GENERAL ENGINEERING AND APPLIED SCIENCES

Engineering
Economy
Lectured by:
Engr. Denver G. Magtibay
Smart EDGE ECE Review Specialist

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
Outline
 Simple Interest
 Discount
 Compound Interest
 Effective Rate
 Continuous Compounding
 Cash Flow Diagrams
 Annuity
 Gradient
 Capitalized Cost
 Break – even Analysis

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
INTEREST
Interest
– Payment for the use of the borrowed
money

Two Types of Interest

1. Simple Interest
2. Compound Interest

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
SIMPLE INTEREST

Two Types
1. Ordinary Simple Interest
2. Exact Simple Interest

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
ORDINARY SIMPLE INTEREST

n: 1 year =
360 days
= 12
months
1 month = 30
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
1. Find the interest on P6800.00 for 3 years at 11%
simple interest.
A. P1,875.00
B. P1,987.00
C. P2,144.00
D. P2,244.00

D. P2,244.00
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
2. How many years will it take the principal amount
to double if it is invested in an account that gives
10% ordinary simple interest.
A. 5 B. 8 C. 10 D. 16

C. 10
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
3. A man borrows Php 800.00 from Engr. Ronnie Yu and
promised to repay him Php 850.00 after 1.5 years. What is the
interest rate assuming ordinary simple interest?
A. 3.7% B. 4.2% C. 2.1% D. 5.6%

B. 4.2%
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
EXACT SIMPLE INTEREST
Equations for ordinary simple interest is the
same as for the exact simple interest.

The difference lies with the number of years.

n: 1 year = 365 days

(ordinary year)
= 366 days (leap
year)

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
4. From August 22, 2011 to February 22, 2012, determine the
exact simple interest of the principal Php 5000.00 for 8%.
A. Php 201.49
B. Php 721.21
C. Php 124.22
D. Php 219.89

A. Php 201.49
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
DISCOUNT
 Deduction of the actual interest on
the principal before the money is
obtained by the borrower
 Difference between the future and
present worth of money.

D=Fnd
D=F-P
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
Tsupul borrowed Php 2000 from a bank and promised to pay after 1
year. The bank deducted the interest of Php 80.00 in advance.

5. What is the interest rate?

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

6. What is the rate of discount?

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

C, A
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
COMPOUND INTEREST

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
MODES OF COMPOUNDING

MODE OF
m
COMPOUNDING

Annually 1

Semi – annually 2

Quarterly 4

Monthly 12

Bi-monthly 6

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
NOMINAL AND INTEREST RATE

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
COMPOUND INTEREST

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
Tsupul borrows Php 8000.00 from a bank that has an interest rate of
2% compounded quarterly.

7. How much is the money after 8 years?

A. Php 9384.34 C. Php 8523.66
B. Php 9348.34 D. Php 8325.66

8. How much is the money after 8 quarters?

A. Php 9384.34 C. Php 8523.66
B. Php 9348.34 D. Php 8325.66

A, D
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
A businessman borrows money from a bank and promised to pay Php
5000.00 after 12 months. How much money did the he borrow if:
9. Money is worth 8% compounded monthly.
A. Php 6414.81 C. Php 4616.81
B. Php 1985.57 D. Php 1895.57

10. Money is worth 8% monthly.

A. Php 6414.81 C. Php 4616.81
B. Php 1985.57 D. Php 1895.57

C, B
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
11. How long (in years) will it take for an investment to fivefold
its amount if money is worth 14% compounded semi-annually?
A. 11 B. 12 C. 13 D. 14

B. 12
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
EFFECTIVE RATE
The equivalent rate of a certain nominal
rate as if it is compounded annually

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
What is the nominal rate of 4% compounded
quarterly if compounded:
12. Monthly?
A. 3.987% B. 4.02% C. 4.06% D. 4%

13. Semi – annually?

A. 3.987% B. 4.02% C. 4.06% D. 4%

14. Annually?
A. 3.987% B. 4.02% C. 4.06% D. 4%

A, B, C
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
CONTINUOUS COMPOUNDING
Money grows every instant of time

Equivalence
𝑟
𝐸𝑅 =𝑒 −1
𝑟𝑛
𝐹 =𝑃 𝑒

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
15. What is the present worth of money if Php 8000.00 is paid
after 3 years? The money is worth 8% compounded
continuously.
A. Php 6293.02 C. Php 2693.02
B. Php 2963.02 D. Php 3296.02

A. Php 6293.02
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
16. Determine the effective rate of 8% compounded
continuously.
A. 8.22% B. 7.95% C. 8.33% D. 7.23%

C. 8.33%
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
CASH FLOW DIAGRAMS

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
17. Tsupul borrows P10,000 at an interest rate of 8%
compounded annually and wishes to repay the loan over a 4
year period with annual payments such that the second is P500
greater than the first payment, the third payment is P1000
greater than the second payment and the fourth payment is
P2000 greater than the third payment. The amount of first
payments is:
A. P1854 B. P1574 C. P1474 D. P1754

D. P1754
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
18. A sum of P1000 is invested now and left for eight years at
which time the principal is withdrawn. The interest that has
accrued is left for another eight years. If the effective annual
interest rate is 5%, what will be the withdrawal amount at the
end of the 16th year?
A. P706 B. P500 C. P774
D. P799

A. P 706
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
ANNUITY
Series of equal payments

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
ANNUITY
Types of Annuity
 Ordinary annuity
 Deferred annuity
 Annuity due
 Perpetuity
 Annuity w/ continuous compounding

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
I. Ordinary Annuity
It is an annuity where payments (A) are made
at the end of each period.
Cash Flow Diagram
(ordinary Annuity)

( ))
𝒏 −𝒙 0 1 2 3 4(n-1) n

𝒓
𝑷=𝑨 ∑ 𝟏+
𝒎
A A A A A A
A
𝟏 P
F

Note: In solving any kind of annuity, the

nominal interest rate should be appropriate
with the number of payments per year.
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
19. A man inherited a regular endowment of P100,000 every end of 3
months for 10 years. However, he may choose to get a single lump
sum payment at the end of 4 years. How much is this lump sum if the
cost of money is 14% compounded quarterly?
A. P3,702,939.73 B. P7,302,939.73
C. P3, 939,702.73 D. P9, 339,702.73

A. P3,702,939.73
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
20. An employee obtained a loan of P10,000 at the rate of 6%
compounded annually to repair a house. How much must he
pay monthly to amortize the loan within a period of ten years?
A. P210.22 C. P310.22
B. P110.22 D. P410.22

B. P110.22
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
II. Deferred Annuity
It is an annuity where payments are made
late by several periods from the start of
annuity. Cash Flow Diagram

( ))
(Deferred Annuity)
𝒃 −𝒙
𝒓
0 1 2 3……...n

𝑷=𝑨 ∑
0 1 2 k

𝟏+
𝒂 𝒎 A A A A A
F
n periods
P k + n periods

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
21. A businessman is faced with the prospect of fluctuating future budget for the
maintenance of the generator. During the first 5 years, P1,000 per year will be budgeted.
During the second 5 years, the annual budget will be P1500 per year. In addition, P3500 will
be budgeted for an overhaul of the machine at the end of the fourth year and another
P3500 for an overhaul at the end of 8th year. Assuming compounded interest at 6% per
annum, what is the equivalent annual cost of maintenance?
A. P1,888.87 B. P2,888.87 C. P3,888.87
D. P4,888.87

A. P1,888.87
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
22. A parent wishes to develop a fund for a newborn child’s college
education. The fund is to pay P50000 on the 18th, 19th, 20th, and 21st
birthdays of the child. The fund will be built up by the deposit of fixed
sum on the child’s first to seventeenth birthdays. Find the fixed sum if
money worth 4% per annum.
A. P7658.81 B. P6758.81 C. P5678.81 D. P5687.81

A. P7658.81
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
III. Annuity Due
It is the annuity where the payments started
at the beginning of the annuity periods.

