ES Econ: Engineering Economics

Problem set

Submit PS any time from 8:00 am on Mon 2nd to 4:00 pm on Tue 3rd December 2024 to the IE
Department. The department’s lunch break is 12:00-1:00 pm and it closes at 5:00 pm. The submitted PS
is time-stamped by the receiver (secretary or lab assistant). Late submissions will have deduction.
Submit PS stapled short bond paper. Refer to the HW/PS page on Canvas for the guidelines.

You are encouraged to discuss your solutions with your classmates for you to learn together. However,
ensure that you do your own work and write your own solutions. Some of your answers may slightly
vary from the given answer due to rounding off. That should be fine.

No. Problem Answer

1 A young woman, 22 years old, has just graduated from college. She Age=30.7957+22
accepts a good job and desires to establish her own retirement fund. At =52.80 years old,
the end of each year thereafter, she plans to deposit P2,000 in a fund at or 52 years and 9.5
15% annual interest. months old
A. Draw the cash flow diagram.
B. How old will she be when the fund has an accumulated value of
P1 million?
2 Determine the value of P in the following cash flow diagram at 15% P=157.06
interest using the following approaches:
A. P/F
B. Gradient series

3 A company buys a machine for P12,000, which it agrees to pay for five P7,779.58
equal annual payments, beginning one year after the date of purchase,
at an interest rate of 4% per annum. Immediately after the second
payment, the terms of the agreement are changed to allow the balance
due to be paid off in a single payment the next year. What is the final
payment?
4 A realtor sold a piece of land on August 31, 1997, for P150,000 to a A=P14,019.5454
buyer in which a 20% down payment was made. The buyer took a 15- Mortgage
year mortgage on the property with an interest rate of 8% per annum. balance=P80,565.27
The buyer intends to pay off the mortgage owned in yearly payments
starting August 31, 1998.
A. Draw the cash flow diagram.
B. How much of the mortgage will still be owed after the payment
due on August 31, 2004 has been made?
5 What is the amount of 10 equal annual deposits that can provide five P/G:
annual withdrawals, where a first withdrawal of P3,000 is made at the P=P13,383.9237
end of year 11 and subsequent withdrawals increase at the rate of 6% A/F: A=P923.89
No. Problem Answer
per year over the previous years, if the interest rate is 8% compounded
annually?
6 A stamping machine was purchased for P500K. Its scrap value is -
estimated at P50K after it yields 150K stamps. Develop a depreciation
schedule for the machine.

Book value Depreciation Accumulated Book value at

Year Yield
at year start during the year depreciation year end
1 18,325 500,000 ? ? ?
2 10,540 ? ? ? 413,405
3 ? 413,405 ? 192,285 ?
4 30,142 ? ? ? ?
5 ? ? 121,008 ? ?
6 15,427 ? ? ? 50,000
Total 150,000

7 For how many years, at an interest rate of 12% compounded n=4.663464899

continuously, does P8,000 must be invested for it to become P14,000? = 4.66 years
8 Two electric motors are being considered to power an industrial hoist. Depreciation
Each can provide 100 hp. The relevant information is as follows: cost=P963.07;
AC(A)= 6,363.07+
Motor A Motor B 62,166.67X
Investment (P) 25,000 32,000
Electrical efficiency 84% 88% X=P0.6616 per kWh
Maintenance per year (P) 400 600
Useful life (years) 10 10 If cost<P0.66/kwh,
choose motor A.
Money is worth 20%. If the expected usage of the hoist is P700 hours
per year, what would the cost of the electrical power have to be before If cost>P0.66/kwh,
Motor A is favored over Motor B. (1 hp = 0.746 kW) choose motor B.
9 Suppose that P1,000 is deposited each year for five years into an equity A. P5,866.60
(common stock) account earning 8% per year. During this period, B. P5,060.58
general inflation is expected to remain at 3% per year. At the end of five
years, what is the:
A. Actual peso value of the equity account immediately after the
fifth deposit (i.e., current or nominal peso)?
B. Real peso value of the account in terms of today’s purchasing
power (i.e., constant peso)?
10 You are considering the purchase, for P15,000, of an annuity that pays i=11.3%
P2,500 per year for the next 10 years. You want to have a real rate of PW=P14,539.69
return of 5%, and you estimate inflation will average 6% per year over Since this is less
the next 10 years. Should you buy the annuity? than the P15,000
initial investment,
do not buy the
annuity.
11 A debt of P5,000 can be repaid, with an interest of 8% compounded B. P1,497.08
annually, by the following payments:

Page 2 of 5
No. Problem Answer

Year Payment (P)

1 500
2 1,000
3 1,500
4 2,000
5 X

The payment at the end of the 5th year is shown as X.

