ENGINEERING

ECONOMY
LEAR NI NG M O DULES

BY: JAN ALEXIS B. MONSALUD

i
 TABLE OF CONTENTS
LESSON 1 Fundamentals of Economy......................................................................................................... 1
LESSON 2 Selections in Present Economy.................................................................................................. 3
LESSON 3 Simple Interest............................................................................................................................ 7
LESSON 4 Compound Interest................................................................................................................... 10
LESSON 5 Annuities................................................................................................................................... 13
LESSON 6 Gradients.................................................................................................................................. 14
LESSON 7 Depreciation and Depletion....................................................................................................... 15
LESSON 8 Economic Studies..................................................................................................................... 16
LESSON 9 Break-Even Analysis................................................................................................................. 17
LESSON 10 Benefit/Cost Ratio..................................................................................................................... 18

LESSON 1 Monopoly – the opposite of perfect competition.

The market is comprised of a single supplier
FUNDAMENTALS OF selling to many buyers.
ECONOMY Oligopoly – when there are few suppliers of a
product or service that the action of one will
Goods or Commodity – any tangible economic result in a similar action by the other suppliers.
product that contributes to human wants.
Necessities – goods and services that are
required to human life, needs, and activities.
SUPPLY AND DEMAND
Luxuries – goods and services that are desired
by humans and will be acquired only after the
necessities have been satisfied. Supply – the amount of product made available
for sale. The supply is directly proportional to
selling price.
Demand – the need, want or desire, willingness
TYPES OF MARKETS and ability to pay for a product. The demand is
inversely proportional to its selling price.

The basic market types are:

Perfect Competition – refers to the market
situation in which any given product or service is
supplied by a very large number of vendors and
there is no restriction against additional vendors
from entering the market.

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ECONOMIC LAWS

LAW OF DIMINISHING RETURNS

LAW OF SUPPLY AND DEMAND
When the use of one of the factors of production
Under conditions of perfect competition, the
is limited, either in increasing cost or by absolute
price at which any given product will be supplied
quantity, a point will be reached beyond which
and purchased is the price that will result in the
an increase in variable factors will result in a
supply and demand being equal.
less than proportionate increase in output.

EXERCISES

The following terms are not discussed in this

lesson and is left to the student to research their
meanings.
1. Economics
2. Engineering Economy
3. Tangible and Intangible Factors
4. Elastic and Inelastic Demand
5. Utility
6. Marginal Revenue and Marginal Cost
7. Physical and Economic Efficiency
Answer the following:
1. List and describe important applications
of engineering economy.

LESSON 2
SELECTIONS IN PRESENT SOLVED PROBLEMS
ECONOMY
EXAMPLE 2.1
There are many times in engineering economy A contractor has a job which should be
that we are to choose between alternative completed in 120 days. At present, he has 90
designs, methods, materials or etc. in the men on the job, and it is estimated that they
present time. This means that the passage of finish the work in 150 days. If of the 90 men, 50
time will not affect the value of money we are are paid P 400 a day, 30 at P 500 a day, and 10
dealing with. For these kinds of problems, at P 600 a day, and if for each day beyond the
Interest (which we will discuss in the next
lesson) is not considered.

iii
original 120 days the contractor must pay P So, the total cost of not hiring additional men is:
20,000 liquidated damages:
Total=3+2.25+0.9+ 0.6=6.75 Million Pesos
a. How many more men should the contractor
add so he can complete the work on time?

b. If additional men, each paid at P 500 a day, is

provided, would the contractor save money by Now, if he elected to hire additional men, the
employing more men and not paying the fine? total cost will be:

Peso
50 men × 400 × 120 days=P2,400,000
man-day
Solution: Peso
( 30+23 ) men ×500 ×120 days=P 3,180,000
man-day
The total amount of work in a jobsite is usually Peso
10 men ×600 ×120 days=P 720,000
expressed as man-days (or man-hours). So, the man-day
total amount of work to be done is:
For a total of:
Work=90 men× 150 days=13500 man-days
Total=2.4+ 3.18+0.72=6.3 Million Pesos

