REVIEW IN

ENGINEERING
ECONOMY
MATHEMATICS, ENGINEERING ECONOMICS
AND BASIC ENGINEERING SCIENCES
ENGR. PAOULO H. DE VEGA, ME
INSTRUCTOR III
 TOPIC OUTLINE
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I. Simple Interest
II. Compound Interest
III. Inflation
IV. Cash Flow
V. Annuity
VI. Breakeven
VII. Depreciation
VIII. Comparison of Alternatives
IX. Benefit-Cost Ratio
 Simple Interest
REVIEW IN ENGINEERING ECONOMY

It is the interest earned by the principal alone over a given period of

time usually counted in number of days, month or in years
1. Ordinary Simple Interest
Basis: 360 days/ year
30 days/ month
12 months/ year
2. Exact Simple Interest
Basis: 365 days/ year
366 days/ leap year

To be a leap year, the year number must be

divisible by four – except for end-of-century
years, which must be divisible by 400.
 Compound Interest
REVIEW IN ENGINEERING ECONOMY

It is the method of paying interest where the interest earned on

previous period is added to the principal for the succeeding
period and earn interest too. Hence, in other words, it the
interest on the top of interest.

Where: (1+n)n = future value factor (FVF)

(1+n)-n = present value factor (PVF)
Nominal Rate of Interest
REVIEW IN ENGINEERING ECONOMY

It is the rate of interest that specifies the number of interest

periods in one year.
Example: 12% compounded quarterly means that the
interest is paid 4 times a year at a rate of 3% per quarter.

𝒋
𝒊=
𝒏𝟏
Effective Rate of Interest
REVIEW IN ENGINEERING ECONOMY

It is the way how to identify which given interest rate is higher or

better for the depositor.
It is the method used to convert an interest rate to another method of
compounding. This is done by equating their effective rates.
Continuous Compounding
Interest
REVIEW IN ENGINEERING ECONOMY
If the interest is compounded continuously, it
can be noted that the rate of change of
principal is equal to the product of the rate of
interest compounded continuously and the
principal at any time.
 SAMPLE PROBLEM
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1. How many months at

an interest rate of 1
percent per month does
money have to be
invested before it will
double in value?

ANS: 70 months
 SAMPLE PROBLEM
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2. TMI Systems, a company

that customizes software for
construction cost estimates,
repaid a loan obtained 3
years ago at 7% per year
simple interest. If the
amount that TMI repaid was
$120,000, calculate the
principal of the loan.

ANS: $99,173.55
 SAMPLE PROBLEM
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3. The simple interest rate

per year that will accumulate
the same amount of money
in 2 years as a compound
interest rate of 20% per year
is closest to:

ANS: 22%
 SAMPLE PROBLEM
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4. A man deposited P12,000

in a bank at a rate of 10%
per annum from January 15,
2013 to October 31, 2020.
Determine the exact simple
interest.

ANS: P9350.68
 SAMPLE PROBLEM
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5. A man borrows P15, 000

from Hong Kong Bank. The
rate of the simple interest is
12%, but the interest is to be
deducted from the loan at
the time the money is
borrowed. At the end of one
year, he has to pay back
P15, 000. What is the actual
of interest?

ANS: 13.64%
 SAMPLE PROBLEM
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6. If the interest rate of an

account is 11.5%
compounded quarterly, how
many years will it take to
triple the amount?

ANS: 9.69 yrs.

 SAMPLE PROBLEM
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8. You deposited P10000 in

a savings account five years
ago. The account has
earned 5.25% interest
compounded continuously
since then. How much
money is in the account 7
years from now?

ANS: 18800
 SAMPLE PROBLEM
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9. How much money would

you need to deposit today at
9% annual interest
compounded monthly to
have $12000 in the account
after 6 years?

ANS: 7007
 SAMPLE PROBLEM
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10. What nominal rate of

interest must you get if you
need $12500 in 8 years and
have $4500 to invest now
and money is compounded
monthly?

ANS: 12.83%
Cash Flow Diagram
REVIEW IN ENGINEERING ECONOMY

It is a graphical representation of cash flows(the vertical arrows)

which are drawn in time scale (the horizontal number line).

NOTE:
= CASH INFLOW, money is received

= CASH OUTFLOW, money is disbursed or

spent
 SAMPLE PROBLEM
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11. Mr. Isagani made a loan

of P100000 at a rate of 13%
per annum and promise to
pay it according to the
following manner, P30000 at
the end of 1st year, P25000
after 2 years, an unknown
payment at the end of 3rd
year. And a final payment of
P73000 at the end of 5th
year. Find the unknown
payment by the man.

