is the book value of P120,000 worth

electronic equipment after 8 years of use if it
depreciates to 13% of its original value in 12
years. Use straight line method of
depreciation
a. P50,400 c. P52,412.50
b. P34,650.85 d. P60,500
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 QUESTION # 9
A company bought equipment for P60,000
which includes installation and tax
changes. The equipment is expected to
have a life of 16 years with the salvage
value of 10% of the original cost.
Determine the book value at the end of 12
years. The money worth 12% interest.
a. P29,520 c. P35,550
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b. P20.480 d. P15,040
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 QUESTION # 10

Equipment cost P12,000 It has an estimated

salvage value at the end of life of P1000 .
Determine the depreciation charge during
the 3rd year if it has an economical life of
5 years. Use SYD method
a. P2200 c. P5400
b. P1733 d. P3200
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 QUESTION # 11

The cost of the machine is P140,00 and has a

useful value of P 10,000 , find the depreciation
charge during fourth year using double
declining balance method.
a. P 16,766.60 b. P 19,765.6
c. P 10,762.60 d. P 14,765.6

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 QUESTION # 11
Three Engineers met in a school reunion and were
discussing their relative successes by comparing their
investments earning 8% compounded annually. Engr. A
says he has P200,000 invested now. Engr. B says he had
P160,000 invested 4 yrs ago and Engr. C says he will
receive P230,000 five years from now. Considering that
these investments are intact and no change in interest rate is
to occur during the study period. Which of the following
statements is true basing your calculation on these
investments?
a. Engr. A is the poorest b. Engr. C is the poorest
c. Engr.
57 B is the poorest d. Engr. A is the richest
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 QUESTION # 12
If the sum of P 15,000 is deposited in
account earning interest at the rate of 12%
compounded quarterly, what will be the
principal at the end of 10 years?
A. P37,630
B. P48,930
C. P52,340
D. P55,520
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 QUESTION # 13
A machine was purchased 5 years ago at a cost
of P 120,000. Its estimate salvage value at the
end of 10 years is P 10,000. If it is sold now for
P 30,000. What is the sink cost if the
depreciation method used is straight line
method?
A. P 21,000
B. P 30,000
C. P 35,000
D.59 P 25,000
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 QUESTION # 14
I want to have P 1M in 20 years, what is my
monthly deposit in 8% compounded
monthly?
A. P 3,948
B. P 1,846
C. P 1,689
D. P 2,694

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 QUESTION # 15

A debt of P 100,000 is to be discharged by ten semi-annual

payments, the first to be made 6 months after the loan is
given. The debt will be discharged by 5 equal payments each
P 10, 000 and by 5 other equal payments of such amount that
the final payment will liquidate the debt. If interest is 12%
compounded semi-annually, what is the amount of the last
five payments?
A. P 16,386.74
B. P 18,386.74
C. P 22,956.44
D. P 18,584.36
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 QUESTION # 16
A young engineer barrowed a P10,000 at
12% interest and paid P2000 per
annum for the first 4 years. What does he
have to pay at the end of the fifth year in
order to pay off his loan?
A. P6919.28
B. P5674.00
C. P6074.00
D. P3926.00
 QUESTION # 17

Mr. Cruz plans to deposits for the education of his 5

years old son, P500 at the end of each month for 10
years at 12% annual interest compounded monthly.
The money that will be available in two years is
A. P 13,000
B. P 14,500
C. P 13,500
D. P 14,000
 QUESTION # 16

What rate of interest compounded annually

must be received if an investment of P 5,400
made now will result in a receipt of P 7,200
five years hence?
A. 2.85%
B. 5.92%*
C. 4.75%
D. 3.65%
 QUESTION # 17

How much must Karla deposit every year

starting year 1 from now at 5.5% per year in
order to accumulate Php 60,000 seven years
from now?
A. Php 8711
B. Php 7258
C. Php 6172
D. Php 7369
QUESTION # 18
QUESTION # 18
QUESTION # 18
QUESTION # 18