To complete the job on time, the contractor will

need:
Therefore, the contractor will save money by
increasing his workforce.
13500 man-days ÷ 120 days=112.5 ≈ 113 men

EXAMPLE 2.2
So, an additional of 23 men is required.
The monthly demand for a certain machine part
Ans. a. 23 additional men is required to being manufactured by a company is 4,000
complete the job on time. pieces. With a manually operated guillotine, the
unit cutting cost to produce the desired shape of
the machine part is P 30.00 per unit. An
The cost of manpower is: electrically operated hydraulic guillotine was
offered to the company at a price of P 300,000
which will cut by 35% the unit cutting cost.
Peso
50 men × 400 × 150 days=P3,000,000
man-day
Disregarding the cost of money (interest), how
Peso
30 men ×500 ×150 days=P 2,250,000 many months will the company be able to
man-day recover the cost of the new machine if they
Peso decide to buy now?
10 men ×600 ×150 days=P 900,000
man-day
and paying liquidated damages will amount to: Solution:

P For the manually operated guillotine, the total

20,000 ×30 days=P 600,000
day cutting cost is:

iv
 P units P
30 ×4000 =120,000
unit month month
Solution:
And for the electrically operated hydraulic
guillotine: For the first method, using the drill press, we
have:
P units P
( 1−0.35 ) × 30 × 4000 =78,000 Time to drill 6000 holes:
unit month month

So, the monthly savings will be: 6000

=200 hours
30
120,000−78,000=P 42,000 per month
Wage of machinist:
The number of months to recover the initial cost
of the new guillotine is: P 70× 200=P 14,000

300,000 Cost of drill press ¿ P 60,000

=7.14 months
42,000
Total cost ¿ 14,000+60,000=P 74,000
Ans. 7.14 months

EXAMPLE 2.3
For the second method of using the punch
The makings of rivet holes in structural steel machine we have:
members can be done by two methods.
Time to punch 6000 holes:
The first method consists of laying out the
position of the holes in the members and using a
drill press consisting P 60,000. The machinist is 6000
=25 hours
paid P 70 per hour and he can drill 30 holes per 4 × 60
hour.

Wage of machinist:
The second method makes use of a multiple
punch machine costing P 55,000. The punch
operator is paid P 60 an hour and he can punch P 60 ×25=P 1,500
out 4 holes every minute. This method also
requires an expense of P 3.50 per hole to set
Cost of setting machine:
the machine.

a. If all other costs are assumed equal, what is 6000 × P 3.50=P 21,000
the total cost for each machine for 6,000 holes,
assuming the total cost of each machine to be Cost of machine:
charged to these holes?

P 55,000
b. For how many holes will the costs be equal?

v
Total Cost: For steel:

1,500+21,000+55,000=P77 ,500 Weight per piece 2.02 ×0.0081=0.01636 kg

Ans. a. P 74,000 for drill press and P 77,500 for Cost per piece:
punch machine.
Material ¿ 0.01636 ×32.50=P 0.5317
Now let x=¿ the number of holes for equal cost.
45
For the drill machine, the total cost is: Operator ¿ × 40=P 0.50
3600

x 7 45
×70+ 60,000→ x+ 60,000 Overhead ¿ ×50=P 0.625
30 3 3600

And for the punch machine:

Total cost:

x 15 0.5317+ 0.50+0.625=P 1.6567

× 60+3.5 x +55,000 → x +55,000
4 × 60 4

For equal cost, we equate the two equations:

For brass:
7 15 17
x +60,000= x +55,000 x=5,000
3 4 12 Weight per piece 2.02 ×0.0088=0.01778 kg
x=3530 holes
Cost per piece:
Ans. b. 3530 holes for equal cost
Material ¿ 0.01778 ×60=P1.668
EXAMPLE 2.4
30
The volume of the raw material required for a Operator ¿ × 40=P 0.333
certain machine part is 2.02 cubic centimeters. 3,600
The finished volume is 1.05 cu.cm. The time for
machining each piece is 45 seconds for steel 30
and 30 seconds for brass. The cost of steel is P Overhead ×50=P 0.4167
32.5 per kg and the value of scrap is negligible. 3600
The cost of brass is P 60 per kg and the value of
brass scrap is P 25 per kg. The wage of the Less cost of scrap:
operator is P 40 per hour and the overhead cost
of the machine is P 50 per hour. The weight of
steel and brass are 0.0081 and 0.0088 kg per ( 2.02−1.05 ) × 0.0088× 25=P 0.2134
cu.cm respectively. Which material will you
recommend?
Total Cost:

Solution:
1.668+0.333+ 0.4167−0.2134=2.2046

vi
Ans. Use Steel since it’s cheaper. 7. The selling price of a TV set double that
of its net cost. If the TV set is sold to a
customer at a profit of 25% of the net
cost, how much discount was given to
the customer?
EXERCISES 8. The quarrying cost of marble and
granite blocks plus delivery cost to the
processing plant each is P 2,400.00 per
1. A bookstore purchased a best-selling cubic meter. Processing cost of marble
book at P 200.00 per copy. At what into tile is P 200.00 per square meter
price should this book be sold so that by and that of granite into tiles also is P
giving a 20% discount, the profit is 600.00 per square meter.
30%?
9. If marble has a net yield of 40 square
2. A businessman wishes to earn 7% on meters of tiles per cubic meter of block
his capital after payment of taxes. If the and sells at P 400.00 per square meter,
income from an available investment will and granite gives a net yield of 50
be taxed at an average rate of 42%, square meters of tiles per cubic meter of
what minimum rate of return, before block and sells at P 1,000.00 per square
payment of taxes, must the investment meter, considering all other costs to be
offer be justified? the same, which is more profitable and
by how much?
3. A manufacturing firm maintains one
product assembly line to produce signal 10. A 220 V 2 hp motor has an efficiency of
generators. Weekly demand for the 80%. If power cost P 3.00 per kW-hr for
generators is 35 units. The line operates the first 50 kW-hr, P 2.90 per kW-hr for
for 7 hours per day, 5 days per week. the second 50 kW-hr, P 2.80 per kW-hr
What is the maximum production time for the thirds and so on until a minimum
per unit in hours required of the line to of P 2.50 per kW-hr is reached, how
meet the demand? much does it cost to run this motor
continuously for 7 days?
4. Dalisay Corporation's gross margin is
45% of sales. Operating expenses such 11. An electric utility purchases 2,300,000
as sales and administration are 15% of kW-hr per month of electric energy from
sales. Dalisay Corporation is in the 40% the National Power Corporation at P
tax bracket. What percent of sales is 2.00 per kW-hr and sells all this to
their profit after taxes? consumers after deducting distribution
loses of 20%. At what average rate per
5. By selling balut at P 100 per dozen, a kW-hr should this energy be sold to
vendor gains 20%. The cost of the eggs break even if the following are other
rises by 12.5%. If he sells at the same monthly expenses in its operation:
price as before, find his new gain in %.
2.5% of Gross
6. In a certain department store, the Taxes
Revenue
monthly salary of a saleslady is partly
Salaries P 750,000
constant and partly varies as the value
Depreciation P 2,250,000
of her sales for the month. When the
value of her sales for the month is P Interest P 700,000
200,000.00, her salary for the month is Maintenance P 300,000
P 9,000.00. When her monthly sales go Miscellaneous P 200,000
up to P 240,000.00, her monthly salary
goes up to P 10,000.00. What must be
the value of her sales for the month so
that her salary for the month will be P
20,000.00?
LESSON 3

vii
 Determine the ordinary simple interest on P
SIMPLE INTEREST 20,000 for 9 months and 15 days if the rate of
interest is 12%.
Interest – Amount of increase in value due to
passage of time. Also known as the cost of
money.
Principal Amount – Original value. Also called Solution:
the “Present Worth”
Future Worth – Value after the interest is added For ordinary simple interest, we will use 1 year =
to the present worth 360 days and 1 month = 30 days. The total
number of days is

F=P+ I
9 months+ 15 days=9 ×30+15=285 days
I =Pin
Since the interest period is not given, the default
is “per year.” We need to convert the time from
F=P+ PinF=P(1+¿) days to years.

