ENGINEERING

ECONOMY
KIV RYAN A. ALBINO, ECE, ECT
Engineering Economy – is a subset of economics  concerned with the
use and application of economic principles in the analysis of
engineering decisions.

Interest – payment for the use of the borrowed money.

Simple Interest
1. Ordinary Simple Interest
2. Exact Simple Interest
ORDINARY SIMPLE INTEREST

Interest=(P)(i)(n) Final = P(1+in)

where:
P=Principal amount
i=Interest Rate 1 year = 360 days
n=Period             = 12 months
1. Find the interest on P6800.00 for 3 years at 11% simple interest.

A. P1,875.00
B. P1,987.00
C. P2,144.00
D. P2,244.00
2. How many years will it take the principal amount to double if it is
invested in an amount that gives 10% ordinary simple interest.

A. 5
B. 8
C. 10
D. 16
3. A man borrows Php 800.00 from Engr. John Doe and promised to
repay him Php 850.00 after 1.5 years. What is the interest rate
assuming ordinary simple interest?

A. 3.7%
B. 4.2%
C. 2.1%
D. 5.6%
EXACT SIMPLE INTEREST

Formula is the same as Ordinary but period is exact.

n=1 year=365 days [Ordinary Year]

                =366 days [Leap Year]
4. From August 22, 2011 to February 22, 2012, determine the exact
simple interest of the principal Php 5000.00 for 8%.

A. Php 201.49
B. Php 721.21
C. Php 124.22
D. Php 219.89
DISCOUNT

• Deduction of actual interest on the principal before money is

obtained by borrower.
• Difference between future and present worth of money.

 i
______
%d = 
i+1
5. Chupol  borrowed Php 2000 from a bank and promised to pay after 1
year. The bank deducted the interest of Php 80.00 in advance. What is
the interest rate?

A. 4%
B. 2%
C. 4.2%
D. 7%
6. Chupol  borrowed Php 2000 from a bank and promised to pay after 1
year. The bank deducted the interest of Php 80.00 in advance. What is
the rate of the discount?

A. 4%
B. 2%
C. 4.2%
D. 7%
 COMPOUND INTEREST

• It is the addition of interest to Mode of Compounding m

the principal sum of a loan or
Annually 1
deposit, or in other words,
interest on interest.
Semi-Annually 2

F=P(1+i)n Quarterly 3
where:
     r  
i=------ Monthly 12
  m
n=mt
Bi-Monthly 6
7. Chupol borrows Php 8000.00 from a bank that has an interest rate of
2% compounded quarterly. How much is the money after 8 years?

A. Php 9384.34
B. Php 9348.34
C. Php 8523.66
D. Php 8325.66
8. Chupol borrows Php 8000.00 from a bank that has an interest rate of
2% compounded quarterly. How much is the money after 8 quarters?

A. Php 9384.34
B. Php 9348.34
C. Php 8523.66
D. Php 8325.66
9. A businessman borrows money from a bank and promised to pay
Php 5000.00 after 12 months. How much money did he borrow if the
money is worth 8% compounded monthly?

A. Php 6414.81
B. Php 1985.57
C. Php 4616.81
D. Php 1895.57
10. A businessman borrows money from a bank and promised to pay
Php 5000.00 after 12 months. How much money did he borrow if the
money is worth 8% monthly?

A. Php 6414.81
B. Php 1985.57
C. Php 4616.81
D. Php 1895.57
11. How long (in years) will it take for an investment to fivefold its
amount of money is worth 14% compounded semi-monthly?

A. 11
B. 12
C. 13
D. 14
Effective Rate

 r m
___
ER=(1+     ) -1
m

Continuous Compounding

F=Pern
12. What is the nominal rate of 4% compounded quarterly if
compounded MONTHLY?

A. 3.987%
B. 4.02%
C. 4.06%
D. 4%
13. What is the nominal rate of 4% compounded quarterly if
compounded SEMI-ANNUALLY?

A. 3.987%
B. 4.02%
C. 4.06%
D. 4%
14. What is the nominal rate of 4% compounded quarterly if
compounded ANNUALLY?

A. 3.987%
B. 4.02%
C. 4.06%
D. 4%
15. What is the present worth of money if Php 8000.00 is paid after
years? The money is worth 8% compounded continously.

A. Php 6293.02
B. Php 2963.02
C. Php 2693.02
D. Php 3296.02
16. Determine the effective rate of 8% compounded continuously.

A. 8.22%
B. 7.95%
C. 8.33%
D. 7.23%
17. Chupol borrows P10,000 at an interest rate of 8% compounded
annually and wishes to repay the loan over a 4 year period with annual
payments such that the second is P500 greater that the first payment,
the third payment is P1000 greater than the second payment and the
fourth payment is P2000 greater than the third payment. The amount
of first payments is:

A. P1854
B. P1574
C. P1474
D. P1754
18. A sum of P1000 is invested now and left for eight years at which
time the principal is withdrawn. The interest that has accrued is left for
another eight years. If the effective annual interest rate is 5%, what will
be the withdrawal amount at the end of the 16th year?

A. P706
B. P500
C. P774
D. P799
Annuity - is a series of payments made at equal intervals.

• Ordinary Annuity – starts at end of year

• Annuity Due – starts at beginning of year
• Deferred Annuity – starts at specific year
• Perpetuity – infinite series of payment
19. Determine the present worth of an annual payment of Php
2500.00 at the end of each year for 12 years at 8%
compounded annually.

