ENGINEERING

ECONOMY

GENERAL ENGINEERING AND APPLIED SCIENCES

TOPICS
➢ SIMPLE INTEREST
➢ RATES OF INTEREST
➢ COMPOUND INTEREST
➢ ANNUITIES
➢ CAPITALIZED COST
➢ ARITHMETIC & GEOMETRIC GRADIENT
TOPICS
➢ DEPRECIATION
➢ BONDS
➢ BREAK-EVEN
ENGINEERING
ECONOMY

SIMPLE INTEREST
SIMPLE INTEREST
• Interest is the amount of money paid for the use of borrowed
capital or the income produced by money which has been
loaned.
• Simple interest is calculated using the principal only, ignoring
any interest that had been accrued in preceding periods.
• In practice, simple interest is paid on short-term loans in which
the time of the loan is measured in days.
SIMPLE INTEREST
• Mathematically,
𝐼 = 𝑃𝑖𝑛; 𝐹 = 𝑃 + 𝐼 = 𝑃 1 + 𝑖𝑛
where: I – interest
P – principal or present worth
n – number of interest periods
i – rate of interest per interest period
F – accumulated amount or future worth
SIMPLE INTEREST
• Ordinary simple interest is computed on the basis of 12 months
of 30 days each or 360 days a year (1 banker’s year).
𝑑
𝐼𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 = 𝑃𝑖
360
SIMPLE INTEREST
• Exact simple interest is based on the exact number of days in a
year, 365 days for an ordinary year (Fed. 1–28) and 366 days for
a leap year (Feb. 1–29).
𝑑
𝐼𝑒𝑥𝑎𝑐𝑡 = 𝑃𝑖
365 𝑜𝑟 366
Note: Leap year is divisible by 4.
EXAMPLE PROBLEM 1
Determine the exact and ordinary simple interests on ₱1200 for the
period from January 16 to November 26, 1992, if the rate of interest
is 24%.
a.) ₱247.87, ₱252.00 c.) ₱427.87, ₱220.50
b.) ₱287.47, ₱225.00 d.) ₱724.87, ₱522.00
EXAMPLE PROBLEM 1
Solution: By checking the year, 1992/4 = 498 (leap year). For the
number of days,
Jan.–15 (excluding 16) Jun.–30 Nov.–26
Feb.–29 Jul.–31
Mar.–31 Aug.–31
Apr.–30 Sept.–30
May–31 Oct.–31
EXAMPLE PROBLEM 1
For the total number of days, d = 315. Solve the exact and ordinary
simple interest.
𝑑 315
𝐼𝑒𝑥𝑎𝑐𝑡 = 𝑃𝑖 = 1200 0.24 = ₱247.87
366 366
𝑑 315
𝐼𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 = 𝑃𝑖 = 1200 0.24 = ₱252.00
360 360
EXAMPLE PROBLEM 1
Determine the exact and ordinary simple interests on ₱1200 for the
period from January 16 to November 26, 1992, if the rate of interest
is 24%.
a.) ₱247.87, ₱252.00 c.) ₱427.87, ₱220.50
b.) ₱287.47, ₱225.00 d.) ₱724.87, ₱522.00
ENGINEERING
ECONOMY

RATES OF INTEREST
RATES OF INTEREST
• Nominal rate of interest specifies the rate of interest and the
number of interest periods per year.
𝑁𝑅 = 𝑖𝑚
where:
NR – nominal rate of interest
i – interest rate per period
m – number of periods
RATES OF INTEREST
Note: For the number of periods (m),
• Annually (every 12 months): m = 1
• Semi-annually (every 6 months): m = 2
• Quarterly (every 3 months): m = 4
• Bimonthly (every 2 months): m = 6
• Semi-quarterly (every 1.5 months): m = 8
• Monthly (every month): m = 12
RATES OF INTEREST
• Semi-monthly (every 0.5 month): m = 24
RATES OF INTEREST
• Effective rate of interest is the actual or exact rate of interest on
the principal during one year.
𝑚
𝑚
𝑁𝑅
𝐸𝑅𝐼 = 1 + 𝑖 −1= 1+ −1
𝑚
where:
ERI – effective rate of interest
m – number of periods
RATES OF INTEREST
• Effective Interest Rate for Continuous Compounding
𝐸𝑅𝐼 = 𝑒 𝑁𝑅 − 1
where:
NR – nominal rate of interest
RATES OF INTEREST
• Equivalent Nominal Rates
- For two nominal rates to be equal, their effective rates must
be equal.
EXAMPLE PROBLEM 2
Find the nominal rate compounded annually equivalent to the rate
of interest of 8% compounded quarterly.
a.) 7.56% c.) 8.42%
b.) 8.24% d.) 7.65%
EXAMPLE PROBLEM 2
Solution:
𝐸𝑅𝐼𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦 = 𝐸𝑅𝐼𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦
1 4
𝑁𝑅 8%
1+ −1= 1+ −1
1 4
𝑁𝑅 = 8.24%
EXAMPLE PROBLEM 2
Find the nominal rate compounded annually equivalent to the rate
of interest of 8% compounded quarterly.
a.) 7.56% c.) 8.42%
b.) 8.24% d.) 7.65%
ENGINEERING
ECONOMY

