ENSC 2063/ ENSC 20093

ENGINEERING ECONOMY/
ENGINEERING ECONOMICS

BY
FACULTY OF ENGINEERING SCIENCES DEPARTMENT, ESD 2020
Engr. Maricar B. Carreon Engr. Babinezer D. Memoracion
Engr. Eduardo O. Dadivas Engr. Jimmy L. Ocampo
Engr. Carmelita I. Durias Engr. Ruben A. Pureza
Engr. Angela L. Israel Engr. Roland C. Viray
 ENGINEERING ECONOMY
INSTRUCTIONAL MATERIAL

THE OVERVIEW

This instructional material (IM) for Engineering Economy will give the students a
good understanding on what is the time value of money like the present worth and future relation
and how rate of interest affects their respective values. Likewise, it will also show the importance
of equation of value and its use to solve various problems in this subject. Similarly, it will also
show the different types of annuity and how depreciation changes the worth of a property due to
passage of time. It will also give the importance of break-even point in decision making whether
a company can make or break in its operation.

Several sample problems are presented as guide to solve the problems in the assessments at
the end of each module which eventually will give the student a chance to master the use of
formulas as presented in this instructional material.

THE LEARNING OBJECTIVES

This instructional material (IM) for the subject Engineering Economy will discuss the topics which
are commonly given in the Engineering Board Examination such as;
1. Simple Interest
2. Compound Interest
3. Present Worth (P) and Future Worth (F) Relations
4. Discount and Rate of Discount
5. Importance of Equation of Value
6. Annuity and Amortizations
7. Arithmetic and Geometric Gradients
8. Capitalized cost
9. Bond Value Calculation
10. Depreciation and Depletion
11. Break-Even Analysis and Profit Computation

COURSE MATERIALS:
1. Engineering Economy by de Garmo
2. Engineering Economy by Blank et.al.
3. Engineering Economy by Arreola
4. Engineering Economy by Sta Maria
5. Simplified Engineering Economy by Ocampo et.al.
6. Engineering Economy by Engr. Jimmy L. Ocampo at youtube.com

1
MODULE 1

LEARNING OBJECTIVES:
After the completion of Module 1, it is expected that the student have understand the
following:
1. Simple and Compound Interest
2. Present Worth (P) and Future Worth (F) relations
3. Discount and Rate of Discount
4. Importance of Equation of Value

ENGINEERING ECONOMY
- it deals with the use and application of economic principles in the analysis of
engineering decisions.

TOPIC 1 – MONEY AND INTEREST

MONEY – it is a measure of wealth
INTEREST – it is the amount paid for the use of borrowed capital

1. THE SIMPLE INTEREST, SI

- it is the interest earned by the principal alone over a given period of time usually
counted in number of days, months or in years.

a. Ordinary SI
Basis: 30 days / month
360 days / year
12 months / year
b. Exact SI
Basis: 365 days / year
366 days / leap year

NOTE: a year which is exactly divisible by four (4) is a leap year.

FORMULAS:
1. I = Pin
2. F = P (1 + in)
where,
I = interest, P
P = present worth or principal amount, P
i = rate of interest, reported as percent per unit time (yr) and used as
decimal in computation, % per unit time, e.q. 5% per year
n = no. of interest periods, the duration or time usually in years.
F = future worth or accumulated amount, P

NOTE: In formulas 1 and 2, the unit of time in i and n must be consistent.

EXAMPLES:

1. What is the interest of 8600P after 4 years at 12% simple interest rate?
Solution:
use, I = Pin
where,
P = 8600P
i = 12% “per year” = 0.12
n = 4 years
hence,
I = 8600(0.12)(4) = 4128P
2. 5000P will become how much after one year at simple interest of 15%?
Solution:
use, F = P (1 + in)
where,
P = 5000P
i = 15% “per year” = 0.15
n = 1 year
hence,
F = 5000 { 1 + (0.15) (1) }
F = 5750P

3. Find the present worth with a total interest of 5000P after 2 years at simple interest
rate of 6.25%.
Solution:
use, I = Pin
where,
I = 5000P
i = 6.25% “per year” = 0.0625
n = 2 years
hence,
5000 = P (0.0625) (2)
P = 40,000 P

4. In how many years will the investment to double its value at 5% simple interest?
Solution:
use, F = P (1 + in)
where,
F = 2P
i = 5% “per year” = 0.05
hence,
2P = P (1 + 0.05n) n = 20 years

5. A man deposited 10,000P in a bank at 10% per annum for 3 years, 8 months and 25
days. Find the ordinary simple interest.
 Solution:
use, I = Pin
where,
P = 10,000P
i = 10% “per year” = 0.10
1� 1��
n = 3 years + 8 months x � + 25 days x
12 360 ����
n = 3.74 years ���
hence,
I = 10000 (0.10) (3.74)
= 3740P

6. 10,000P was deposited in a bank at 10% per annum from Jan 15,2020 to Oct 25,2020.
Find the accumulated amount based on exact simple interest computation.
Solution:
use, F = P(1 + in)
where,
P = 10,000P
i = 10% per year = 0.1
n = ? year
2020
Count the no of days covered by the deposit, 4 = 505 “exact”
hence,
2020 is a Leap year and 366 days / Leap year

��� 15 − 31 = 16 "������� ��� 15"

�������� = 29 "���� ����"
����ℎ =
31
𝐴��𝑖� =
30
��� =
31
����
= 30
����
= 31
𝐴�� =
31
𝑆��� =
30
��� 1 − 25 = 25 "𝑖������ ��� 25"

n = 284 days
284
n=
366
= 0.776 yr
hence,
F = 10000 { 1 + (0.1)(0.776) } = 10776P
 7. A price tag of 1500P is payable in 70 days but if paid in 35 days it will have a 5%
discount. Find the rate of interest.
Solution:
use, F = P (1 + in)
where,
F = 1500P
P = 1500 – 0.05
(1500) P = 1425P
1��
n = 35 days ( ) = 0.0972 yr
360
hence, ��
��

1500 = 1425 { 1 + i (0.0972) }

i = 0.5415 = 54.15% per
yr

TOPIC 2 – COMPOUND INTEREST

- it is the interest on top of interest.

1. Nominal Rate of Interest ( j ) = the rate of interest that specifies the no of

interest periods in one year.
Ex:
j = 12% compounded quarterly (n1 = 4) --- i = 3% per quarter
FORMULA
: �
i=
𝒏�
where n1 = no. of interest periods in one year.

Common Methods of Values of n1

Compounding

annually
1 semi-annually every 6 mos
2 quarterly every 3 mos
4 bi-monthly every 2 mos
6 monthly
12
daily
365

2. Effective Rate of Interest ( ie ) = the actual rate of interest in one

year.
FORMULAS
: a. ie = ( 1 + 1i )n - 1
� n
b. ie = ( 1 + ) 1 –1
𝒏
Importance of ie �

1. To identify which interest rate is higher

2. To convert an interest rate to other method of compounding.
NOTE: Two interest rates are equal if their effective rates are equal.
EXAMPLES:

1. A bank charges 1.5% per month on credit card. Find (a) the nominal rate of interest
compounded monthly (b) the effective rate of interest (c) the equivalent nominal rate of
interest which is compounded quarterly.
Solution:
�
a) i=
�1
where,
i = 1.5% per month
n1 = 12
j=?
hence,
�
1.5 =
12
j = 18% compounded monthly
b) ie = ( 1 + i )n - 1
hence, 1
12
ie = ( 1 + 0.015) – 1
ie = 0.1956
ie = 19.56% “per year”
c) 1.5% per month to _% compounded quarterly
ie (quarterly) = ie (monthly)
n1 = 4 n1 = 12
j=? i = 0.015
�
(1+ )4 – 1 = ( 1 + 0.015)12 – 1
4
solve for j,
j = 0.1827
j = 18.27% compounded quarterly

2. A bank advertises 9.5% account that yields 9.84% annually. Find how often is the
interest compounded?
Solution:
j = 9.5% compounded n1 = ?
ie = 9.84%
use,
�
ie = ( 1 + )n1 – 1
�1

0.0984 = ( 1 + 0.095 )n1 – 1

�1
by ES, Shift solve
n1 = 3.88 ≈ 4
hence,
9.5% is compounded quarterly
 3. Find the nominal rate, which is converted quarterly could be used instead of 12%
compounded semi-annually.
Solution:
12% compounded semi-annually to % compounded quarterly
ie (quarterly) = ie (semi-annually)
n1 = 4 n1 = 2
j=? j = 0.12
� 0.12
(1+ )4 – 1 = ( 1 )2 – 1
2
+
4
j = 0.1183 = 11.83% compounded quarterly

TOPIC 3 – P AND F RELATION WITH COMPOUNDED INTEREST

CASH FLOW DIAGRAM, CFD

1 2 3
ǀ ǀ ǀ __n
i
F
FORMULAS:
1. F = P ( 1 + i )n
2. P = F ( 1 + i )-n
where,
( 1 + i )n = Single Payment Compound Amount Factor or
Future Value Factor (FVF)
( 1 + i )-n = Single Payment Present Value Factor (PVF)

EXAMPLES:

1. In 1906, an original painting of Picasso has a market price of 600P and in 1995 its
price has increased to 29,000,000P. What is the rate of interest of the painting?
Solution:
F = P(1 + i)n
where,
F = 29,000,000
P = 600P
n = 1995 – 1906 = 89 years
hence,
29,000,000 = 600(1 + i )89
i = 0.1288
i = 12.9%
 2. If 10,000P is invested at 12% interest compounded monthly, find the 1st yr interest.
Solution:
j = 12% compounded monthly (n1 = 12)
�
12
i= =
�1 12
i = 1% per month
I = F – P ------------------------ 1
where,
F = P (1 + i)n
P = 100,000P
i = 0.01
n = 1 yr = 12 mos

hence,
F = 100,000(1 + 0.01)12 = 112682.5P
subst. values to 1,
I = 112682.5 – 100,000
= 12682.50P

3. After how many years will an investment triple if invested at 10% per annum, net of
deduction, compounded quarterly?
Solution:
F = P(1 + i )n
where,
F = 3P
j = 10% compounded quarterly (n1 = 4)
10
i= = 2.5% per quarter
4
hence,
3P = P(1 + 0.025)n
n = 44.5 quarters
1��
in yrs n = 44.5 quarters ( ) = 11.12 yrs
4
�����
���

TOPIC 4 – P and F Relation with Continuously Compounded Interest

*recall The Exponential Law of Change in the Differential Equations

�
ln = kt or x = x0 ekt
�
0
in monetary values x=F
x0 = P
k = j = continuously compounded interest
t = n, yrs
FORMULAS:
1. F = Pejn j – in decimal
2. ie = ej – 1 n – in yrs
 EXAMPLE:

1. Find the effective interest equivalent to 12% compounded continuously.

Solution:
use, ie = ej – 1 = e0.12 –
1 ie =
0.1275
= 12.75%

2. What is the future worth of 10,000P when invested at the rate of 12% compounded
continuously for 5 yrs?
Solution:
use, F = Pejn = 10000 e0.12(5)
F = 18221.19P

TOPIC 5 – DISCOUNT, D
- it is the difference between the future worth (F) and the present worth (P)
FORMULAS:
1. D = F – P
Rate of Discount, d = the discount on one unit in one unit of time.
P = 1(1+i)-1

CFD

n=1
0

F = 1P
hence,
�
2. d = 1 – (1 + i)-1 or =
�
3. i = � �
�−
or = 𝑷
�

EXAMPLE:

1. What is the corresponding rate of interest for 18% simple discount rate?
Solution:
�
use, i =
1−�
where,
d = 18% = 0.18
hence,
0.18
i= = 0.2195
1 − 0.18

i = 21.95%
TOPIC 6 – EQUATION OF VALUE, EV
- it is the resulting equation when comparing two sets of obligations at a certain
point of comparison called focal date.

EV at a focal date,
∑↑=∑↓
where,
∑ ↑ = sum of cash inflow
∑ ↓ = sum of cash outflow
NOTE: Use EV to solve unknown in a CFD.

EXAMPLE:

1. 12,000P is borrowed now at 12% interest. The 1st payment is 4000P and is made 3
years from now. Find the balance on the debt immediately after the 1st payment.
Solution:
draw CFD
12000
12000 (1.12)3

i = 12% per year

3 yrs
0

4000P

B = ? “balance”

set up EV at 3,
∑↑=∑↓

12000 (1.12)3 = 4000 + B

B = 12860P
 2nd Solution:

12000P

i = 12% = 0.12

3
0
4000P

4000(1.12)-3
B
B(1.12)-3

using zero as focal date

∑↑=∑↓

12000 = 4000(1.12)-3 + B(1.12)-3

B = 12860P

2. An investment pays 6000P at the end of the 1st year, 4000P at the end of the 2nd year
and 2000P at the end of the 3rd year. Compute the present value of the investment if a
10% rate of return is required.
Solution:
draw CFD

P=? i = 10% “per yr”

1 2 3 yr

0 ǀ ǀ ǀ_

2000P
4000P

6000P

using zero as focal date, EV is

∑↑=∑↓
P = 2000(1.1)-3 + 4000(1.1)-2 + 6000(1.1)-1
P = 10262.96P
ASSESSMENT 1
1. A man wishes to accumulate 3722P after 11. How much is expected to be received by
5 yrs, 8 months and 28 days. How a man that makes a loan of 851.06P, which
much should be deposited by the man in a
bank if the ordinary simple interest is
15% per annum?

2. A man deposited 2000P in a bank at the

rate of 15% per annum from March 21,1996
to October 25,1997. Find the exact
simple interest.

3. A bank charges 1.5% per month on a

loan. Find the equivalent nominal rate of
interest.

4. A financing company charges 1.5%

per month on a loan. Find the equivalent
effective rate of interest.

5. A nominal rate of 12%

compounded monthly is equal to an effective
rate of .

6. Convert 16% compounded semi-annually

to equivalent nominal rate which is
compounded daily.

7. Find the accumulated amount of

1000P after 5 yrs when deposited in a bank
at a rate of 16% compounded monthly.

8. How long in yrs will a certain sum of

money to triple its amount when deposited at
a rate of 12% compounded annually?

9. How much should be deposited in a bank

at a rate of 12% compounded continuously
for 5 yrs if its accumulated amount
is
9110.60P?

10. An effective rate of interest, which is

12.75%, is equivalent to what percent if
compounded continuously.

12
is payable at once, if the bank gave him 15. Find the amount of the following
a discount of 6%. payments at the end of 5th yr, 3000P at the
end of 1st yr, 4500P at the end of 2nd yr and
12. Find the cash price of a generator which 6000P at the end of 4th yr if money worth
was bought in installment basis that requires 12%
a down payment of 50,000P and payment of per annum.
30,000P after 1 yr, 40,000P after 2 yrs and a
final payment of 76,374.34P after 4 yrs at a 16. How many yrs will it take for a certain
rate of 15% per annum. sum of money to triple its amount when
deposited at a rate of 12% compounded
13. A man made a loan of 100,000P at a rate continuously?
of 15% per annum and promise to pay it
according to the following manner, 30,000P 17. A bank is advertising 9.5% accounts that
at the end of 1st yr, unknown payment at the yield 9.84% annually. How often is
end of 2nd yr and a final payment the interest compounded?
of
76,374.38P at the end of 4th yr. Find the 18. A man borrows 2000P for 6 yrs at 8%. At
unknown payment made by the man. the end of 6 yrs, he renews the loan for the
amount due plus 2000P more for two yrs at
14. Find the present worth of the 8%. What is the lump sum due?
following payments, 5000P after 1 yr,
4000P after 2 yrs, 8000P after 4 yrs at a 19. You deposit 1000P into a 9%
rate of 12% per annum. account today. At the end of two yrs, you will
deposit another 3000P. In five yrs, you plan
a 4000P
purchase. How much is left in the at the end of one year. Revenue of 150,000P
account one year after the purchase? will be generated at the end of years 1 and
2. What is the net present value of this
business if the effective annual interest rate
20. Consider a business which involves the is 10%?
investment of 100,000P now and 100,000P

ANSWERS TO ASSESSTMENT 1

1. 2000P 8. 9.2 yrs

2. 480P 9. 5000P
3.18% 10. 12%
4.19.56%
5. 12.68%
6.15.39%
7. 2210P

13
11. 800P
12. 150000P
13. 40000P
14. 12737P
15. 17763P
16. 9.16yrs
17. quarterly
18. 6035P
19. 1552P
20. 69422P

14
MODULE 2

LEARNING OBJECTIVES:
After the completion of Module 2, it is expected that the student have understand the
following:
1. Annuity and Amortization
2. Types of Annuity
3. Arithmetic and Geometric Gradients
4. Bond Value and Capitalized Cost

TOPIC 1 – ANNUITY AND AMORTIZATION

ANNUITY – it is a series of equal payments occurring at equal interval of time.
AMORTIZATION – a method of paying debt including the principal and interest which is
done in a series of equal payments occurring at equal interval of time.

TYPES OF ANNUITY

1. Ordinary Annuity – an annuity when payments or amortizations are made at

the end of each period.

Consider the CFD,

P i

1 2 3
0 _ _n

A A A A = P / unit time

FORMULAS:
−𝒏
� −(� + �)
1. P = A { � }
(� + 𝒏� ) −�
2. F = A { � }

where,
( 1 + � )𝑛 −1
=, 𝑖%, �) – is called series of payments
�
( � 𝐴
Compound Amount Factor
1− ( 1 + � ) 𝑃
�
−𝑛 = ( 𝐴 , 𝑖%, �) – is called series of payments
Present Value Factor

14
EXAMPLES:

1. 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 rate
compounded monthly, so that each employee will receive a 1000P bonus?
Solution:
j = 12% compounded monthly (n1 = 12) ------- i = 1% per month = 0.01
n = 1 yr = 12 mos
F = 50 (1000) = 50000P
(1 + 𝑖�) − 1
use, F=A{ 𝑖 }
12
(1 .01 ) −1
50000 = A { 0.01 }
A = 3942.44P / month

2. A young engineer borrowed 10000P at 12% interest and paid 2000P per annum for the
last 4 yrs. What does he have to pay at the end of 5th yr in order to pay his loan?
Solution:
draw CFD
10000P

i = 12% “per year”

1 2 3 4 5
0
A A A A

A = 2000P/yr
PA
x=?

x(1.12)-5

set-up EV at zero
∑↑=∑↓
1000 = PA + x(1.12)-5 ------------------- 1
where,
−
1 −( 1 +𝑖)
�
PA = A { 𝑖 }
1 −( 1
−4.12)
PA = 2000 { } =
6074.70
0.12
subst. to 1
1000 = 6074.70 + x(1.12)-5
x = 6917.72P

3. An investment of 350,000P is made to be followed by revenue of 200,000P each year

for 3 years. What is most nearly the annual rate of return on investment for this project?
Solution:
draw CFD
 PA
A A A = 200k P/yr

0
1 2 3

i=?
350kP

set-up EV at zero
∑↑=∑↓
PA = 350k
−
1 − (1 +�𝑖)
A{ 𝑖 } = 350k
−3
1 − ( 1 +𝑖 )
200k { 𝑖 } = 350k
by ES, i = 0.3268
= 33% per yr

4. To maintain a structure with a life of 20 yrs, it is necessary to provide the following for
repairs; 20000P at the end of 5th yr, 30000P at the end of 10th yr and 40000P at the end
of 15th yr. If money is worth 10% compounded annually, determine the equivalent uniform
annual maintenance cost for the 20 yr period.
Solution:
draw CFD
1. P i = 10% per yr

5 10 15
0
20kP

30kP
40kP

2.
�−(�.�)−�
P=A{ �.� } --------------- 1

0 20 yrs

A A A A=?
 at CFD #1 set up EV at zero
P = 20k(1.1)-5 + 30k(1.1)-10 + 40k(1.1)-15
P = 33560.41P,
subst. to 1 at CFD 2,
1 − (1 .1−20
)
33560.41 = A { 0.1 }
A = 3942P / yr

2. Deferred Annuity – type of annuity where payments are made several periods
after the annuity has started (late amortizations).

CFD
P
m n

1 2 m
0 ' 1 2 3 n
0
A A A A

FORMULA: “by EV at zero”

� −( �−𝒏
+� )
P=A{ � } (1 + i)-m
where,
m = deferred periods
n = ordinary annuity periods

EXAMPLES:

1. A man loans 187,400P from a bank with interest at 5% compounded annually.

He agrees to pay his obligations by paying 8 equal payments, the first being due at the
end of 10 years. Find the annual payments.
Solution:
draw CFD

P = 187400P i = 5% per yr
m=9 n=8

1 2 9 10
1 1 2 3 n=8
0 0
A A A A=?
use,
1 −(1 + −
𝑖)
�
P=A{ 𝑖 } (1 + i)-m
subst. values,
−8
1 −( 1 .05)
187400 = A { 0.05 } (1.05) -9
A = 44980.56P/yr
 2. A student needs 4000P per year for four years to attend college. Her father invested
5000P in a 7% account for her education when she was born. If the student withdraws
4000P at the end of her 17th, 18th, 19th and 20th years, how much money will be left in the
account at the end of her 21st yr?
Solution:
B = ? (balance)
draw CFD
A A A A

1 2 3 16 17 18 19 20

0
01 1 2 3 4 21
m = 16 n=4

5000P
i = 7% “per year”

a) using zero as focal date,

∑↑=∑↓
PD + B(1.07)-21 = 5000
−
1 − (1 + �𝑖 )
A{ 𝑖 } (1+i)-m + B(1.07)-21 = 5000
−4
1 − ( 1 .07)
4000 { 0.07 } (1.07)-16 + B(1.07)-21 = 5000
B = 1700P
b) using 16 as focal date,
∑↑=∑↓
1−(1.07)−4
5000(1.07)16 = 4000 { 0.07 } + B (1.07)-5
= 1700P

3. Perpetuity – type of annuity where payments are made indefinitely or forever.

CFD
P

1 2 3 4
n=∞
0

A A A A

FORMULA:
𝑨
P=
�
 EXAMPLES:

1. What present sum would be needed to provide for annual end of year payments of
150,000 P each forever at an interest of 8%?
Solution:
𝐴
use, P =
�
150000
P=
0.08
P = 1875000P

2. What amount of money deposited 50 yrs ago at 8% interest would now provide a
perpetual payment of 10000P per year?
Solution:
draw CFD
���
P = ��
p �.�
�

A A A = 10000P/yr
i = 8% “per yr”

50
0 ∞
1 2 3

P(1.08)50
P

set-up EV at 50
∑↑=∑↓
10000
= P (1.08)50
0.08
P = 2665.15P

4. Annuity Due – type of annuity where payments started at the beginning of the annuity
periods
P CFD

i
1 2 3 n
0

A A A A A

FORMULAS:
� −( � −
+�)
1. P = A {
�
(𝒏−�)
+ �}
 (� + � ) �
(𝒏+�
2. F = A { )
−�
− �}

EXAMPLE:

1. A man borrows 100000P at 10% effective annual interest. He must pay back the loan
over 30 yrs with uniform monthly payments due on the first day of each month.
What amount does the man pay each month?
Solution:
ie = 10% ----------- i = ?
use, ie = (1 + i)n1 – 1
0.10 = (1 + i)12 – 1
i = 7.974x10-3
or i = 0.7974% per month
1− (1 +�
−(𝑛−1)
)
P=A{ +
1} �
n = 30 yrs = 360 mos
−3 −359
subst. values, )
+ 1}
1−(1+7.974 � 10
100000 = A { 7.974 � 10−3
A = 839.18 P/month

5. Annuity with Continuously Compounded Interest – formulas are similar to Ordinary

Annuity but replace i by ej – 1
FORMULAS:
� −�
1.
�
F=A{ 𝒏 }
�� − �
� −−�
�
2. P = A { 𝒏 }
�� − �
where,
j = interest rate compounded continuously in decimal
n = no of years

EXAMPLE:

1. A man deposits 5000P 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?
Solution:
�
� − 1
F=A{ 𝑛 }
�� − 1
where,
hence,
 000P/yr n = 5
A yrs
j = 5% compounded continuously = 0.05
=
�
0.05(5) − 1
5 F = 5000 { }
�0.05 − 1
F = 27698.40P

TOPIC 2 – ARITHMETIC GRADIENT

- it is a series of payment with common difference and occurring at equal interval of time

CFD

1 2 3 n
0

A
A+G
A+2G
A+(n-1)G

where,
G = common difference
FORMULAS:
1. P = PA + PG
�−(�+�)
where, PA = A {
−𝒏 }
�
� �−
PG = { − 𝒏(� + �)−𝒏}
(�+�)
−𝒏
� �
2. F = FA + FG
(�+�) −
where, FA = A{ 𝒏
�
�
�
}
(�+�)𝒏
−�
FG = { − 𝒏}
� �

EXAMPLE:

1. A farmer buys a tractor. There will be no maintenance cost the 1 st yr as the tractor is
sold with one years free maintenance. The 2 nd yr the maintenance is estimated at 2000P.
In the subsequent yrs the maintenance cost will increase by 2000P per year. How much
 would need to be set aside now at 5% interest to pay the maintenance cost on the tractor
for the first 6 yrs of ownership?
Solution:
draw the CFD

1 2 3 4 5 6
0

0k
2k
4k
6k
8k
10k

A = 0P G = 2k
P = PG = ? n=6
i = 5% = 0.05
use,
� 1−(1+�)
P = PG = { − �(1 + 𝑖)−�}
subst. values, −𝑛
� �
2� 1−(1.05)
P=
0.05 { 0.05
−6 − 6(1.05)−6}

P = 23936P

TOPIC 3 – GEOMETRIC GRADIENT

- series of payment with common ratio and occurring at equal interval of time.
CFD
P

1 2 3 n
0

A
A(1+r)

A(1+r)2
A(1+r)n – 1

where, r = % change in payments

1 + r = common ratio
FORMULAS:
𝑨 �−𝒘
1. P = { 𝒏
�+
� }
�−
𝒘
 �+
where, w=𝒓 ------ use up to the 4th decimal place
�+
�
2. if i = r
P = 𝑨𝒏
�+�

EXAMPLE:

1. A young man has decided to go into business at age 40. He wishes to accumulate
200000 P at that age. On his 25th birthday he deposits a certain amount and will increase
the deposit by 10% each year until the 40th yr. If the fund can be invested at 9.6%
compounded annually, how much should his initial investment be?
Solution:
draw CFD
200kP

i= 9.6%, r = 10%
25 26 27 40
0 1 2 15
x=? ( � +𝒓 )
w= = = 1.00365
(�.�)
(�+ (�.��𝟔)
�)
A = x(1.1)

x(1.1)2
PGG x(1.1)15

set-up EV at zero
∑↑=∑↓
x + PGG = 200k(1.096)-15
�(1.1) 1 − (1.00365)
x+ 15 } = 200k(1.096)-15
1.096 { 1 − 1.00365
solve for x
x = 3074.85P

TOPIC 4 – BOND VALUE

- it is the present worth or cost of a bond.
CFD
C ------ if not given, C ≃ F
n = maturity period
I I I

I = Fr ------ if not given

F = face value or par- value
0 n r = bond rate
I = dividend
i = yield of investment

P = bond value = ?
 FORMULA:
set-up EV at zero
� − (� −𝒏
+�)
P=I{ } + C (1+i)-n
�

EXAMPLE:

1. A 1000P face value bond pays dividend of 110P at the end of each yr. If the bond
matures in 20 yrs, what is the approximate bond value at an interest of 12% per yr
compounded annually?
Solution:
1 − (1 +�
−𝑛 )
use, P=I{ } + C (1+i)-n
�
where, I = 110P/yr i = 12% per yr = 0.12
n = 20 yrs C ≃ F = 1000P
−20
1 − ( 1.12)
hence, P = 110 { } + 1000(1.12)-2 = 925.31P
0.12

TOPIC 5 – CAPITALIZED COST, CC

- it is the sum of the first cost (FC or C 0) and the present worth of perpetual
annual maintenance and operational cost (MC), cost of repair (CR) at interval k yrs, and
renewal cost (RC) at the end of life L yrs.
FORMULA:
�� � 𝑹
CC = FC + 𝑹 �
� + +
NOTE:
(�+�)�− (�+�)�−
� �
1. if Life L yrs is given and RC is not given,
use, RC ≃ FC – CR – SV
where, SV or CL = salvage value
2. k is a factor of L

EXAMPLES:

1. A machine costs 80000P and with a salvage value of 20000P at the end of useful life of
20 yrs. The annual operating costs is 18000P. Find the capitalized cost of the machine at
an interest rate of 10% per annum.
Solution:
�𝐶 𝐶𝑅 𝑅𝐶
use, CC = FC + + +
� (1+�)𝐿−1
where, (1+�)�−1
FC = 80kP SV = 20kP L = 20 yrs i = 10%
MC = 18kS/yr CR = 0 RC = ?
RC = FC – SV – CR = 80 – 20 – 0 = 60kP
subst. value,
18 0.10 60�
CC = 80k + �
+
(1.1)20−1 =
270
475
.77
P
2. A dam was constructed for 200kP. The annual maintenance cost is 5kP. Find
the capitalized cost of the dam at an interest rate of 5% per annum.
Solution:
�𝐶 𝐶𝑅 𝑅𝐶
use, CC = FC + + +
� (1+�)𝐿−1
where, (1+�)�−1
FC = 200kP CR = 0 i = 5%
MC = 5kP/yr RC = 0
hence,
5�
CC = 200kP + = 300000P
0.05
ASSESSMENT 2
1. Find the accumulated amount of pit to the owner on the basis of 15%
the ordinary annuity paying an interest?
amortization of
1000P per month at a rate of 12%
compounded monthly for 5 years.

2. What present sum is equivalent to a

series of 1000P annual end-of-year
payments, if a total of 20 payments are
made and interest is
12%?

3. A man made ten annual-end-of

year purchases of 1000P common stock.
At the end of 10th year he sold all the
stock for
12000P. What interest rate did he obtain on
his investment?

4. A piece of property is purchased for

10000P and yields a 1000P yearly profit. If
the property is sold after 5 years, what is the
maximum price to break-even if the interest
is 6% per annum?

5. A condominium unit can be bought at

a down payment of 150000P and a
monthly payment of 10000P for 10 years
starting at the end of 5th year from the date of
purchase. If money is worth 12%
compounded monthly, what is the cash
price of the condominium unit?

6. The owner of the quarry signs a contract

to sell his stone on the following basis.
The purchaser is to remove the stone
from the certain portion of the pit according
to a fixed schedule of volume, price and
time. The contract is to run 18 years as
follows. Eight years excavating a total of
20,000 m per year at 10P per meter, the
remaining ten years, excavating a total of
50,000 m per year at
15P per meter. On the basis of equal year-
end payments during each period by the
purchaser, what is the present worth of the
7. A wealthy man donated a certain amount 10. The amount of the perspective investor
of money to provide scholarship grants pay for a bond if he desires an 8% return on
to deserving students. The fund will his investment and the bond will return
grant 1000P per year for 20 years and 20,000P
10,000P per year for the first 10 years and after 20 years is
20,000P per year on the years thereafter.
The scholarship grants started one year after 11. A machine costs 50,000P. Find
the money was donated. How much was the capitalized cost if the annual
donated by the man if the fund earns maintenance and operational cost is
12% interest. 5000P and money worth 15% per annum.

8. What amount of money deposited 40 12. A machine cost 50,000P. Find

years ago at 12% interest would now the capitalized cost if the annual
provide a perpetual payment of 10,000P per maintenance cost is 5000P and cost of
annum? repair is 4000P every 4 years and money
worth 12% per annum.
9. A company rent a building for 50,000P per
month for a period of 10 years. Find the 13. A building cost 10 million and the
accumulated amount of the rentals if the salvage value is 150,000P after 25 years.
rental for each month is being paid at the The annual maintenance cost is 60,000P
start of each month and money is worth costs of repair is 200,000P every 5
12% compounded monthly. years. Find the capitalized cost if money
worth 15% per annum.
14. A salesman earns 1000P on the 1 st interest, find the amount of the account at
month, 1500P on the 2nd month, 2000P the end of 15 years.
on the 3rd month and so on. Find
the accumulated amount of his income at the 18. Twenty-five thousand pesos is deposited
10th month if money worth 12% in a savings account that pays 5% interest,
compounded monthly. compounded semi-annually. Equal annual
withdrawals are to be made from the
account, beginning one year from now and
15. A man wishes to accumulate a total
continuing forever. Find the maximum
of
amount of the equal annual withdrawal.
500,000P at the age of 30. On his 20 th
birthday, he deposited a certain amount 19. What amount of money deposited 50
of money at a rate of 12% per annum. If years ago at 8% interest would now provide
he increases his deposit by 10% each year a perpetual payment of 10000P per year?
until the 30th birthday, how much should his
initial deposit be? 20. A man buys a motor cycle. There will be
no maintenance cost the first year as the
16. If 2000P is deposited in a motor cycle is sold with one year
savings account at the beginning of each of free maintenance. The 2nd year the
15 years and the account draws interest maintenance is estimated at 2000P. In
at 7% per year, compounded annually. subsequent years the maintenance cost will
Find the value of the account at the end of increase by 2000P per year. How much
15 years. would need to be set aside now at 5%
interest to pay the maintenance costs of
17. A man deposits 1000P every year for 10 the motor cycle for the first 6 years of
years in a bank. He makes no deposit during ownership?
the subsequent 5 years. If the bank pays 8%
 ANSWERS TO ASSESSMENT 2
1. 81670P 11. 83334P
2. 7470P 12. 98641P
3. 4% 13. 10.9MP
4. 7745P 14. 33573P
5. 539171P 15. 15987P
6. 2127948P 16. 53776P
7. 110165P 17. 21286P
8. 896P 18. 1265P/yr
9. 11616954P 19. 2665P
10. 14109P 20. 23936P
MODULE 3

LEARNING OBJECTIVES:
After the completion of Module 3, it is expected that the student have understand the
following:
1. Depreciation and Depletion
2. Common Methods to Calculate depreciation
3. Methods of Evaluating Depletion
4. Hoskold’s Formula for Valuation

TOPIC 1 – COMMON METHODS OF EVALUATING DEPRECIATION

DEPRECIATION – it is the decrease in worth or value of a property due to passage of time.

a. Straight Line Method, SLM

▪ the simplest method
▪ depreciation charge per year (d) is constant
FORMULAS:
�� −
1. d =
��
�
𝒏
2. Dn = nd = (C0 – CL)
�
3. Cn = C0 – Dn
where,
C0 = original cost DN = total depreciation after n years
CL = salvage value CN = book value after n years

EXAMPLES:

1. A machine costing 1.8M P has a life of 8 yrs. Using SLM, the total depreciation at the
end of 4th year is 800kP. Determine the salvage value of the machine.
Solution:
�
use, DN = (C0 – CL)
�
for n = 4,
4
D4 = (C0 – CL)
8
subst. values,
1
800k = (1.8M – CL)
2
CL = 200000P

2. A drill press is purchased for 10000P and has an estimated life of 12 yrs. The salvage
value at the end of 12 yrs is estimated to be 1300P. Using SLM, compute the book value
of the drill press at the end of 8 yrs.
 Solution:
Cn = C0 – DN
�
Dn = (C0 – CL)
�
�
Cn = C0 - (C0 – CL)
�
for n=8 L = 12
C0 = 10kP CL = 1.3kP
subst. values
8
C8 = 10k – ( 10k – 1.3k)
12
C8 = 4200P

b. Sinking Fund Method, SFM

▪ d = constant per year
▪ interest rate i is considered in the computations
CFD
C0 - CL
i Dn

0 1 2 3 n L

d d d d d
using,
𝑛 −1
F=A{ }
(1+�)
FORMULAS: �
(�� −
1. d =
��) � (�
where, + �)� −� = Sinking Fund Factor, SFF
�
(� + �)�
−�
(�+�)𝒏
2. Dn = d { −� } or
�
(�+�)𝒏
Dn = −� (C0 – CL)
(�+�)�
−�
3. Cn = C0 – Dn

EXAMPLE:

1. An equipment cost 10kP with a salvage value of 500P at the end of 10yrs. Calculate
the annual depreciation cost by sinking fund method if interest rate is 4%.
Solution:
( �� −
use, d=
�� ) �
( + �)�
� −�
where,
C0 = 10kP
CL = 500P
L = 10 yrs
i = 4% = 0.04
hence,
(10� − 500)(0.04)
d=
(1.04)10 −1
d = 791.26P

c. Sum of the Years Digit Method, SYDM

▪ depreciation charges varies from yr to yr
▪ evaluated by the principle of Arithmetic Progression
FORMULAS:
�(� − 𝒏 +
1. dn = �) (C0 – CL) ----------
�(� + Ocampo’s Formula
�) (C0 – CL) -----------
2. Dn =
𝒏(�� − 𝒏 +
�)
�(� +
�)

3. Cn = C0 - Dn

EXAMPLES:

1. An asset is purchased for 120kP, its estimated life is 10 yrs, after which it will be sold
for 12k P. Find the depreciation for the 2nd yr using sum of the years digit method.
Solution:
2(� − � +
use, dn = 1) (C0 – CL)
�(� +
1)
for n=2 C0 = 120kP
L = 10 CL = 12kP
hence,
2(10 − 2 + 1)
d2 = (120k – 12k) = 17672.73P
10(11)

2. What is the book value of equipment purchased 3 yrs ago for 15kP if it is depreciated
using sum of the years digit method and the expected life is 5 yrs?
Solution:
Cn = C0 – Dn
�(2� − � + 1)
Dn = (C0 – CL)
�(� +
1)
for n=3 C0 = 15kP
L=5 CL = 0
hence,
3{2(5) − 3 + 1}
D3 = (15k – 0) = 12kP
5(6)
C3 = C0 – D3 = 15k – 12k = 3000P
d. Declining Balance Method, DBM
or Matheson’s Formula or Constant Percentage Method
▪ d varies from yr to yr
▪ N/A if CL = 0
▪ by Principle of Geometric Progression
FORMULAS:
1. Constant percentage
� �� 𝒏 �
k=1-√
��
=1- √�𝒏
�
2. dn = C0k (1 – k)n – 1
𝒏
� �
3. Cn = C0 (1 – k) = C0 ( �)
n
�
�
4. CL = C0 (1 – k)L
5. Dn = C0 { 1 – (1 - k)n }

EXAMPLE:

1. A radio service panel truck initially costs 560kP. Its resale value at the end of 5 th yr is
estimated at 150kP. Find the depreciation charge on the second year by Declining
Balance Method.
Solution:
use, dn = C0k (1 – k)n – 1
𝐿 𝐶𝐿
k=1-√
𝐶0
for L = 5yrs
C0 = 560kP
CL = 150kP
5 150�
k=1-√ = 0.2316
560�
hence, for n = 2
d2 = (560k) (0.2316) (1-0.2316)1
d2 = 99658.41P

e. Double Declining Balance Method, DDBM

2
▪ same formulas as in DBM, simply replace k by
�
.
FORMULAS:
� 𝒏−�
1. dn = � (� �)
�
� −
�

2. Cn = C0 (� 3. CL = C0 (� −
−
� 𝒏 � �
)
�
)
�
--- etc ---
EXAMPLE:

1. A machine costs 100kP and the useful life is 10 yrs. Find the depreciation charge at
the 3rd yr Double Declining Balance Method.
Solution:
2 𝐶0 2 �−1
dn = (1 − �
)
�
for n=3
L = 10
C0 = 100kP
2(100�) 2 2
d3 = (1 − 10)
10
d3 = 12800P

f. Service-Output Method

1. Per Hour Basis

FORMULA:
� �� −
=
�𝒓 ��
�� − ��
�
�
or Dn = ( ) Hn or Dn = ( ) Hn
� �
where, 𝒓
H = total generating hours within the service life
Hn = no. of hours used during n period
Dn = total depreciation within the n period

2. Per Unit Basis

FORMULA:
� �� −
=
�𝒏�� ��
�� − ��
�
�
or Dn = ( ) Tn or Dn = ( ) Tn
� 𝑻
where, 𝒓
T = total no of units produced within the service life
Tn = no of units produced within n period

EXAMPLE:

1. An asphalt and aggregate mixing plant having a capacity of 50 m3/hr costs 2.5M P. It is
estimated to process 800k m3. If its scrap value is 100kP, determine (a) the
depreciation chargeable per batch of m 3. (b) the depreciation chargeable per batch
of
50m3. (c) the total depreciation during a certain yr if it processed 60k m3.
 Solution:
𝐶0 − 𝐶𝐿 (2 .5�
a.
� = =
−100� ) 𝑃 = 3 P/m3
�3 𝑇 800�
�3
𝑃 350 �
�
b. �3 = (3 )( ) = 150 P/batch
�3 ��
𝐶0 − 𝐶𝐿 ��ℎ 2.5� −100 �
c. Dn = ( )Tn = ( 800
) (60k) = 180000P
𝑇
�

TOPIC 2 – SUNK COST, SC

- it is the cost which can not be recovered due to poor estimate of book value.
FORMULA:
SC = Cn ---- Resale Value or Trade-In Value
where,
Cn = book value after n yrs when replacement occur.
EXAMPLE:

1. A machine was purchased 5 yrs ago at a cost of 120k P. Its estimated salvage
value at the end of 10 yrs is 10k P. If it is sold now for 30k P, what is the
sunk cost if the depreciation method used is straight line method?
Solution:
SC = Cn --- Resale Value
for n=
5
Resale Value = 30k P
SC = c5 – 30k -------- 1
by SLM,
Cn = C0
– Dn
�
Dn = (C0 – CL)
�
for n=5 C0 = 120k P
L = 10 CL = 10k P
5
D5 = (120k – 10k)
10
D5 = 55k P
C5 = C0 – D5
C5 = 120k – 55k = 65k P
subst. values
to 1
SC = 65k – 30k
SC = 35000 P

TOPIC 3 – DEPRECIATION TAX SHIELD,

DTS
- it is the present sum of money needed for the payments of the depreciation taxes.
FORMULA:

� −−( � +� )
�
DTS = d { �
} (TR)
 where,
d = constant depreciation charge per yr which
can be evaluate by SLM or SFM.
TR = tax rate

EXAMPLE:

1. A company purchase 200kP of equipment in year zero. It decides to use SLM

of depreciation over the expected 20 yr life of the equipment. The interest rate is 14%. If
the overall tax rate is 40%, what is the present worth of the depreciation tax shield?
Solution:
−𝐿
1 − ( 1+ � )
DTS = d { �
} (TR) -------- 1
by SLM,
𝐶0 − 𝐶𝐿
d=
�
200� − 0
d= = 10kP
20
subst. values to 1
1 − ( 1.14−20
)
DTS = 10k { } (0.40)
0.14
DTS = 26492.52P

TOPIC 4 – DEPLETION
- the decrease in worth of a natural resources (e.q. mine)
due to gradual extraction of each content.

METHODS OF CALCULATION
1. Per Unit or Factor Method
FORMULA:
�� −
d = ) Sn
��
where, n (
𝑻
C0 = orig. cost
CL = salvage value
T = total no. of units available
Sn = no. of units extracted and sold at n period

EXAMPLE:

1. A mining company invested 25M P to develop an oil well which us estimated to contain
1M barrels of oil. During a certain yr, 200k barrels were produced from this well. Compute
the depletion charge during the year.
Solution:
𝐶0 − 𝐶𝐿
d n= ( 𝑇
) Sn
 where,
hence,
C0 = 25M P
CL = 0
T = 1M barrels
Sn = 200k barrels

25� −0
dn = ( ) (200k)
1�
dn = 5MP
2. Percentage Allowance Method
a. Based on Gross Income, GI
����������
dn = ( ) (�� )
���������
��� �ℎ�
�������
���������
from Table

b. Based on Net Income, NI

NI = GI – Expenses Excluding Depletion
dn = 50% NI
NOTE: Compare results of a and b and report whichever is less

EXAMPLE:

1. The total gross income of an oil company is 30MP. The taxable income after deducting
all expenses excluding depletion is 11.8MP. Determine the allowable depletion allowance
for the year. The percentage allowance for oil is 22% of the gross income.
Solution:
a. Based on Gross Income
dn = 0.22 (30M) = 6.6MP
b. Based on net Income
dn = 0.5 (11.8M) = 5.9MP
* by comparison of results of a and b, dn = 5.9MP

TOPIC 5 – VALUATION
- the process of estimating the cost of a natural resources which is done by authorized
individual called appraiser.
FORMULA:
(𝑷 −
A = Pr + � ) � ------------ Hoskold’s Formula
�
where, (�+�)�
−�
A = net annual income
P = estimated cost of mine
r = rate of return
CL = salvage value
i = interest on the sinking fund
L = life, yrs
EXAMPLE:

1. A timber tract will yield an annual income of 1MP for 10 yrs after which the timber tract
will be exhausted. The land can be sold for 120kP. If a prospected buyer wishes to earn
12% on his investment and can deposit money in a sinking fund at 6%, determine the
maximum price he could pay for the tract.
Solution:
(𝑃 − 𝐶𝐿 )
A = Pr +
�
where, (1+�)𝐿−
A = 1MP 1
L = 10 yrs
r = 12%
i = 6%
CL = 120kP
(𝑃−120�)(0.06)
1M = P(0.12) +
(1.06)10−1
solve for P, P = 5151961.37P

36
ASSESSMENT 3

1. A brand new car costs 500,000P and the life, find its depreciation at the year 1998
salvage value is 10% of the original cost if its total operating hours were 2520.
after
20 years. Find the book value of this car
after
5 years by straight line method.

2. A generator set costs 500,000P and

the salvage value is 10% of the original cost
after
20 years, find the depreciation charge
per
year if money worth 12%.

3. A car costs 500,000P and the salvage

value is 10% of the original cost after
20 years. Find the depreciation charge at the
8th year by sum of the year’s digit
method (SYDM).

4. A lathe machine cost 650,000P and

the salvage value is 65,000P after 20 years,
find the depreciation charge at the 5 th
year by Matheson’s Formula, (Declining
Balance Method, DBM).

5. A pump costs 50,000P and the useful life

is 10 years. Find the book value after 8
years by double declining balance
method (DDBM).

6. A concrete hollow blocks (CHB) machine

cost 40,000P and the salvage value is
4000P after 6 years. If it can make 108,000
pieces of hollow blocks within the useful life,
find the depreciation charge at the year
1999 if it made 15,000 pieces only.

7. A car costs 500,000P and the

salvage value is 50,000P after 20 years.
Find the book value after 5 years if money
worth 12% per annum.

8. A motor costs 60,000P and the

salvage value is 6000P after 10 years. If it
was used for 28,800 hours within the useful
37
9. A tractor costs 800,000P and
whose salvage value is 40,000P after 10
years. Find the total depreciation after 6
years by declining balance method.

10. A generator costs 500,000P and whose

salvage value is 10,000P after 20 years.
Find the book value after 12 years by sum of
the year’s digit method.

11. A personal computer costs 60,000P and

the salvage value is 5000P after 10
years. Find the book value after 6 years if
money worth’s 12% per annum.

12. A car costs 800,000P 4 years ago and

the salvage value is 50,000P 6 years from
now. If it is to be replaced by a new one and
the trade in value is 450,000P find the sunk
cost if money worth’s 12%.

13. To develop a timberland

containing
2,000,000 trees required an initial investment
of 30,000,000P. In a certain year,
400,000 trees were cut off. Find the
depletion charge during the year.

14. A mining company has a gross income

of
32,000,000P per month from the production
of iron core. All expenses,
excluding depletion expenses, amount of
26,000,000P per month. If the fixed depletion
rate of iron core is 15%, what is the
monthly depletion allowance?

15. Ten hectares of timberland will yield an

annual profit of 1,000,000P for 10 years,
after which the timber will be exhausted. The
land can be sold for 12,000P per hectare. If
the prospective buyer wishes to earn 15% on
his investment and can deposit money in
a sinking fund at 8%, determine the
maximum price he could pay for the
timberland.

38
16. A machine cost 100,000P and with a constant percentage in the declining book
useful life of 25 years. Find the book value value.
after 3 years by using double
declining balance method. 19. A machine cost 80,000P and the salvage
value is 20,000P after 20 years. Find the
17. A machine cost 80,000P and the salvage sinking fund factor if interest rate is 8% per
value is 20,000P after 20 years. Find the year.
book value after 2 years by using sum of the
years digit method. 20. A machine cost 80,000P and the salvage
value is 20,000P after 20 years. Find the
18. A machine cost 80,000P and the salvage depreciation charge by sinking fund method
value is 20,000P after 20 years. Find the if interest rate is 8% per year.

ANSWERS TO
ASSESSMENT 3
1. 387500P 11.
2. 6245P 34566P
3. 27857P 12.
4. 44590P 145741
5. 8389P P
6. 5000P 13. 6MP
7. 460324P 14. 3MP
8. 4725P 15.
9. 667459P 4603415
10. 94000P P
16.
77869P
17.
68857P
18.
6.69%
19.
0.0219
20.
1311P

38
MODULE 4

LEARNING OBJECTIVES:
After the completion of Module 4, it is expected that the student have understand the
following:
1. Evaluation of Break Even Point
2. Calculation of Profit

TOPIC 1 – BREAK-EVEN ANALYSIS

1. Break-Even Point (BEP) – a point in economic study where the sales volume is just
enough pay the costs of production. Hence no loss, no gain.
FORMULA:
S(x) = C + V(x) ---------- x = no. of units needed
at BEP
where,
S(x) = sales function = ( 𝑆���𝑖��)�� (� )𝑖��
���
C = Fixed cost ��𝑖�
V(x) = variable cost function
�����𝑖��
𝐶��� ���
��𝑖�
+ ����� 𝐶���
={
��� ��𝑖�
+ ��ℎ��} (�)
���𝑖����
𝐶���
���
��𝑖�

EXAMPLES:

1. A steel drum manufacturer incurs a yearly fixed operating cost of 200kP. Each drum
manufactured costs 160P to produce and sells for 200P. What is the manufacturer’s
break- even sales volume in drums per year?
Solution:
let x = no of drums needed per year at BEP
use, S(x) = C + V(x)
200x = 200k + 160x
Solve for x,
x = 5000

2. A company manufactures bookcases that it sells for 65P each. It costs 35kP per yr to
operate its plant. This sum includes rent, depreciation charges on equipment and salary
payments. If the additional cost to produce one bookcase is 50P, how many cases must
be sold each year for the company to avoid taking a loss?
Solution:
let x = no of bookcases needed per year at BEP
S(x) = C + V(x)
65x = 35k + 50x
39
 x = 2334

3. A piece of property is purchased for 10kP and yields 1kP yearly profit. The property is
sold after 5 years. At 6% interest, what is the minimum price to break-even?

40
Solution:
draw CFD

S(1.06)-5
S = ? “selling price”
P
A
A

1
K
P
/
y
r

0 1 2 3 4 5 (yrs)

i = 6% “per year”

10kP

s
e
t
-
u
p

E
V

a
t

z
e
r
o
∑↑=∑↓
PA + S(1.06)-5 = 10k
−5 1 − (1. 06)
1k { } + S(1.06)-5 = 10k
0
.
0
6
S = 7745.16P
40
 ent worth of projects A and B must be
equivalent.
4. Project A
CFD for Project B
requires
100kP now. PB
Project B
requires an
80kP 0
investment
n
now and an
additional =
40kP
investment ?
later. At 8%
interest, what 4
0
is the BEP on k
the timing of P
the additional 80kP
40k later?
Solution: w
a h PA = 100kP
t e
B r
E e
P
,
,
EV at zero PB = 80k + 40k (1.08)-n
t
hence,
h
100k = 80k + 40k (1.08)-n
e
n = 9 yrs
p
r
e 2. Unhealthy Point - it is a point in economic study where the
s sales volume is just enough to pay the
dividends.
FOR
MUL S(x) = C + V(x) + D
A:

41
where,
D = payment of dividends usually P/yr

NOTE: be consistent with time unit

3. Profit Calculation
FORMULA:
Sales = Fixed cost + Variable cost + Dividend +
Profit
Capital
or Profit = Sales
– Capital

EXAMPLE:

1. A company assembling small radio produced and sold 100 units per
month. It costs
800P to produce a unit which is sold at 1200P. If the company has a
fixed cost of 20kP per month and pays 10% on its 10k shares with a
par value of 200P/share dividends, calculate
the profit or loss of the company.
Solution:
Profit = Sales – Expenses or Capital ---------- 1
in
1mon 1200𝑃
th,
Sales = ( ) (100 units) = 120kP
�
�
�
�
Expenses = Fixed cost + Production cost +
Dividend
Fixed cost = 20kP
8
0
0
�
�
Production ) (100 units) = 80kP
�
cost = ( �
�
�
Dividend = { (0.10)(10k )(
200𝑃 1��
shares) } ( )
�ℎ��� �� 12
�
�
�
= 16666.67 P/yr
he
nc Expenses = 116666.67P
e,
subst.
values to 1, Profit = 3333.33P

41
 2. An 0
investor is .
considering 5
a stock (
portfolio that 1
costs 55P. If 0
he invests in 0
the portfolio, )
there is a 0.5
=
probability
that he will 6
receive a 0
total revenue P
of 20P. If
that event C
does not a
occur, he will p
receive a i
total revenue t
of 100P, a
what will be l
the investors
expected =
profit if he
decides to 5
invest? 5
P
Soluti
on:
Profit = 60 –
Profit =
where, Income or 55 = 5P
Sales –
Capital or
hence, Expenses

I
n
c
o
m
e

0
.
5
(
2
0
)

42
ASSESSMENT 4
1. A concrete hollow blocks (CHB)plant has 6. A certain firm has a capacity to produce
an overhead cost of 150,000P per 650,000P units of a certain product per year.
month. The material cost is 3.75 per unit and At present, it is operating at 62%
labor cost 2.25 per unit. How many units capacity. The firm’s annual income is
should be made per month to break-even if 4,160,000P. Annual fixed cost is
the selling price is 7.50 per unit. 1,920,000P and the variable costs are
equal to 3.56 per unit. What is the annual
2. A high voltage gloves manufacturer profit or loss?
produces a pair of gloves at labor cost of 15
and a material cost of 40 a pair. The 7. A shoe manufacturer produces a pair
fixed charges on the business are of shoes at a labor cost of 90P a pair
90,000P a month and the variable cost are and materials cost of 80P a pair. The
15 a pair. If the gloves sell for 160 a pair, fixed charges of the business are 90,000P a
how many pairs must be produced per month and the variable cost is 40P a
month by the manufacturer to break- pair. If the shoes sell for 300P a pair, how
even? many pairs must be produced each
month by the manufacturer to break-
3. A steel drum manufacturer incurs a yearly even?
fixed operating cost of 2,000,000P. Each
drum manufacturer cost 160P to produce 8. A plant has capacity of producing
and sells for 200P. What is the 8000 units per month of a product, which it
manufacturers break-even sales volume in sells for
drums per year? 1.50P per unit regardless of output. The
monthly fixed costs are 2800P and a
4. The direct labor cost and direct variable cost of 4800P at 75% capacity.
material cost of certain product are 300P What is the fixed cost per unit at the break-
and 400P per unit, respectively. Fixed even point?
charges are
100,000P per month and other variable 9. A local company assembling stereo radio
costs cassettes produces 300 units per month at a
are 100P per unit. If the product is sold for cost of 800P per unit. Each cassette sells for
1200P per unit, how many units must be 1200P. If the firm makes a profit of 10% on
produced and sold to break-even? its 10,000P shares with a par value of 200P
per share, and the total fixed cost per month
5. A local factory assembling calculators is 20,000P what is the break-even point?
produces 400 units per month and sells
them at 1800P each. Dividends are 8% 10. Company A and B manufactures the
on the same article. Company A, relying mostly on
8000 shares with par value of 250P machines has fixed expenses of 12000P per
each. The fixed operating cost per month and direct cost of 8 per unit.
month is Company B, using more hand work, has
25000P. Other costs are 1000P per unit. fixed expenses of 4000P and direct cost
Determine the number of units needed to be of 20 per unit. At what monthly
produced per month at unhealthy point. production rate will the total cost per
unit is the same for the two
companies?

42
 ANSWERS TO ASSESSMENT 4
1. 100000 6. 805320P
2. 1000 7. 1000
3. 50000P 8. 0.70
4. 250 9. 92
5. 48 10. 667

43