SOLVED PROBLEMS IN

ENGINEERING
ECONONOMY

Charlie A. Marquez, PIE

2016
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

ENGINEERING ECONOMY – the analysis and evaluation of the factors that will affect
the economic success of engineering projects to the end that a recommendation can be
made which will ensure the best use of capital.

FORMULAS IN ENGINEERING ECONOMY

SIMPLE INTEREST – the interest on a loan that is based only on the principal. Usually
used for short-term loans where the period is measured in days rather than years.

I = Pni (1)

F = P + I = P + Pni

F = P(1+ni) (2)

where: I = interest

P = principal or present worth

n = number of interest periods

i = rate of interest per interest period

F = accumulated amount or future worth

TYPES OF SIMPLE INTEREST

ORDINARY SIMPLE INTEREST - interest is computed on the basis of 12 months of 30 days

each which is equivalent to 360 days a year. In this case, the value of n that is used in the
preceding formulas may be computed as:

where d is the number of days the principal was invested

EXACT SIMPLE INTEREST – interest is computed based on the exact number of days in a
given year which is 365 days for a normal year and 366 days during a leap year (which occurs
every 4 years, or if it is a century year, it must be divided by 400). Note that during leap years,
February has 29 days and 28 days only during a normal year. In this case, the value of n that is
used in the preceding formulas may be computed as:

for a normal year

for a leap year

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

DISCOUNT – discount in simple terms is the interest deducted in advance. It is the

difference between the amount a borrower receives in cash (present worth) and the amount he
pays in the future (future worth).

Discount = Future Worth – Present Worth

D=F–P (3)

Rate of discount is the discount on one unit of principal for one unit of time.

d = 1 – (1 + i)-1 (4)

i= (5)

Where: d = rate of discount

i = rate of interest for the same period

COMPOUND INTEREST – interest which is based on the principal plus the previous
accumulated interest. It may also be defined as ‘interest on top of interest.” This is usually
used in commercial practice especially for longer periods.

CASH FLOW DIAGRAMS – a graphical representation of cash flows drawn on a time scale.

↑ = receipts (positive cash flow or cash inflow)

↓ = disbursements (negative cash flow or cash outflow) F

F = P(1+i)n (6) 0 • • • •
1 2 3 n

P = F(1+i)-n (7) P

Where: F = future amount of money

P = present worth or principal

i = rate of interest per interest period

n = number of interest periods

(1+i)n = single payment compound amount factor

(1+i)-n = single payment present worth factor

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

RATE OF INTEREST – the cost of borrowing money or the amount earned by a unit
principal per unit time.

TYPES OF RATES OF INTEREST

NOMINAL RATE OF INTEREST – is the basic annual rate of interest. It specifies the rate of
interest and the number of interest periods in one year.

i= (8)

Where: i = rate of interest per interest period

r = nominal rate of interest

m = number of compounding periods per year

EFFECTIVE RATE OF INTEREST – is the actual or the exact rate of interest earned on the
principal during a one-year period.

ERi = (1+i)m – 1 (9)

Where: ERi = effective rate of interest

CONTINUOUS COMPOUNDING – based on the assumption that cash payments occur once
per year but compounding is continuous throughout the year.
nm
F=P
xnm

Let x= F=P

But =e

Therefore, F=P (10)

EQUATION OF VALUE – this is obtained by setting the sum of the values on a certain
comparison or focal date of one set of obligations to the sum of the values on the same
date of another set of obligations.
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

ANNUITIES – a series of equal payments occurring at equal interval of time.

TYPES OF ANNUITIES
ORDINARY ANNUITY – this type of annuity is one where the payments are made at the
end of each period beginning from the first period.
P0 Fn
1 2 3..
0
• • • • • n

A A A A

Finding F when A is given:

F = A{[(1+i)n – 1] / i} (11)

Finding P when A is given:

P = A{[1-(1+i)-n ] / i} (12)

Where: F = future worth of an annuity

A = a series of periodic, equal amounts of money

P = present worth of an annuity

i = interest rate per interest period

n = number of interest periods

DEFERED ANNUITY – this type of annuity is one where the first payment is made
several periods after the beginning of the annuity.
P0 Fn
1 2 3 4 5…
• • • • • • • n
0

A A A A A

Finding F when A is given:

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

F = A{[(1+i)n – 1] / i}(1+i)n (13)

Finding P when A is given:

P = A{[1-(1+i)-n ] / i}(1+i)-n (14)

PERPETUITY – is an annuity wherein the payments continue indefinitely.

P
n ∞
• • •

P = A{[1-(1+i)-n ] / i} = A{[1-(1+i)- ∞ ] / i}

P= (15)

CAPITALIZED COST – this is one of the most important applications of perpetuity.

The capitalized cost of any property is the sum of its first cost and the present worth of all
costs for replacement, operation, and maintenance for a long period or forever.

Case 1: No Replacement, maintenance and/or operation every period.

CC = FC + P (16)

Where: CC = capitalized cost

FC = first cost

P = present worth of perpetual operation and maintenance

Case 2: Replacement only, no operation and maintenance

CC = FC + X (17)

X = S / (1+i)k-1 (18)

Where: X = present worth of perpetual replacement

S = amount needed to replace the property every k period

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

k = periodic replacement

GRADIENT – A series of disbursements or receipts that increases or decreases in each

succeeding period by a constant amount

P PA PG

P = PA + PG

P = A(P/A, i%,n) + G(P/G, i%, n) (19)

PG = G(P/G, i%,n) = [(1+i)n-1/i]-n}(1+i)-n

Where: PA = present worth of an annuity

PG = present worth of gradient

CAPITAL FINANCING WITH BONDS

BONDS – a financial security note issued by businesses or corporations and by the

government as a means of borrowing long-term fund. It may also be defined as a long-term
note issued by the lender to the borrower stipulating the terms of repayment and other
conditions.

BOND VALUE – the value of a bond is the present worth of all future amounts that
are expected to be received through ownership of the bond.

METHODS OF BOND RETIREMENT

1. The corporation may issue another set of bonds equal to the amount of
bonds due for redemption.

2. The corporation may set up a sinking fund into which periodic deposits
of equal amounts are made. The accumulated amount in the sinking fund
is equal to the amount needed to retire the bonds at the time they are due.
C
F Fr Fr Fr Fr
0 1 2 n-1 0
n
1 2 3 n
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

A A A A P
A = F/(F/A, i%, n) (20)

P = Fr [(1-(1+i)-n)/i] + C(1+i)-n (21)

Where: A = periodic deposit into the sinking fund

F = amount needed to retire the bonds, face / par value

C = redemption price (often equal to F)

r = bond rate

i = investment rate or yield per period

P = purchase price of the bond / value of the bond n periods before redemption.

DEPRECIATION – the decrease in the value of a physical property with the passage of
time.

TYPES OF DEPRECIATION

1. Physical depreciation – this is due to the reduction of the physical ability of an

equipment or asset to produce results.

2. Functional depreciation – this is due to the lessening in the demand for the
function which the property was designed to render.

METHODS OF DEPRECIATION

1. Straight Line Method – this method assumes that the loss in the value is
directly proportional to the age of the equipment or asset.

d= (22)

Dn = (n){ (23)

Cn = Co – Dn (24)

Where: d = annual depreciation charge

Co = original cost of the property

CL = scrap value / salvage value

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

L = useful life of the property

Dn = accumulated depreciation up to n years.

Cn = book value at the end of n years.

2. Sinking Fund Method – in this method, it is assumed that a sinking fund is

established in which funds will accumulate for replacement purposes.

d = (Co – CL)(i) / (1+i)L-1 (25)

Dn = d(1+i)n-1 (26)

Cn = Co – Dn (27)

Note: all parameter definitions are the same with SLM.

3. Declining Balance Method – in this method, it is assumed that the annual cost
of depreciation is a fixed percentage of the book value at the beginning of the
year. This method is also called the constant percentage method or the
Matheson Formula.

L
k=1- or k=1- (28)

dn = Co(1-k)n-1(k) (29)

Cn = Co(1-k)n (30)

Cn = Co(CL/Co)n/L (31)

Where: k = decline rate, whose value must always be < 1 and the salvage
value must not be zero.

4. Double Declining Balance Method – this method is very similar to DBM but
the decline rate, k, is replaced by 2/L.

dn = Co[1-(2/L)]n-1(2/L) (32)

Cn = Co[1-(2/L)]n (33)

5. SUM-OF-THE-YEARS’ DIGIT METHOD (SYD)

dn = (Co – CL)(reverse digit/ digits) (34)

 digits = (35)
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

6. SERVICE-OUTPUT METHOD – this method assumes that the total

depreciation that has taken place is directly proportional to the quantity of
output of the property up to that time.

dn = (Co-CL / T)(Qn) (36)

where: T = total units of output up to the end of life

Qn = total number of units of output during the nth year

DEPLETION – depletion cost is the reduction of the value of a certain natural

resource such as mines, oil, quarries, etc. due to the gradual extraction of its contents.

