ALCORCON ENGINEERING REVIEW CENTER

Cebu: 4 Flr. Coast Pacific Downtown Center, Sanciangco St. Cebu City (Tel # 254-33-84)
TH

Manila Branch: 3 floor JPD Bldg 1955, C M Recto corner N. Reyes St, Sampaloc, Manila Tel # (02) 736-4438
rd

ENGINEERING ECONOMICS
PROBLEM SET # 13
INSTRUCTION: Encircle the letter that corresponds to the correct answer of your choice.
MULTIPLE CHOICE:

1. With a 12% interest, approximately how much money must be invested today in order to withdraw $2000 per year
at the end of each year for 10 years?
A. $10,900 B. $11,000 C. $11,200 D. $11,300

2. A machine is under consideration for purchase. The cost of the machine is $32,614. Each year it operates,
the machine will generate a savings of $15,000. Given an effective annual interest rate of 18%, what is the discounted
payback period on the purchase in the machine?
A. 1 yrs B. 2 yrs C. 3 yrs D. 4 yrs

3. Consider a project that involves the investment of $100,000 now and $100,000 at the end of year 1. Revenues of
$160,000 will be generated at the end of years 1 and 2. What is most nearly the net present value of this project if the
effective annual interest rate is 10%?
A. $76,777 B. $86,777 C. $96,777 D. $100,777

4. An investment of x dollars is made at the end of each year for 3 yr, at an interest rate of 12% per year compounded
annually. What will the dollar value of the total investment be, most nearly, upon the deposit of the third payment?
A. $3.37x B. $4.37x C. $5.37x D. $6.37x
5. If $800 is invested at the end of each year for 6 yr at an effective annual interest rate of 7%, what is most nearly the
total dollar amount available upon the deposit of the sixth payment?
A. $5423 B. $5523 C. $5623 D. $5723

6. A student needs $4000/yr for 4 yr to attend college. Her father invested $6000 in a 7% account for her education when
she was born. If the student withdraws $4000 at the end of her 17th, 18th, 19th, and 20th years, how much money will be left
in the account at the end of her 21st year?
A. $5,540.42 B. $5,640.42 C. $5,740.42 D. $5,840.42

7. The following schedule of funds is available to form a sinking fund. t = 0 yr, $5000; t = 1 yr, $4000; t = 2 yr, $3000; t = 3 yr, $2000 At
the end of the fourth year, equipment costing $33,000 will have to be purchased as a replacement for old equipment. Money is valued
at 20% by the company. At the time of purchase, how much money will be needed?

A. $8400 B. $8600 C. $8800 D. $9000

8. $10,000 is invested at the beginning of a year in a 15% security and held for 5 yr. During that time, the
average annual inflation is 8%. Approximately how much, in terms of year zero dollars, will be in the account at
maturity?

A. $13,689 B. $13,789 C. $13,889 D. $13,989

9. The following cash flow diagram presents an investment of $600 and a revenue of x at the end of years one and two. Given a
discount rate of 15% compounded annually, what must x approximately be for this set of cash flows to have a net present worth of
zero?
A. $359 B. $369 C. $379 D. $389

10. What annuity over a 10 yr period at 8% interest is most nearly equivalent to a present worth of $700?

A. $104.32 B. $114.32 C. $124.32 D. $134.32

11. Instead of paying $10,000 in annual rent for office space at the beginning of each year for the next 10 years, an
engineering firm has decided to take out a 10-year, $100,000 loan for a new building at 6% interest. The firm will invest
$10,000 of the rent saved and earn 20% annual interest on that amount. What will be the difference between the firm’s
annual revenue and expenses?
A. $1387 B. $1487 C. $1587 D. $1687

12. Mr. Richardson borrowed $20,000 two years ago. The repayment terms of the loan are 10% interest for 10 yr and uniform annual
payments. He just made his second payment. How much principal, most nearly, does he still owe?

