ENGINEERING ECONOMY

ELEMENTS OF SIMPLE INTEREST

P = principal or present worth

I = interest earned
F = future worth , F = P + I
r = simple interest rate (per year)
t = time in years or fraction of a year
PROBLEM 1

An ordinary simple interest of 8.5% per

year is applied on a P50,000.00 loan made on
July 01, 2005. Find the lump sum interest to be
paid on the loan on June 05, 2012.
PROBLEM 2

Using the same data in Problem 1,

determine the total amount to be paid on the
loan if an exact interest rate of 7.5% is used.
PROBLEM 3

Find the interest on P6800.00 for 3 years at

11% simple interest.
PROBLEM 4

What is the principal amount if the

amount if the amount of interest at the end of 2
½ year is P4500 for a simple interest of 6% per
annum?
PROBLEM 5

How long must a P40,000 note bearing 4%

simple interest run to amount to P41,350.00?
PROBLEM 6

If P16,000 earns P480 in 9months, what is

the annual rate of interest?
PROBLEM 6

Price tag of 1200 pesos is payable in 60 days. A

3% discount is offered if paid in 30 days. What is
the rate of interest?
EFFECTIVE INTEREST RATES

𝑟 𝑚
𝐸𝑅 = 1 + −1
𝑚

𝐸𝑅 = 𝑒 2 − 1
PROBLEM 7

A bank offers 0.5% effective monthly

interest. What is the equivalent effective annual
rate?
PROBLEM 8

Find the nominal rate that if converted

quarterly could be used instead for 15%
compounded semi-annually?
PROBLEM 9

What is the effective rate for an interest

rate of 12% compounded continously?
PROBLEM 10

How long will it take P1,000 to amount to

P1346 if the invested at 6% compounded
quarterly?
PROBLEM 11

After how many years will an amount

double, if the rate of interest is 5% per annum,
compounded continuously.
PROBLEM 12

An investment of P250,000 earns a

nominal annual interest of 6% compounded
continuously. Find its accumulated sum at the
end of 5 years.
PROBLEM 13

A man expects to receive P20,000 in 10

years. How much is that money worth now
considering interest at 6% compounded
quarterly?
PROBLEM 14

If the interest rate on an account is 11.5%

compounded yearly, approximately how many
years will it take to triple the amount?
PROBLEM 15

At what rate of interest compounded

quarterly will an investment double in 4 years?
PROBLEM 16

A house and lot costing P2M was bought at

a down payment of P500,000.00 and P1M after
one year. The remaining balance will be paid at
the end of the third year. If the interest rate is
24% compounded semi annually, what is the
required payment?
PROBLEM 17

East Side Bank offers the following

effective rates on 5-year loans; 8% for the first
two years, 10% for the third year, 11% for the
fourth year and 12% on the fifth year. If
P500,000.00 is borrowed, determine the lump-
sum amount to be paid at the end of the loan
period.
PROBLEM 17

What is the uninflated present worth of a

P200,000.00 future value in two years if the
average inflation rate is 6% and i is 10%?

P 147, 106.85
ANNUITY

Ordinary Annuity
𝐴( 1 + 𝑖 𝑚𝑛 − 1)
𝐹=
𝑖
Deferred Annuity
𝐴( 1 + 𝑖 𝑚𝑛 − 1)
𝐹=
𝑖
Annuity Due
PROBLEM 18

The president of a growing engineering

firm wishes to give each of 50 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 P1000.00 bonus?
PROBLEM 19

If money is worth 4% compounded

monthly, what payment at the end of each
quarter will replace payments of P500.00
monthly?

P 1505.00
PROBLEM 20

An endowment today of one million pesos

maybe converted into monthly pensions for 20
yrs. Determine the pension in pesos, considering
that the rate of interest is 9% compounded
monthly.

P 8997.26
ANNUITY

Annuity Due
PROBLEM 21

A contractor bought a concrete mixer at

P120,000.00 if paid in cash. The mixer may also
be purchased by installment to be paid within 5
years. If money is worth 8%, the amount of each
annual payment, if all payments are made at the
beginning of each year is:

P 27,828.49
PROBLEM 22

An engineer wishes to take out a

P150,000.00 educational policy for his son, if
money is worth 14% effective, find the
premiums to be paid
a. If five yearly payments are needed

22,692.53
PROBLEM 23

An individual makes five deposits that

increase uniformly by P300.00 every year in a
savings account that earns 12% interest
compounded annually. If the initial deposit is
P4,500.00, determine the accumulated amount
in the account just after the last deposit.

P 31969.93
CAPITALIZED COST

𝑂𝑀 𝑅𝐶 − 𝑆𝑉
𝐾 = 𝐹𝐶 + +
𝑖 1+𝑖 𝑛−1
ANNUAL COST

(𝑅𝐶−𝑆𝑉)𝑖
AC= 𝐹𝐶𝑖 + 𝑂𝑀 +
1+𝑖 𝑛−1
PROBLEM 24

A machine cost P300,000.00 new, and

must be replaced at the end of each 15 years. If
the annual maintenance required is P5,000.00,
find the capitalized cost, if money is worth 5%
and the final salvage value is P50,000.00

P 631,711.44
PROBLEM 25

A certain equipment costs P150,000.00

lasts for 6 years, and has a salvage value of
P30,000. How much could an investor afford to
pay for another machine for the same purpose,
whose life is 10 years and the salvage value if
P40,000, if money is worth 5%?

P 218697.13
DEPRECIATION
FC = first cost , initial cost
SV = salvage value or trade-in-value
d= depreciation charge
n= economic life of the property in years
m= any time before n
BVm=book value after m years
Dm=total Depreciation for m years
STRAIGHT LINE DEPRECIATION ***neglecting interest

This is the most common method used in

computing depreciation. In this method, the
cost of the property is assumed to vary linearly
with time. The following formulas are used.

𝐹𝐶 − 𝑆𝐶
𝑑=
𝑛

𝐷𝑚 = 𝑑 × 𝑚
SINKING FUND METHOD ***considering interest

In this method, an imaginary fund d called a

sinking fund is invested yearly at a rate of i to
amount to (FC - SV) at the end of the life of the
property.

(𝐹𝐶 − 𝑆𝐶)𝑖
𝑑=
1+𝑖 𝑛−1

𝑑((1 + 𝑖)m−1)
𝐷𝑚 =
𝑖
SUM OF THE YEARS DIGIT METHOD (SOYD)
The depreciation charge in this method is
assumed to vary directly to the number of years
and inversely to the sum of the year’s digit.
′
𝑛
𝑆𝑢𝑚 𝑜𝑓 𝑦𝑒𝑎𝑟 𝑠 𝑑𝑖𝑔𝑖𝑡, 𝑆𝑈𝑀 = (1 + 𝑛)
2

(𝐹𝐶 − 𝑆𝐶)(𝑛 − 𝑚 + 1)
𝑑𝑚 =
𝑆𝑈𝑀

m(2𝑛 − 𝑚 + 1)
𝐷𝑚 = (𝐹𝐶 − 𝑆𝐶)
2 × 𝑆𝑈𝑀
 DECLINING BALANCE METHOD ***constant percentage method

Also known as Matheson formula. This method is

based on the compound interest formula F=P(1+i)n,
where P is the first cost, FC, F is the book value at
any time, and i is the depreciation rate and is equal
to –K. Then

𝐵𝑉𝑚 = 𝐹𝐶 1 − 𝐾 𝑚
𝑆𝑉 = 𝐹𝐶 1 − 𝐾 𝑛
𝑛 𝑆𝑉
𝐶𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒, 𝐾 = 1 −
𝐹𝐶
𝑑𝑚 = 𝐹𝐶(1 − 𝐾)𝑚−1 𝐾
DOUBLE DECLINING BALANCE METHOD
2
Depreciation charge to date = ×BV at the
n
beginning of the year
𝑚
2
𝐵𝑉𝑚 = 𝐹𝐶 1 − ≥ 𝑆𝑉
𝑛
2
𝑑𝑚 = 𝐵𝑉𝑚
𝑛
PROBLEM 27

An engineer bought an equipment for

P500,000.00. Other expenses including
installation amounted to P30,000.00. At the end
of its estimated useful life of 10 years, the
salvage value will be 10% of the first cost. Using
the straight line method of depreciation, what is
the book value after five years?

P 291,500
PROBLEM 28

A pick-up truck costs P960,000.00 and is

expected to be used for 10 years after which it
will have a salvage value of P160,000.00. Find
the book value at the end of the third year using
8% sinking fund method.

P 780,722.13
PROBLEM 29

ABC construction bought an equipment for

P60,000.00 with a salvage value of P10,000.00.
The equipment is expected to have a life of 10
years. Find its book value after 6 years using
sum of the years digit.

P 19,090.90
PROBLEM 30

A power plant purchases a fire tube boiler

for P525,000.00. It is estimated to have a scrap
value of P30,000.00 after 12 years. Using the
Matheson Formula, find
a. The depreciation charge for the fourth year
b. The book value at the end of seven years

P 54, 469.62 and P 98,867.55

PROBLEM 31

Ice bottling company purchased a filling

machine for P1M with additional cost for
optional features amounting to P120,000.00. For
an expected life of five years, determine the
accumulated depreciation after three years
using the Double Declining Balance Method.

P 878,080.00
PROBLEM 32
Given the following data for construction
equipment:
Initial Cost = P1,200,000.00
Economic Life = 12 years
Estimated Salvage Value = P320,000.00
Determine the book value after seven years using:
a. The sum of the year’s digit method
b. The double declining balance method
c. The declining balance method, and
d. The sinking fund method using 6% interest.

489230.77, 334898, 555047, 762145.65

BREAKEVEN ANALYSIS

𝐶𝑜𝑠𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒

𝐹𝐶 + 𝑉𝐶 𝑥 = 𝑆𝑃(𝑥)
PROBLEM 32

The cost of producing a computer diskette

is as follows: Material cost is P7.00 each, labor
cost is P2.00 each, and other expense is P1.50
each. If the fixed expenses is P69,000.00 per
month, how many diskettes must be produced
each month for break-even if each diskettes is
worth P45.00?

2000 units