METHODS OF COMPUTING DEPLETION CHARGE

1. UNIT OR FACTOR METHOD – this method is dependent on the initial cost of the
property and the number of units in the property.

Depletion cost in any year = (units sold during the year)

(37)

2. PERCENTAGE OR DEPLETION ALLOWANCE METHOD

Depletion charge = Fixed percentage of Gross Income (38)

Depletion charge = 50% of the Net Taxable Income (39)

INVESTMENT OF CAPITAL
METHODS OF MAKING ECONOMY STUDIES

1. RATE OF RETURN (ROR) METHOD – this method is a measure of the

effectiveness of an investment of capital. When this method is used, it is necessary to
decide whether the computed rate of return is sufficient to justify the investment. If
the computer ROR is RORreq’d, the proposed investment is justified.

Conditions:

1. A single investment of capital is made at the beginning of the first year.

2. The capital invested is the total amount of capital investment required to finance
the project.

3. There is identical revenue and cost date for each year.

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

ROR = (40)

2. ANNUAL WORTH METHOD – in this method, interest on the original investment is

included as a cost. If the excess if annual cash inflows over annual cash outflows is
0, the proposed investment is justified. Same conditions apply as the ROR
method.

3. PRESENT WORTH (PW) METHOD – this method is based on the concept of

present worth. If the present worth of net cash flows is than 0, the proposed
project is economically justified.

4. PAYBACK PERIOD METHOD – this is the length of time required to recover the
first cost of an investment from the net cash flow.

Payback Period (years) = (41)

COMPARING ALTERNATIVES -
METHODS OF COMPARING ALTERNATIVES

1. ROR ON ADDITIONAL INVESTMENT – in this method, if the ROR on additional

investment is than the ROR required, then the alternative requiring an additional
investment is more economical and therefore, should be chosen.

ROR on additional investment = (42)

2. ANNUAL COST (AC) METHOD – to use this method, the annual cost of the
alternatives including interest on capital is determined. The alternative with the least
annual cost is chosen. This applies only to alternatives which has a uniform cost data
for each year and a single investment of capital at the beginning of the project.

3. EQUIVALENT UNIFORM ANNUAL COST (EUAC) METHOD – in this method,

all cash flows must be converted to an equivalent uniform annual cost. The
alternative with the least EUAC should be selected. This method is flexible and can
be used for any type of alternative selection problems.

4. PRESENT WORTH COST (PWC) METHOD – in this method, determine the

present worth of the net cash outflows for each alternative for the same period of
time. The alternative with the least PW should be selected.
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

5. PAYBACK PERIOD METHOD – in this method, the payback period for each
alternative is computed. The alternative with the shortest payback period is adopted.

BREAK-EVEN ANALYSIS – this is used in situations where the cost of two or more
alternatives may be affected by a common variable.

BREAK-EVEN POINT – is the value of the variable for which the costs of the
alternatives will be equal.

C1 = f1(x) and C2 = f2(x) (43)

To Break-Even,

Income = fixed costs + variables cost (x) (44)

Income = fixed costs + variables cost (x) + profit/loss (45)

Income = fixed costs + variables cost (x) + dividends + profit/loss (46)

Where: C1 = certain specified total cost applicable to alternative 1

C2 = certain specified total cost applicable to alternative 2

x = a common independent variable affecting alternatives 1 & 2

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SIMPLE INTEREST AND DISCOUNT

1. Determine the ordinary simple interest on P10,000 for 9 months and 15 days if
the rate of interest is 6%.
a. P475 c. P467.21
b. P468 d.NOTA

SOLUTION:

I = Pni

Solving for the number of days:

n = (9 X 30) + 15 = 285 days

I = (10,000)( )(0.06) = P475

2. Determine the exact simple interest on P20,000 for the period from January 15 to
November 15, 2012 if the rate of simple interest is 5%.

a. P847.22 c.P833.33
b. P835.16 d.NOTA

SOLUTION:

I = Pni

Solving for the number of days:

January 15-31 = 16 days

February = 29 (2012 is a leap year)

March = 31

April = 30

May = 31
June = 30
July = 31
August = 31
September = 30
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

October = 31
November 1-15 = 15 days
Total n = 305 days
I = Pni

I = (20,000)( )(0.05) = P833.33

3. You loan from a bank the amount of P100,000 with a rate of simple interest of
20% but the interest was deducted from the loan at the time the money was
borrowed. If at the end of 1 year, you have to pay the full amount of P100,000,
what is the actual rate of interest?

a. P80,000 c. i = 20%
b. i = 25% d. NOTA

SOLUTION:

Interest = (0.20)(100,000) = 20,000

Amt. received = 100,000 - 20,000 = 80,000

I = Pni

20,000 = 80,000(1)i

i = 25%

ANOTHER SOLUTION:

F=P(1+ni)

100,000 = 80,000[1+(1)i]

1.25 – 1 = i

i = 0.25 = 25%

4. Mr. Dee Jay borrowed money from the bank and he received the amount of
P18,420 and promised to repay P20,000 at the end of 10 months. Determine the
rate of simple interest.

a. i = 10.29% c. i = 8.58%
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

b. P = 1,580 d. NOTA

SOLUTION:

F=P(1+ni)

20,000 = 18,420[1+( )i]

i = 10.29%

5. If P50,000 is borrowed for 90 days at 8% per annum simple interest. How much
will be due at the end of 90 days?

a. P50,986 c. P51,000
b. i = 8% d. NOTA
SOLUTION:

F = P(1+ni)

F = 50,000[1+ (0.08)]

F = P51,000

6. On his recent birthday on April 18, 2012, Cai was given by his mother a certain
amount of money as birthday present. He decided to invest the said amount on
a 12% exact simple interest. If the investment will mature on Christmas day at
an amount of P15,000, how much did Cai receive from his mother on his
birthday?

a. P13,859.37 c. P15,000
b. P13,841.47 d. NOTA

SOLUTION:

Solving for the number of days, n

April 18-30 = 12 days

May = 31

June = 30
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

July = 31

August = 31

September = 30

October = 31

November = 30

December 1-25= 25

Total = 251 days

F = P(1+ni)

15,000 = P[1+ (0.12)]

P = P13,859.37

7. Carle borrowed money from Cy with simple interest of 12%. Find the present
worth of P50,000 which is due at the end of 6 months.

a. P74,691.18 c. P47,169.81
b. P50,000 d. NOTA

SOLUTION:

F = P(1+ni)

50,000 = P[1+(6/12)(0.12)]

P = 47,169.81

8. A loan of P5,000 is made for a period of 15 months at a simple interest rate of

15%. What future amount is due at the end of the loan period?

a. P5,750.00 c. P5,600.00
b. P5,937.50 d. NOTA

SOLUTION:

F = P(1+ni)
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

F = 5,000[1+(15/12)(0.15)]

F = P5,937.50

9. Ciel borrowed P20,000 from the bank and promised to pay the amount after one
year. He received the amount of P19,200 after the bank collected an advance
interest of P800. What was the rate of discount and the rate of interest that the
bank collected in advance?

a. d=4%; i=4.17% c. P19,200; P20,000

b. i=4%; d=4.17 d. NOTA

SOLUTION:

Solving for the rate of discount,

d = Interest (I) / Future Amount

d = 800 / 20,000 = 4%

Solving for the rate of interest,

i=

i=

i = 4.17%

10. You pawned your PSP for P5,000 and agreed to pay the amount at the end of 9
months. The pawnshop gave you P4,000 cash after deducting the interest in
advance. What was the rate of discount?

a. i = 20% c. d = 20%
b. d = 25% d. NOTA

SOLUTION:

d = Interest (I) / Future Amount

d=
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

d = 20%

11. What was the rate of interest for the problem in # 10?

a. i=20% c. d=25%
b. i=25% d. NOTA

SOLUTION:

i=

i=

i = 25%

COMPOUND INTEREST / EQUATION OF VALUE

12. If the sum of P15,000 is deposited in an account earning interest at the rate of
8% compounded quarterly, what will it become at the end of 5 years?

a. P22,039.92 c. P22,289.21
b. P32,866.85 d. NOTA

SOLUTION:

F = P(1+i)n

F = 15,000[1+(0.08/4)]4*5

F = P22,289.21

13. An employee has a promissory note, due 5 years hence, whose maturity value is
P70,000. If the rate of interest is 12% compounded semi-annually, what is the
value of this note now?