Using the formula for interest we get

where:

I =¿ Interest
P=¿ Principal or Present Worth
I =Pin I =( 20,000 ) ( 0.12 ) ( 285
360 )
I =1,900

F=¿ Future Worth

i = rate of interest (%, default is /year)
n=¿ number of interest period (default Ans. I =P 1,900
is
in years) that has passed

EXACT SIMPLE INTEREST

ORDINARY SIMPLE INTEREST
The exact number of days is used.

The following conversions are used: 1 year = 365 days for ordinary years

1 month = 30 days 1 year = 366 days for leap years

1 year = 12 months
1 year = 360 days (also called a Banker’s Year) A leap year is defined as a year that is divisible
by 4 but not by 100 except including those
divisible by 400.

EXAMPLE 3.1

viii
 322
I =Pin I =50000 ×0.16 × I =7038.25
366

Ans. I =P 7,038.25
EXAMPLE 3.2
Determine the exact simple interest on P 50,000
for the period from January 25 to November 27,
2020 at 16% interest.
DISCOUNT

Discount is the difference between the future

Solution: value and present value of items.
The Rate of Discount is the discount on one
Jan 11-31 = 20 days (excluding Jan 11) unit of principal per unit time

February = 29 (2020 is a leap year) 1

d=1−
1+i
March = 31
d
April = 30 i=
1−d

May = 31 where:

June = 30 d=¿ rate of discount

i=¿ rate of interest
July = 31
EXAMPLE 3.3
August = 31
A man borrows P 70,000 from a bank. The rate
of simple interest is 10%, but the interest is to be
September = 30 deducted from the loan at the time the money Is
borrowed. At the end of one year, he must pay
back P 70,000.
October = 31

What is the actual rate of interest?

Nov 1-27 = 27 (including Nob 27)

Solution:
Total = 322 days

The present value that the man will get is

From simple interest formula we get P=70,000 × (1−0.10 ) P=60,000

ix
The future value to be paid is F=70,000. Ans. i=16.67 %

Since

F=P+ I EXERCISES

We get
1. Determine the ordinary simple interest
on P 700,000 for 8 months and 15 days
I =F−PI =70,000−60,000I =10,000 if the rate of interest is 15%.
Ans. P 74,380
The rate of interest is therefore 2. What will be the future worth of money
after 14 months if a sum of P 100,000 is
I 10,000 invested today at a simple interest rate
I =Pini= i= i=16.67 % of 12% per year?
Pn 60,000 ×1
Ans. P 114,000
Or if we consider the given rate as the rate of 3. A man borrowed P 5,000 from a bank
discount, d=15 %, then and agreed to pay the loan at the end of
9 months. The bank discounted the loan
and gave him P 4,000 in cash.
d 0.15
i= i= i=16.67 % a. What was the rate of discount?
1−d 1−0.15
b. What was the rate of interest?

LESSON 4
COMPOUND INTEREST F=P ( 1+i )n
F
P=
By default, interest rates are compounded. In ( 1+i )n
other words, unless explicitly told that we are to
use simple interest, we assume that the interest
is a compounded interest. where:

Compounded means that the interest rate also P=¿ Principal or “Present Worth”
works on the accrued total interest.
F=¿ Future Worth
tim
Start Interest End i=¿ interest rate
e
1 P Pi P+ Pi=P(1+i) n=¿ interest periods
2 P(1+i) P ( 1+ i ) i P ( 1+ i ) + P ( 1+i ) i=P ( 1+i )2
2 2 2 2
3 P ( 1+ i ) P ( 1+ i ) i P ( 1+ i ) + P ( 1+ i ) i=P (1+i )3 4.1
EXAMPLE
… … … …
n−1 n−1 What is the future worth in 25 years of a
n P ( 1+ i ) P ( 1+ i ) i P ( 1+ i )n commodity which is presently valued at P
100,000 if the cost of money is 15%?
Solution:

x
F=P ( 1+i )n F=100,000 ( 1+ 0.15 )25 Yearly per year.
20% Compounded
F=3,291,895.26 20% per month
Monthly per Month
6% compounded 6% compounded
Ans. F=P 3,291,895.26 quarterly quarterly per year
8% compounded 8% compounded
daily per month daily per month