A. P32, 225.52
B. P18, 840.20
C. P47, 442.82
D. P20, 288.21
20. A contractor bought a concrete mixer at Php 120,000 if paid in cash.
The mixer may also be purchased by installment to be paid within 5
years. If money is worth 8%, the amount of each annual payment, if all
payments are made at the beginning of the year is:

A. P 27, 828.50
B. P 29, 568.00
C. P 31, 005.00
D. P 32, 555.00
21. Calculate the present value of series of twenty-five equal annual
payments of Php 5,000.00 starting five years from today. Assume an
effective interest rate of 6%

A. Php 50,628.08
B. Php 34,571.08
C. Php 60,258.80
D. Php 43,751.80
22. Calculate for the present worth of the following infinite cash flow
series at an interest rate of 10%
n Net Cash Flow
0 0
1-10 Php 400
11-∞ Php 500
A. P4612.15
B. P4385.54
C. P4451.07
D. P9854.10
Gradient – series of payment that increases or decreases at a certain
rate or amount.

• Arithmetic Gradient – certain amount

• Geometric Gradient – certain rate
23. An arithmetic gradient with series of end of period payments of
P10,000 on the 1st year, P8,000 on the 2nd year, P6000 on the 3rd year,
P4,000 on the 4th year and P2,000 on the 5th year. If interest rate is
12%, what is its present worth?

A. P12,125
B. P23,007
C. P22,565
D. P23,254
24. A newly acquired machine requires an annual maintenance cost of
10,000 pesos. If the annual maintenance cost increases by 20% each
year for 10 years, what is the estimated present worth of the
maintenance costs if money is worth 15%?

A. P106,100
B. P126,100
C. P116,100
D. P136,100
25. What do you call the amount of property in which a willing buyer
will pay to a willing seller for the property when neither one is under
the compulsion to buy nor sell?

A. Far value
B. Book value
C. Market value
D. Goodwill value
26. What is a market situation whereby there is only one buyer of an
item for which there is no goods substitute?

A. Monopsony
B. Oligopoly
C. Monopoly
D. Oligopsony
27. What is the type of annuity where the payments are made at the
start of its period beginning from the first period?

A. Deferred annuity
B. Ordinary annuity
C. Annuity due
D. Perpetuity
28. It is defined as the future value minus the present value on a
negotiable paper.

A. Discount
B. Rate of return
C. Capital
D. Interest
29. ______ is the amount of company's profits that the board of
directors of the corporation decides to distribute to ordinary
shareholders.

A. Par value
B. Return
C. Share of stock
D. Dividend
30. It is defined as the sum of the first cost and the present costs of the
perpetual replacement, operation and maintenance.

A. Bond
B. Capitalized cost
C. Depreciation
D. Collateral
31. What refers to an imaginary cost representing what will not be
received if a particular strategy is rejected?

A. Opportunity cost
B. Horizon cost
C. Ghost cost
D. Null cost
32. "Under conditions of perfect competition the price at which a given
product will be supplied and purchased is the price that will result in
the supply and the demand being equal."

A. Law of Supply
B. Law of Demand
C. Law of Supply and Demand
D. Law of Diminishing Return
Capitalized Cost
• expense recorded as the cost of a fixed asset.
• Defined as the sum of the first cost and the present costs of
perpetual replacement, operation and maintenance.

CC = FC +           +               +
MC       ______ 
____    FC-SV      ______
    RC
   i         (1+i)L-1    (1+i)k-1
33. A machine costs P300,000 new, and must be replaced at the end of
each 15 years. If the annual maintenance required is P5,000, find the
capitalized cost, if the money is worth 5% and the final salvage value is
P50, 000.

A. P631,711.44
B. P316,171.44
C. P613,171.44
D. P613,711.44
Depreciation
• The decrease in the value of certain objects as its economic life
passes by.
• Methods:
o Straight Line Method
o Declining Balance Method
o Double Declining Balance Method
o Sum of Years Digit Method
o Sinking Fund Method
34. A machine cost P4,850 has a life of 10 years and a salvage value of P
500. Using straight line method, determine the book value at the end of
the fourth year.

A. P3,110
B. P435
C. P1,305
D. P2,321
35. A machine costing 720,000 pesos is estimated to have a life of 10
years. If the annual rate of depreciation is 25%, using declining balance
method, determine the salvage value.

A. P56,953
B. P21,452
C. P52,213
D. P40,546
36. A plant bought a machine for P200,000 and used it for 10 years, the
life span of the equipment. What is the book value of the machine after
5 years of use? Assume a scrap value of P20,000. Use double declining
balance method.

A. P43,648
B. P65,536
C. P59,425
D. P70,923
37. A machine is bought for Php 20,000.00 with a useful life of 10 years.
Other initial charges amounted to Php 2000.00. The book value after
the useful life is Php 5000.00. Using Sum-of-the-Year's Digit method,
determine total depreciation at the end of the fourth year?

A. Php 16127.27
B. Php 10509.09
C. Php 2163.64
D. Php 4212.21
38. A machine, with a useful life of 15 years, is bought for Php
20,000.00. The money is worth 8% and the scrap value is 25% of the
original price of the machine. Using sinking fund method, determine
the accumulated depreciation for the 4th year.

A. Php 281.29
B. Php 2489.37
C. Php 552.44
D. Php 11,997.04
Break-even Analysis
• Profit is 0
• Revenue = Cost
39. Compute for the number of blocks that an ice plant must be able to
sell per month to break even based on the following data:
Cost of electricity per block: P20.00
Tax to be paid per block: P2.00
Real Estate Tax: P3500.00/mo
Salaries and Wages: P25,000/mo
Others: P12,000/mo
Selling Price of Ice: P55.00/block

A. 1228          B. 2921            C. 1412         D. 1129