COMPOUND INTEREST
COMPOUND INTEREST
• In compound interest, the interest earned by the principal at the
end of each interest period (compounding period) is added to the
principal. The sum (principal + interest) will earn another interest
in the next compounding period.
𝑚𝑡
𝑁𝑅
𝐹 =𝑃 1+
𝑚
−𝑚𝑡
𝑁𝑅
𝑃 =𝐹 1+
𝑚
COMPOUND INTEREST
where:
F – future worth or accumulated amount
P – present worth
NR – nominal rate of interest
m – number of periods
t – time
COMPOUND INTEREST
• For the continuous compounding,
𝐹 = 𝑃𝑒 𝑟𝑡
𝑃 = 𝐹𝑒 −𝑟𝑡
where:
r = NR
EXAMPLE PROBLEM 3
What is the accumulated amount after 3 years of ₱6500 invested at
the rate of 12% per year compounded semi-annually?
a.) ₱8768.22 c.) ₱7872.33
b.) ₱9220.37 d.) ₱5566.23
EXAMPLE PROBLEM 3
Solution: For P = 6500, m = 2, t = 3, and NR = 12%,
𝑚𝑡
𝑁𝑅
𝐹 =𝑃 1+
𝑚
2 3
12%
𝐹 = 6500 1+ = ₱9220.37
2
EXAMPLE PROBLEM 3
What is the accumulated amount after 3 years of ₱6500 invested at
the rate of 12% per year compounded semi-annually?
a.) ₱8768.22 c.) ₱7872.33
b.) ₱9220.37 d.) ₱5566.23
EXAMPLE PROBLEM 4
Alexander Michael owes ₱25,000.00 due in 1 year and ₱75,000.00
due in 4 years. He agrees to pay ₱50,000.00 today and the balance
in 2 years. How much must he pay at the end of two years if money
is worth 5% semi-annually?
a.) ₱39,015.23 c.) ₱39,056.21
b.) ₱39,026.25 d.) ₱39,089.78
EXAMPLE PROBLEM 4
Solution: Draw a cash flow diagram.
Set the focal date at t = 0.
EXAMPLE PROBLEM 4
At i = 5% and m = 2,
−4
5%
𝑄 1+ + 50000
2
−2 −8
5% 5%
= 25000 1+ + 75000 1+
2 2
𝑄 = ₱39,021.28
EXAMPLE PROBLEM 4
Since the value is not in the choices, the nearest value is the final
answer.
EXAMPLE PROBLEM 4
Alexander Michael owes ₱25,000.00 due in 1 year and ₱75,000.00
due in 4 years. He agrees to pay ₱50,000.00 today and the balance
in 2 years. How much must he pay at the end of two years if money
is worth 5% semi-annually?
a.) ₱39,015.23 c.) ₱39,056.21
b.) ₱39,026.25 d.) ₱39,089.78
ENGINEERING
ECONOMY

ANNUITIES
ANNUITIES
• An annuity is a series of equal payments occurring at equal
periods of time.
• In engineering economy, annuities are classified into four
categories. These are ordinary annuity, annuity due, deferred
annuity, and perpetuity.
ANNUITIES
Symbols and their meaning:
P – value of sum of money at present
F – value or sum of money at some future time
A – a series of periodic, equal amounts of money
n = mt – number of interest periods
i = NR/m – interest rate per interest period
m & t – mode of payment and time
ORDINARY ANNUITY
• An ordinary annuity is one where the payments are made at the
end of each period.
ORDINARY ANNUITY
𝑚𝑡
𝑁𝑅
𝐴 1+ −1
𝐴 1+𝑖 −1𝑛 𝑚
𝑃= 𝑛
= 𝑚𝑡
𝑖 1+𝑖 𝑁𝑅 𝑁𝑅
1+
𝑚 𝑚
𝑚𝑡
𝑁𝑅
𝐴 1+ −1
𝐴 1+𝑖 𝑛
−1 𝑚
𝐹= =
𝑖 𝑁𝑅
𝑚
ORDINARY ANNUITY
For the calculator technique,
𝑛

𝑃 =𝐴෍ 1+𝑖 −𝑥

𝑥=1
𝑛−1
𝑥
𝐹 =𝐴෍ 1+𝑖
𝑥=0
EXAMPLE PROBLEM 5
With a 12% interest rate, approximately how much money must be
invested today in order to withdraw ₱1000 per year at the end of
each year for 10 years?
a.) ₱4800 c.) ₱5800
b.) ₱5650 d.) ₱6150
EXAMPLE PROBLEM 5
Solution: At NR = 12%, A = 1000, m = 1 and t = 10, solve for the
present value P.
𝑚𝑡 1 10
𝑁𝑅 12%
𝐴 1+ −1 1000 1+ −1
𝑚 1
𝑃= 𝑚𝑡 = 1 10
𝑁𝑅 𝑁𝑅 12% 12%
1+ 1+
𝑚 𝑚 1 1
𝑃 = ₱5650.22
EXAMPLE PROBLEM 5
Alternative solution: Using calculator technique,
𝑛 10 −𝑥
−𝑥
0.12
𝑃 =𝐴෍ 1+𝑖 = 1000 ෍ 1+
1
𝑥=1 𝑥=1