CASHFLOW DIAGRAMS Nominal Rate – interest rate where the interest

period and the compounding period are
different.
A cashflow diagram is a graphical Effective Rate – interest rate where the interest
representation of cash flow drawn on a time period and compounding period are the same. In
scale. some books, effective rate is only when
For example, a loan of P1,000 at simple interest compounding and interest period are set to one
of 10% will become P2,000 after 10 years, the year.
cashflow diagram can be drawn as follows: Inflation – decrease in buying power of money
From the point of view of the lender: when time passes

ss Income Tax Rate – rate deducted from the

income.
Real Rate – interest rate considering the effects
of inflation

1−( 1−t ) ×i
r= −1
1+ f

From point of view of borrower: where:

r =¿ real rate of interest

t=¿tax rate
i=¿ interest rate or income rate
f =¿ inflation rate

NOMINAL, EFFECTIVE, AND REAL CONVERSION FROM NOMINAL TO

RATES OF INTEREST EFFECTIVE INTEREST RATE
Just convert the interest period to match the
units of the compounding period.
Interest Period – period in which the interest
rate is applied. If not given, the default is per 12% compounded monthly:
year.
Comp , Mth 1 Year Comp . Mth
Compounding Period – period in which the 12 % × =1 %
interest is compounded. If not given, the default Year 12 Months Month
is equal to the interest period. 18% Compounded Daily per Quarter:
Given Rate Complete Comp . D 1Q Comp . Daily
Description 18 % × =0.2 %
12% 12% Compounded Q 90 days Day

xi
CONVERSION OF COMPOUNDING PERIODS
To convert from one compounding period to CONTINUOUS COMPOUNDING
another, the total interest must be the same for a
given unit of time (usually, 1 year).
Continuous compounding is when the
compounding period is infinitely short.
n n
( 1+i 1 ) =( 1+i 2 )
1 2

C∞
r
Y
EXAMPLE 4.2 To get the effective interest per year we get
What is the equivalent interest rate per year of C ∞ 1Y r C∞
the following nominal rates? r × =
Y ∞∞ ∞ ∞
a. 12% compounded monthly
b. 6% compounded quarterly
r ∞ (
c. 1% bi-monthly ( )
1+
∞
= 1+i )
1

From algebra, the left-hand side of the equation

Solution: can be simplified as

a. 12% compounded monthly per year. e r =( 1+i )1

CM 1Y CM Therefore, the effective yearly interest for
12 % × =1 %
Y 12 M M continuous compounding or rate r % is

12 1 CY i=e r −1
( 1+0.01 ) =( 1+i ) i=12.68 %
Y It follows that the Future Worth when using
b. 6% compounded quarterly per year continuous compounding is
n
CQ 1Y CQ F=P ( 1+i )n F=P ( 1+ e r−1 )
6% × =1.5 %
Y 4Q Q
CY F=P e rn
( 1+0.015 )4 =( 1+i )1i=6.14 %
Y

EXAMPLE 4.3
c. 1% compounded bi-monthly per bi-month
How many years are required for P 10,000 to
CBM increase to P 20,000 if invested at 9% per year
1% compounded continuously?
BM
CY
( 1+0.01 )6= (1+i )1i=6.15 % Solution:
Y
F=P e rn20000=10000 e0.09 n2=e0.09 n
ln 2=ln e 0.09nln 2=0.09 nn=7.702 years

Ans. 7.702 years

xii
EXERCISES

Answer the following problems:

1. Find the nominal rate which if converted
quarterly could be used instead of 12%
compounded monthly. What is the
corresponding effective rate (per year)?
Ans. 12.12% CQ/Y, eff. = 12.68% CY/Y
2. A P 200,000 loan was originally made at
8% simple interest for 4 years. At the
end of this period, the loan was
extended for 3 years, without anything
being paid by the borrower, but the new
interest rate was made 10%
compounded semi-annually. How much
should the borrower pay at the end of 7
years?
Ans. P 353,786
3. A man bought a lot worth P 1,000,000 if
paid in cash. On the installment basis,
he paid a down payment of P 200,000;
P 300,000 at the end of the first year; P
400,000 at the end three years and a
final payment at the end of five years.
What was the final payment if the cost of
money is 20%?
Ans. P 792,560
4. A man invested P 100,000 at an interest
rate of 10%. What will be the final
amount of his investment, in terms of
today’s pesos, after five years if inflation
remains the same at the rate of 8% per
year?
Ans. P 109,609

