Agricultural Engineering

Board Exam Review

in Farm Economics
 Reviewer/Basic concepts and
definition of terms
A. The discipline concerned with the economic aspects
of engineering, and involves the systematic evaluation
of the costs and benefits of proposed technical and
business projects and ventures is (no. 1, easy)
a. Enterprise management c. Economics
b. Entrepreneurship d. Engineering economy
 Reviewer/Basic concepts…
Enterprise – a venture or project usually designed for profit
Management – the exercise of control over a business or organization
Entrepreneurship – organization, management, and assumption of
risks of a business or enterprise
Economics – a social science concerned chiefly with description and
analysis of the production, distribution, and consumption of goods
and services
Engineering economy – is concerned with the economic aspects of
engineering, and involves the systematic evaluation of the costs and
benefits of proposed technical and business projects and ventures
Ans. d
 Applications of Engineering
Economics
selection among alternative designs/
projects
estimation of costs of improvements in a
factory or a farm
determining when to replace old
equipment with new ones
choosing between leasing or purchasing
assets
 Reviewer/Basic concepts …
B. Accounting is (no. 2, easy)
a. the process of recording all transactions of an enterprise
which affect investments of capital so that at any time, the
result of the investment may be known
b. the allocation of scarce capital among alternatives in such a
way as to yield the highest returns to capital from all
investments put together
c. the method of making a comparative study of costs and returns
analysis resulting from a change in a part of the farm
business organization
d. none of the above
 Reviewer/Basic concepts …
Accounting - the process of recording all transactions of
an enterprise which affect investments of capital so that
at any time, the result of the investment may be known
Capital rationing - the allocation of scarce capital
among alternatives in such a way as would yield the
highest returns to capital from all investments put
together
Partial budgeting - the method of making a comparative
study of costs and returns analysis resulting from a
change in a part of the business organization
Ans. a
 Reviewer/Basic concepts …
C. In a balance sheet, which of the following items is not entered
under assets? (No. 3, Easy)
a. Accounts receivable c. preferred or common shares of stock
b. Inventory of goods and materials d. none of the above

Answer

c
 Typical form of a balance sheet

Name of company
As of _____

Assets
Current assets
Cash on hand and in banks
Notes and accounts receivable
Other receivables (give details)
Less: Reserve for bad debts
Inventories (goods and materials on
hand)
Total current assets
Fixed assets Land
Building or manufacturing plant
(less reserve for depreciation)
Properties other than buildings
(less reserve for depreciation)
Total fixed assets
Prepaid expenses
Amounts paid in advance for
insurance, rental, interest, supplies,
etc.
Total prepaid expenses
Other assets
Goodwill
Patents, franchises, licenses
Other intangibles
Total other assets
Total assets
Liabilities
Current liabilities
Notes and accounts payable
Taxes, wages, interest, etc.
Declared and unpaid dividends
Other current liabilities (give details)
Total current liabilities
Fixed liabilities
Mortgages payable
Indebtedness in the form of bonds
Reserve for expansion
Other long-term liabilities (give
details)
Total fixed liabilities
 Prepaid income
Advance payment on orders
Other income paid in advance to the
company
Total prepaid income
Total liabilities
Ownership or
proprietorship
Preferred shares
Common shares
Undivided surplus (Retained
earnings)
Total ownership
TOTAL Liabilities + ownership
 Balance sheet
Balance sheet defined:
- a financial summary showing the
relationship among assets, liabilities
and ownership in the enterprise as of a
given date
- an enumeration of the nature and
amount of assets, liabilities, and
ownership of the company
 Balance Sheet
Assets – anything of value possessed by an
enterprise
Fixed assets – properties that cannot be readily
converted into cash – e.g., buildings, land,
machinery, equipment, furniture
Current or liquid assets – include cash, accounts
receivable within a short time or within the present
accounting period – e.g., raw materials, goods in
the process of production, and finished goods
ready for sale; prepaid expenses – money paid for
materials not yet delivered or services not yet
rendered to the company – e.g., insurance, rental
 Balance sheet
Liabilities – debts or claims of anyone other than the
owners of the property upon the assets of the
company
Fixed liabilities – those which are not due for
payment until sometime in the future, usually after a
period exceeding one year
Current liabilities – those which mature within a
short time, usually a year which include wages, short-
term debts, and prepaid income (income paid for
goods not yet delivered or services not yet rendered)
 Balance sheet
Owner or proprietorship – represents the investment
of a person or several persons in the enterprise
Fundamental accounting equation
Assets = Liabilities + Ownership (owner’s equity)

Equity – claims of anyone against the assets of the

enterprise
Types of ownership or proprietorship:
individual or sole proprietorship – single owner
partnership – partners (family members, friends)
corporation – shares of common and preferred
stocks of investors
 Reviewer/Basic concepts …
D. A new enterprise’s balance sheet lists among its assets cash and
inventories amounting to P1,500,000 and P16,500,000
respectively, fixed assets of P30M, and notes payable
amounting to P4,500,000, total wages of P9,500,000 and fixed
liabilities of P15M. Is the enterprise liquid (that is, will it be
able to pay off its current financial obligations)? (no.1,
moderate)

a) No, the enterprise is not liquid.

b) Yes, but this is just an honest guess.
c) Yes, as shown by its current ratio that is 1.286
d) No, because its current liabilities exceed current assets
 Reviewer/Basic concepts …
Given:
Current Assets
Cash P1.5M
Inventory P16.5M
Fixed Assets P30M
Current liabilities
Notes payable P4.5M
Wages P9.5M
Fixed liabilities P15M
Find: Current ratio
 Financial ratios
Financial ratios – used to measure the risks and returns of an enterprise
Ratio Calculation Meaning
Liquidity ratio
Current ratio Current assets The extent to which a firm can meet
Current liabilities its short-term obligations
Leverage ratio
Debt-to-total assets Total debt The percentage of total funds that are
ratio Total assets provided by creditors
Activity ratio
Inventory turnover ________Sales__________ Whether a firm holds excessive
Inventory of finished goods stocks of inventories and whether it
is selling its inventories slower than
the industry average
Profitability ratio
Return on stockholders’ _______Net income_______ After-tax profits per peso of
equity Average stockholders’ equity stockholders’ investment in the firm
Growth ratio
Sales Annual percentage growth in Firm’s sales growth rate
sales
 Reviewer/Basic concepts …
Solution:
Current assets
Current ratio (C.R.) 
Current liabilitie s

Current assets = P1.5M + P16.5M and

Current liabilities = P4.5M + P9.5M

Therefore:
P18M
C.R.   1.286
P14M

Answer: c
How many faces can you see in this tree?
 Economic and cost concepts
Economics – deals with the interaction between people and
wealth; a branch of social science concerned with the allocation
of scarce resources to meet the unlimited wants of people
Competition
Perfect competition – occurs when any given product is
supplied by a large number of sellers and there is no restriction
on additional vendors entering the market
Perfect monopoly – exists when a unique product or service is
available from only a single seller and that seller can prevent
the entry of others in the market
Oligopoly – exists when there are so few suppliers of a product
or service that action by one will almost inevitably result in
similar action by the others
 Reviewer/Economic and cost concepts

E. The power of a good or service to satisfy human wants is

(No. 4, Easy)
a) Value c) Utility
b) Benefit d) None of the above
 Reviewer/Economic and cost concepts

Utility – the power of a good or service to satisfy human

wants; inherent not in the object but in the regard that a
person has for it
Value – designates the worth that a person attaches to an
object or service; it is the measure of utility and is expressed
as the price that must be paid to obtain a particular item
Benefit – payment (allowance or entitlement) received
under an annuity or pension plan

Answer: c
 Reviewer/Economic and cost concepts
F. The group of costs associated with initiation of an activity and
which occurs only once for any given activity is (No. 5, Easy)
a. Fixed cost c) First cost
b. Life-cycle cost d) non-recurring cost
 Reviewer/Economic and cost concepts
Fixed cost – those that are unaffected by changes in activity level over
a feasible range of operations for the capacity or capability available.
Examples: taxes, general management and administrative salaries,
license fees, interest on borrowed capital
Life-cycle cost – the summation of all costs, both recurring and non-
recurring, related to a product, structure, system, or service during its
lifespan
First cost (also known as initial or investment cost) – is the cost of
getting an activity started and occurs only once for any given activity
Non-recurring cost – are those that are not repetitive even though the
total expenditure may be cumulative over a relatively short period of
time. Examples: cost of real estate, cost of constructing a plant
Ans. c
 Reviewer/Economic and cost concepts
G. Among the following, that which can be classified as
variable cost is (No. 6, Easy)
a) cost of purchasing machines
b) cost of materials
c) cost of making preliminary design of product or
structure
d) depreciation cost
Reviewer/Economic and cost concepts

Variable costs – are those associated with an operation

that will vary in total with the quantity of output or
other measures of activity level. Examples: cost of
materials, cost of labor used in a product or service
Depreciation cost – a non-cash cost, a book cost
charged for the use of assets such as plant and
equipment to account for wear and tear and other
causes of the deterioration of assets
Answer: b
 Reviewer/ Economic and cost concepts
Relationship between cost and production
C Total cost, CT
o
s
t
Total variable cost,
Cv

Fixed cost, CF

Production
 Reviewer/ Economic and cost concepts
Price, Demand and Total Revenue
p  a  bD
where : p  price
a  intercept on the price (y) axis
b  slope
D  demand for a product

TR  price  Demand  p  D

TR  (a  bD)  D  aD  bD 2
To maximize Total Revenue,
d (TR)
 a  2bD  0
d ( D)


Da
2b
 Reviewer/ Economic and cost concepts
Relationship between total revenue and total cost

Total revenue, TR
Cost
and
Profit Total cost, CT
Revenue

Loss

Loss

D1’ D2’

Production volume (Demand), D

 Reviewer/ Economic and cost concepts
Cost, Volume and Breakeven Point Relationships
At any demand, D, the total cost CT is
CT = C F + CV
If cv is the variable cost per unit, then the total variable cost, CV, is
given by:
CV = cv×D
At any volume (or demand), D
Profit (Loss) = л = Total Revenue – Total Costs
= (aD – bD 2) – (CF + cvD)
= - CF + (a-cv ) × D – bD2
 Reviewer/ Economic and cost concepts
To maximize profit:
d  
 a  cv  2bD
d ( D)
a  cv
D 
2b
where : D   demand that will maximize profit

Economic breakeven point:

@ Breakeven, Total Revenue = Total Cost

aD  bD 2  CF  cv D
Transformi ng :
 bD 2  (a  cv )  D  CF  0
Solving for D':
 a  cv   a  c   4(b)(CF )
2

D'  v

2(b)
 Reviewer/ Economic and cost concepts
H. A company produces circuit boards that are used to
update computer equipment. The fixed cost is P3.15M
per month and the variable cost is P3,975 per circuit
board. The selling price per unit is p=P11,250-1.5D.
Maximum output of the plant is 6,000 units per month.
What demand will maximize the profit for this product?
(No. 2, Moderate)
a) 3,425 c) 1,875
b) 4,115 d) 2,425
 Reviewer/ Economic and cost concepts
Given:
CF = P3.15M
cv = P3,975 per unit
price = p = P11,250 – 1.5D
Solution:
Using the equation for D* :
ac
D*  v
2b
Substituti ng known valu es :
P11,250  P3,975
D*   2,425 Answer: d
2(1.5)
 Reviewer/ Economic and cost concepts
I. The fixed cost that can be allocated to the production of
plywood by Duraboard Plywood Corporation is P10M
per month. The variable cost per thousand board feet is
P6,575. The price charged will be determined by p =
P18,000-2.5D per thousand board feet. The profit at the
optimal sales volume is closest to: (No. 3, Moderate)
a) P1.286M c) P2.478M
b) P3.053M d) P3.670M
 Reviewer/ Economic and cost concepts
Given: CF = P10M
cv = P6,575
p = P18,000 – 2.5D
Find: ¶ (profit)
Solution: First, solve for D*
a  cv 18,000  6,575
D*    2285
2b 2(2.5)

Then solve for  at D *

  TR  TC  (a  bD*) D * (CF  cv D*)
  ( P18,000  P 2.5  2285)(2285)  ( P10M  P6,575  2285)
  P3.053M
 Reviewer/ Economic and cost concepts
J. A manufacturing enterprise has determined that its revenue for
product ZED was highest when it could produce 2,500 units of
ZED per month. Further, profit was also found to be at a
maximum at a production of 2,000 units per month. The
company’s monthly fixed cost for making product ZED was
P10,000 and the cost of making 1 unit of ZED was P20 apiece.
The lower range of the company’s profitable operation (breakeven
point) is at 129 units of product ZED. What is the higher limit of
producing ZED profitably (the other breakeven point?) (No. 1,
Difficult)
a) 1,245 b) 2,372 c) 3,871 d) 4,045
 Reviewer/ Economic and cost concepts

Given: Demand when revenue is highest = D =2,500
Demand when profit is highest = D* = 2,000
CF = P10,000
Cv = P20
D1’=129
Find: D2’
Solution: To solve for D2’, we need to find the roots of
the quadratic equation using the formula:
 a  c   a  c   4(b)(C )
2

D'  v v F

2(b)
 Reviewer/ Economic and cost concepts
Since D1’ is given, we need only to solve for D2’.
However, we have to find the values of the constants a and b
since these are not directly given.
From 
and a  cv
Da D* 
2b 2b

We can solve for a and b.

a a  P 20
2500  and 2000 
2b 2b
5000b  P 20
a  5000b and 2000 
2b
 b  P0.02 and a  P100
 Reviewer/ Economic and cost concepts

Substituting into


 ac 
v
 a  cv 2  4( b)( CF )
D' 
2( b)

 (100  20)  (100  20)2  4( 0.02)  (10,000)

D' 
2( 0.02)
D'  129 and D'  3871
1 2

Answer: c
 Reviewer/ Economic and cost concepts
K. A small manufacturer of a car accessory has fixed costs of P5M
per year, and its maximum output capacity is 100,000 units per
year. The variable cost is P1,000 per unit and the product sells for
P1,800 per unit. What is the economic breakeven point for the
company? (No. 4, Moderate)
a) 4,750 b) 5,000 c) 6,250 d) 7,050
 Reviewer/ Economic and cost concepts
In some cases, it is helpful to treat firms as too small to have an
influence on the market price of its products. In such cases, the
price can be conveniently assumed as fixed and the total
revenue curve will be a straight line up to the mill’s capacity.
TR
price TC
TR
&
TC
Breakeven
point

Demand Demand
 Reviewer/ Economic and cost concepts
Given: CF = P5M
cv = P1,000
p = P1,800
Find: Breakeven point
Solution: @ Breakeven, TR = TC
p×D’=CF + cvD’
Solving for D’,
CF
D' 
p  cv

D' 
P5M
 6250 units
Answer: c
1,800  1,000
Someone’s looking at you. Can’t you see?
 Reviewer/ Allocation of Overhead Costs
Difference between direct and indirect (overhead or burden)
costs
Direct cost – those that can be reasonably measured and
allocated to a specific output or work activity.
Examples: materials needed to make a chair, seeds to plant
a given hectare of land, amount of fertilizer applied
Indirect cost – those that are difficult to attribute or allocate to
a specific output or work activity.
Examples: cost of common tools, general supplies,
equipment maintenance, interest payment on loans
Reviewer/ Allocation of Overhead Costs
Common methods of allocating indirect
charges to the product being produced:
 Direct labor cost method
 Direct labor hour method

 Direct material cost method

 Machine hour method

 Space utilization method

 Reviewer/ Allocation of Overhead Costs
L. In a given month, a versatile machine called “Alien” is used to make 400
units of product R 60% of the time. For the remaining hours “Alien” is in
use, 400 units of another product S are made. An overhead charge of
P80,000 per month applies, to be allocated using machine hours. Labor
and material cost for R and S are given in the table below: (No. 5,
Moderate)
R S
Material cost / unit P150 P170
Labor cost / unit P80 P90
Which product costs more to make, R or S?
a) R is more expensive by P4 per piece
b) R is more expensive by P10 per piece
c) S is more expensive by P20 per piece
d) R is just as expensive as S to make
 Reviewer/ Allocation of Overhead Costs
Given:
Details R S
No. of products 400 400
made
Material cost per P150 P170
unit
Labor cost per unit P80 P90
Share in overhead 60% 40%
charge

Find: Difference in making products R and S

 Reviewer/ Allocation of Overhead Costs
Solution:

Item Computation Total Computation Total

For R for S
Material cost P150×400 P60,000 P170×400 P68,000

Labor cost P80×400 P32,000 P90×400 P36,000

Overhead P80,000×60 P48,000 P80,000×40 P32,000

cost % %
Total P140,000 P136,000

Answer: b
 Reviewer/ Allocation of Overhead Costs
M. Three products, S, T, and U are manufactured by a company using a single
machine but at different times of the day. Day-to-day charges for overhead
amount to P64,000. The daily costs involved and other information pertinent to
making these products are as follows: (No. 2, Difficult)
S T U
Total direct cost of materials P39, 200 P22,800 P62,000
Total direct cost of labor 38,400 49,400 81,500
Hours on the machine 2 2 4
No. of units produced/machine 120 90 390
hour
If overhead was determined by the number of machine hours, what is the daily
production cost of the company?
a) P485,300 c) P293,300
b) P357,300 d) information is missing to be able to solve the problem
 Reviewer/ Allocation of Overhead Costs
Given: As shown in the table; Overhead cost = P64,000
Required: Daily production cost
Solution:
Items S T U Total
Total cost of P39, 200 P22,800 P62,000 P124,000
materials
Total direct cost of 38,400 49,400 81,500 P169,300
labor
Total overhead cost P64,000
Total P357,300

Answer: b
 Reviewer/ Present Economy Studies
Present economy studies defined – it refers to cost
analyses undertaken when the influence of time on
money is not a significant consideration
N. A designer has a choice between gray iron and aluminum for an
instrument mounting in a power plant. Either material would serve
equally well under the same conditions of use. The per-kilogram cost
of aluminum and gray iron is P650 and P430, respectively. Each
casting made of aluminum would cost P315 to machine while the
corresponding cost for the gray iron would be P276. The casting
made of aluminum would weigh 0.59 kg while that of the iron would
be 1.09 kg. Which material will you recommend to use for making
the instrument mounting? (No. 6, moderate)
a) Aluminum because it is cheaper to make by P28.4
per piece
b) Aluminum because is cheaper to make by P46.2 per
piece
c) Iron because it is cheaper to make by P28.4 per
piece
d) Iron because it is cheaper to make by P46.2 per
piece
 Reviewer/ Present Economy Studies
Given:

Aluminum Iron

Cost/kg P650 P430

Machining cost P315 P276

Weight/casting 0.59 kg 1.09 kg

Required: Cost/piece of Al casting

 Reviewer/ Present Economy Studies
Solution:
Computation Total Computation Total
For aluminum for iron
Cost of P650/kg × P383.50 P430/kg× P468.70
material
0.59kg 1.09 kg
Machining P315 P276
cost

Total P698.50 744.70

Answer: b
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Preliminary research indicates that 8-10 glasses of water a day

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sufferers.

A mere 2% drop in body water can trigger fuzzy short-term

memory, trouble with basic math, and difficulty focusing on the
computer screen.

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79%, and one is 50% less likely to develop bladder cancer.
No kidding, all of the above are true....

Of course, too much water may have strange side effects......

So, don't get carried away!

 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
O. Interest is rental for the use of someone
else’s money. However, it is unlawful to
charge exceedingly high interest rate. (No.
7, Easy)
a) Both statements are false
b) The first is true but the second statement is
false.
c) Both statements are true.
d) The first is false but the second statement is
true. Answer: c
 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
P. Which of the following contribute(s) to
the interest rate being charged? (No. 7,
Moderate)
a) unfamiliarity with the identity of the
borrower
b) administrative cost of collecting the
money
c) opportunity cost of money
d) all of the above Answer: d
 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
Interest

Interest is a fee that is charged for the use of

someone else’s money. The percentage of money
charged as interest is called interest rate.

Simple interest is defined as a fixed percentage of

the principal (initial amount of loan or money
borrowed) multiplied by the life of the loan (or the
number of interest periods for which the principal is
committed).
 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
Total interest, I, is computed by the formula:

I = (P) × (n) × (i)

where: P = principal
n = number of interest period (for
example, years)
i = interest rate per interest period
(expressed as a decimal).
 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
Q. What annual rate of simple interest is
earned by an investment of P28,000 if it
accumulates P3,552.50 in interest after
twenty-one months? (No. 8, Easy)
a) 12.69% c) 7.25%
b) 9.82% d) none of the above
 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
Given:
Solution:
P = P28,000
From the formula, I = P× i × n, we
I = P3,552.50 can solve for i:
n = 21 months = 1.75 yrs
i = I/P×n
Find: i/year
i = P3,552.50/(P28,000×1.75 yrs)
i = 0.0725 = 7.25% / yr

Answer: c
 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
R. How long will it take to double your
money if it earns a simple interest of
10% per year? (No. 8, Moderate)
a) 7 b) 8 c) 9 d) 10
 Reviewer/ Interest Factor Formulas…
Given: P
F = 2×P
i = 10%/yr
Find: n such that F = 2P
Solution: F=P+I Since F = 2P, then
2P = P + I But I = P×i×n
2P = P + P×i×n = P(1 + i × n)
2 = 1 + (i × n) Substituting 0.10/yr for i
2 = 1 + (0.1/yr × n) Solving for n,
n = 1/(0.1/yr)= 10 yrs
Answer: d
 Reviewer/ Interest Factor Formulas and
Equivalence Calculations
S. Five years ago, P12,000 was deposited into
a savings account that provides an interest of
6.5% compounded annually. The money in
the account is closest to what value now?
(No. 9, Easy)
a) P8,759 b) P16,441 c) P14,265
d) This cannot be determined because there
is no interest factor for finding a present
amount given a past amount
 F?

0 1 2 3 4 5
i = 6.5%
P = P12,000
Find F.
F = P×(1+i)n = P12,000 × (1+0.065)5 = P16,441
 Reviewer/Interest Factor…
Compound Interest

Whenever the interest charge for any interest period is based

on the remaining principal amount plus any accumulated interest
charges up to the beginning of that period, the interest is said to be
compound.
 Reviewer/Interest Factor…
Amt owed Total amt
at accumulated or
Interest beginning Amt owed at end
period Interest
of period of period

1 P I1=P×i F1=P+I1=P+P×i
F2=F1+I2
2 F1 I2=F1×i
F2=P(1+i)2
F3=F2+I3
3 F2 I3=F2×i
F3=P(1+i)3
n Fn=P(1+i)n
 Reviewer/Interest Factor…
In general, if there are n interest periods
Fn = P (1 + i)n where Fn is the total amount of money
accumulated or owed after n interest periods.
Example: If P1,000 were loaned for 3 years at an interest rate
of 10% compounded annually, what amount should be repaid
in 3 years?
Solution: Given: P = P1, 000
n = 3 years
i = 10 %, compounded annually
F3 = P (1 + i)3
F3 = 1,000 (1 + 0.1) 3 = (1,000) × (1.331) = P1, 331
Joke time!!!

Man1: Away kami ni misis, nag-Historical siya.

Man2: Pare baka ang ibig mo sabihin ay nag-
Hysterical.
Man1: Hinde, historical kasi inungkat lahat ng
kasalanan ko!"

Bobo1: Pare, alam mo ba tawag sa paniki na mababa

ang lipad?
Bobo2: Hindi eh! Ano ba pare?
Bobo1: Lowbat pare! Lowbat!
 Reviewer/Interest Factor…
CASH FLOW DIAGRAM AND INTEREST FORMULAS
Notations used in formulas for compound interest calculations:
i = interest rate per interest period
n = number of compounding periods
P = present sum of money; the equivalent worth of one or more
cash flows at a reference point in time called the present
F = future sum of money; the equivalent worth of one or more
cash flows at a reference point in time called the future
A= end-of-period cash flows in a uniform series continuing for a
specified number of periods; starring at the end of the first
period and continuing through the last period
 Reviewer/Interest Factor…
Cash flow diagram:
A cash flow is the difference between total cash receipts
(inflows) and total cash disbursements (outflows) expenditures
for a given period of time.
A cash flow diagram is used to visualized a cash flow;
individual cash flows are presented as vertical arrows along a
horizontal time sale.
Positive cash flows (net inflows) are represented by
“upward-pointing” arrows and negative cash flows (net
outflows) by “downward-pointing” arrows. The length of an
arrow is proportional to the magnitude of the corresponding
cash flow. Each cash flow is assumed to occur at the respective
time period. The cash flow diagram is dependent on the point on
view (e.g. lender vs. borrower viewpoint).
Reviewer/Interest Factor…

Example of a cash flow diagram:

End –of-period Event or transaction
0 (now) Outlay of P100,000
1 Additional expenditure of P25,000
2 Receipts of P60,000
3 to 6 Uniform receipts of P80,000
7 Receipts of P100,000
Reviewer/Interest Factor…
P100,000
P80,000

P60,000

0 1 2
3 4 5 6 7 periods
-P25,000

-P100,000
 Interest Formulas for discrete cash flows
involving annual compounding
Discrete compounding means that the interest is compounded at the end of each finite length
period, such as a month or a year. The formulas for discrete compounding also assume discrete
(lump-sum) cash flows spaced at the end of equal time intervals of a cash flow diagram.

Single payment compound amount factor – used to find F when P is given

F = P × (1 + i)n = P × (F/P, i% ,n)

F=?

0 n

P
 Interest formulas
Single payment present worth factor – used to find P when given F; reciprocal of the single
payment compound amount factor
-n
P = F (1+ i) = F (P/F, i%, n)

0 n

P=?
 Uniform series
Uniform Series – also called annuity and means uniform
amount of money, A, occurring at the end of each period for
n periods with interest at i% per period.
Ordinary annuities – uniform amounts in which the first cash
flow is made at the end of the first period
Assumptions:
a) P (present worth) occurs at 1 interest period before the
first A
b) F (future worth) occurs at the same time as the last (A)
and n interest periods after P
c) A (annual worth) occurs at the end of periods 1 through n,
inclusive
 Interest Formulas
Uniform series, compound amount factor – used to find F
when given A
 1  i n  1
F  A   A  (F/A, i%, n)
 i 

F=?

0 1 2 3 4 n-1 n
 Interest Formulas

Uniform series present worth factor – used to find P when

given A

 1  i) n  1 
P  A 
 A  (P/A, i% , n)
n 
 i  (1  i) 
A

0 1 2 3 4 n-1 n
P=?
 Interest Formulas

Uniform series, sinking fund factor – used to find A when

given F; the reciprocal of the uniform series, compound
amount factor
 i 
A  F    F  (A/F, i%, n)
 1  i n
 1 
F
A=?

0 1 2 3 4 n-1 n
 Interest Formulas

Uniform series, capital recovery factor – used to find A

when given P; the reciprocal of the uniform series, present
worth factor
 i  1  i n 
A  P    P  (A/P, i%, n )
 1  i   1
n

A=?

0 1 2 3 4 n-1 n
P
 Interest Formulas

Uniform gradient series of cash flows – a series of annual

payments in which each payment is greater than the
previous one by a constant amount, G.

To find A when G is given, we use the formula;

1 n 
A  G    G  (A/G, i%, n)
 i (1  i)  1
n
 Reviewer/Interest Formulas
U. A uniform payment series is one that consists of
equal payments (No. 10, Easy)
a) starting now up to year n
b) starting one year from now up to year n
c) starting one year from now increasing by a
uniform amount up to year n
d) none of the above

Answer: b
Reviewer/Interest Formulas

1 2 3 4 5 6 7 n-1 n

P
 Table of interest factors for discrete compounding; interest rate of 5%
n (F/P,I%,n) (P/F,I%,n) (F/A,I%,n) (A/F,I%,n) (P/A,I%,n) (A/P,I%,n) (A/G,I%,n)
1 1.0500 0.9524 1.0000 1.0000 0.9524 1.0500 0.0000
2 1.1025 0.9070 2.0500 0.4878 1.8594 0.5378 0.4878
3 1.1576 0.8638 3.1525 0.3172 2.7232 0.3672 0.9675
4 1.2155 0.8227 4.3101 0.2320 3.5460 0.2820 1.4391
5 1.2763 0.7835 5.5256 0.1810 4.3295 0.2310 1.9025
6 1.3401 0.7462 6.8019 0.1470 5.0757 0.1970 2.3579
7 1.4071 0.7107 8.1420 0.1228 5.7664 0.1728 2.8052
8 1.4775 0.6768 9.5491 0.1047 6.4632 0.1547 3.2445
9 1.5513 0.6446 11.0266 0.0907 7.1078 0.1407 3.6758
10 1.6289 0.6139 12.5779 0.0795 7.7217 0.1295 4.0991
11 1.7103 0.5847 14.2068 0.0704 8.3064 0.1204 4.5144
12 1.7959 0.5568 15.9171 0.0628 8.8633 0.1128 4.9219
13 1.8856 0.5303 17.7130 0.0565 9.3936 0.1065 5.3215
14 1.9799 0.5051 19.5986 0.0510 9.8986 0.1010 5.7133
15 2.0789 0.4810 21.5786 0.0463 10.3797 0.0963 6.0973
16 2.1829 0.4581 23.6575 0.0423 10.9378 0.0923 6.4736
17 2.2920 0.4363 25.8404 0.0367 11.2741 0.0887 6.8423
18 2.4066 0.4155 28.1324 0.0355 11.6896 0.0855 7.2034
19 2.5270 0.3957 30.5390 0.0327 12.0853 0.0827 7.5569
20 2.6533 0.3769 33.0660 0.0302 12.4622 0.0802 7.9030
21 2.7860 0.3589 35.7193 0.0280 12.8212 0.0780 8.2416
22 2.9253 0.3418 38.5052 0.0260 13.1630 0.0760 8.5730
23 3.0715 0.3256 41.4305 0.0241 13.4886 0.0741 8.8971
24 3.2251 0.3101 44.5020 0.0225 13.7986 0.0725 9.2140
25 3.3864 0.2953 47.7271 0.0210 14.0939 0.0710 9.5238
30 4.3219 0.2314 66.4388 0.0151 15.3725 0.0651 10.9691
35 5.5160 0.1813 90.3203 0.0111 16.3742 0.0611 12.2498
40 7.0400 0.1420 120.7998 0.0083 17.1591 0.0583 13.3775
50 11.4674 0.0872 209.3480 0.0048 18.2559 0.0548 15.2233
60 18.6792 0.0535 353.5837 0.0028 18.9293 0.0528 16.6062
80 49.5614 0.0202 971.2290 0.0010 19.5965 0.0510 18.3526
100 131.5010 0.0076 2610.025 0.0004 19.8479 0.0504 19.2337
 Reviewer/Interest Formulas

V. The equal payment series sinking fund factor is used

(No. 11, Easy)

a) to find F given A c) to find A given F

b) to find A given P d) none of the above

Answer: c
Reviewer/Interest Formulas

F
A

0 1 2 3 4 5 6 7 n
 Reviewer/Interest Formulas
W. The amount of P65,000 was to be borrowed at an
annual interest rate of 12% to be repaid in 5 years. Two
different plans, both equally desirable, could be selected
to repay the loan. The first plan requires paying 1/5 of
the principal each year + interest due. The second plan
requires paying an equal amount every year. In Plan 1,
the amount to be repaid at the end of year 1 will be
closest to (No. 9, Moderate)

a) P17,680 b) P20,800 c) P18,240 d) P16,120

 Reviewer/Interest Formulas
Given: P = P65,000
i=12%/yr
n = 5 yrs
For Plan 1, 1st payment = I + 1/5P
Find: Amt of 1st payment
Solution:
1st Payment = I + 1/5P = (P×i) + 1/5P
= (65,000×0.12) + (1/5)(65,000)
= 7,800 + 13,000 = P20,800 b
 Reviewer/Interest Formulas
X. A loan can be repaid in 4 years using any of the 3 following plans: (No. 12,
Easy)
Plan End-of Interest Total owed at Payment
end of Year
Year for Year
Plan 1 1 7,200 97,200 27,173
2 5,602 75,629 27,173
3 3,876 52,332 27,173
4 2,013 27,173 27,173
Plan 2 1 7,200 97,200 0
2 7,776 104,976 0
3 8,398 113, 374 0
4 9,070 122,444 122,444
Plan 3 1 7,200 97,200 7,200
2 7,200 97,200 7,200
3 7,200 97,200 7,200
4 7,200 97,200 97,200
 Reviewer/Interest Formulas
The original amount of the loan is:
a) P72,000 c) P108,692
b) P90,000.00 d) P97,200

Given: 3 different plans to pay a loan as shown in the table.

Find: P
Solution: Since interest rate is not given, it is best to look at
interest earned and total amount owed at the end of year 1.
For all plans, total amount owed at the end of year 1,
F1 = P97,200. From the given table, the interest earned for
year 1, I1 = P7,200.
Therefore, P = F1 – I1 = P97,200 – P7,200 = P90,000 b
 Reviewer/Interest Formulas

Y. The value of the interest factor needed to find the

equivalent at time 0 of P155,000 occurring 7 years from
now when interest rate is 9% per year compounded
yearly is (No. 13, Easy)
a) 1.8280 c) 0.0129
b) 0.5470 d) none of the above
 Reviewer/Interest Formulas
Given: F7 = P155,000
n = 7 yrs
i = 9%/yr
Find: Value of interest factor to find P given F
Solution:
Cash flow diagram is as follows:
F = P155,000

(P/F)

i=9%/yr n=7yrs

P?
(P/F,i,n) = (1+i)-n = (1 + 0.09)-7 = 0.5470 b
 Reviewer/Interest Formulas
Z. The value of the interest factor needed to find a
series of equal revenues that must be received every
year for 12 years to realize a return of 25% from an
initial investment of P25M is (No. 10, Moderate)
a) 0.2685 c) 0.0687
b) 0.0185 d) none of the above
Reviewer/Interest Formulas

1 2 3 4 5 6 7 8 9 10 11 12

(A/P,i,n) = [i×(1+i)n] = [0.25×(1+0.25)12]

(1+i)n-1 (1+0.25)12-1
P = P25M

(A/P,i,n) = 0.2684 a
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