Problem Set # 14 Engineering Economics

1. An asset is purchased for P500,000. The salvage value in 25 years is P80,000/

what are the depreciation in the first three years using straight line method?
A. P 48,000.00
B. P 24,000.00
C. P 32,000.00
D. P
16,800.00
2. A machine has an initial cost of P50,000 and a salvage value of P 5,000 after
10 years what is the book value after five years using straight line
depreciation?
A. P 27,500.00
B. P 25,000.00
C. P 15,500.00
D. P 30,000.00
3. A machine has a first cost of P 50,000 with interest rate of 10 annually.
Expected salvage value after 10 years is P 5,000. Find the book value after 5
years using sinking fund method.
A. P 12,039
B. P 22,084
C. P 42,084
D. P 32,762
4. An asset is purchased for P10,000. Its estimated life is 10 years after which it
will be sold for P1,000.00. Find the book value during the 4 th year if the sum
of the years digit (SOYD) depreciation is used.
A. P6,100.00
B. P4,307.69
C. P5,082.00

D>

P4,692.30
5. A company purchases an asset for P20,000 and plans to keep it for 15 years.
If the salvage value is zero at the end of the 20 th year, what is the
depreciation in the third year? Use sum of the years digit depreciation.
A. P1,000.00
B. P2166.67
C. P936.00
D. P747.00
6. An asset is purchased for P10,000. Its estimated life is 10 years after which it
will be sold for P1,000. Find the book value during the first year if sum of the
years digit (SOYD) depreciation is used
A. P8.363.64
B. P6,500.00
C. P7,545.00
D. P6000.00
7. An item is purchased for P150.000. annual cost is P10,000. Using 10% what is
the capitalized cost of perpetual servise?
A. P352,000
B. 250,000
C. P532,000
D. P325,000
8. A machine has a first cost of P60,000 and has an expected salvage value
after 10 years is P6,000. Find the book value after 6 years using declining
balance method.
A. P10,028.34

B. P15,071.32

C P20,083.45

D. P25,083.45
9. An equipment has a first cost of P30,000 and salvage value of P10,000 after 5
years. If interest is 10%, Find the capital recovery rate per year.
A. P3974.34
B. P4875.67
C. P5083.34
D. P6,276.00

10.A bond worth P40,000 has a bond rate of 12% has a redeemable value of
P50,000 after 15 years. If interest rate is 10% annually, find the present value
of bond.
A. P48,478.78

B. P34,084.55

C. P29,095.45

D. P59,375.23
11.A bond pays P342 interest per year and has face value of P8,000 at the end
of 10 years, when it has to be redeemed. If the current value of bond is
P6,000, what is the interest earned on the bond ?
A. 14%
B. 13%
C. 10%
D. 8%
12.A member of congress wants to know the capitalized cost of maintatining a
proposed national park. The annual maintenance cost is expected to be
$20,000. At an interest rate of ^% per year, the capitalized cost of the
maintenance would be closest to:
A. $1,500
B. $25,000
C. $333,333
D. $416.667
13.A dam will have a first cost of $5,000,000 an annual maintenance cost of
$20,000 and minor reconstruction cost of $120,000 every six years. At an
interest of 7% per year , the capitalized cost of the dam is nearest to :
A. $213,125
B. 525,625
C. $5,312,500
D.
$5,574,473
14.An alternative for manufacturing a certain part has a first cost of $60,000, an
annual cost of $8,000 and a salvage value of $4,000 after its 8 year life. At
and interest rate of 12% per year, the capitalized cost of the alternative is
closest to:
A. $17,822
B. $164,608
C. $178,215
D. $189,355
15.A company must relocate one of its factories in five years. Equipment for the
loading dock is being considered for purchase. The original cost is $40,000,
the salvage value after five years us $8000. The companys rate of return on
money is 8%. Determine the capital recovery rate (CR) per year.
A. $5455 per year B. $4946 per year C. $5115 per year D. $5625/year
16.Company A purchases P180,000 of equipment in year zero, It decides to use
straight line depreciation over the expected 20 years life of the equipment.
The interest rate is 10% if its average tax rate is 30%, what is the present
worth of the depreciation tax held?
A. P3,500.00
B. P26,500.00

C. P39700.00

D. P22,987
17.A machine has a first cost of P100,000 and salvage value of P10,000 after 10
years. The Annual maintenance of the machine is P4,000. If interest rate is
10%, find the annual cost of the machine.

A. P17,009.34

B. P19,647.08

C. P21,083.58

D. P32074.56
18.A certain product has the following corresponding cost: 250 units for P4,000
and 400 units for P5000. Find The incremental cost.
A. 3.46
B. $.05
C. 5.31

D.

6.67
19.A machine has an initial cost of P200,000 and has a maintenance if P10,000 4
years from now and P30,000 ten years from now. Fin the present worth of the
machine (i=13%)
A. P112,323/42

B. P212,323.42

C. P312,323.42

D.