( ))
Cash Flow Diagram

𝒏−𝟏 −𝒙
𝒓
(Annuity Due)

𝑷=𝑨 ∑
1 2 3 4 5 (n-1) n

𝟏+
𝟎 𝒎 A A A A A A A

F
P n – 1 periods

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
23. A man will deposit P200 with a savings and loan association at the
beginning of 3 months for 9 years. If the association pays interest at
the rate of 5.5%quarterly, find the sum to his credit just after the last
deposit.
A. P3639 B. P6393 C. P9363
D. P3936

C. P9363
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
24. A man owes P12,000 today and agrees to discharge the debt by
equal payments at the beginning of each 3 months for 8 years, where
these payments include all interest at 8% payable quarterly. Find the
quarterly payment.
A. P501.30 C. P301.30
B. P105.30 D. P103.30

A. P501.30
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
IV. Perpetuity
It is an annuity where payments are made
indefinitely or forever.

𝑨
𝑷=
𝒊

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
25. Find the present value, in peso, of a perpetuity of P15,000
payable semi-annually if money is worth 8% compounded
quarterly.
A. P317,287 B. P371,287
C. P287,371 D. P278,371

B. P371,287
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
26. A wealthy man deposited a certain amount of money in a bank at a
rate of 12% compounded annually to be able to pay the following
scholarship awards; P4000 per year for the first 5 years, P6000 per
year on the next 5 years and P9000 per year on the years thereafter.
Find the amount of money deposited by the man.
A. P30839.78 B. P40839.78 C. P50839.78 D. P60839.78

C. P50839.78
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
V. Annuity w/ Continuous
Compounding
Simply an ordinary annuity with a given continuous
compounding interest rate.
1. Convert the compounded continuously interest (r)
to effective interest: ER = er-1
2. Use the formula of ordinary annuity.
Cash Flow Diagram

𝒏 (ordinary Annuity)

𝑷=𝑨 ∑ (( 𝟏+𝑬𝑹) )
−𝒙 0 1 2 3 4(n-1) n

A A A A A A
𝟏 A
F
P

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
27. Ryan invest P5,000 at the end of each year in an account
which gives a nominal annual interest of 7.5%, compounded
continuously. Determine the total worth of his investment at the
end of 15 years.
A. P133,454.58 B. P331,545.58
C. P331,454.58 D. P133,545.58

D. P133,545.58
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
28. A man deposits P500 each year into his savings account that pays
5% nominal interest compounded continuously. How much will be the
worth of the account at the end of 5 years?
A. P2679.84 C. P2769.84
B. P7629.84 D. P7269.84

C. P2769.84
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
GRADIENT
Series of payments that
increase/decrease at a certain rate.

Two Types of Gradient:

1. Arithmetic
2. Geometric

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
I. Arithmetic Gradient
It is a series of payments with common
difference occurring at equal period or
interval of time.

A=F–D
B=D

F = First Cost D = Common

Difference
n = number of periods
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
29. The maintenance cost for a sewing machine this year is expected to be
P500. The cost will increase by P50 each year for the subsequent 9 years. The
interest is 8% compounded annually. What is the present worth of maintenance
for the machine over the full 10 years?
A. P4635.88 B. P6435.88
C. P4653.88 D. P6453.88

C. P4653.88
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
30. An arithmetic gradient with series of end of period payments of P
10,000 on the 1st year, P 8,000 on the 2nd year, P 6,000 on the 3rd
year, P 4,000 on the 4th year and P 2,000 on the 5th year. If interest
rate is 12%, what is its present worth?
A. P 12,125 B. P 23,007 C. P 22,565 D. P 23,254

D. P 23,254
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
II. Geometric Gradient
It is a series of payments with common ratio
occurring at equal period or interval of time.

A=F/R
B=R

F = First Cost R = Common Ratio

n= number of periods

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
31. A newly acquired machine requires an annual maintenance cost of
10,000 pesos. If the annual maintenance cost increases by 20% each
year for 10 years, what is the estimated present worth of the
maintenance costs if money is worth 15%?
A. P 106,100
B. P 126,100
C. P 116,100
D. P 136,100

A. P 106,100
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
32. The annual maintenance cost of a generator is P1000 after 1 year
and it is estimated to increase by 10% each year for the subsequent 7
years. Find the present worth of the maintenance cost if the rate of
interest is 15% compounded annually.
A. P5985.14
B. P9585.14
C. P5958.14
D. P9558.14