A. $17,165 B. $17,365 C. $17,565 D. $17,765

13. Given that the discount rate is 15%, what is the equivalent uniform annual cash flow for the following stream of cash flows?
Year 0: $100,000; Year 1: 200,000; Year 2: $50,000; Year 3: 90,000

A. $160,444 B. $162,444 C. $164,444 D. $168,444

14. In 5 yr, $25,000 will be needed to pay for a building renovation. In order to generate this sum, a sinking
fund consisting of three annual payments is established now. No further payments will be made after the third
year. What payments are most nearly necessary if money is worth 15% per year?
A. $5144 B. $5244 C. $5344 D. $5444

15. Mr. Johnson borrows $120,000 at 10% effective annual interest. He must pay back the loan over 30 yr with uniform monthly
payments due on the first day of each month. Approximately what amount does Mr. Johnson pay each month?
A. $1007 B. $1107 C. $1207 D. $1307

16. What is the most nearly the internal rate of return on the following cash flow?
t = 0 yr spend $100,000
t = 1 yr spend $50,000
t = 2 yr receive $100,000
t = 3 yr receive $120,000
A. 12.93% B. 14.93% C. 16.93% D. 18.93%
17. An investment of $380,000 is made, to be followed by revenue of $200,000 each year for three years. What is
most nearly the annual rate of return on investment for this project?
A. 22.84% B. 24.84% C. 26.84% D. 27.84%

18. A parent on the day the child is born wishes to determine what lump sum would have to be paid into an account bearing interest at
8% compound annually, in order to withdraw P25,000 each on the child’s 18th, 19th, 20th and 21st birthdays.

A. P35,941.73 B. P33,941.73 C. P22,379.13 D. P25,941.73

19. A graduating high school student decides to take a year off and work to save money for college. The student plans to invest all money
earned in a savings account earning 6% interest, compounded quarterly. The student hopes to have $10,000 by the time school starts in
12 months. How much money will the student have to save each month?

A. $810.66/month C. $850.66/month
B. $830.66/month D. $870.66/month

20. A gold mine is projected to produce $20,000 during its first year of operation, $18,800 the second year, $17,600 the third year, and
so on. If the mine is expected to produce for a total of 10 years, and the effective annual interest rate is 6%, what is the present worth?

A. $111,279 B. $111,479 C. $111,679 D. $111,879

21. An engineer deposits $10,000 in a savings account on the day her child is born. She deposits an additional $1200 on every birthday
after that. The account has a 5% nominal interest rate, compounded continuously. How much money will be in the account the day after
the child’s 21st birthday?

A. $72,055 B. $72,155 C. $72,255 D. $72,355

22. Given the following cash flow diagram and a 12% effective annual interest rate, what is the equivalent annual
expenses over the five-year period?
A. $162 B. $262 C. $362 D. $462

23. A delivery company is expanding its fleet by five vans at a total cost of $75,000. Operating and maintenance costs for
the new vehicles are projected to be $20,000/year for the next eight years. After eight years, the vans will be sold for a
total of $10,000. Annual revenues are expected to increase by $45,000 with the expanded fleet. What is the company’s
rate of return on the purchase?
A. 28.65% B. 29.65% C. 30.65% D. 27.65%

24. Suppose you deposited $500 at the end of every year for seven years in an account that earned 6% annual effective interest. At the
end of seven years, how much would the account be worth?
A. $4,197 B. $4,297 C. $4,397 D. $4,497
25. Suppose you will retire exactly one year and want an account that will pay you $30,000 a year for the next 15 years. (The fund will
be depleted at the end of the fifteen year) Assuming a 6% annual effective interest rate, what is the amount you would need to deposit
now?

A. $231,367 B. $251,367 C. $271,367 D. $291,367

26. A bonus package pays an employee $1000 at the end of the first year, $2500 at the end of the second year, and so on, for the first
nine years of employment. What is the present worth of the bonus package at 6% interest?

A. $21,892 B. $25,892 C. $27,892 D. $29,892

27. The national debt is approximately $5 trillion. What is the required payment per year to completely pay off the debt in 20 years,
assuming an interest rate of 6%?

A. $416 billion B. $426 billion C. $436 billion D. $446 billion

28. The president of a growing engineering firm wishes to give each of 50 employees a holiday bonus. How much is needed to invest
monthly for a year at 12% nominal interest rate, compounded monthly, so that each employee will receive a $1500 bonus?

A. $5314 B. $5514 C. $5814 D. $5914

29. An engineering graduate plans to buy a home. She has been advised that her monthly house and property tax payment should not
exceed 35% of her disposable monthly income. After researching the market, she determines she can obtain a 30-year home loan for
6.95% annual interest per year, compounded monthly. Her monthly property tax payment will be approximately $150. What is the
maximum amount she can pay for a house if her disposable monthly income is $2500?