A. Draw the cash flow diagram.
B. How much is X?
12 A consultant saves a fixed percentage of his salary at the end of each B. F=P13,851.50
year. This year, he saved P1,500. For the next 5 years, he expects his C. P=P7,818.81
salary to increase at an 8% annual rate, and he plans to increase his
savings at the same 8% annual rate. He invests his money in the stock
market. Thus, there will be six EOY investments (the initial P1,500 plus
five more). The investments increase in the stock market at a 10%
annual rate.
A. Draw the cash flow diagram.
B. How much will the investments be worth at the end of 6 years?
C. How much is the value of his entire investments in today’s
money? Use P/G and P/F approaches.
13 Determine the value of C in the following cash flow diagram, assuming P283.53
a 10% interest rate

14 On average, a laptop loses 15% of its value annually. Assume that a -

laptop was purchased for P80,000. Develop a five-year depreciation
schedule for the laptop.

Total
Book value at Depreciation Book value
Year depreciation at
year start during the year at year end
year end
1 80,000.00 ? ? ?
2 ? 10,200.00 ? ?
3 57,800.00 ? ? ?
4 ? ? 38,239.50 ?
5 ? ? ? 35,496.43

Page 3 of 5
No. Problem Answer
15 Suppose in year 0 you were offered a piece of paper that guaranteed P625.17
you would be paid P400 at the end of 3 years and P600 at the end of 5
years. The interest rate is 12%.
A. Draw the cash flow diagram.
B. How much would you be willing to pay for this piece of paper?
16 A company purchased a generator set for P112,000 and P8,000 for P5,269.50
freight and delivery charges. The generator set has a normal life of 12
years with a trade-in value of P20,000 at the end of its life. The interest
rate is 8% compounded annually. Determine the annual depreciation
cost using the sinking fund method.
17 Determine the capitalized cost of a database server that requires the P3,936,397.05
following:
1. P1.2 million acquisition cost.
2. P120,000 at the end of every year for the first 3 years for the
setup cost.
3. P80,000 each year for operating and maintenance expenses.
4. P1 million every 5 years for equipment replacement.
The interest rate is 10% per annum.
18 Consider an end-of-year geometric gradient series of cash flows for five P20,782.97
years, where the amount in year 1 is P5,000. The rate of increase is 8%
per year after the first year and the interest rate is 12% per year.
Determine the present value of the geometric gradient series.
19 Your firm is considering the purchase of an old office building with an P793,113
estimated remaining service life of 25 years. The tenants have recently
signed long-term leases, which leads you to believe that the current
rental income of P150,000 per year will remain constant for the first
five years. Then the rental income will increase by 10% for every five-
year interval over the remaining asset life. For example, the annual
rental income would be P165,000 for years six through 10; P181,500 for
years 11 through 15; P199,650 for years 16 through 20; and P219,615
for years 21 through 25.

You estimate that operating expenses, including income taxes, will be

P45,000 for the first year and that they will increase by P3,000 each
year thereafter. You estimate that razing the building and selling the lot
on which it stands will realize a net amount of P50.000 at the end of the
25-year period. If you had the opportunity to invest your money
elsewhere and thereby earn interest at the rate of 12% per annum,
what would be the maximum amount you would be willing to pay for
the building and lot at the present time?
20 Maintenance money for a new building at a college is being solicited A. P372,103.72
from potential alumni donors. A philanthropist would like to donate to B. P48,373.48
cover all future expected maintenance costs for the building. These
maintenance costs are expected to be P40,000 each year for the first
five years; P50,000 for each of years six through 10; and $60,000 each
year after that. The building has an indefinite service life.

Page 4 of 5
No. Problem Answer
A. If the money is placed in an account that will pay 13% interest
compounded annually, how large should the gift be?
B. What is the equivalent annual maintenance cost over the
infinite service life?

Page 5 of 5