A. P5985.14
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
33. What do you call the amount of property
in which a willing buyer will pay to a willing
seller for the property when neither one is
under the compulsion to buy nor sell?
A. Far value
B. Book value
C. Market value
D. Goodwill value

C. Market value
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
34. What is a market situation whereby
there is only one buyer of an item for
which there is no goods substitute?
A. Monopsony
B. Oligopoly
C. Monopoly
D. Oligopsony

A. Monopsony
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
35. What is the type of annuity where
the payments are made at the start of
its period, beginning from the first
period?
A. Deferred annuity C. Annuity
due
B. Ordinary annuity D. Perpetuity

C. Annuity due
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
36. It is defined as the future value
minus the present value on a negotiable
paper
A. Discount
B. Rate of return
C. Capital
D. Interest

A. Discount
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
37. _______ is the amount of company’s
profits that the board of directors of the
corporation decides to distribute to
ordinary shareholders
A. Par value
B. Return
C. Share of stock
D. Dividend

D. Dividend
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
38. It is defined as the sum of the first
cost and the present costs of perpetual
replacement, operation and
maintenance.
A. Bond C. Depreciation
B. Capitalized cost D. Collateral

B. Capitalized cost
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
39. What refers to an imaginary cost
representing what will not be received if
a particular strategy is rejected?
A. Opportunity cost C. Ghost cost
B. Horizon cost D. Null cost

A. Opportunity cost
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
40. “Under conditions of perfect competition
the price at which a given product will be
supplied and purchased is the price that will
result in the supply and the demand being
equal.”
A. Law of Supply
B. Law of Supply and Demand
C. Law of Demand
D. Law of Diminishing Return

B. Law of Supply and Demand

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
CAPITALIZED COST
It is the sum of the first cost (FC) and the present
worth of the following costs:
a. Annual Maintenance and Operational Cost (MC)
b. Cost of Repair (CR)
c. Renewal Cost (RC)

L=useful life
k=interval of repair (factor of L)
Note: If RC is not given, use RC=FC-SV-CR where
SV=salvage value
If MC is not constant, use the formula of annuities.

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
41. A bridge has an initial cost of P600000 and whose estimated life is 30 years.
The annual maintenance cost is P6000 and the cost of repair is P25000 every 5
years. Find the capitalized cost if the salvage value is P30000 and cost of money
is 9%.
A. P757506.92 C. P757560.92
B. P575706.92 D. P575760.92

A. P757506.92
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
42. An item is purchased for P100,000.00. Annual cost are
P18,000.00. Using 8%, what is the capitalized cost of perpetual
service?
A. P532000
B. P352000
C. P523000
D. P325000

D. P325000
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
BREAK – EVEN ANALYSIS
The break-even level or break-even point
(BEP) represents the sales amount—in either
unit or revenue terms—that is required to
cover total costs (both fixed and variable).
Profit at break-even is zero.

Sales = Fixed Cost + Variable Cost

The purpose of break-even analysis is to
provide a rough indicator of the earnings
impact of a marketing activity.

Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
43. Compute for the number of blocks that an ice plant must be
able to sell per month to break even based on the following
data:
Cost of electricity per block: P 20.00
Tax to be paid per block: P 2.00
Real Estate Tax: P 3500.00/mo
Salaries and Wages: P 25,000/mo
Others: P 12,000/mo
Selling Price of ice: P 55.00/block
A. 1228 B. 2921 C. 1412 D.
1129

A. 1228
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
REVIEW QUESTION
44. A manufacturer produces a certain item at a labor cost of P115.00 each,
material cost of P76.00 each and variable cost of P2.30 each. If the item has a
unit price of P600.00, how many number of units must be manufactured each
month for the manufacturer to break even if the monthly overhead cost is
P428,000?
A. 1053 B. 1052 C. 1501 D. 1500

A. 1053
Smart EDGE ECE Review Specialist General Engineering and Applied Sciences Denver G. Magtibay, ECE
SUCCESS occurs
when your

DREAMS get
bigger than your
.
EXCUSES

GOD BLESS FUTURE ENGINEERS!!!

FIGHT!!! LET’S DO THIS!!!