P412,323.42
20.An equipment has a first cost of P500,000 and has an installation cost of
P50,000. The salvage value of the equipment is P70,000 after 10 years.
Maintenance is P10,000 and consider tax as 3%. Find the annual cost of the
equipment. (i=10%)
A. P111,618
B. P172,475
C. P197,636
D. P208,576
21.Which of the following alternatives is superior over a 20 years period if
interest rate is &%?
Type
Life
Initial cost
Maintenance
A. Alternative A

Alternative A
Alternative B
Brick
Wood
20years
10 years
P1800
P850
P5/year
P30/year
B. Alternative B
C. A & B

D.

None of these
22.Two plans are available for a company to obtain automobiles for its salesmen.
How many miles must the cars be driven each year for the two plans to have
the same cost? Use an interest rate of 10%. (use the year-end convention for
all costs).
Plan A : lease the cars for P5000 and economic life of three years, after
which it can
Plan B : Purchase the cars for P5000 abd economic life of three years,
after which it can be sold for P1200. Gas and oil cost P0.04 per mile.
Insurance is P500 per year.
A. P17,028 mile/yr B. 12,527 miles/yr C. 14,527 miles/yr D. 19,527 miles/yr
23.A machine has an initial cost of P50,000 and an annual maintenance cost of
P6,000. Its useful life is 10 years and salvage is P5,000. The annual benefit
from purchasing the machine is P25,000 . The effective annual interest rate is
10%. What is the machines benefit cost ratio?

A. 1.22

B. 1.83

C. 2.03

D.

2.43
24.A public works project has an initial cost of P1,200,000, benefits with a
present worth of P1,800,000, and dis-benefits with a present worth of
P300,000. What is the benefit-cost-ratio?
A. 1.05
B 1.10
C. 1.25
D. 1.84
25.A company is considering two methods for obtaining a certain part. Method A
will involve purchasing a machine for $50,000 with a life of 6 years, a $2,000
salvage value and a fixed annual operating cost of $10,000. Additionally each
part produce by the method will cost $10. Method B will involve purchasing
the part from a subcontractor for $25 per part. At an interest rate of 10% per
year, The number of parts per year required for the two methods to break
even is.
A. 1,333
B. 1,415
C. 1,850
D. 2,011
26.A replacement electric motor is being considered for purchase. It is capable of
providing 200hp. The pertinent data are as follows:
Cost
$3200
Electric efficiency
0.85
Maintenance cost per year
$50
Life expectancy
14 yr
Salvage value after 14 yr
$0
The motor is used for 500h/yr and the cost of electricity is $0.04/kWhr(1hp=.746 kW). What is most nearly the effective annual cost using an
interest rate of 10%?
A> $2920
B. $3250
C. $3290
D. $3610
27.A company must relocate one of its factories in 3 yr. Equipment for the
loading dock is being considered for purchase. The original cost is $20,000
and the salvage value after 3 yr is $8000. The companys rate of return on
money invested is 10%. The capital recovery rate per year is most nearly.
A. $4810/yr
B. $4950/yr
C. $5120/yr
D. $5630/yr
28.What is the book value of equipment purchased 3 yr ago for $15,000 if it is
depreciated using the sum of the years digits (SOYD) method? The expected
life is 5 yr.
A. $3000
B. $4000
C. $6000
D. $9000
29.The purchase of a motor of $6000 and a generator for $4000 will allow a
company to produce its own energy. The configuration can be assembled for
$500. The service will operate for 1600h/yr for 10 yr. The maintenance cost is
$300/yr, and the cost to operate is $0.85/h for fuel and related cost. There is

$400 in salvage value for the system at the end of 10 yr. Using straight line
depreciation, what is the annual cost for the operation?
A. $2480/yr
B. $2630/yr
C. $2670/yr
D. $2710/yr
30.Company A purchases $200,000 of equipment in year 0. It decides to use
straight line depreciation over the expected 20 yr life of the equipment. The
interest rate is 14%. If its overall tax rate is 40%, what is the present worth of
the after-tax depreciation recovery?
A. $23,500
B. $24,000
C. $26,500
D. $39,700
31.A firm is considering renting a trailer at $300/mo. The unit is needed for 5yr.
The leasing company offers a lump sum payment of $24,000 at the end of 5
yr as an alternative payment plan, but is willing to discount this figure. The
firm places a value of 10% (effective annual rate) on invested capital. How
large should be the discount be in order to be acceptable as an equivalent?
A. $750
B$820
C. $980
D. $1030
32.Which plan is the least expensive way to purchase plant maintenance
equipment? The discount rate is 11%
Plane A: $50,000 down, equal payments of $25,115.12 for 20 yr
Plant B: nothing down, equal payments of $31,393.91 for 20yr
Plant C: $100,000 down, Equal payments of $21,975.74 for 20 yr
A. Plan A
B. Plan B
C. Plant C
D. Plan D