a. P39,720.82 c. P96,675.79
b. P39,087.63 d. NOTA

SOLUTION:
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

P = F(1+i)-n

P = 70,000[1+(0.12/2)]-2*5

P = P39,087.63

14. IEdeas is planning to expand its operations and plans to purchase a parcel of
land on which to construct a building for their review center, which they will need
5 years hence. The current costs are: land: P2M; building: P3.5M. Since these
are not needed immediately, the company plans to defer the purchase of the land
and the construction of the building until they are needed. If the value of the land
and the cost of the building are expected to appreciate at the rates of 10% and
8% per annum, respectively. What will be the total cost of the investment after 5
years?

a. P8,580,275.74 c. P8,363,668.27
b. P7,244,668.37 d. NOTA

SOLUTION:

Solving for the future worth of the land,

F = P(1+i)n

F = 2,000,000(1.10)5 = 3,221,020

Solving for the future worth of the building,

F = P(1+i)n

F = 3,500,000(1.08)5 = 5,142,648.27

Total cost of investment after 5 years = 3,221,020 + 5,142,648.27 =

Total cost of investment after 5 years = P8,363,668.27

15. A debt of P150,000 was paid for as follows: P40,000 at the end of 3months,
P50,000 at the end of 12 months, P30,000 at the end of 15 months, and a final
payment F at the end of 21 months. If the rate of interest is 12% compounded
quarterly, find the final payment F.

a. P15,774.56 c. P12,359.52
b. P157,745.58 d. NOTA

150,000
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SOLUTION:
3 12 15 21
0
40,000 30,000
50,000 F
Using “21” as focal point

i = r / m = 0.12/4 = 0.03/quarter

F + 30,000(1.03)2 + 50,000(1.03)3 + 40,000(1.03)6 – 150,000(1.03)7

F = 15,774.56

16. Adriste Philippines, Inc. expects to retire an existing machine at the end of 2013
and will replace it with a new machine for the same task at an estimated cost of
P600,000. The old machine can be sold for P50,000 when it is replaced. To
provide for replacement, the company intends to deposit the following amounts in
an account earning interest at 8% compounded quarterly:
P200,000 at the end of 2010

P150,000 at the end of 2011

P100,000 at the end of 2012

What additional amount is needed at the end of 2013 to purchase the new machine?

a. P15,774.56 c. P12,359.52
b. P35,952.12 d. NOTA

600,000-50,000
SOLUTION:
2010 2011 2012

i = 0.08/4 = 0.02/quarter 150,000 100,000

200,000
F
F + 100,000(1.02)4 + 150,000(1.02)8 + 200,000(1.02)12 = 600,000 – 50,000

F = P12,539.52

17. If P500,000 is invested at 8% interest compounded quarterly, how many years

will it take for this amount to accumulate to P900,000?

a. 29.68 c. 14.84
b. 7.42 d. NOTA

SOLUTION:
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

F = P(1+i)n

900,000 = 500,000[1+(0.08/2)]n

1.8 = 1.02n

n = ln 1.8 / ln 1.02

n = 29.68 quarters / 4

n = 7.42 years

18. Charlie wishes to bequeath his youngest son P200,000 ten years from now.
What amount should he invest now if it will earn interest of 6% compounded
annually during the first 5 years and 8% compounded quarterly during the next 5
years?

a. P200,000 c. P100,576.67
b. P134,594.27 d. NOTA

SOLUTION:

P = F (1+i)-n

P = 200,000[1+(0.08/4)]-5*4 (1.06)-5

P = P100,576.67

19. Find the nominal rate compounded monthly which is equivalent to 16%
compounded quarterly. What is the corresponding effective rate?

a. r=15.79% ; Eri = 16.98% c. r=16.98% ; Eri=15.97%

b. i=15.97% ; r=16.98% d. NOTA

SOLUTION:

Note: For two nominal rates to be equal, their corresponding effective rates must
also be equal.

Nominal Rate Effective Rate

(1 + )12 – 1 = (1 + )4 – 1
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

1+ = 1.04(4/12)

r = 15.79% compounded quarterly

Solving for ERi,

ERi = (1 + )4 – 1 = 16.98%

20. What payment X 10 years from now is equivalent to a payment of P500,000 7

years from now, if interest rate is 12% compounded semi-annually?

a. P221,150.05 c. P709,259.56
b. P155,902.36 d. NOTA

7 10
SOLUTION:

500,000
X

NOTE: For two future amounts to be equal, their corresponding present values
must also be equal.

500,000[1+(0.12/2)]-2*7 = X[1+(0.12/2)]-2*10

X = P709,259.56

21. At a certain interest rate compounded annually, P100,000 will become P450,000
in 15 years. What is the amount at the end of 10 years?

a. P272,638.68 c. P100,000.00
b. P450,000.00 d. NOTA

F10 450,000
SOLUTION:
0

15
F = P(1+i)n
100,000
15
450,000 = 100,000(1+i)

450,000/100,000 = (1+i)15
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

i = 1 – (4.5)1/15

i = 10.55%

solving for F10,

F10 = 100,000(1.1055)10

F10 = P272,638.68

22. Compare the accumulated values at the end of 5 years if P100,000 is invested at
the rate of 12% per year compounded annually, semi-annually, quarterly,
monthly, daily, and continuously. Which gives the highest return interest.

a. ANNUALLY c. CONTINUOUSLY
b. DAILY d. NOTA

a) Fannual = 100,000(1.12)5 = P176,234.17

b) Fsemi-annual = 100,000(1.06)5*2 = P179,084.77

c) Fquarterly = 100,000(1.03)5*4 = P180,611.24

d) Fmonthly = 100,000(1.01)5*12 = P181,669.67

e) Fdaily = 100,000[1+(0.12/365)]5*365 = P182,193.91

f) Fcontinuously = 100,000e0.12*5 = P182,211.88

ANNUITIES

23. In preparation for the college education of his son, DJ plans to deposit equal
amounts money for five consecutive years starting one year from now. If he
wants his son to be able to withdraw P1,000,000 ten years from now at 8%
interest compounded annually, what is the amount of each deposit?

a. P190,651.28 c. P116,010.09
b. P161,010.09 d. NOTA

F10 = 1M
SOLUTION:
0 1 5

10
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

A A A A A
Using today as focal point, take the present worth of the annuity…

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

A{[1-(1.08)-5]/0.08} = 1,000,000(1.08)-10

A = P116,010

Using year “5” as focal point

A{[(1.08)5 – 1]/0.08} = 1,000,000(1.08)-5

A = P116,010

24. A farmer bought a farm and he paid P100,000 cash and agreed to pay P20,000
at the end of each 6 months for 5 years. He failed to pay the first 5 payments. At
the end of 3 years, he is required to pay the seller the entire debt consisting of
his accumulated and future liabilities, otherwise the farm will be foreclosed. What
must he pay if money is worth 14% compounded semi-annually?

a. P200,863.70 c. P68,661.62
b. P197,018.73 d. NOTA

SOLUTION:

Let X – amount the farmer must pay to settle his entire indebtedness.

X = F5 + P5

X = 20,000[(1.075 – 1)/0.07] + 20,000[1-(1.07)-5/0.07]

X = 115,014.7802 + 82,003.9487

X = P197,018.7289

25. IEDeas constructed its building 6 years ago financed by a 10-year bank loan of
P10M with 12% annual interest rate compounded monthly. The company has
paid all the monthly instalments for the past 6 years. However, to reduce the
amount of instalment payments, it was decided to refinance the balance of the
loan through an insurance company. The new loan is for 10 years with interest
at 8% compounded quarterly. A service charge of 5% will be added to the loan
amount. Determine the balance on the original mortgage and the amount of the
quarterly payments to the insurance company.
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

a. P209,119.55; P5,448,161.75 c. P5,448,161,75

b. P5,448,161.75; P209,119.55 d. NOTA

10M
SOLUTION:
1 120
0

A A A A A A

Solving for the balance on the original loan,

10M = A (P/A,12%,120)

A = P143,470.9938

Balance on the original loan = present worth of all future payments from period
73 to period 120.

P72 = 143,470.9939[(1-1.01-48)/0.1)] = P5,448,161.7

New Loan = P5,448,161.7 + service charge

New loan = P5,448,161.7 + (0.05 X P5,448,161.7) = P5,720,569.84

Solving for the quarterly payments to the Insurance Company,

P5,720,569.84
SOLUTION:
1 40
0

A A A A A A

Solving for the quarterly payments to the Insurance Company,

5,720,569.84 = A(P/A,2%,40)

A = P209,119.5496
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

26. Bright Futures Inc. will make the following disbursements for their retiring
employees:

P500,000 on Dec. 31, 2011

P1,000,000 on Dec. 31, 2012

P2,000,000 on Dec. 31, 2013

To accumulate these sums, a sinking fund was established by making equal

year-end deposits starting Dec. 31, 2006 up to the end of 2013. If the fund earns
8% compounded annually, what is the required amount of the annual deposits?

a. P344,395.77 c. P106,366
b. P3,633,200 d. NOTA

2M
1M
SOLUTION: 500k
2006
0 2013

A A A A A =? A

Using “2013” as focal point

A[(1.088-1)/0.08] = 2M + 1M(1.08)1 + 500,000(1.08)2

A = 3,363,200 / 10.6366 = P344,395.7656

27. Ceila invests P100,000 for the college education of her 3-year old son, Ciel. If
the fund earns 12% effective interest rate, how much will Ciel get each year
starting from his 18th to his 22nd birthday?

a. P324,486.82 c. P324,483.37
b. P135,574.26 d. NOTA

SOLUTION:

Using “22” as focal point

A[(1.125-1)/0.12] = 100,000(1.12)19
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

A = P135,574.2616

28. Carle buys a piece of property for P100,000 down payment and 10 deferred
semi-annual payments of P10,000 each starting three years from now. What is
the present value of the investment if the rate of interest is 8% compounded
semi-annually?

a. P166,665.65 c. P60,165.45
b. P691,665.56 d. NOTA

SOLUTION:

P = 100,000 + 10,000[(1-1.04-10)/0.04][1.04-5]

P = P166,665.65

29. Sir DJ spent the following amounts for the maintenance of the machine he
bought: P4,000 each year for the 1st five years, P6,000 each year for the next five
years. In addition, he spent P15,000 for overhauling at the end of the 4 th year
and another P20,000 for overhauling at the end of the 8 th year. If money is worth
6% compounded annually, what was the equivalent uniform annual cost for the
10-year period?

a. P8,174.54 c. P60,165.45
b. P16,849.46 d. NOTA

SOLUTION:

Solve for the present worth of all future payments,

P = 4,000[(1-1.06-5)/0.06] + 6,000[(1-1.06-5)/0.06][1.06-5] + 15,000(1.06)-4 +

20,000(1.06)-8

P = P60,165.4471

Solving for the equivalent uniform annual cost,

A = (60,165.4471)(0.06) / (1-1.06-10)

A = P8,174.5421

30. UST Hospital purchased a CT Scan machine on the basis of guaranteed

performance. However, initial tests indicate that the operating cost will be
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

P5,000 more per year than guaranteed. If the expected life of the machine is 20
years and money is worth 15%, what deduction from the purchase price would
compensate UST for the additional operating cost?

a. P13,269.99 c. P31,296.66
b. P84,590.92 d. NOTA

SOLUTION:

P = 5,000[(1-1.15-20)/0.15]

P = P31,296.6574

31. A brand new car can be purchased with a down payment of P150,000 and equal
instalments of P18,000 each paid at the end of every month for the next 36
months. If money is worth 12% compounded monthly, determine the equivalent
cash price of the car.
a. P150,000 c. 168,000
b. P691,935.09 d. NOTA

SOLUTION:

Cash Price = 150,000 + 18,000[(1-1.01-36)/0.01]

Cash Price = P691,935.0907

32. A brand new house and lot costs P5M if paid in cash. On the instalment plan,
the buyer should pay 30% down and 20 quarterly instalments. The first payment
due at the end of the 1 st year. If money is worth 12% compounded quarterly,
determine the amount of quarterly instalments.

a. P257,069.41 c. P3.5M
b. P4.85M d. NOTA

SOLUTION:

5M = 1.5M + A[(1-1.03-20)/0.03][1.03-3]

A = P257,069.41

33. You have a building for rent and you were offered two options by a prospective
client:
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

A) P1.2M a year for 6 years, the rent being paid at the beginning of each year.

B) P300,000 for the 1 st year, P400,000 for the 2 nd year, P500,000 for the 3rd year,
and P600,000 a year for the next three years. All rentals are paid at the
beginning of each year.

If money is worth 12%, which is the better offer?

a. OFFER A c. SAME OFFER

b. OFFER B d. NOTA

SOLUTION:

OFFER A:

POffer A = 1.2M + 1.2M[(1-1.12-5)/0.12]

POffer A = P5,525,731.443

OFFER B:

POffer B = 300,000 + 400,000(1.12-1) + 500,000(1.12-2) +

600,000[(1-1.12-3)/0.12](1.12-2)

POffer B = P2,204,574.91

Therefore, choose Offer A!

PERPETUITY & CAPITALIZED COST

34. It costs P500,000 at the end of each year to maintain a section of Kennon Road
in Baguio City. If money is worth 10%, how much would it pay to spend
immediately to reduce the annual cost to P100,000?
a. P4M c. P1M
b. P5M d. NOTA

SOLUTION:

Savings = P500,000-100,000 = 400,000

P = A / I = 400,000 / 0.10

P = P4M
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

35. For its maintenance, a bridge in NLEX requires P250,000 at the end of 3 years
and annually thereafter. If money is worth 8%, determine the capitalized cost of
all future maintenance.
a. P214,334.71 c. P3,125,000
b. P2,679,183,81 d. NOTA

SOLUTION:

Capitalized Cost = (250,000/0.08)(1.08)-2

Capitalized Cost = PP2,679,183.81

36. API installed a new steam boiler at a total cost of P1.5M and is estimated to have
a useful life of 10 years. It is estimated to have a scrap value of P50,000 at the
end of its life. If interest is 8% compounded annually, determine its capitalized
cost.
a.P1.5M c. P1.45M
b. P2,751,159.48 d. NOTA

SOLUTION:

Capitalized Cost = FC + X (present worth of perpetual replacements)

Solving for X

X = (FC – CL)/[(1+i)k-1]

X = (1.5M – 50,000) / [(1.08)10-1] = P1,251,159.48

Capitalized Cost = 1.5M + 1,251,159.48

Capitalized Cost = P2,751,159.48

37. The capitalized cost of a certain piece of equipment was found to be P1.42M.
The rate of interest is 12% with a salvage value of P100,000 at the end of its
useful life of 10 years. Assuming that the cost of perpetual replacement remains
constant, determine the original cost of the equipment.

a. P994,973.76 c. 1.42M
b. P47,487.89 d. NOTA

SOLUTION:

CC = FC + X
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

X = (FC – CL)/[(1+i)k-1]

1.42M = FC + (FC – 100,000) / (1.1210-1)

1.42M = FC + 0.4749FC – 47,486.8

FC = P994,973.76

38. DJ & Charlie Foundation wishes to set-up a trust fund to provide the following
expenditures: P15M for the lot and the building and P5M for the initial equipment
of a Methods and Ergonomics Laboratory; P1M for the annual operating costs
every year; and P3M for the purchase of new equipment and replacement of
some equipment every 5 years beginning 5 years from now. If money is worth
10% compounded annually, how much money should be put into the fund?

a. P34,913,924.42 c. P24M
b. P30M d. NOTA

SOLUTION:

CC = FC + P + X

Solving for P

P = 1M / 0.1 = P10M

Solving for the present worth of perpetual replacement, X

X = 3M / (1.105 – 1) = 4,913,924.42

CC = FC + P + X

CC = (15M + 5M) + 10M + 4,913,924.42)

Amount of money that should be put into the fund = CC = P34,913,924.42

39. A fund is to be donated by APIEMS Foundation to provide annual scholarships to

deserving Industrial Engineering students. The fund will grant P500,000 each for
the first 5 years, P800,000 for each of the next 5 years, and P1M each year
thereafter. The scholarship will start one year after the fund is established. If the
fund earns 8% interest, what is the amount of the donation?

a. P1,996,355.02 c. P2,173,897.09
b. P9.96M d. NOTA
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SOLUTION:

Solving for the amount of the donation, X

X = 500,000(P/A,8%,5) + 800,000(P/A,8%,5)(P/F,8%,5) + (1M/0.08)(1.08)-10

X = 500,000(3.9927) + 800,000(3.9927)(0.6806) + (1M/0.08)(1.08)-10

X = P9,960,170.71

GRADIENT

40. IEdeas signed a contract to lease a building at P60,000 a year with an annual
increase of P1,000 a year for 5 years. Payments are to be made at the end of
each year, starting one year from now. If money is worth 8%, what lump sum
paid today is equivalent to the 5-year lease-payment plan?

a. P246,935.03 c. P7,372.43
b. P239,562.60 d. NOTA

SOLUTION:

P = PA + PG

P = 60,000[(1-1.08-5)/0.08] + {[(1.085-1)/0.08]-5}(1.08)-5

P = P246,935.03

41. Find the equivalent annual payment of the following obligations at 12% interest:

End of Year Payment (Pesos)

1 100,000
2 80,000
3 60,000
4 40,000
5 20,000

a. EUAC = 127,940.32 c. P64,507.68

b. EUAC = 360,477.62 d. NOTA

SOLUTION:
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

P = PA + PG

P = 100,000(P/A,12%,5) - {[(1.125-1)/0.12]-5}(1.12)-5

P = 360,477.62 – 127,940.32 = 232,537.2994

EUAC = 232,537.2994(0.12) / (1-1.12-5)

EUAC = P64,507.68

42. Two brothers, Cy and Ciel decided to save money in a fund that earns 8%
interest compounded annually but on different ways. Cy decided to save money
by making an end of year deposit of P10,000 on the 1 st year, P11,000 on the 2 nd
year, 12,000 on the 3rd year, and so on increasing the next year’s deposit by
P1,000 until the end of 10 years. Ciel decided to save by just making annual
deposits of P14,000 annually for 10 years. Who has more savings at the end of
10 years?

a. CY c. SAME
b. CIEL d. NOTA

SOLUTION:

Solving for the saving of Cy after 10 years,

Pcy = PA + PG

Pcy = 10,000(P/A,8%,10) + {[(1.0810-1)/0.08]-10}(1.08)-10

Pcy = 67,100.81 + 25,976.83 = 93,077.64

Savings of Cy after 10 years, F10

F10 = 93,077.64(1.08)10 = P200,947.65

Solving for the saving of Ciel after 10 years,

PCIEL = PA + PG

PCIEL = 14,000(P/A,8%,10)

PCIEL = P93,941.14

Savings of Ciel after 10 years, F10

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

F10 = 93,941.14(1.08)10 = P202,811.87

Therefore, Ciel has more savings at the end of 10 years!

43. As an IE consultant for the World Bank you are earning an average annual salary
of $5M for 10 years. A private company would like to acquire your services and
offers you an initial salary of $3M but is increasing at the rate of $400,000
annually. If money is worth 10%, are your going to accept the offer?

a. YES, ACCEPT THE OFFER c. P93,941.14

b. NO, Don’t accept the offer d. NOTA

SOLUTION:

Solving for the present worth of your salary as a consultant for the WB,

PWB = 5M(P/A,10%,10) = 30,722,835.53

Solving for the present worth of the private company’s offer,

Pcompany = PA + PG

Pcompany = 3M (P/A,10%,10) = 20,130,244.20 +

{[(1.1010-1)/0.10]-10}(1.10)-10

Pcompany = 30,520,976.79

PWB > Pcompany; Therefore, do not accept the offer!

44. An Industrial Engineer wrote a best selling book in IE and was offered two
alternatives by a publishing company for the rights to publish and sell his book.
The 1st offer was a single lump sum payment of P3.5M. The 2 nd offer was an
initial payment of P2.5M plus 4% of the gross receipts for the next 5 years
estimated to be as follows:

End Of Year Gross Receipts (Pesos) 4% of Gross

Receipts(Pesos)
1 10M 400,000
2 8M 320,000
3 6M 240,000
4 4M 160,000
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

5 2M 80,000
th
After the 5 year, the author will not receive further royalties. If money is worth
10%, which alternative should he select?

a. Choose Offer 1 c. Get them both

b. Choose Offer 2 d. NOTA

SOLUTION:

OFFER 1: P3.5M

OFFER 2: 2.5M + 4% of the gross receipts for the next 5 years

P = PA + PG

P = 2.5 + 400,000(P/A,10%,5) - {[(1.105-1)/0.10]-5}(1.10)-5

P = 4,565,258.12

POFFER 2 > POFFER 1 , THEREFORE, choose Offer 2!

CAPITAL FINANCING WITH BONDS

45. APIEMS Corporation is establishing a sinking fund for the purpose of

accumulating a sufficient capital to retire its outstanding bonds at maturity. The
bonds are redeemable in 10 years and their maturity value is P10M. How much
should be deposited each year if the fund pays interest at the rate of 4%.

a. P10M c. P832,909.44
b. P400,000 d. NOTA

SOLUTION:

Maturity Value = 10M

F10 = A(A/F,4%,10)

10,000,000 = A[(1.0410-1)/0.04]

A = 832,909.44

46. PIIE Corporation issued 5,000 bonds of P1,000 face value each, redeemable at
par at the end of 10 years. To accumulate the funds required for redemption, the
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

company established a sinking fund consisting of annual deposits, the interest of

the fund being 5%. What was the principal in the fund at the end of 7 years?

a. P397,522.64 c. P5M
b. P3,236,632.68 d. NOTA

SOLUTION:

C = (5,000X1,000) = 5M

Solving for the accumulated amount after 7 years, F7

F10 = A(A/F,5%,10)

5,000,000 = A[(1.0510-1)/0.05]

A = 397,522.64

F7 = 397,522.64[(1.057-1)/0.05]

F7 = P3,236,632.68

47. You were offered a Land Bank certificate with a face value of P1M. The bond is
bearing an interest of 6% per year payable semi-annually and due in 5 years. If
you want to earn 8% semi-annually, how much are you willing to pay for the
certificate?

a. P1M c. P30,000
b. P918,891.04 d. NOTA

SOLUTION:

P = Fr(P/A,i%,n) + C(1+i)-n

Fr = (1M)(0.06/2) = 30,000

P = 30,000[(1-1.04-2*5)/0.04] + 1M(1.04)-2*5

P = P918,891.04

48. A P100,000, 6% bond pays dividend semi-annually and will be redeemed at

120% on December 31, 2015. If you bought this bond on December 31, 2011 to
yield 5% interest compounded semi-annually, find the price of the bond.
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

a. P120,000 c. P21,510.41
b. P98,489.59 d. NOTA

SOLUTION:

P = Fr(P/A,i%,n) + C(1+i)-n

Fr = (100,000)(0.06/2) = 3,000

C = 100,000(1.2) = 120,000

P = 3,000[(1-1.025-2*4)/0.025] + 120,000(1.025)-2*4

P = P120,000

49. You want to make 14% nominal interest compounded quarterly on a bond
investment. How much are you willing to pay now for a 12%, P100,000 bond that
will mature in 5 years and pays interest quarterly?

a. P100,000 c. P92,893.80
b. P50,256.59 d. NOTA

SOLUTION:

P = Fr(P/A,i%,n) + C(1+i)-n

Fr = (100,000)(0.12/4) = 3,000

P = 3,000[(1-1.035-5*4)/0.035] + 100,000(1.035)-5*4

P = P92,893.80

50. You bought a bond having a face value of P10,000 for only P9,000. The bond
rate was 14% nominal and interest payments were made to you semi-annually
for a total of 7 years. At the end of this period, you sold the bond at a price that
yielded 16% nominal on your investment. For how much did you sell the bond?

a. P9,484.30 c. 410.453.66
b. P26,434.75 d. NOTA

SOLUTION:
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

P = Fr(P/A,i%,n) + C(1+i)-n

Using “14” as focal point

9,000(1.08)2*7 = (10,000)(0.14/2)[(1.0814-1)/0.08] + C

C = P9,484.30

DEPRECIATION AND DEPLETION

A. Straight Line Method

51. A machine costsP80,000 and an estimated life of 10 years with a salvage value
of P5,000. What is the book value after 5 years using the straight line method?

a. P42,500 c. P7,500
b. P75,000 d. NOTA

SOLUTION:

d = (Co – CL) / L = (80,000-5,000) / 10 = 7,500

D5 = nd = (5)(7,500) = 37,500

C5 = Co - D5

C5 = 80,000-37,500

C5 = P42,500

52. A knitting machine is purchased for P500,000. The salvage value in 10 years is
P100,000. What is the total depreciation in the first 6 years using the SLM?

a. P40,000 c. P400,000
b. P240,000 d. NOTA

SOLUTION:

d = (Co – CL) / L = (500,000-100,000) / 10 = 40,000

D6 = nd = (6)(40,000)
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

D6 = 240,000

53. The cost of a Tajima embroidery machine is P1.2M and the cost of installation is
P50,000. If the salvage value is 10% of the cost of the machine at the end of 10
years, determine the book value at the end of the 3 rd year. Use SLM.

a. P339,000 c. P1.25M
b. P911,000 d. NOTA

SOLUTION:

Co = 1.2M + 50,000 = 1,250,000

CL = (0.10)(1.2M) = 120,000

d = (Co – CL) / L = (1,250,000-120,000) / 10 = 113,000

D3 = 3(113,000) = 339,000

C3 = 1,250,000 – 339,000

C3 = P911,000

B. Sum-of-the-Year’s Digit Method

54. A linking machine is purchased for P20,000. It is estimated to have a useful life
of 10 years and a salvage value of P10,000. Find the depreciation for the 1 st
year using the SYD method.

a. P10,000 c. P1,818.18
b. P18,812 d. NOTA

SOLUTION:

dn = (Co – CL)

d n = {10 / [10(10+1)/2]}(20,000-10,000)

dn = P1,818.18

55. Zach’s Corporation purchased a Jacquard machine for P6M, freight and
installation charges amounted to 3% of the purchase price. If the machine will be
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

depreciated over a period of 10 years with a salvage value of 6%, determine the
depreciation cost during the 5th year using the SYD method.

a. P633,730.91 c. 360,000
b. P6.18M d. NOTA

SOLUTION:

dn = (Co – CL)

Co = 6M + (0.03)(6M) = 6,180,000

CL = (0.06)(6.18M) = 370,800

= n(n+1)/2 = 10(10+1)/2 = 55

Reverse digit:

1 10
2 9
3 8
4 7
5 6
6 5
7 4
8 3
9 2
10 1

d5 = (6/55)( 6,180,000-370,800)

d5 = P633,730.91

56. Kaizen Corporation makes it a policy that for any new equipment purchased, the
annual depreciation cost should not exceed 20% of the 1 st cost at any time with
no salvage value. Determine the service life necessary if the depreciation
method used is the SYD.

a. 7 YEARS c. 9 YEARS
b. 8 YEARS d. NOTA
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SOLUTION:

dn = 0.20Co

dn = (Co – CL)

0.20Co = 2Co / n+1

n +1 = 2Co/0.20Co

n = 9 yrs.

C. DECLINING BALANCE METHOD (MATHESON FORMULA)

57. A stop watch used for TMS has a selling price of P1,500. If its selling price is
expected do decline at a rate of 10% per year due to obsolescence, what will be
its selling price after 3 years?

a. P1,093.5 c. P150.50
b. P1,500 d. NOTA

SOLUTION:

k=1-

0.10 = 1 -

(1-0.10)3 = ( )3

C3 = (0.90)3(1,500)

C3 = P1,093.5

58. A circular linking machine costing P45,000 has a book value of P4,500 when
retired at the end of 10 years. Depreciation cost is computed using a constant
percentage of the declining book value. What is the annual rate of depreciation
in %.
a. P4,500 c. K=20.57%
b. P45,000 d. NOTA
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SOLUTION:

k=1-

k=1-

k = 20.57%

59. A generator costing P750,000 depreciates in value each year by 20% of its
value. Find its book value when the generator is 5 years old.

a. P245,760 c. 750,000
b. P150,000 d. NOTA

SOLUTION:

C5 = CO(1-K)5

C5 = 750,000(1-0.20)5

C5 = P245,760

D. SINKING FUND METHOD

60. An electric sewing machine costs P10,000 with a salvage value of P500 at the
end of 10 years. Calculate the annual depreciation cost by the sinking fund
method at 5% interest.

a. P755.29 c. P500
b. P755,293.5 d. NOTA

SOLUTION:

d = Co – CL / (F/A,i%,L)

d = (10,000-500)(0.05) / (1.0510 – 1)
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

d = P755.29

61. A set of Wire Bond machine costs $500,000. This amount includes freight and
installation charges estimated at 10% of the original price. If the machine shall
be depreciated over a period of 10 years with a salvage value of $5,000, and
money is worth 6% per year, what is the annual depreciation charge?

a.41,348.04 c. P545,000
b. P37,554.64 d. NOTA

SOLUTION:

d = Co – CL / (F/A,i%,L)

d = (500,000 – 5,000)(0.06) / (1.0610 - 1)

d = P37,554.64

62. A steam boiler was bought for P300,000. Other expenses including freight and
installation amounted to P20,000. The boiler is expected to have a life of 12
years with a salvage value of 10% of the purchase price. Determine the book
value at the end of 10 years using the Matheson formula at 8% annual interest.

a. P15,281.55 c. P320,000
b. P98,622.80 d. NOTA

SOLUTION:

Co = 300,000 + 20,000 = 320,000

CL = (0.10)(300,000) = 30,000

d = (320,000-30,000)(0.08) / (1.0812-1) = 15,281.5549

D10 = d[(1.0810-1)/0.08] = 221,377.1996

C10 = 320,000 – 221,377.1996

C10 = P98,622.80

E. DOUBLE DECLINING BALANCE METHOD

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

63. A Die Attach machine was bought for $200,000 and used it for 10 years. What is
the book value of the machine after 5 years if the salvage value is $20,000 using
the double declining balance method?

a. P13,107.2 c. P65,536
b. P200,000 d. NOTA

SOLUTION:

C n = Co[1-(2/L)]n

C5 = 200,000[1-(2/10)]5

C5 = P65,536

64. Determine the total depreciation up to the end of 6 years for a large dryer that
costs P50,000 when new and has an estimated salvage value of P2,000 at the
end of 10 years by the double declining balance method.

a. P36,892.8 c. P46,892.18
b. P56,308.12 d. NOTA

SOLUTION:

D6 = Co – [Co(1-2/L)n]

D6 = 50,000 – [50,000(1-2/10)6]

D6 = P36,892.80

F. SERVICE-OUTPUT METHOD

65. Julie’s Bakeshop bought a loaf bread machine for P500,000 on June 1, 2010. It
is estimated that it will have a useful life of 10 years, a scrap value of P10,000,
production of 400,000 loaves of bread and working hours of 150,000. The
company uses the machine for 15,000 hours in 2010 and 20,000 hours in 2011.
The machine produces 40,000 loaves in 2010 and 50,000 loaves in 2011.
Compute the depreciation in 2011 using (a) service-output method (b) working
hours method.

a. P61,250; P65,333.33 c. P56,366.66;P61.520

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

b. P25,000; 65,000 d. NOTA

SOLUTION:

a) d n = [(Co-CL)/T](Qn)

d2011 = [(500,000-10,000)/400,000] X (50,000)

d2011 = P61,250

b) d n = [(Co-CL)/H](Qn)

d2011 = [(500,000-10,000)/150,000] X (20,000)

d2011 = P65,333.33

G. DEPLETION

66. Balatok Mines has a total gross income for a particular year of P100M. The
taxable income after taking all deductions except for depletion is P20M. What is
the allowable depletion allowance for that particular year? Use percentage of
gross income for iron ore of 15%.

a. P10M c. P25M
b. P15M d. NOTA

SOLUTION:

Using depletion allowance method.

d = Fixed percentage of Gross income OR 50% of Net Taxable Income

d = (0.15)(100M) = 15M

OR

d = (0.50)(20M) = 10M

Therefore, d = P10M
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

67. Philex Oil Refinery developed an oil well which is estimated to contain 7M barrels
of oil at an initial cost of $75M. What is the depletion charge during the year
where it produces 1M barrels of oil? Use the Unit or Factor Method in computing
depletion.

a. P1M c. P10.7143M
b. P7.5M d. NOTA

SOLUTION:

Using Unit or Factor method,

d = (initial cost of property / total units in property)(units sold during the year)

d = (75M / 7M)(1M)

d = P10.7143M

INVESTMENT OF CAPITAL

A. ROR METHOD

68. A company estimates that insulation of steam pipes in the factory will reduce the
fuel bill by as much as 25%. The cost of the insulation is P100,000 installed and
the annual cost of taxes and insurance is 6% of the first cost. Without the
insulation, the annual fuel bill is P200,000. If the insulation is worthless after 5
years of use, and a minimum return on investment of 10% is desired, would it be
worthwhile to invest in the insulation? Solve using the ROR method.

a. ROR = 10%, yes invest c. ROR = 7.62%, do not invest

b. ROR = 27.62%, yes invest d. NOTA

SOLUTION:

Annual Savings = (0.25)(200,000) = P50,000

Annual Costs:

Dep’n = (100,000-0)(0.10)/(1015-1) = 16,379.75

T&I = (0.06)(100,000) = 6,000

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

TAC = 22,379.75

ROR = net annual savings / capital invested

ROR = (50,000 - 22,379.75) / 100,000

ROR = 27.62% > 10%

Therefore, it is worthwhile to invest in the insulation!