ANS: P20,562.99
 SAMPLE PROBLEM
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12. An investor deposited

₱60000 now; ₱30000 two
years from now; and
₱40000 five years in order
to be able to buy machine
after ten years from now.
Calculate the price of this
machine today if the
interest rate is 5% per
year.

ANS: ₱118551
 Annuity
REVIEW IN ENGINEERING ECONOMY

Annuity is a series of equal payments occurring at

equal period or interval of time.
• Ordinary annuity is an annuity where payments
are made at the end of each period.
 Annuity
REVIEW IN ENGINEERING ECONOMY

• Deferred annuity is an annuity where payments

are made late by several periods from the start of
annuity.

{ }
−𝒏
𝟏− ( 𝟏+𝒊 ) −𝒎
𝑷=𝑨 (𝟏+𝒊)
𝒊
 Annuity
REVIEW IN ENGINEERING ECONOMY

• Annuity due is the annuity where payments

started at the beginning of the annuity periods.
 Annuity
REVIEW IN ENGINEERING ECONOMY

• Perpetuity is an annuity where payments are

made indefinitely or forever.

𝐴
𝑃=
𝑖
 Annuity
REVIEW IN ENGINEERING ECONOMY

• Annuity with continuous compounding of interest

 SAMPLE PROBLEM
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13. A man deposit 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?

ANS: 2770
 SAMPLE PROBLEM
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14. A manufacturing firm

wishes to give each 80
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
P2,000 bonus?

ANS: 12615
 SAMPLE PROBLEM
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15. An instructor plans to

retire in one year and want
an account that will pay
him P25,000 a year for the
next 15 years. Assuming a
6% annual effective
interest rate, what is the
amount he would need to
deposit now?

ANS: P242,806
 SAMPLE PROBLEM
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16. A car dealer advertise

the sale of a car model for a
cash price of P280,000. If
purchased on installment,
the required down payment
is 15% and the balance
payable in 18 equal monthly
installments at an interest
rate of 1.5% per month. How
much will be the required
monthly payments?

ANS: P15,185.78
 SAMPLE PROBLEM
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17. A series of year-end

payments extending over eight
years are as follows: P10,000
for the first year, P20,000 for
the second year, P50,000 for
the third year, and P40,000 for
each year from the fourth
thorough the 8th year. Find the
equivalent annual worth of
these payments if the annual
interest is 8%.

ANS: P33,563.85
 SAMPLE PROBLEM
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18. A man inherited a regular

endowment of P100,000 every
end of 3 months for x years.
However, he may choose to
get a single lump sum of
P3,702,939.80 at the end of 4
years. If the rate of interest
was 14% compounded
quarterly, what is the value of
x.

ANS: 10 yrs
 SAMPLE PROBLEM
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19. A father wants to set aside

money for his 5-year-old son's
future college education. Money
can be deposited in a bank
account that pays 8% per year,
compounded annually. What equal
deposits should be made by the
father, on his son's 6th through
17th birthdays, in order to provide
$5000 on the son's 18th, 19th,
20th, and 21st birthdays?

ANS: $872.67
 SAMPLE PROBLEM
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20. An old engineer borrowed

P10,000 at 12% interest and
paid P2000 per annum for the
first 4 yrs. What does he have
to pay at the end of the 5th year
in order to pay off the loan.

ANS: P6,922.93
 Bond
REVIEW IN ENGINEERING ECONOMY

A bond is a fixed income instrument that represents

a loan made by an investor to a borrower (typically
corporate or governmental).

𝑷 =𝑰 ¿
𝐼=𝐹𝑟 ,𝑖𝑓 𝐼 𝑖𝑠𝑛𝑜𝑡 𝑔𝑖𝑣𝑒𝑛.
 Capitalized Cost
REVIEW IN ENGINEERING ECONOMY

𝑀𝐶 𝐶𝑅 𝑅𝐶
𝐶𝐶 =𝐹𝐶 + + +
𝑖 𝑘 𝐿
(1+𝑖) − 1 ( 1+ 𝑖) −1
Notes:
• If RC is not given, use RC=FC-SV-CR
• If annual maintenance cost is not of a constant value, replace by
which is evaluated by the principle of problem 2 of perpetuity
Arithmetic Gradient
REVIEW IN ENGINEERING ECONOMY

It is a series of payments with COMMON

DIFFERENCE occurring in equal period or interval of
time.

• Kalkyu-tech
Geometric Gradient
REVIEW IN ENGINEERING ECONOMY

It is a series of payments with COMMON RATIO

occurring in equal period or interval of time.
Where:

Note:
r is positive for increasing payments
r is negative for decreasing payments
w – store values for high degree of
accuracy

• Kalkyu-tech
 SAMPLE PROBLEM
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21. 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.