𝑃 = ₱5650.22
EXAMPLE PROBLEM 5
With a 12% interest rate, approximately how much money must be
invested today in order to withdraw ₱1000 per year at the end of
each year for 10 years?
a.) ₱4800 c.) ₱5800
b.) ₱5650 d.) ₱6150
EXAMPLE PROBLEM 6
Suppose that you make 10 equal annual deposits of ₱2000 each
into a bank account paying 9% interest per year. The first deposit
will be made one year from today. How much money can be
withdrawn from this bank account immediately after the 10th
deposit?
a.) ₱25,728.17 c.) ₱32,821.03
b.) ₱30,385.86 d.) ₱27,338.25
EXAMPLE PROBLEM 6
Solution: Using calculator technique at n = 10, A = 2000, and i =
9%.
𝑛−1 10−1
𝑥 𝑥
𝐹 =𝐴෍ 1+𝑖 = 2000 ෍ 1 + 9%
𝑥=0 𝑥=0
𝐹 = ₱30385.86
EXAMPLE PROBLEM 6
Suppose that you make 10 equal annual deposits of ₱2000 each
into a bank account paying 9% interest per year. The first deposit
will be made one year from today. How much money can be
withdrawn from this bank account immediately after the 10th
deposit?
a.) ₱25,728.17 c.) ₱32,821.03
b.) ₱30,385.86 d.) ₱27,338.25
EXAMPLE PROBLEM 7
Junsel obtained a loan of ₱10,000 at the rate of 6% compounded
annually in order to repair the house. How much must he pay
monthly to amortize the loan within period of 10 years?
a.) ₱111.25 c.) ₱125.55
b.) ₱110.22 d.) ₱158.35
EXAMPLE PROBLEM 7
Solution: Equate first the ERI monthly and annually.
𝐸𝑅𝐼𝑚𝑜𝑛𝑡ℎ𝑙𝑦 = 𝐸𝑅𝐼𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
12 1
𝑁𝑅 6%
1+ −1= 1+ −1
12 1
𝑁𝑅
1+ = 1 + 𝑖 = 1.004867551
12
EXAMPLE PROBLEM 7
Solve for the monthly payment at n = 120 and P = 10000.
𝑛

𝑃 =𝐴෍ 1+𝑖 −𝑥

𝑥=1
120

10000 = 𝐴 ෍ 1.004867551 −𝑥

𝑥=1
𝐴 = ₱110.22
EXAMPLE PROBLEM 7
Junsel obtained a loan of ₱10,000 at the rate of 6% compounded
annually in order to repair the house. How much must he pay
monthly to amortize the loan within period of 10 years?
a.) ₱111.25 c.) ₱125.55
b.) ₱110.22 d.) ₱158.35
EXAMPLE PROBLEM 8
A man inherited a regular endowment of ₱100,000 every end of 3
months for 10 years. However, he may choose to get a single lump
sum payment at the end of 4 years. How much is this lump sum if
the cost of money is 14% compounded quarterly?
a.) ₱3,702,939 c.) ₱3,502,546
b.) ₱3,802,862 d.) ₱3,602,431
EXAMPLE PROBLEM 8
EXAMPLE PROBLEM 8
Solution: Set the focal date at t = 4 years, A = 100000, NR = 14%,
and m = 4.
16−1 𝑥 24 −𝑥
14% 14%
𝑄 = 100000 ෍ 1+ + 100000 ෍ 1+
4 4
𝑥=0 𝑥=1

𝑄 = ₱3,702,939.731
EXAMPLE PROBLEM 8
A man inherited a regular endowment of ₱100,000 every end of 3
months for 10 years. However, he may choose to get a single lump
sum payment at the end of 4 years. How much is this lump sum if
the cost of money is 14% compounded quarterly?
a.) ₱3,702,939 c.) ₱3,502,546
b.) ₱3,802,862 d.) ₱3,602,431
DEFERRED ANNUITY
• A deferred annuity is one where the payment of the first amount
is deferred (postpone or delay) a certain number of periods after
the first.
DEFERRED ANNUITY
1 + 𝑖 𝑘+𝑛 − 1 −𝑘
𝑃=𝐴 𝑘+𝑛
1+𝑖
𝑖 1+𝑖
For the calculator technique,
𝑏

𝑃 =𝐴෍ 1+𝑖 −𝑥

𝑥=𝑎
EXAMPLE PROBLEM 9
A parent on the day the child is born wishes to have to determine
what lump sum would have to be paid into an account bearing
interest at 5% compounded annually, in order to withdraw ₱20,000
each on the child’s 18th, 19th, 20th, and 21st birthdays.
a.) ₱35,941.73 c.) ₱30,941.73
b.) ₱33,941.73 d.) ₱25,941.73
EXAMPLE PROBLEM 9
Solution: Solve using deferred annuity calculator technique at A =
20000, i = 5%, a = 18, and b = 21.
𝑏 21
−𝑥 −𝑥
𝑃 =𝐴෍ 1+𝑖 = 20000 ෍ 1 + 5%
𝑥=𝑎 𝑥=18
𝑃 = ₱30941.73
EXAMPLE PROBLEM 9
A parent on the day the child is born wishes to have to determine
what lump sum would have to be paid into an account bearing
interest at 5% compounded annually, in order to withdraw ₱20,000
each on the child’s 18th, 19th, 20th, and 21st birthdays.
a.) ₱35,941.73 c.) ₱30,941.73
b.) ₱33,941.73 d.) ₱25,941.73
EXAMPLE PROBLEM 10
A house and lot can be acquired a downpayment of ₱500,000 and a
yearly payment of ₱100,000 at the end of each year for a period of
10 years, starting at the end of 5 years from the date of purchase. If
the money is worth 14% compounded annually, what is the cash
price of the property?
a.) ₱810,000 c.) ₱801,900
b.) ₱808,836 d.) ₱805,902
EXAMPLE PROBLEM 10
EXAMPLE PROBLEM 10
Solution: Solve for the cash price at 500000 downpayment, A =
100000, and i = 5%.
14
−𝑥
𝑃 = 500000 + 100000 ෍ 1 + 5%
𝑥=5
𝑃 = ₱808835.92
EXAMPLE PROBLEM 10
A house and lot can be acquired a downpayment of ₱500,000 and a
yearly payment of ₱100,000 at the end of each year for a period of
10 years, starting at the end of 5 years from the date of purchase. If
the money is worth 14% compounded annually, what is the cash
price of the property?
a.) ₱810,000 c.) ₱801,900
b.) ₱808,836 d.) ₱805,902
EXAMPLE PROBLEM 11
If ₱10,000 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%.
a.) ₱33,250.21 c.) ₱35,583.45
b.) ₱32,434.36 d.) ₱34,675.18
EXAMPLE PROBLEM 11
EXAMPLE PROBLEM 11
Solution:
9 17

10000 ෍ 1 + 14% −𝑥 =𝐴 ෍ 1 + 14% −𝑥

𝑥=1 𝑥=10
𝐴 = ₱34675.18
EXAMPLE PROBLEM 11
If ₱10,000 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%.
a.) ₱33,250.21 c.) ₱35,583.45
b.) ₱32,434.36 d.) ₱34,675.18
ANNUITY DUE
• An annuity due is one where the payments are made at the start
of each period, beginning from the first period.
ANNUITY DUE
𝑁𝑅 𝑚𝑡−1
1 + 𝑖 𝑛−1 − 1 1+ −1
𝑚
𝑃 =𝐴+𝐴 =𝐴+𝐴
𝑖 1+𝑖 𝑛−1
𝑁𝑅 𝑁𝑅 𝑚𝑡−1
1+
𝑚 𝑚
𝑁𝑅 𝑚𝑡−1
1+𝑖 𝑛−1
−1 1+ −1
𝑚
𝐹=𝐴 −𝐴=𝐴 −𝐴
𝑖 𝑁𝑅
𝑚
ANNUITY DUE
For the calculator technique,
𝑛−1

𝑃 =𝐴+𝐴෍ 1+𝑖 −𝑥

𝑥=1
𝑛+1 −1 𝑛

𝐹=𝐴 ෍ 1+𝑖 𝑥 −𝐴 =𝐴෍ 1+𝑖 𝑥 −𝐴

𝑥=0 𝑥=0
EXAMPLE PROBLEM 12
A farmer bought a tractor costing ₱25,000 payable in 10 semi-
annual payments, each installment payable at the beginning of
each period. If the rate of interest is 26% compounded semi-
annually, determine the amount of each installment.
a.) ₱4,707.02 c.) ₱4,077.02
b.) ₱4,707.20 d.) ₱4,077.20
EXAMPLE PROBLEM 12
Solution: Solve for the annual installment at P = 25000, n = 10, and
i = 26%/2 using calculator technique.
𝑛−1
−𝑥
𝑃 =𝐴+𝐴෍ 1+𝑖
𝑥=1
10−1 −𝑥
26%
25000 = 𝐴 + 𝐴 ෍ 1+
2
𝑥=1

𝐴 = ₱4077.20
EXAMPLE PROBLEM 12
A farmer bought a tractor costing ₱25,000 payable in 10 semi-
annual payments, each installment payable at the beginning of
each period. If the rate of interest is 26% compounded semi-
annually, determine the amount of each installment.
a.) ₱4,707.02 c.) ₱4,077.02
b.) ₱4,707.20 d.) ₱4,077.20
EXAMPLE PROBLEM 13
A man wishes to have ₱35,000 when he retires 15 years from now.
If he can expect to receive 4% annual interest, how much must he
set aside beginning at the end of each of the 15 years?
a.) ₱1,680.71 c.) ₱1,680.17
b.) ₱1,860.17 d.) ₱1,860.17
EXAMPLE PROBLEM 13
Solution: Solve for annual amount at F = 35000, i = 4%, and n = 15
using calculator technique.
𝑛

𝐹 =𝐴෍ 1+𝑖 𝑥 −𝐴
𝑥=0
15
𝑥
35000 = 𝐴 ෍ 1 + 4% −𝐴
𝑥=0
𝐴 = ₱1680.71
EXAMPLE PROBLEM 13
A man wishes to have ₱35,000 when he retires 15 years from now.
If he can expect to receive 4% annual interest, how much must he
set aside beginning at the end of each of the 15 years?
a.) ₱1,680.71 c.) ₱1,680.17
b.) ₱1,860.17 d.) ₱1,860.17
PERPETUITY
• A perpetuity is an annuity where the payment periods extend
forever or in which the periodic payments continue indefinitely.
PERPETUITY
𝐴
𝑃=
𝑖
EXAMPLE PROBLEM 14
What amount of money invested today at 15% interest can provide
the following scholarships: ₱30,000 at the end of each year for 6
years; ₱40,000 for the next 6 years and ₱50,000 thereafter?
a.) ₱287,138.46 c.) ₱234,560.24
b.) ₱270,445.58 d.) ₱241,282.32
EXAMPLE PROBLEM 14
EXAMPLE PROBLEM 14
Solution: Set the focal date at t = 0.
𝑃
6 12
−𝑥 −𝑥
50000 −12
= 30000 ෍ 1.15 + 40000 ෍ 1.15 + 1.15
0.15
𝑥=1 𝑥=7
𝑃 = ₱241282.32
EXAMPLE PROBLEM 14
What amount of money invested today at 15% interest can provide
the following scholarships: ₱30,000 at the end of each year for 6
years; ₱40,000 for the next 6 years and ₱50,000 thereafter?
a.) ₱287,138.46 c.) ₱234,560.24
b.) ₱270,445.58 d.) ₱241,282.32
ENGINEERING
ECONOMY

CAPITALIZED COST
CAPITALIZED COST
• The capitalized cost of any property is the sum of the first cost
and the present worth of all costs of replacement, operation and
maintenance for a long time or forever.
CAPITALIZED COST
• Case 1: No replacement, only maintenance and or operation
every period. The capitalized cost would be
𝐶𝐶 = 𝐹𝐶 + 𝐴𝑀
where:
CC – capitalized cost
FC – first cost
AM – annual maintenance or present worth of perpetual
operation and or maintenance
EXAMPLE PROBLEM 15
Determine the capitalized cost of a structure that requires an initial
investment of ₱1,500,000 and an annual maintenance of
₱150,000. Interest is 15%.
a.) ₱3,500,000 c.) ₱2,500,000
b.) ₱5,500,000 d.) ₱4,500,000
EXAMPLE PROBLEM 15
Solution: The ₱150,000 is the annuity amount in a perpetual mode
(perpetuity).
𝐴
𝐶𝐶 = 𝐹𝐶 + 𝐴𝑀 = 𝐹𝐶 +
𝑖
150000
𝐶𝐶 = 1500000 +
0.15
𝐶𝐶 = ₱2500000
EXAMPLE PROBLEM 15
Determine the capitalized cost of a structure that requires an initial
investment of ₱1,500,000 and an annual maintenance of
₱150,000. Interest is 15%.
a.) ₱3,500,000 c.) ₱2,500,000
b.) ₱5,500,000 d.) ₱4,500,000
CAPITALIZED COST
• Case 2: Replacement only, no maintenance and or operation.
The capitalized cost would be
𝐶𝐶 = 𝐹𝐶 + 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑤𝑜𝑟𝑡ℎ 𝑜𝑓 𝑝𝑒𝑟𝑝𝑒𝑡𝑢𝑎𝑙 𝑟𝑒𝑝𝑙𝑎𝑐𝑒𝑚𝑒𝑛𝑡
𝑆
𝐶𝐶 = 𝐹𝐶 + 𝑋 = 𝐹𝐶 +
1+𝑖 𝑘−1
CAPITALIZED COST
where:
CC – capitalized cost
FC – first cost
AM – annual maintenance or present worth of perpetual operation
or maintenance
S – amount needed to replace or maintain the property every k
periods
X – amount of principal invested at i% per period, the interest on
which will amount to S every k periods
EXAMPLE PROBLEM 16
A manufacturing plant installed a new boiler at a total cost of
₱150,000 and is estimated to have a useful life of 10 years. It is
estimated to have a scrap value at the end of its useful life of
₱5,000. If interest is 12% compounded annually, determine its
capitalized cost.
a.) ₱218,855.86 c.) ₱222,468.56
b.) ₱234,620.34 d.) ₱247,932.77
EXAMPLE PROBLEM 16
Solution: Solve for the capitalized cost at FC = 150000, SV (salvage
value) = 5000, i = 12%, and k = 10.
𝑆 = 𝐹𝐶 − 𝑆𝑉 = 150000 − 5000 = 145000
𝑆 145000
𝐶𝐶 = 𝐹𝐶 + 𝑘
= 150000 +
1+𝑖 −1 1 + 12% 10 − 1
𝐶𝐶 = ₱218855.86
EXAMPLE PROBLEM 16
A manufacturing plant installed a new boiler at a total cost of
₱150,000 and is estimated to have a useful life of 10 years. It is
estimated to have a scrap value at the end of its useful life of
₱5,000. If interest is 12% compounded annually, determine its
capitalized cost.
a.) ₱218,855.86 c.) ₱222,468.56
b.) ₱234,620.34 d.) ₱247,932.77
CAPITALIZED COST
• Case 3: Replacement, maintenance and or operation every
period. The capitalized cost would be
𝐶𝐶 = 𝐹𝐶 + 𝐴𝑀 + 𝑋
𝑆
𝐶𝐶 = 𝐹𝐶 + 𝐴𝑀 +
1+𝑖 𝑘−1
EXAMPLE PROBLEM 17
Determine the capitalized cost of a research laboratory which
requires ₱5,000,000 for original construction; ₱100,000 at the end
every year for the first 6 years and then ₱120,000 each year
thereafter for operating expenses, and ₱500,000 every 5 years for
replacement of equipment with interest at 12% per annum?
a.) ₱6,375,465.85 c.) ₱6,573,645.74
b.) ₱6,753,456.62 d.) ₱6,537,654.93
EXAMPLE PROBLEM 17
EXAMPLE PROBLEM 17
Solution: For the annual maintenance, the focal date must always
set to the beginning of the period.
6
−𝑥
120000 −6
𝐴𝑀 = 100000 ෍ 1 + 12% + 1 + 12%
12%
𝑥=1
𝐴𝑀 = ₱917771.8535
EXAMPLE PROBLEM 17
EXAMPLE PROBLEM 17
For the replacement,
𝑆 500000
𝑋= 𝑘
=
1+𝑖 −1 1 + 12% 5 − 1
𝑋 = ₱655873.8831
EXAMPLE PROBLEM 17
Therefore, the capitalized cost is
𝐶𝐶 = 𝐹𝐶 + 𝐴𝑀 + 𝑋
𝐶𝐶 = 5000000 + 917771.8535 + 655873.8831
𝐶𝐶 = ₱6573645.74
EXAMPLE PROBLEM 17
Determine the capitalized cost of a research laboratory which
requires ₱5,000,000 for original construction; ₱100,000 at the end
every year for the first 6 years and then ₱120,000 each year
thereafter for operating expenses, and ₱500,000 every 5 years for
replacement of equipment with interest at 12% per annum?
a.) ₱6,375,465.85 c.) ₱6,573,645.74
b.) ₱6,753,456.62 d.) ₱6,537,654.93
EXAMPLE PROBLEM 18
Calculate the capitalized cost of a project that has an initial cost of
₱3,000,000 and an additional investment cost of ₱1,000,000 at
the end of every ten years. The annual operating cost will be
₱100,000 at the end of every year for the first four years and
₱160,000 thereafter. In addition, there is expected to be a recurring
major network cost of ₱300,000 every 13 years. Assume i = 15%.
a.) ₱4,218,953.69 c.) ₱4,821,593.85
b.) ₱4,281,935.96 d.) ₱4,812,539.58
EXAMPLE PROBLEM 18
Solution: Solve for the capitalized cost.
𝐶𝐶 = 𝐹𝐶 + 𝐴𝑀 + 𝑋
For the annual operating cost,
4
−𝑥
160000 −4
𝐴𝑀 = 100000 ෍ 1.15 + 1.15
0.15
𝑥=1
𝐴𝑀 = ₱895367.9649
EXAMPLE PROBLEM 18
For the investment and recurring major cost,
1000000 300000
𝑋= 10
+
1.15 −1 1.15 13 − 1
𝑋 = ₱386567.9965
EXAMPLE PROBLEM 18
Therefore,
𝐶𝐶 = 𝐹𝐶 + 𝐴𝑀 + 𝑋
𝐶𝐶 = 3000000 + 895367.9649 + 386567.9965
𝐶𝐶 = ₱4281935.96
EXAMPLE PROBLEM 18
Calculate the capitalized cost of a project that has an initial cost of
₱3,000,000 and an additional investment cost of ₱1,000,000 at
the end of every ten years. The annual operating cost will be
₱100,000 at the end of every year for the first four years and
₱160,000 thereafter. In addition, there is expected to be a recurring
major network cost of ₱300,000 every 13 years. Assume i = 15%.
a.) ₱4,218,953.69 c.) ₱4,821,593.85
b.) ₱4,281,935.96 d.) ₱4,812,539.58
ENGINEERING
ECONOMY

ARITHMETIC & GEOMETRIC GRADIENT

ARITHMETIC GRADIENT
• If the change in succeeding periods is constant, then the series is
known as a uniform arithmetic gradient. Figure shows the
cashflow of arithmetic gradient with constant value of G. The G is
considered as increasing or decreasing value in arithmetic
gradient.
ARITHMETIC GRADIENT
ARITHMETIC GRADIENT
• For the present worth of the uniform gradient, let N = n. The
equation would be
𝐺 1− 1+𝑖 −𝑛 𝑛
𝑃= − 𝑛
𝑖 𝑖 1+𝑖
• For the future worth, simply use the compound interest formula
𝐹 =𝑃 1+𝑖 𝑛
ARITHMETIC GRADIENT
• For uniform annual amount, use the ordinary formula
1+𝑖 𝑛−1
𝑃=𝐴
𝑖 1+𝑖 𝑛
1+𝑖 𝑛−1
𝐹=𝐴
𝑖
ARITHMETIC GRADIENT
• For the calculator technique,
MODE → STAT → A+Bx
𝑛
−𝑥
𝑃 = ෍ 𝑋 𝑦ො 1 + 𝑖
𝑥=1
EXAMPLE PROBLEM 19
An amortization of a debt is in a form of a gradient series of ₱5,000
on the first year, ₱4,500 on the second year, ₱4,000 on the third
year, ₱3,500 on the fourth year. What is the equivalent uniform
periodic payment if interest is 5%?
a.) ₱4,280.47 c.) ₱4,378.17
b.) ₱4,259.68 d.) ₱4,325.12
EXAMPLE PROBLEM 19
Solution: Using the calculator technique,
MODE → STAT → A+Bx
EXAMPLE PROBLEM 19
Then press AC.
4

𝑃 = ෍ 𝑋 𝑦ො 1.05 −𝑥 = ෍ 𝑋 𝑦ො 1.05 ^ −𝑋 , 1,4

𝑥=1
𝑃 = ₱15178.34647
EXAMPLE PROBLEM 19
Solve for uniform periodic payment.
𝑛

𝑃 =𝐴෍ 1+𝑖 −𝑥

𝑥=1
4
−𝑥
15178.34647 = 𝐴 ෍ 1.05
𝑥=1
𝐴 = ₱4280.47
EXAMPLE PROBLEM 19
An amortization of a debt is in a form of a gradient series of ₱5,000
on the first year, ₱4,500 on the second year, ₱4,000 on the third
year, ₱3,500 on the fourth year. What is the equivalent uniform
periodic payment if interest is 5%?
a.) ₱4,280.47 c.) ₱4,378.17
b.) ₱4,259.68 d.) ₱4,325.12
GEOMETRIC GRADIENT
• A geometric gradient series is a sequence consisting of end-of-
period payments, where each payment increases or decreases by
a fixed percentage. In geometric gradient, payment begins at the
end of the first period.
GEOMETRIC GRADIENT
GEOMETRIC GRADIENT
• For the present worth of the uniform gradient, let A1 = C (the first
payment at the end of the first period), N = n and 𝑓% ҧ = r. The
equation would be
𝐶 1 − 𝑤𝑛 1+𝑟
𝑃= ; 𝑤=
1+𝑟 1−𝑤 1+𝑖
• For the future worth, simply use the compound interest formula
𝐹 =𝑃 1+𝑖 𝑛
GEOMETRIC GRADIENT
• For uniform annual amount, use the ordinary formula
1+𝑖 𝑛−1
𝑃=𝐴
𝑖 1+𝑖 𝑛
1+𝑖 𝑛−1
𝐹=𝐴
𝑖
GEOMETRIC GRADIENT
• For the calculator technique,
MODE → STAT → e^x
𝑛
−𝑥
𝑃 = ෍ 𝑋 𝑦ො 1 + 𝑖
𝑥=1
EXAMPLE PROBLEM 20
A mechanical contractor is trying to calculate the present worth of
personnel salaries over the next five years. He has four employees
whose combined salaries thru the end of this year are $150,000. If
he expects to give each employee a raise of 5% each year, the
present worth of his employees’ salaries at an interest rate of 12%
per year is nearest to:
a.) $591,000 c.) $816,100
b.) $702,900 d.) $429,300
EXAMPLE PROBLEM 20
Solution: Using the calculator technique,
MODE → STAT → e^x
EXAMPLE PROBLEM 20
Then press AC.
5

𝑃 = ෍ 𝑋 𝑦ො 1.12 −𝑥 = ෍ 𝑋 𝑦ො 1.12 ^ −𝑋 , 1,5

𝑥=1
𝑃 = ₱591007.6414
EXAMPLE PROBLEM 20
A mechanical contractor is trying to calculate the present worth of
personnel salaries over the next five years. He has four employees
whose combined salaries thru the end of this year are $150,000. If
he expects to give each employee a raise of 5% each year, the
present worth of his employees’ salaries at an interest rate of 12%
per year is nearest to:
a.) $591,000 c.) $816,100
b.) $702,900 d.) $429,300
ENGINEERING
ECONOMY

DEPRECIATION
DEPRECIATION
• Depreciation is the decrease in the value of physical property
due to passage of time.
DEPRECIATION
Symbols used and their meaning:
d – annual depreciation charge
dn – depreciation charge during the “nth” year
D – total depreciation after “n” years
FC – first cost/original cost
SV – salvage value after “L” years
BVn – book value after “n” years
DEPRECIATION
L – expected depreciable life of the property
n – number of years before “L”
STRAIGHT LINE METHOD
𝐹𝐶 − 𝑆𝑉
𝑑=
𝐿
𝐷𝑛 = 𝑛𝑑
𝐵𝑉𝑛 = 𝐹𝐶 − 𝐷𝑛
STRAIGHT LINE METHOD
For the calculator technique (MODE → STAT → A+Bx),
x (time) y (BV)
0 FC
L SV
𝐵𝑉𝑛 = 𝑛 𝑦ො
𝑑𝑛 = 𝑛 − 1 𝑦ො − 𝑛 𝑦ො
𝐷𝑛 = 𝐹𝐶 − 𝐵𝑉𝑛
EXAMPLE PROBLEM 21
A machine is purchased for ₱55,000. The salvage value in 20 years
is ₱10,000. What is the depreciation in the first three years using
straight line method?
a.) ₱3,450 c.) ₱6,750
b.) ₱5,450 d.) ₱7,350
EXAMPLE PROBLEM 21
Solution: Using calculator technique (MODE → STAT → A+Bx)
x y
0 55000
20 10000
𝐷3 = 𝐹𝐶 − 𝐵𝑉𝑛 = 55000 − 3𝑦ො = ₱6750
EXAMPLE PROBLEM 21
A machine is purchased for ₱55,000. The salvage value in 20 years
is ₱10,000. What is the depreciation in the first three years using
straight line method?
a.) ₱3,450 c.) ₱6,750
b.) ₱5,450 d.) ₱7,350
EXAMPLE PROBLEM 22
A manufacturing plant was built at a cost of ₱5M and is estimated
to have a life of 20 years with a salvage value of ₱1M. A certain
equipment worth ₱570,000 was installed at a cost of ₱80,000 is
expected to operate economically for 15 years with a salvage value
of ₱50,000. Determine the book value of the plant and equipment
after 10 years, using straight line depreciation method.
a.) ₱3,250,000 c.) ₱4,250,000
b.) ₱3,750,000 d.) ₱4,500,000
EXAMPLE PROBLEM 22
Solution: Using calculator technique, MODE → STAT → A+Bx. For the
plant,
x y
0 5000000
20 1000000

