ECON CO1 REVIEWER
Probset and Quiz
1. While preparing for the final semester of the year, you and your two friends are wondering whether to sign up for
college meal or to cook for yourselves. The colleqe meal system provides you with 2 meals a day, for 5 days a week
for the entire semester of 10 weeks, and costs $500 for the semester. If you and your friends cook, then the cost per
meal per person will be halved, but one person will have to cook for an hour to make a meal for three. Final exams
are around the corner.
a. what is the problem in this situation? Please state it in an explicit and precise manner.
b. systematically apply the seven principles of engineering economy to the problem you have defined in part (a).
2. Classify each of the following cost items as mostly fixed or variable:
Raw materials -
Direct labor -
Depreciation -
Supplies -
Utilities -
Property taxes -
Interest on borrowed money -
Administrative salaries -
Payroll taxes -
Insurance (building and equipment) -
Clerical salaries -
Sales commissions -
Rent -
3. The volume of the raw material required for a certain machine part is 2.02 [Link]. The finished volume is 1.05
[Link]. The time for machining each piece is 45 seconds for steel and 30 seconds for brass. The costs of steel is
P32.50 per kg and the value of steel scrap is negligible. The cost of the brass is P60.00 per kg and the value of brass
scrap is P25.00 per kg. The wage of the operator is P40.00 per hour and the overhead cost of the machine is P50.00
per hour. The weight of steel and brass are 0.0081 and 0.0088 kg per cu. cm. respectively. Which material will you
recommend?
4. Find the present value of perpetuity of P1,000.00 payable every month if money is worth 10% compounded
quarterly.
5. What is the future equivalent of $500 invested at 8% simple interest per year for 2.5 years?
6. A man wishes to provide a fund for his retirement such that from his 60th to 70th birthdays he will be able to withdraw
equal sums of P18,000 for his yearly expenses. He invest equal amounts from 41st to 59th birthdays in a fund earning
10% compounded annually. How much should he invest?
7. A concrete pavement on a street would cost P10,000 and would last for 5 years with negligible repairs. At the end
of each 5 years, P1,000 would be spent to remove the old surface before P10,000 is spent again to lay a new surface.
Find the capitalized cost of the pavement at 5%.
8. A firm is considering the installation of an automatic data processing unit to handle some of its accounting
operations. Machine for that purpose may be purchased for P20,000 or may be leased for P8,000 for the 1s year and
P1,000 less every year now and then until the end of the 4" year. If money is worth 15%, is it advisable to rent or buy
the machine?
ECON CO1 REVIEWER
1. In connection with surfacing a new highway, a contractor has a choice of two sites on which to set up the asphalt-
mixing plant equipment. The contractor estimates that it will cost P2.75 per cubic yard mile to haul the asphalt-
paving material from the mixing plant to the job location. Factors leading to the mixing sites are as follows
(production costs at each site are the same)
The job requires 50,000 cubic yards of mixed-asphalt-paving material. It is estimated that four months (17weeks of
five working days per week) will be required for the job. Compare the two sites in terms of their fixed, variable and
total costs. Assume that the cost of the return trip is negligible. Which is the better site? For the selected site, how
many cubic yards of paving material does the contractor have to deliver before starting to make a profit if paid P12
per cubic yard delivered to the job location
2. Two currently owned machines are being considered for the production of a part. The capital investment
associated with the machines is about the same and can be ignored for purposes of this example. The important
differences between the machines are their production capacities (production rate x available production hours and
their reject rates (percentage of parts produced that cannot be sold).
The material cost is $6.00 per part and all defect-free parts produced can be sold for $12 each. (Rejected parts have
negligible scrap value.) For either machine, the operator costs is $15.00 per hour and the variable overhead rate for
traceable costs is $5.00 per hour. Assume that the daily demand for this part is large enough that all detect-free parts
can be sold. Which machine should be selected?
3. A company has a contract to build a sewer in a nearby province. It must dig a ditch 2m wide, 1m deep and 2000m
long. Laborers are available at $16 a day for an 8- hr/day, and they can dig on the average 0.5m3 per hour. A ditch
digging machine may be rented at a cost of $210 a day for all the time it was in use or in transit. One day would be
required for transporting the machine each way. Freight costs would total $600. The machine operation will be paid
$50 a day including travel time of two days. If the machine is used, 3 laborers would be required. The ditch digging
machine can excavate 1m3 in 6 minutes. All workers and machine rentals must be paid on a full 8 hr/day basis. What
would you recommend?
4. An employee at [Link] borrows $10,000 on May 1 and must repay a total of $10,700 exactly 1 year
later. Determine the interest amount and the interest rate paid
5. Manufacturers make backup batteries for computer systems available to Batteries dealers through privately
owned distributorships. In general, batteries are stored throughout the year, and a 5% cost increase is added each
year to cover the inventory carrying charge for the distributorship [Link] you own the City Center Batteries
outlet. Make the calculations necessary to show which of the following statements are true and which are false
about battery costs.
(a) The amount of $98 now is equivalent to a cost of $105.60 one year from now.
(b) A truck battery cost of $200 one year ago is equivalent to $205 now.
(c) A $38 cost now is equivalent to $39.90 one year from now.
(d) A $3000 cost now is equivalent to $2887.14 one year earlier.
(e) The carrying charge accumulated in 1 year on an investment of $20,000 worth of batteries is $1000.
6. Determine the ordinary and exact simple interest on $5000 for the period from Jan 15 to June 20, 1978. If the rate
of simple interest is 14%
7. A man borrows $10,000 from a loan [Link] rate of simple interest is 15% but the interest is to be deducted from
the loan at the time the money is [Link] the end of one year he has to pay back $10,[Link] is the actual rate
of interest?
8. A company that manufacturers regenerate thermal oxidivers made investment 10 years ago that is now worth
$130,[Link] much was the initial investment at an interest rate of 15% per year considering simple interest?
9. Find the nominal rate which if converted quarterly could be used instead of 12% compounded monthly. What is
the compounded effective rate?
ECON CO1 REVIEWER
10. Find the amount at the end of two years and seven months if P1000 is invested at 8% compounded quarterly
using simple interest for anytime less than a year interest period.
11. If P1000 becomes P1,811.36 after 5 years when invested at an unknown rate of interest compounded bimonthly,
determine the unknown nominal rate and the corresponding effective rate.
12. For a loan acquired six years ago, a man paid out the amount of P75,000.00. The interest was computed at 18%
compounded annually. How much was the borrowed amount?
13. Compare the accumulated amounts after 5 years of P1,000 invested at the rate of 10% per year compounded:
(a) annually (b) semi annually (c) quarterly (d) monthly (e) daily (f) continuously
14. What are the present worth and the accumulated amount of a 10-year annuity paying P10,000 at the end of each
year, with interest at 15% compounded annually?
15. What is the present worth of P500 deposited at the end of every three months for 6 years if the interest rate is
12% compounded semi-annually?
16. A chemical engineer wishes to set up a special fund by making uniform semi annual end-of-period deposits for
20 years. The fund is to provide P100,000 at the end of each of the last five years of the 20-year period. If interest is
8% compounded semiannually, what is the required semiannual deposit to be made?
17. Using a compound interest of 8%, find the equivalent uniform annual cost for a proposed machine that has a
first cost of P100,000 an estimated salvage value of P20,000 and an estimated economic life of 8 years. Annual
maintenance will amount to P2,000 a year and a periodic overhaul costing P6,000 each will occur at the end of the
second and fourth year.
18. A man purchased a house for P425,000. In the first month that he owned the house, he spent P75,000 on repairs
and remodeling. Immediately after the house was remodeled, he was offered P545,000 to sell the house. After some
consideration, he decided to keep the house and have it rented for P4,500 per month starting two months after the
purchase. He collected rent for 15 months and then sold the house for P600,000. If the interest rate was 1.5% per
month, how much extra money did he make or lose by not selling the house immediately after it was remodeled.
19. Today, you invest P100,000 into a fund that pays 25% interest compounded annually. Three years later, you
borrow P50,000 from a bank at 20% annual interest and invest in the fund. Two years later, you withdraw enough
money from the fund to repay the bank loan and all interest due on it. Three years from this withdrawal you start
taking P20,000 per year out of the fund. After five withdrawals you withdraw the balance in the fund. How much was
withdrawn?
20. If P10,000 is deposited each year for 9 years, how much annuity can a person get annually from the bank every
year for 8 years starting 1 year after the 9th deposit is made. Cost of money is 14%.
21. A debt of P40,000 whose interest rate is 15% compounded semi-annually, is to be discharged by a series of 10
semi annual payments, the first payment to be made 6 months after consummation of the loan. The first 6 payments
will be P6000 each, while the remaining 4 payments will be equal and of such amount that the final payment will
liquidate the debt. What is the amount of the last 4 payments?
22. A man bought an equipment costing P60,000 payable in 12 quarterly payments, each installment payable at the
beginning of each period. The rate of interest is 24% compounded quarterly. What is the amount of each payment?
23. A certain property is being sold and the owner received two bids. The first bidder offered to pay P400,000 each
year for 5 years, each payment is to be made at the beginning of each year. The second bidder offered to pay
P240,000 first year. P360000 the second year and P540,000 each year for the next 3 years, all payments will be made
at the beginning of each year. If money is worth 20% compounded annually, which bid should the owner of the
property accept?
24. What amount of money invested today at 15% interest can provide the following scholarships: P30,000 at the
end of each year for 6 years; P40,000 for the next 6 years and P50000 thereafter?
25. Determine the capitalized cost of a structure that requires an initial investment of P1,500,000 and an annual
maintenance of P150,000. Interest is 15%.
26. A new engine was installed by a textile plant at a cost of 300,000 and projected to have a useful life of 15 years.
At the end of its useful life, it is estimated to have a salvage value of P30,000. Determine its capitalized cost if interest
is 18% compounded annually.
ECON CO1 REVIEWER
27. Determine the capitalized cost of a research laboratory which requires P5,000,000 for original construction:
P100,000 at the end of every year for the first 6 years and then P120,000 each year thereafter for operating expenses
and P500,000 every 5 years for replacement of equipment with interest at 12% per annum?
28. A debt of P5,000 with interest at 12% compounded semi-annually is to be determined by equal semi-annual
payments over the next 3 years, the first due in 6 months. Find the semiannual payment and construct an
amortization schedule.
29. A debt of P10,000 with interest at the rate of 20% compounded semiannually is to be amortized by 5 equal
payments at the end of each 6 months, the first payment is to be made after 3 years. Find the semi-annual payment
and construct an amortization schedule.
30. A loan was to be amortized by a group of four end-of year payments forming an ascending arithmetic progression.
The initial payment was to be P5,000 and the difference between successive payments was to be P400. But the loan
was renegotiated to provide for the payment of equal rather than uniformly varying sums. If the interest rate of the
loan was 15%, what was the annual payment?
31. Find the equivalent annual payment of the following obligations at 20% interest.