AUXESIS REVIEW CENTER Day 3 – Engineering Economy

Regular Review Program Prepared by: Engr. John Ryan Regalario

____________________________ ____________________________
- it is the analysis and evaluation of the factors that will - the quantity of a certain commodity that is offered for
affect the success of engineering projects to the end that sale at a certain price at a given place and time.
a recommendation be made which will ensure the best
use of capital. ____________________________
- under conditions of perfect competition the price at
____________________________ which a given product will be supplied and purchased is
- it is an economic or a market situation in which only a the price that will result in the supply and the demand
single seller or producer supplies a commodity or a being equal.
service.
____________________________
____________________________ - when the use of one of the factors of production is
- it is a market situation in which there are so few limited, either in increasing cost or by absolute quantity,
suppliers of a particular product that one supplier’s a point will be reached beyond which an increase in the
actions significantly impact prices and supply. variable factors will result in a less that proportionate
increase in output.
____________________________
- it is a market condition in which a product is traded Simple Interest
freely by buyers and sellers in large numbers without - interest on an investment that is calculated once per
any individual transaction affecting the price. period, usually annually, on the amount of the capital
alone and not on any interest already earned.
____________________________
- it is an economic or market situation in which a single ____________________________
consumer or buyer buys a commodity or a service from - a type of simple interest in which interest is calculated
suppliers. as through each month had 30 days.

____________________________ I = Pin
- It is an economic or market situation in which there are F = P + I = P + Pin = P(1 + in)
many sellers or producers that supplies a commodity or where:
a service to very few consumers. I = simple interest
P = present worth
____________________________ i = interest per period
- it is an economic system based on the private n = number of interest period
ownership of the means of production and distribution of
goods, characterized by a free competitive market and 1. Determine the ordinary simple interest on P5000 for 9
motivation by profit. months and 10 days if the rate of interest is 12%.
ans:
____________________________
- these are tangible things – things that you can touch – 2. Determine the future worth on the previous problem.
that satisfy human wants. ans:

____________________________ 3. If P1000 accumulates to P1500 when invested at a

- these are activities that people do for themselves or for simple interest for 3 years, what is the rate of interest?
other people to satisfy their wants. ans:

____________________________ 4. Jojo bought a 2nd hand DVD player and then sold it to
- products or services that are required to support Rowace at a profit of 40%. Rowace then sold the DVD
human life and activities, which will be purchased in player to Kat at a profit of 20%. If Kat paid 2856 more
somewhat the same quantity even though the price than it cost Jojo, how much did Jojo pay for the unit?
varies considerably. ans:

____________________________ ____________________________
- products or services that are desired by humans and - it is a type of simple interest in which interest is
will be purchased if money is available after the required calculated on the basis of a year with 365 days rather
necessities have been obtained. than the conventional 360 days.

____________________________ i = r/365 (for ordinary year)

- the quantity of a certain commodity that is bought at a = r/366 (for leap year)
certain price at a given place and time. I = Pin
F = P + I = P + Pin = P(1 + in)

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AUXESIS REVIEW CENTER Day 3 – Engineering Economy
Regular Review Program Prepared by: Engr. John Ryan Regalario

where: 10. What rate of interest compounded annually is the

I = simple interest same as the rate of interest of 8% compounded
P = present worth quarterly?
i = interest per period ans:
n = number of interest period
11. Which of these gives the lowest effective rate of
5. The exact simple interest of P5000 invested from interest?
June 21, 1995 to December 25, 1995 is P100. What is a. 12.35% compounded annually
the rate of interest? b. 11.90% compounded semi-annually
ans: c. 12.20% compounded quarterly
d. 11.60% compounded monthly
6. Calculate for the exact simple interest on P15,000 for
the period from February 12, to August 15, 2004 if the Compound Interest
rate of simple interest is 12%. 𝑟 𝑚𝑛
𝐹 = 𝑃(1 + 𝑖)𝑛 = 𝑃 (1 + )
ans: 𝑚
𝑟 −𝑚𝑛
𝑃 = 𝐹(1 + 𝑖)−𝑛 = 𝐹 (1 + )
Rate of Discount 𝑚
Continuously Compounding
- is the discount of one unit of principal per unit time
𝑑 𝐹 = 𝑃𝑒 𝑟𝑛
𝑖= 𝑃 = 𝐹𝑒 −𝑟𝑛
1−𝑑
where: Single Payment Present Amount Factor
i = rate of interest = (1 + i)-n
d = rate of discount Single Payment Future Amount Factor
= (1 + i)n
7. A college freshman borrowed P2000 from a bank for
his tuition fee and promised to pay the amount for one 12. A loan for P50000 is to be paid in 3 years at the
year. He received only the amount of P1920 after the amount of P65000. What is the effective rate of money?
bank collected an advance interest of P80. What was the ans:
rate of discount?
ans: 13. An amount of P1000 becomes P1608.44 after 4
years compounded bimonthly. Find the nominal interest.
8 Ms. Evilla borrowed money from a bank. She receives ans:
from the bank P1340 and promised to pay P1500 at the
end of 9 months. Determine the corresponding discount 14. How long will it take money to double itself if
rate or often referred to as the banker’s discount. invested at 5% compounded annually?
ans: ans:

Nominal Rate of Interest (r) 15. By the condition of a will, the sum of P20000 is left to
- is defined as the basic annual rate of interest. a girl to be held in trust fund by her guardian until it
amounts to P50000. When will the girl receive the
r = im money if the fund is invested at 8% compounded
where: quarterly?
i = interest per period ans:
m = number of interest per periods per year
m = 1 (annually) 16. If the nominal interest rate is 5% percent, how much
= 2 (semi-annually) is P3000 worth in 15 years in a continuously
= 4 (quarterly) compounded account?
= 6 (bi-monthly) ans:
= 12 (monthly)
= 52 (weekly) ____________________________
= 360 (daily) - is defined as a series of equal payments occurring at
equal interval of time.
Effective Rate of Interest (ERI)
- is defined as the actual or exact rate of interest earned ____________________________
on the principal during one-year period. - is a type of annuity where the payments are made at
𝑟 𝑚 the end of each period beginning from the 1st period.
𝐸𝑅𝐼 = (1 + ) − 1 (1 + 𝑖)𝑛 − 1
𝑚 𝐹=𝐴
9. What is the effective rate of interest corresponding to 𝑖
18% compounded daily? Take 1 year = 360 days.
1 − (1 + 𝑖)−𝑛
ans: 𝑃=𝐴
𝑖
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AUXESIS REVIEW CENTER Day 3 – Engineering Economy
Regular Review Program Prepared by: Engr. John Ryan Regalario

(1 + 𝑖)𝑛 − 1 Uniform Geometric Gradient

Uniform Series Compound Amount Factor =
𝑖 - is a series consisting of end-of-period payments, where
𝑖
uniform series sinking fund factor = each payment increases or decreases by a fixed
(1+𝑖)𝑛 −1
𝑖 percentage
uniform series capital recovery factor =
1−(1+𝑖)−𝑛
1−(1+𝑖)−𝑛 22. The first year maintenance cost for a new automobile
uniform series present worth factor =
𝑖
is estimated to be P10,000 and it increases at a uniform
rate of 10% per year. Using an 8% interest rate,
17. What annuity is required over 12 years to equate
calculate the present worth of cost of the first 5 years of
with a future amount of P20000? Assume I = 6%
maintenance.
annually.
ans:
ans:

____________________________
18. How much money must you invest today in order to
- refers to the present worth of a property that is
withdraw P2000 annually for 10 years if the interest rate
assumed to last forever. The capitalized cost of any
is 9%?
property is the “sum of the first cost and the present
ans:
costs of perpetual replacement, operation and
maintenance”.
____________________________
- is a type of annuity where the payments are made at
Case 1: No replacement, only maintenance
the beginning of each period starting from the 1st period.
A
1 − (1 + 𝑖)−𝑛 CC = FC +
𝑃=𝐴 (1 + 𝑖) i
𝑖 Case 2: No maintenance, only replacement
P
19. Mr. Ayala borrows P100,000 at 10% effective annual CC = FC +
(1 + i)n − 1
interest. He must pay back the loan over 30 years with
Case 3: With maintenance and replacement
uniform monthly payments due on the first day of each A 𝑃
CC = FC + + (1+𝑖)𝑛
month. What does Mr. Ayala pay each month? i −1
ans:
23. At 6%, find the capitalized cost of a bridge whose
____________________________ cost is P250M and life is 20 years, if the bridge must be
- is the type of annuity where the first payment is made partially rebuilt at a cost of P100M at the end of each 20
later than the first or is made several periods after the years.
beginning of the annuity. ans:
1 − (1 + 𝑖)−𝑛
𝑃=𝐴 (1 + 𝑖)−𝑑
𝑖 24. An equipment is purchased for P50,000. If the
annual maintenance cost is P1500, determine the
20. A person buys a piece of lot for P100,000 down capitalized cost of perpetual service with an interest rate
payment and 10 deferred semi-annual payments of of 6%.
P8,000 each, starting three years from now. What is the ans:
present value of the investment if the rate of interest is
12% compounded semi-annually? ____________________________
ans: - is the decrease in the value of physical property due to
passage of time.
____________________________
- is a series of disbursements or receipts that increases d = annual depreciation
or decreases in each succeeding period by constant C0 = first cost
amount. BV = book value before life expectancy (L)
n = years before life expectancy (L)
21. The Texas Highway Department expects the cost of SV = salvage value
maintenance for a particular piece of heavy equipment to Dn = total depreciation after year n
be P5000 in year 1, P5500 in year 2 and amounts dn = depreciation charge on year n
increasing by P500 through year 10. At an interest rate
of 10% per year, the present worth of the maintenance ____________________________
cost is 𝐶0 − 𝑆𝑉
𝑑=
ans: 𝐿
𝑛
𝐷𝑛 = 𝑛𝑑 = (𝐶0 − 𝑆𝑉)
𝐿
𝐵𝑉𝑛 =𝐶0 − 𝐷𝑛