LESSON 5
ANNUITIES ORDINARY ANNUTY

Annuities – a type of cashflow where there are

In the previous lessons we dealt with single
multiple equal payments per period.
payment cashflows. In the following lessons we
will now tackle cashflows with many payments. Ordinary annuity – an annuity that starts at the
end of the first period.

xiii
The basic equation to determine the present First, our we must have a coherent set of units.
worth of an annuity is: So, let’s take the time units to be in months, this
means we need to convert the interest rate into
its equivalent interest rate in terms of months.
( 1+i )n−1
P= A × n
i× ( 1+i ) Convert 12% compounded quarterly per year to
compounded monthly per month.
While the future worth of an annuity is:
CQ 1 Y CQ
12 % × =3 %
n
( 1+ i ) −1 Y 4Q Q
F= A ×
i
CQ 4 12
CM
Homework: Find out how these two equations
( 1+0.03
Q ) (= 1+i
M )
are derived. Hint: It is based on the definition of
the future and present worth of a single payment
combined with the concept of a geometric CM
i=0.99016 %
series. M

And of course, the time will be:

<TODO: Figure of cashflow diagram showing
future and present worth.>
12 M
4Y×
1Y

n=48 M

Now we can proceed to use the equation for the

future worth of an annuity since all are in terms
of months now.

( 1+ i )n−1
F= A ×
EXAMPLE 5.1
i
( 1+ 0.0099016 )48−1
What is the future worth of P 600 deposited at F=600 × F=36642.80
the end of every month for 4 years if the interest
0.0099016
rate is 12% compounded quarterly?

Ans. P 36,642.80

<TODO: cashflow diagram>

Solution:

xiv
 EXAMPLE 5.2
GENERAL ANNUITIES
A man loans P 187,400 from a bank with interest
at 5%. He agrees to pay his obligations by
Annuities need not start at the end of the first paying 8 equal annual payments, the first being
period. We call these general (or shifted) due at the end of 10 years. Find the amount of
annuities. payment he is going to pay per year.
Annuity Due – the annuity starts at the
beginning of the first period.
Deferred Annuity – the annuity starts some
other time after the end of the first period.

<TODO: Cashflow diagram>

<TODO: Figure example of annuity due and
deferred annuity.>

Solution:

The technique to solve this is to separate the

I won’t be introducing new equations in this solution into two parts. First, we get the future
section. Some books will have formulas for worth of the loan at the end of the 9th year (start
annuity due and deferred annuity, but I don’t like of 10th year).
them so let’s skip those. :D
These are the technique to solve general
F '=P ( 1+ i )9 F '=187400 ( 1+ 0.05 )9
annuity problems:
F '=290718.9077
<TODO: show cashflow diagrams>

This will be the present worth of the ordinary

annuity:

P=F ' =290718.9077

Now, using the present worth of an ordinary

annuity, we get:

( 1+i )n−1 i× ( 1+i )n

P= A × n
A=P× n
i× ( 1+i ) ( 1+i ) −1
0.05× ( 1+ 0,05 )8
A=290718.9077× 8
( 1+0.05 ) −1
A=44980.56

<TODO: Cashflow diagram of what happened>

xv
 <TODO: cashflow diagram na tatlo>

Ans. P 44,980.56

PERPETUITY The first two are problems involving annuity

while the third one is a perpetuity. We just need
to find their present worth at the beginning of the
Perpetuity is a type of annuity that does not end
first year.
– perpetual, infinite.