A. $109,521 B. $119,521 C. $129,521 D. $139,521

30. Mr. Jones plans to deposit $500 at the end of each month for 10 years at 12% annual interest, compounded
monthly. The amount that will be available in three years is
A. $21,538 B. $22,538 C. $23,538 D. $24,538

31. The purchase price of a car is $35,000. Mr. Smith makes a down payment of $5000 and borrows the balance from a
bank at 6% interest for five years. Calculate the nearest value of the required monthly payments to pay off the loan.
A. $520 B. $540 C. $560 D. $580

32. A piece of machinery can be bought for $10,000 cash or for $2000 down and payments of $850 per year for 15 years.
What is the annual interest rate for the time payments?
A. 4.48% B. 6.48% C. 8.48% D. 10.48%
33. You have borrowed $6000 and must pay it off in five equal annual payments. Your annual interest rate is 10%. How much interest
will you pay in the first two years?

A. $1002 B. $1102 C. $1256 D. $1302

34. A company puts $30,000 down and will pay $5000 every year for the life of a machine (10 years). If the salvage value is zero and the
interest rate is 10% compounded annually, what is the present value of the machine?

A. $60,323 B. $60,523 C. $60,723 D. $60,923

35. You borrow $3500 for one year from a friend at an interest rate of 2% per month instead of taking a loan from a bank at a rate of
24% per year. Compare how much money you will save or lose on the transactions.

A. You will pay $98.85 more than if you borrow from the bank B. You will pay $630 more than if you borrow from the bank
C. You will pay $685 more than if you borrow from the bank D. You will save $55 by borrowing from your friend.

36. A college student borrows $15,000 today at 10% interest compounded annually. Four years later, the student makes the first
repayment of $3000. Approximately how much money will the student still owe on the loan after the first payment?

A. $15,962 B. $16,962 C. $17,962 D. $18,962

37. A house is expected to have a maintenance cost of $2000 the first year. It is believed that the maintenance cost will increase $500
per year. The interest rate is 6% compounded annually. Over a 10-year period, what will be approximate affective annual maintenance
cost?

A. $4011 B. $4111 C. $4211 D. $4311

38. A young woman plans to retire in 25 years. She intends to contribute the same amount of money each year to her retirement fund.
The fund earns 10% compounded annually. She would like to withdraw $100,000 each year for 20 years, starting 1 year after the last
contribution is made. Approximately how much money should she contribute to her retirement fund each year?

A. $8,257 B. $8,457 C. $8,657 D. $8,857

39. A machine costs $20,000 today and has an estimated scrap cash value of $4000 after eight years. Inflation is 8% per year. The
effective annual interest rate earned on money invested is 8%. How much money needs to be set aside each year to replace the
machine with an identical model eight years from now?

A. $3104 B. $3204 C. $3304 D. $3404

40. Permanent mineral rights on a parcel of land are purchased for an initial lump-sum payment of $100,000. Profits from
mining activities are $10,000 each year, and these profits are expected to continue indefinitely. What approximate interest
rate is being earned on the initial investment?
A. 10% B. 12% C. 14% D. 16%
41. A company purchases a piece of construction equipment for rental purposes. The expected income is $3100 annually for its useful
life of 15 years. Expenses are expected to be $700 annually. If the purchase price is $25,000 and there is no salvage value, what is the
prospective rate of return, neglecting taxes?

A. 2.95% B. 4.95% C. 6.95% D. 8.95%

42. An investment of $350,000 is made, to be followed by revenue of $200,000 each year for three years. What is most nearly the
annual rate of return on investment for this project?

A. 15% B. 33% C. 42% D. 57%

43. A man borrowed P30,000 and promised to pay the amount annually for 10 years at the beginning of each period with interest rate of
16% compounded annually. Find the annual amount.

A. P3092 B. P4973 C. P6530 D. P5351

44. A man borrowed P100,000 at 10% compounded annually for 10 years. And promised to pay the amount starting 5
years from now. Find the annual payment.
A. P21,083.55 B. P23,827.55 C. P25,038.22 D. P27,099.34
45. A company issued 50 bonds of P1,500 face value each, redeemable at par at the end of 15 years. To accumulate the funds required
for redemption, the firm established a sinking fund consisting of annual deposits, the interest rate of the fund being 4%. What was the
principal in the fund at the end of the 10th year?

A. P44,970.00 B. P38,378.00 C. P41,453.00 D. P37,519.00

46. A house and lot can be acquired a down payment of P500,000.00 and a yearly payment of P150,000 at the end of each year for a
period of 10 years, starting at the end of 5 years from the date of purchase. If money is worth 14% compounded annually, what is the
cash price of the property?

A. P710,100.00 B. P808,811.00 C. P963,253.88 D. P1,181,902.00