69. An investor buys a land for P1M and constructs a three-door apartment for
students worth P5M. He estimates that the annual receipts from the apartment
to be P1.2M and annual expenses to cover taxes, insurance, and maintenance of
the apartment to be P100,000. He also estimates that the land can be sold for
P3M at the end of 10 years. If his money is now earning 8% interest before
taxes, will this property earn enough for the investment to be justified? Use ROR
method.

a. ROR = 1.6%, not justified c. ROR = 13.06%, justified

b. ROR = 16.03%, justified d. NOTA

SOLUTION:

Annual Income = 1.2M

Annual Costs:

Dep’nland = (1M-3M)(0.08)/(1.0810-1) = -138,058.98

Dep’nbldg = (5M-1M)(0.08)/(1.0810-1) = 276,117.95

O&M = 100,000

TAC = 238,058.97

ROR = (1.2M – 238,058.97) / 6M

ROR = 16.03% > 8%; therefore, investment is justified!

B. ANNUAL COST METHOD

70. An investment of P3M can be made in a business that will produce a uniform
annual revenue of P1.2M for five years and then have a salvage value of 10% of
the investment. Operations and maintenance will be P100,000 per year. Taxes
and insurance will be 5% of the first cost per year. The investor expects to earn
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

not less than 20% before income taxes. Is this a good investment? Use the
annual cost method.

a. P2,112,825.2; good investment! c. -P912,825.199; do not invest!

b. P1.2M; good investment d. NOTA

SOLUTION:

Annual Income: P1.2M

Annual Costs:

Dep’n = [3M-(0.10*3M)](0.20) / (1.205-1) = 362,825.20

O&M = 100,000

T&I = (0.05*3M)

Min Req’d Profit = (0.20*3M) = 600,000

TAC = P2,112,825.199

Difference = -P912,825.199; therefore, not a good investment!

71. You are considering building a 25-unit apartment near a Call Center. If you want
a return of 25%, will this be a good investment? Other related data are shown
below:

Land P5,000,000
Building P10,000,000
Study period 25 years
Cost of land after 25 years P20,000,000
Cost of building after 25 years P1,000,000
Rent per unit per month P8,000
Maintenance per unit per year P1,000

Property taxes 2%
Insurance 1%
a. P2.4M; good investment c. P4.219M; good investment
b. –P1.918M; do not invest d. NOTA
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SOLUTION:

Annual Income: 8,000*25*12 = 2.4M

Annual Costs:

Dep’nland = (5M-20M)(0.25) /1.2525-1 = -14,220.8242

Dep’nbldg = (10M-1M)(0.25) / 1.2525-1 = 8,532.4945

O&M = 1,000*25 = 25,000

Taxes = 0.02*15M = 300,000

Insurance = 0.01*15M = 150,000

MRP = 0.25*15M = 3.75M

Total Annual Cost = P4,219,311.67

Difference = 2.4M - 4,219,311.67 = -P1,819,311.67

therefore, not a good investment!

C. PRESENT / FUTURE WORTH METHOD

72. A project capitalized for P5,000,000 is expected to earn a uniform annual

revenue of P1,000,000 in 10 years. The cost of operation and maintenance is
P100,000 a year, taxes and insurance will cost 3% of the first cost per year. If
the company expects its capital to earn 12% income before taxes, would you
recommend investing in the project? Use the PW method.

a. PW income < PW costs; don’t c. PW income = PWcosts ; invest

invest
b. PW income > PW costs; invest d. NOTA

SOLUTION:

PW income = 1M(P/A,12%,10) = 1M[(1-1.12-10)/0.12] = 5,650,223.03

PW costs = 5M + [(100,000+(0.03*5M)][(1-1.12-10)/0.12] = 6,412,555.76

Since PWincome < PWcosts ; therefore; do not invest!

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

73. A proposed project will require the immediate investment of P500,000 and is
estimated to have year-end revenues and costs as follows:

Year Revenue (P) Costs

1 750,000 600,000
2 900,000 770,000
3 1,000,000 750,000
4 950,000 800,000
5 600,000 470,000

An additional investment of P200,000 will be required at the end of the 2 nd year.

The project will terminate at the end of the 5 th year, and the assets are estimated
to have a salvage value of P250,000 at that time. If interest is 12% per year, is
this a good investment? Use the PWC method.

a. PWincome < PWcosts; don’t c. PWincome = PWcosts ; invest

invest
b. PWincome > PWcosts; invest d. NOTA

SOLUTION:

PW income = 150,000(1.12)-1 + 250,000(1.12)-3 + 150,000(1.12) -4 + 803,000(1.12)-5

PW income = 862,845.11

PW costs = 500,000 + 70,000(1.12)-2

PW costs = 555,803.57

Since PW income > PWcosts ; therefore; it is a good investment!

D. PAYBACK PERIOD METHOD

74. A proposed manufacturing plant will require a fixed capital investment of P6M
and an estimated working capital of P1M. Annual depreciation is estimated to be
5% of the fixed capital investment. If the annual profit is P3M, determine the rate
of return on the total investment and the minimum payback period.

a. ROR = 38.57%; Payback c. ROR = 35.57%; Payback Period =

Period = 2.33 years 3.33 years
b. ROR = 28.75%; Payback d. NOTA
Period = 3.23 years
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SOLUTION:

A) ROR = net annual profit / capital invested

ROR = [3M – (0.05*6M)] / (6M+1M)

ROR = 38.57%

B) Payback period = investment – salvage value / net annual cashflow

Payback period = 7M / 3M = 2.33 years.

COMPARING ALTERNATIVES

A. ROR ON ADDITIONAL INVESTMENT

B. ANNUAL COST METHOD
C. EUAC METHOD
D. PWC METHOD
E. PAYBACK PERIOD METHOD

75. A company is considering the purchase of a generator. Three offers were

received and the basis of selection have been tabulated as follows:

OFFER A OFFER B OFFER C

Price of Generator P600,000 P800,000 P1M
Economic Life 5 7 10
Salvage Value P50,000 P100,000 P120,000
Annual O&M P15,000 P12,000 P10,000

If the cost of money is 8%, what offer would you recommend to be purchased?

Using ROR on additional investment?

a. OFFER A c. OFFER C
b. OFFER B d. NOTA

OFFER A OFFER B OFFER C

Dep’n (600,000-50,000)(0.08) (800,000-100,000)(0.08) (1M-120,000)(0.08)
(1.08)5-1 (1.08)7-1 (1.08)10-1
O&M 15,000 12,000 10,000
TAC 108,751.05 90,450.68 70,745.95
OFFER A VS OFFER B
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

RORon addl investment = (108,751.05-90,450.68) / 800,000-600,000 = 9.51%

Choose OFFER B!

OFFER B VS OFFER C

RORon addl investment = (90,450.68-70,745.95) / 1M-800,000 = 9.85%

Since RORC > RORB > RORA

Therefore, Choose OFFER C!

Using Annual Cost Method?

a. OFFER A c. OFFER C
b. OFFER B d. NOTA

OFFER A OFFER B OFFER C

Dep’n (600,000-50,000)(0.08) (800,000-100,000)(0.08) (1M-120,000)(0.08)
(1.08)5-1 (1.08)7-1 (1.08)10-1
O&M 15,000 12,000 10,000
MRP 0.08*600,000 0.08*800,000 0.08*1M
TAC 156,751.05 154,450.68 150,745.95

Since TACC < TACB < TACA ;

Therefore, choose Offer C!

76. To remedy the traffic situation at a busy intersection in Quezon City, two plans
are being considered. Plan A is to build a complete clover-leaf costing P100M
which would provide for all the needs during the next 30 years. Maintenance
costs are estimated to be P200,000 a year for the first 15 years, and P300,000 a
year for the next 15 years.

Plan B is to build a partial clover-leaf at a cost of P70M which would be sufficient

for the next 15 years. At the end of 15 years, the clover-leaf will be completed at
an estimated cost of P50M. Maintenance would cost P120,000 a year during the
first 15 years and P220,000 a year during the next 15 years.

If money is worth 10%, which of the two plans would you recommend?

a. Recommend Plan A c. Recommend neither of the 2 Plans

b. Recommend Plan B d. NOTA

SOLUTION:
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

Solve for the PWCA :

PWCA = 100M + 200,000[(1-1.10-15)/0.10] + 300,000[(1-1.10-15)/0.10][1.10-15]

PWCA = 102,067,466.4

Solve for the PWCB :

PWCB = 70M + 50M(1.10)-15 + 120,000[(1-1.10-15)/0.10] +

220,000[(1-1.10-15)/0.10][1.10-15]

PWCB = 82,882,332.01

Since PWC A > PWCB ; therefore, choose Plan B!

77. You are considering two offers of an equipment for your manufacturing plant and
pertinent data are as follows:

Offer A Offer B
First Cost P500,000 P850,000
Annual O&M Cost P128,000 P96,000
Annual Labor Cost P125,000 P80,000
Insurance and Taxes 3% 3%
Payroll Taxes 4% 4%
Estimated Life 10 10

If the minimum required rate of return is 12%, which equipment should be

selected?

Using ROR on additional investment?

a. Offer A c. both offers

b. Offer B d. NOTA

OFFER A OFFER B
Dep’n (500,000-0)(0.12) (850,000-0)(0.12)
(1.12)10-1 (1.12)10-1
O&M 128,000 96,000
LABOR 125,000 80,000
INSURANCE 0.03*500,000 0.03*850,000
TAXES 0.04*500,000 0.04*850,000
TAC 316,492.08 283,936.54
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

ROR = (316,492.08 – 283,936.54) / (850,000 – 500,000)

ROR = 9.30% < 12%; therefore, choose Offer A!

REPLACEMENT STUDIES

78. Shutdowns costs a company an average of P5,000 per day. Based on past
data, there are 5 average shutdowns per year. To prevent future shutdowns, it is
proposed to purchase a standby machine for P30,000 which is expected to have
a service life of 10 years and a salvage value of P6,000. Annual O&M would
cost 2,000. Would it pay to buy the standby machine if the minimum required
return is 12%?

Using ROR on additional investment?

a. do not buy the machine c. buy a 2 nd hand machine

b. buy the machine d. NOTA

Annual costs = 5,000 * 5 = 25,000

Standby Machine:

Dep’n = (30,000-6,000)(0.12) / (1.1210-1) = 1,367.62

O&M = 2,000

TAC = 3,367.62

ROR = (25,000 – 3,367.62) / 30,000

ROR = 72.10% > 12% ; therefore, but the standby machine!

Using Annual Cost Method?

a. do not buy the machine c. buy a 2 nd hand machine

b. buy the machine d. NOTA

TAC = 3,367.62 +
(0.12*30,000) = 6,967.62
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

Since TAC (new machine) < 25,000; therefore, buy the standby machine!

79. An existing machine of a company requires P20,000 for O&M. If the company
decides to sell the machine now, it can be sold for P15,000. If the company
decides to use it, the machine will last for 10 more years but the salvage value at
that time will be zero.

Another plan is to overhaul the existing machine at a cost of P10,000 which is

expected to reduce the annual O&M to P15,000. Its economic life will also be
extended to 10 years but with a salvage value of P5,000.

Alternatively, a new machine can be purchased for P50,000 which is expected to

reduce annual costs for O&M to P10,000 for a period of 10 years, at which time
the salvage value is expected to be P10,000. If money is worth 12% to the
company, which alternative would you recommend?

Using Annual Cost Method?

a. Use existing machine c. Buy new machine

b. Overhaul old machine d. NOTA

EXISTING MACHINE OVERHAUL MACHINE NEW MACHINE

Dep’n (15,000-0)(0.12) (10,000-5,000)(0.12) (50,000-10,000)(0.12)
(1.12)10-1 (1.12)10-1 (1.12)10-1
O&M 20,000 15,000 10,000
MRP 0.12*15,000 0.12*10,000 0.12*50,000
TAC 22,654.76 16,484.92 18,279.37

Since TAC of overhauling the machine is the lowest, therefore, recommend to overhaul
the machine.

BREAK-EVEN ANALYSIS

80. A leather gloves manufacturer produces certain items at a labor cost of P500,
materials cost per unit is P150, variable cost of P50.00 each. If the gloves has a
selling price of P1,500 per pair, how many units must be manufactured each
month for the company to break-even if the monthly overhead is P500,000?

a. 525 c. 625
b. 600 d. NOTA
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

SOLUTION:

Let X – number of units to be produced per month to break-even

Income = 1,500X

Expenses:

Labor cost = 500X

Material cost = 150X

Variable cost = 50X

Overhead = 500,000

To Break-Even:

Income = Expenses

1,500X = 500X + 150X + 50X + 500,000

1,500X = 700X + 500,000

800X = 500,000

X = 625 pairs

81. Baysports Manufacturing produces m&m chocolate dispensers at a labor cost of

P280 each, material cost of P100 each and variable cost of P4.50 each. If the
item has a unit price of P900, how many units must be manufactured each month
for the company to break-even if the monthly overhead is P450,000.

a. 872.9 c. 297
b. 873 d. NOTA

SOLUTION:

Let X – number of units to be produced per month to break-even

Income = 900X

Expenses:

Labor cost = 280X

Material cost = 100X

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

Variable cost = 4.50X

Overhead = 450,000

To Break-Even:

Income = Expenses

900X = 280X + 100X + 4.50X + 450,000

900X = 384.5X + 450,000

515.5X = 450,000

X = 873 dispensers

82. A pharmaceutical firm manufactures a whitening pill at a labor cost of P500 and
material cost of P300. The fixed charges on the company are P2M a month and
the variable costs are P200 per pill. Royalty to the movie actress promoting the
product is P600 per pill sold. If the whitening pill can be sold for P2,500 each,
how many pills must be produced each month for the firm to break-even?

a. 2,223 c. 2,222
b. 2,222.22 d. NOTA

SOLUTION:

Let X – number of whitening pills to be produced per month to break-even

Income = 2,500X

Expenses:

Labor cost = 500X

Material cost = 300X

Variable cost = 200X

Royalty = 600X

Overhead = 2M

To Break-Even:
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

Income = Expenses

2,500X = 500X + 300X + 200X + 600X + 2M

2,500X = 1,600X + 2M

900X = 2M

X = 2,223 whitening pills

83. A small company manufacturing car stereos with usb has a capacity of 250 units
a month. The variable costs are P1,200 per unit. The average selling price of
the stereos is P2,700. Fixed costs of the company amount to P175,000 a month
including all taxes. The company pays annual dividend of P15.00 per share on
each of the 25,000 shares of common stocks. (A) Determine the number of
stereos that must be produced and sold each month to break-even and the sales
volume corresponding to the unhealthy point. (B) What is the profit or loss if 200
units were produced and sold per month?

BEP:

a. 117 c. 116.67
b. 116 d. NOTA

SOLUTION:

Let X – number of car stereos to be produced per month to break-even

Income = 2,700X

Expenses:

Variable cost = 1,200X

Fixed costs = 175,000

To Break-Even:

Income = Expenses

2,700X = 1,200X + 175,000

1,500X = 175,000

X = 117 stereos
 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

Unhealthy Point:

a. 137.5 c. 137
b. 138 d. NOTA

Let Y – the unhealthy point

Income = 2,700Y

Expenses:

Variable cost = 1,200Y

Fixed costs = 175,000

Dividends = (15*25,000) / 12 = 31,250

To Break-Even:

Income = Expenses + dividends

2,700Y = 1,200Y + 175,000 + 31,250

1,500Y = 206,250

X = 138 car stereos

Profit / Loss

a. 93,750 – loss c. 540,000

b. 93,750 – profit d. NOTA

SOLUTION:

If 200 stereos were produced and sold:

Income = 2,700(200) = 540,000

Expenses:

Variable cost = 1,200(200) = 240,000

Fixed costs = 175,000

Dividends = (15)(25,000) / 12 = 31,250

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

To Break-Even:

Income = Expenses + dividends + P/L

540,000 = 175,000 + 240,000 + 31,250 + P/L

P/L = P93,750

84. A local factory making watches produces 500 units per month and sells them at
P2,000 each. Dividends are 6% on the 10,000 shares with par value of P300
each. The fixed operating cost per month is P30,000. Other costs are P1,200
per watch. Determine the break-even point. If only 30 units were produced and
sold per month, determine the profit or loss.

Break-Even

a. 38 c. 37
b. 37.5 d. NOTA

SOLUTION:

Let X – number of watches to be produced per month to break-even

Income = 2,000X

Expenses:

Variable cost = 1,200X

Fixed costs = 30,000

To Break-Even:

Income = Expenses

2,000X = 1,200X + 30,000

800X = 30,000

X = 38 watches

Profit / Loss

a. -21,000 – loss c. 60,000

 SOLVED PROBLEMS IN ENGINEERING ECONOMY 2016

b. 21,000 – profit d. NOTA

SOLUTION:

If 30 watches were produced and sold:

Income = 2,000(30) = 60,000

Expenses:

Variable cost = 1,200(30) = 36,000

Fixed costs = 30,000

Dividends = (0.06)(10,000)(300) / 12 = 15,000

To Break-Even:

Income = Expenses + dividends + P/L

60,000 = 36,000 + 30,000 + 15,000 + P/L

P/L = -21,000

“Whether you think you can or you can’t, either

way you are right.”

- Henry Ford -