For the first annuity:

A
P=
i
( 1+i )n−1
P 1= A × n
Now, think about why we don’t have a formula i × ( 1+i )
for the future worth of a perpetuity. ( 1+0.15 )6−1
P1=30000 × P =113534.48
6 1
0.15 × ( 1+0.15 )
EXAMPLE 5.3
What amount of money invested at 15% interest
can provide the following scholarships:

For the second annuity, I will get the present

P 30,000 at the end of each year for 6 years worth at the end of year 6 first:

P 40,000 for the next 6 years and

( 1+i )n−1
P' = A × n
P 50,000 each year thereafter. i × ( 1+i )
( 1+ 0.15 )6−1
P' =40000× 6
0.15 × (1+ 0.15 )
P' =151379.3078=F
Solution:
After this, we transfer this to the beginning of the
The cashflow diagram can be separated as first year:
three cashflows as shown:

xvi
 F 151379.3078
P 2= P=
n 2 BONDS
( 1+i ) ( 1+ 0.15 )6
P2=65445.45219

For the third cashflow, we get the worth of the

perpetuity at the end of the 12th year:

EXERCISES
A 50000 '
P = P' =
'
P =333333.333=F
i 0.15
1. The first problem is already in the lesson
text – find out how the equations in this
The transferring to the beginning of the first year lesson are derived.
we get:
2. Find out about the following terms, why
they called what they are called, and
F 333333.333 relate them to the equations in this
P 3= P=
n 3 P3=62302.3834 lesson:
( 1+i ) ( 1+ 0.15 )12
a. Uniform series compound factor

Now that all cashflows are in the same point in b. Uniform series present worth
time, we can now add them to get: factor
c. Sinking fund factor
P=P1 + P2 + P3 d. Capital recovery factor
P=113534.48 +65445.45219+62302.3834
P=241282.32 3.

Ans. P 241,282.32

LESSON 6
GRADIENTS
EXAMPLE 6.1

ARITHMETIC GRADIENT

A type of cashflows where the amount of

payment increases (or decreases) by a fixed
amount per period is called an arithmetic
gradient series.

<TODO: Cashflow example of an arithmetic

gradient>

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GEOMETRIC GRADIENT EXERCISES

A type of cashflow where the increase (or 1. The

decrease) in payment per period is a constant
percentage of the previous amount is called a 2.
geometric gradient series.

EXAMPLE 6.2

LESSON 7
DEPRECIATION AND SUM-OF-YEAR’S-DIGIT METHOD
DEPLETION

Depreciation – the decrease in value of a good

or commodity due to normal use and passage of
time
DECLINING BALANCE METHOD
Economic Life – time span in which the item is
useful
In this method, the depreciation per period is a
Book Value – the value of the item for a given constant percentage of the previous book value.
time
First Cost – the cost of acquiring an item
Salvage Value – the amount in which an item
can be sold after its economic life
DOUBLE DECLINING BALANCE
METHOD

STRAIGHT LINE METHOD

A type of depreciation method where the

depreciation per period is constant which results
in the book value being directly proportional on
SERVICE-OUTPUT METHOD
time.

Instead of the passage of time, the number of

units of service or output is used as the
parameter to determine the book value.

SINKING FUND METHOD

EXERCISES

1. The

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 2.

LESSON 8
ECONOMIC STUDIES ANNUAL COST METHOD

Economic studies are used to either

1. analyze if a single investment is
attractive or
2. when given multiple alternative FUTURE WORTH METHOD
investments, choose the most
economically sensible investment

RATE OF RETURN
PAYBACK/PAYOUT PERIOD
METHOD

PRESENT COST METHOD

EXERCISES

1. The
2.

LESSON 9
BREAK-EVEN ANALYSIS

TYPES OF COST
BREAK-EVEN POINT
Fixed Costs –
Variable Costs –
Incremental Costs –
Marginal Cost –
Sunk Cost –

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 2.
EXERCISES

1. The
LESSON 10
BENEFIT/COST RATIO

The benefit/cost ratio is the most used metric by

government agencies for deciding on the
desirability of public project.

benefits−disbenefits
B/C=
costs

Advantages to the client (the public) are

quantified in terms of monetary value and is
referred to as benefits. Disadvantages on the
other hand is known as disbenefits.

A B/C ratio greater the 1 tells us that the project

is justified economically.

EXAMPLE 11.1

EXERCISES

1. The
2.
3.

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