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AUXESIS REVIEW CENTER Day 3 – Engineering Economy
Regular Review Program Prepared by: Engr. John Ryan Regalario

25. An engineer bought a machine for P500,000. Other c) Determine the depreciation charge during the 10th
expenses including installation amounted to P30,000. At year.
the end of its estimated useful life of 10 years, the ans:
salvage value will be 10% of the first cost. Using straight
line method of depreciation ____________________________
a) what is the annual depreciation? 2 𝑛
𝐵𝑉𝑛 = 𝐶0 (1 − )
ans: 𝐿
b) what is the book value after 5 years? 2 2 𝑛−1
𝑑𝑛 = 𝐶0 (1 − )
ans: 𝐿 𝐿
2 𝐿
26. A printing equipment costs P 73,500 has a life 𝑆𝑉 = 𝐶0 (1 − )
𝐿
expectancy of 8 yrs. and has a salvage value of P 3500
at the end of its life. The book value at the end of “x” 30. An asset has a 1st cost of P22,000, an estimated life
years is equal to P 38,500. Using straight line method of of 30 years. Using the double declining balance method,
depreciation, solve for the value of “x”. a) Determine the book value after 6 years.
ans: 4 years ans:
b) Determine the depreciation charge during the 6th year.
____________________________ ans:
(𝐶0 − 𝑆𝑉)𝑖 c) What is the salvage value?
𝑑=
(1 + 𝑖)𝑛 − 1 ans:
(1 + 𝑖)𝑛 − 1
𝐷𝑛 = 𝑑
𝑖 ____________________________
𝐿−𝑛+1
𝑑𝑛 =(𝐶0 − 𝑆𝑉)
𝑆𝑌𝐷
27. A broadcasting corporation purchased equipment for
𝐿(𝐿 + 1)
P53,000 and paid P1,500 for freight and delivery 𝑆𝑌𝐷 =
2
charges to the job site. The equipment has a normal life 𝑛 2𝐿 − 𝑛 + 1
of 10 years with a trade-in value of P5,000 against the 𝐷𝑛 = (𝐶0 − 𝑆𝑉) ( )
2 𝑆𝑌𝐷
purchase of new equipment at the end of the life. Using 31. An asset is purchased for P120,000. Its estimated
sinking fund method, (assume annual interest of 6%) economic life is 10 years, after which it will be sold for
a) Determine the annual depreciation. P12,000. Using SOYD
ans: a) find the depreciation charge during the 3rd year.
b) Determine the total depreciation after 5 years. ans:
ans: b) find the total depreciation after 3 years
ans:
____________________________ ____________________________
𝐿 𝑆𝑉 𝑛 𝐵𝑉𝑛 - is a certificate of indebtedness of a corporation usually
𝑘 =1− √ =1− √ for a period not less than ten years and guaranteed by a
𝐶0 𝐶0
𝑛⁄ mortgage on certain assets of the corporation or its
𝑛
𝑆𝑉 𝐿
subsidiaries
𝐵𝑉𝑛 = 𝐶0 (1 − 𝑘) = 𝐶0 ( )
𝐶0
𝐿
𝑆𝑉 = 𝐶0 (1 − 𝑘) 𝐹𝑟
𝑃= (1 − (1 + 𝑖)−𝑛 ) + 𝐶(1 + 𝑖)−𝑛
𝑑𝑛 = 𝑘𝐶0 (1 − 𝑘)𝑛−1 𝑖
where:
28. A VOM has a current selling price of P400. If the F = face, or par, value
selling price is expected to decline at a rate of 10% per C = redemption or disposal price (often equal to F)
annum due to obsolence, r = bond rate per period
a) what will be its selling price after 5 years? n = number of periods before redemption
ans: i = investment rate per period
b) what will be the salvage value if the life expectancy is P= value of the bond n periods before redemption
10 years?
ans: 32. A man wants to make 14% nominal interest
compounded semi-annually on a bond investment. How
29. A machine worth P250,000 has an estimated life of much should he be willing to pay now for a 12%,
15 years with a book value of P30,000 at the end of the P10,000- bond that will mature in 10 years and pays
period. interest semi-annually?
a) Determine the rate of depreciation. ans:
ans:
b) Determine the book value after 10 years.
ans: