ENGINEERING ECONOMY

SIMPLE INTEREST
1. If a man borrowed money from his girlfriend with simple interest rate of 12%,
determine the present worth of P74, 900.00, which due at the end of seven months.
2. Clara has invested P 10,000.00, part at 5% and the remainder at 10% simple
interest. How much is invested at higher rate if the total annual interest from this
investment is P 950.00?
3. Determine the accumulated amount using exact simple interest on P 10,000.00 for
the period from January 20, 1990 to November 28 of the same year at 15% interest
rate.
COMPOUND INTEREST
1. If the sum of P 12,000 is deposited in an account earning interest rate of 9%
compounded quarterly, what will it become after 1 year?
2. In the previous problem, what is the effective rate?
3. What is then the equivalent nominal interest rate if compounded monthly?
4. What payment X ten years from now is equivalent to a payment of P 1,000 six years
from now, if interest is 15% compounded monthly?
ANNUITY
1. If P500.00 is invested at the end of each year for 6 years at an annual interest rate
of 7%, what is the total peso amount upon the deposit of the sixth payment?
2. If P500.00 is deposited in an account at the beginning of each year for 6 years at
an annual interest rate of 7%, how much can be withdrawn after 6 years?
3. A fund is to provide an annual scholarship at P4,000 for the first 5 years; P6,000 for
the next 5 years and P9,000 thereafter. The fund will be established 1 year before
the first scholarship is awarded. If the fund earns 12% interest, what sum must be
deposited?
4. A man paid 10% as down payment of P200,000 for a house and lot and agreed to
pay the balance on monthly installments for 5 years at an interest rate of 15%,
compounded monthly. What was the monthly installment in pesos?

GRADIENT SERIES
1. A certain machine purchased today shall be paid in 3 annual unequal payments
with no down payment. If the company agrees that the first payment is P120,000
at the end of the first year and you have to increase that payment by P30,000 per
year for the next remaining years until the end of the 3rd year, how much is the
present worth of the machine if the company charges 12% annual interest?
2. Annual deposits were made in the fund earning10% per annum. The first deposit
was 2,000 and each deposit thereafter was 200 less than the preceding one.
Determine the amount in the fund after sixth deposit.
3. Annual maintenance costs for a machine are P1,500 this year and estimated to
increase 10% each year every year. What is the present worth of the maintenance
costs for 4 years if i = 8%?
 ENGINEERING ECONOMY
INFLATION
1. 1. In 1960, the average value of a house is P300,000. In 2010, the average value of
the house of the same model is P2,132,000. What was the rate of inflation of the
house?
2. In year zero, you invest P 100,000.00 in a 15% security for 10 years. During that time,
the average annual inflation is 6%. How much in terms of year zero pesos will be in
the account at maturity?
3. A P2,000 in 2 years has an average inflation rate of 6% and the real interest rate of
money is 10%. Determine the inflation-adjusted interest rate.

DEPRECIATION
1. A 30 hp sand mill cost P410,000. Salvage value of the mill is estimated to be P60,000
after 20 years. Find the appraisal or book value of the sand mill using straight line
depreciation method after 10 years.
2. A dump truck was bought for P300,000 six years ago. It will have a salvage value
of P30,000 four years from now. Determine the present value of the dump truck if
the depreciation method used is sinking fund at 6%?
3. An asset is purchased for P9,000. Its estimated life is 10 years, after which it will be
sold for P1,000. Find the book value at the end of third year if sum-of-the-year’s
digit method (SOYDM) depreciation is used.
4. A company purchased new 3D projectors with a total worth of P618,000. If the
equipment is depreciated over an eight- year period with salvage value of 5%,
determine the depreciation charge during the fifth year using declining balance
method.
5. In the previous problem, determine the depreciation charge during the fifth year
using double declining balance method.
6. A property is purchased at P 100,000 with a salvage value of 10% of the original
cost after 8 years of service. If during the first 4 years of service it produces 100 units
per year and 80 units each year for the remaining years. What will be the book
value after 5 years of service using service output method?
7. A machinery worth P10,000 has an anticipated salvage value of P3,000 at the end
of 7 years’ depreciable life. Compute the depreciation of the machinery on the
4th year only using MACRS method.
 ENGINEERING ECONOMY

CAPITALIZED COST AND ANNUAL COST

1. Compute the capitalized cost of a new car worth P800,000 if it is estimated that it
requires P20,000 per year to maintain and must be replaced at the same amount
with a salvage value of P300,000 after 5 years if the interest rate is 12% per annum.
2. A contractor can buy dump trucks for P800,000 each or rent them for P1200 per
day. The truck has a salvage value of P100,000 at the end of its useful life of 5 years.
The annual cost of maintenance is P20,000. Using the annual cost method and
14% interest rate, determine the number of days per year that the truck must be
used to warrant its purchase.

BREAKEVEN
1. The labor cost per unit is P20, cost of materials per unit is P64, and other variable
cost per unit is P5.25. The fixed charges on business is P175,000/mo. If the unit selling
price is P215, determine the number of units to be produced monthly to break-
even.
2. Steel drum manufacturers incur a yearly fixed operating cost of P200,000. Each
drum manufactured costs P160 to produce and sells P200. What is the
manufacturer’s break-even sales volume in drums per year?

BENEFIT – COST RATIO

1. A small entrepreneur invested a capital of P80,000 for a buy and sell business. He
estimated to have a gross income of P25,000 annually and an operating cost of
P6000 annually. It is assumed the business to have a life of 10 years. If the rate of
interest is 12%. Compute the benefit cost ratio.
2. P180,000 was spent in a project that yields annual benefit of P60,000 for a period
of 8 years without any salvage value. Determine the benefit cost ratio considering
the cost of money of 7%.
 ENGINEERING ECONOMY
RATE OF RETURN
1. It is estimated that insulation of steam pipes in a factory will reduce the fuel bill by
as much as 20%. The cost of the insulation is P90,000 installed and the annual cost
of taxes and insurance is 5% of the initial cost. Without insulation, the annual fuel
bill is P180,000. If the insulation is worthless after 6 years’ use, what would be the
rate of return? i=12%
2. An investment of P275,000 in a new machine could reduce the annual cost of
operations by P80,000. It would cost P12,000 per year to maintain the machine
which would last for 10 years with negligible scrap value. A constant annual
deposit in a fund is made at an interest of 8% per annum to accumulate and
recover the first cost of the machine in 10 years. Find the rate of return on the
investment in percent.

RECOVERY PERIOD AND PAYOUT PERIOD

1. It is estimated that insulation of steam pipes in a factory will reduce the fuel bill by
as much as 20%. The cost of the insulation is P90,000 installed and the annual cost
of taxes and insurance is 5% of the initial cost. Without insulation, the annual fuel
bill is P180,000. If the insulation is worthless after 6 years’ use, determine the
recovery period. i=12%
2. A company has a working capital of P20M and a fixed capital of P80M. Annual
depreciation amounts of P5M and the expected annual net profit is P16M.
Compute the payout period in years.

BOND
1. What is the maximum amount an investor should pay for a 25-year bond with a
P20,000 face value and 8% coupon rate (interest only paid semiannually)? The
bond will be kept to maturity. The investor’s effective annual interest rate for
economic decision is 10%.
2. Determine the approximate size of an annual payment needed to retire
Php70,000,000 in bonds issued by a city to build a dam. The bonds must be repaid
over a 50-year period, and they earn interest at an annual rate of 6%
compounded annually.

STOCK VALUATION
1. ABC Corporation has preferred stock outstanding. This stock pays an annual
dividend of P2.5. If the next dividend is paid 1 year from now and the annual
required return is 10%, what should be the value of the preferred stock?
2. DEF Corporation just paid a P1.57 dividend and investors expect that dividend to
grow by 5% each year. If the required return on the stock investment is 14%, what
should be the price of the stock today. GHI Corporation’s stock which currently
sells at Php50 per share, will pay a Php3 annual dividend per share. The dividend
will increase in value at an average rate of 5% per year. What is the company’s
cost of the capital raised through the selling of this stock?

SIMPLE DISCOUNT RATE

1. A C.E. borrowed P50,000 from a bank and promises to pay the loan after 1 year.
The C.E. received P45,000 in cash. Determine the rate of discount and the rate of
interest.
ENGINEERING ECONOMY