ANS: 5985.14
 SAMPLE PROBLEM
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22. A man was offered a Land

Bank certificate with a face
value of P100,000 which is
baring interest of 8% per year
payable semi-annually and due
in 6 years. If he wants to earn
6% semi-annually, how must he
pay the certificate?

ANS: P90,614.92
 SAMPLE PROBLEM
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23. The HIJ bond has a current

price of $800, a maturity value
of $1,000, and matures in 5
years. If interest is paid semi-
annually and the bond is priced
to yield 8%, what is the bond's
annual coupon rate?

ANS: 3.068%
 SAMPLE PROBLEM
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24. Maintenance on an old

machine is P1000 this year but
is expected to increase by P250
each year thereafter. What is
the present worth of five years
of maintenance? Use an
interest rate of 10%.

ANS: P5,506.25
 SAMPLE PROBLEM
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25. A bridge has an initial cost

of P600,000 and whose
estimated life is 30 years. The
annual maintenance cost is
P6,000 and the cost of repair is
P25,000 every 5 years. Find the
capitalized cost if the salvage
value is P30,000 and cost of
money is 9%.

ANS: 757 506.92

 SAMPLE PROBLEM
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26. A telephone company

purchased a microwave
equipment fr P6M with a
salvage value of P600,000 over
a period of 5 years and pay a
lump sum of P400,000 for the
maintenance cost. Minimum
attractive rate of return is 16%
annually. Compute the
capitalized cost of the
equipment.

ANS: 11307566.63
 Breakeven Point
REVIEW IN ENGINEERING ECONOMY

It is the point in economic study where the sales volume is just enough
to pay the costs of production which are the fixed cost and the variable
cost. Hence,

𝑆𝑎𝑙𝑒𝑠 𝑜𝑟 𝐼𝑛𝑐𝑜𝑚𝑒=𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 +𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡

 Unhealthy Point
REVIEW IN ENGINEERING ECONOMY

It is a point in economic study where the sales volume is just enough to

pay the dividends. This point is higher in position than the BEP in the
Break-Even Chart.

𝑆𝑎𝑙𝑒𝑠=𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡+𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡+ 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠

 Income and Profit
Relation
It isREVIEW
a point inIN
economic study where
ENGINEERING the sales volume is just enough to
ECONOMY
pay the dividends. This point is higher in position than the BEP in the
Break-Even Chart.

𝑆𝑎𝑙𝑒𝑠 =𝐹𝐶 +𝑉𝐶+𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠+𝑃𝑟𝑜𝑓𝑖𝑡 / 𝐿𝑜𝑠𝑠

 SAMPLE PROBLEM
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27. A local factory assembling

calculators produces 400 units
per month and sells them at
P1,800 each. Dividends are 8%
on the 8,000 shares with par
value of P250 each. The fixed
operating cost per month is
P25,000. Other costs are
P1,000 per unit. If only 200
units were produced per month,
determine the profit or loss.

ANS: P121,666.67
 SAMPLE PROBLEM
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28. General Electric Company

which manufacture electric
motor has a capacity of
producing 150 motors a month.
The variable costs are P4,000
per month, the average selling
price of the motor is P750 per
motor. Fixed costs of the
company amount to P78,000
per month which includes all
taxes. Determine the break
even point.
ANS: 110
 SAMPLE PROBLEM
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29. An item which can be sold

for P63 per unit wholesale is
being produced with the
following cost data; labor cost,
P10 per unit;material cost, P15
per unit; fixed charges,
P10,000; variable cost, P8.00
per unit. What is the break-even
point?

ANS: 334
 Depreciation
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Depreciation is usually defined as the decrease in worth of a property

due to passage of time.
• Straight Line Method (SLM)
 Depreciation
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Sinking Fund Method (SFM)

 Depreciation
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Sum of the Years Digit Method (SYDM)

 Depreciation
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Declining Balance Method (DBM)

 Depreciation
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Double Declining Balance Method (DDBM)

 Depreciation
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Service Output Method

• Service

• Output
 SAMPLE PROBLEM
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30. A machine cost P8, 000.00

and an estimated life of 10
years with a salvage value of
P500.00. What is its book value
after 8 years using straight-line
method?

ANS: 2000
 SAMPLE PROBLEM
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31. A machine was brought for

P50, 000 with an estimated
useful life of 10 years and a
salvage value of P5, 000. What
is its annual depreciation
assuming straight line trend?

ANS: 4, 500.00
 SAMPLE PROBLEM
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32. What is the book value of an

equipment purchased three
years ago for P15,000 if it is
depreciated using the sum of
the years digit method? The
expected life is 5 years.

ANS: P3000
 SAMPLE PROBLEM
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33. A telephone company

purchased microwave radio
equipment for P6 million.
Freight and installation charges
amounted to 4% of the
purchased price. If the
equipment will be depreciated
over a period of 10 years with a
salvage value of 8%, determine
the depreciated cost during the
5th year using SYD.

ANS: 626269.10
 SAMPLE PROBLEM
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34. A copying machine has a

useful life of 3 years and a
salvage value of P20, 000 was
bought for P135, 000. If the
owner decides to sell after
using it for 2 years, how much
should the selling price be so
that he will not lose or gain if
the interest is 5%? (hint : Apply
the Sinking Fund Method)

ANS: 60218
 SAMPLE PROBLEM
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35. Determine the first cost of a

machine that is used for making
spill-containment pallets if its
book value in year 3 is $25,000.
The machine has a 5-year life,
and the double declining
balance method is applied.

ANS: $115740.74
 SAMPLE PROBLEM
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36. Equipment for immersion

cooling of electronic
components has an installed
value of $182,000 with an
estimated salvage value of
$40,000 after 15 years. For
years 10, use DBM book
depreciation to determine the
depreciation charge.

ANS: 7045
 SAMPLE PROBLEM
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37. A high speed sewing machine

costs ₱60,000 on March 20,1998.
It is estimated that it will have a
useful life of 8 years, salvage
value of ₱5,000, production of
1920 units, and working hours of
6720 hrs. If the machine is used
for 600 hrs, and produced 850
units in 1999, find the depreciation
in 1999 by:
• Service method
• Output method

ANS: 4910.71, 24348.96

 Comparison of
Alternatives
1. Present Worth Cost Method (PWCM)
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2. Future Worth Cost Method (FWCM)

3. Equivalent Uniform Annual Cost Method (EUACM)

 Comparison of
Alternatives
4. RateINofENGINEERING
REVIEW Return Method (RORM)
ECONOMY

5. Capitalized Cost Method(CCM)

6. Payback Period Method (PPM)

 SAMPLE PROBLEM
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38. Wood and steel structures are being considered for a foot bridge. The
wooden structure requires a $10,000 first cost, annual painting and general
maintenance is estimated to cost 1,800, a major overhaul will be required
every 5 years and cost $3,500. The steel bridge will cost $25,000 with annual
upkeep estimated to cost $1,000, and only one overhaul will be required in
the 15th year and cost $6,000. The steel bridge will have a salvage value of
$5,000 at the end of its life in 25 years. The wooden bridge will have no
salvage value at the end of 25 years, but an expense of $4,000 will be
required to remove the structure. Using present worth comparison determine
the best alternative. Interest is 10%.
SAMPLE PROBLEM
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 SAMPLE PROBLEM
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ANS: Wooden foot bridge

 SAMPLE PROBLEM
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39. An industrial firm uses an economic analysis to determine which of two

different machines to purchase. Each machine can perform the same task in
a given amount of time. Assume the minimum attractive rate of return is 8%.
See the following data in this analysis.
 SAMPLE PROBLEM
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ANS: Machine X
 SAMPLE PROBLEM
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40. A ski resort installs two

new ski lifts at a cost of
P2M. The resort expects
annual cost revenue to
increase P600,000 while it
incurs an annual expense of
P75,00 for lift operation and
maintenance. What is the
payback period?

ANS: 3.8 years

 SAMPLE PROBLEM
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40. To connect two barangays on both sides of a river, a bridge is to be

constructed. There are two proposals for the bridge material to be used.
These are as follows:
Timber Steel
First Cost…………………….P60,000 P140,000
Annual MC…………………..P10,000 P2,500
Life (years)………………….12 36
If money is worth 10%, which bridge material should be adopted? Use the
ROR method.
 SAMPLE PROBLEM
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ANS: Steel
 Benefit-Cost Ratio
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Remarks: Benefit-Cost ratio can also be used as basis in comparing two

or more alternatives.

BASED ON TOTAL COST

BASED ON ANNUAL COST

 SAMPLE PROBLEM
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41. A construction company

intends to build a fly-over
that costs P3000000. The
annual maintenance is
P100000 and the annual
benefit to the motorists has
been estimated to be
P250,000 . If money is worth
8% and the useful life is 50
years , find B/C.

ANS: 0.724
 SAMPLE PROBLEM
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42. Two motors are available for a passenger jeepney model and pertinent data
are as follows
Motor A Motor B:
Initial Cost ₱20,000 ₱25,000
Annual Maintenance 7,200 5,000
Annual Income 12,000 15,000
Life in Years 8 8
Which motor should be adopted on the basis of B/C if money worth’s 12% per
annum?
 SAMPLE PROBLEM
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ANS: Motor B
THANK YOU