𝐵𝑉𝑝𝑙𝑎𝑛𝑡 = 10𝑦ො = ₱3000000

EXAMPLE PROBLEM 22
For the equipment
x y
0 570000+80000
15 50000

𝐵𝑉𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 = 10𝑦ො = ₱250000

EXAMPLE PROBLEM 22
For the book value of plant and equipment,
𝐵𝑉𝑝𝑙𝑎𝑛𝑡/𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 = 𝐵𝑉𝑝𝑙𝑎𝑛𝑡 + 𝐵𝑉𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡
𝐵𝑉𝑝𝑙𝑎𝑛𝑡/𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 = 3000000 + 250000
𝐵𝑉𝑝𝑙𝑎𝑛𝑡/𝑒𝑞𝑢𝑖𝑝𝑚𝑒𝑛𝑡 = ₱3250000
EXAMPLE PROBLEM 22
A manufacturing plant was built at a cost of ₱5M and is estimated
to have a life of 20 years with a salvage value of ₱1M. A certain
equipment worth ₱570,000 was installed at a cost of ₱80,000 is
expected to operate economically for 15 years with a salvage value
of ₱50,000. Determine the book value of the plant and equipment
after 10 years, using straight line depreciation method.
a.) ₱3,250,000 c.) ₱4,250,000
b.) ₱3,750,000 d.) ₱4,500,000
EXAMPLE PROBLEM 23
A printing equipment costs ₱73,500 has a life expectancy of 8
years and has a salvage value of ₱3,500 at the end of its life. The
book value at the end of “x” years is equal to ₱38,500. Using the
straight line method of depreciation, solve for the value of “x”.
a.) 5 years c.) 6 years
b.) 4 years d.) 3 years
EXAMPLE PROBLEM 23
Solution: Using calculator technique, MODE → STAT → A+Bx. Make
a reverse engineering method by taking the choices individually to
get the book value of 38500.
x y
0 73500
8 3500
EXAMPLE PROBLEM 23
𝐵𝑉5 = 5𝑦ො = 29750
𝐵𝑉4 = 4𝑦ො = 38500
𝐵𝑉6 = 6𝑦ො = 21000
𝐵𝑉3 = 3𝑦ො = 47250
Therefore, x = 4 years.
EXAMPLE PROBLEM 23
A printing equipment costs ₱73,500 has a life expectancy of 8
years and has a salvage value of ₱3,500 at the end of its life. The
book value at the end of “x” years is equal to ₱38,500. Using the
straight line method of depreciation, solve for the value of “x”.
a.) 5 years c.) 6 years
b.) 4 years d.) 3 years
SINKING FUND METHOD
𝐹𝐶 − 𝑆𝑉 𝑖
𝑑=
1+𝑖 𝐿−1
𝑑 1+𝑖 𝑛−1
𝐷𝑛 =
𝑖
𝐵𝑉𝑛 = 𝐹𝐶 − 𝐷𝑛
SINKING FUND METHOD
For the calculator technique (MODE → STAT → e^x),
x (time) y (multiplier)
0 1
L (1 + i)L
SINKING FUND METHOD
𝑛𝑦ො − 1
𝐷𝑛 = 𝐹𝐶 − 𝑆𝑉
𝐿 𝑦ො − 1
𝐷𝑛
𝑑=
σ𝑛−1
𝑥=0 1 + 𝑖 𝑥

𝐵𝑉𝑛 = 𝐹𝐶 − 𝐷𝑛
EXAMPLE PROBLEM 24
A certain office equipment has a first cost of ₱20,000 and has a
salvage value of ₱1,000 at the end of 10 years. Determine the
depreciation at the end of the 6th year using sinking fund method at
3% interest.
a.) ₱10,720 c.) ₱11,680
b.) ₱12,420 d.) ₱9,840
EXAMPLE PROBLEM 24
Solution: Using calculator technique, MODE → STAT → e^x.
x y
0 1
10 (1 + 0.03)10
EXAMPLE PROBLEM 24
𝑛𝑦ො − 1
𝐷𝑛 = 𝐹𝐶 − 𝑆𝑉
𝐿 𝑦ො − 1
6𝑦ො − 1
𝐷6 = 20000 − 1000
10𝑦ො − 1
𝐷6 = ₱10720.61
EXAMPLE PROBLEM 24
A certain office equipment has a first cost of ₱20,000 and has a
salvage value of ₱1,000 at the end of 10 years. Determine the
depreciation at the end of the 6th year using sinking fund method at
3% interest.
a.) ₱10,720 c.) ₱11,680
b.) ₱12,420 d.) ₱9,840
EXAMPLE PROBLEM 25
An equipment costs ₱10,000 with a salvage value of ₱500 at the
end of 10 years. Calculate the annual depreciation cost by sinking
fund method at 4% interest.
a.) ₱917.26 c.) ₱791.26
b.) ₱917.62 d.) ₱791.62
EXAMPLE PROBLEM 25
Solution: Assume L = n = 10,
𝐷𝑛 10000 − 500
𝑑 = 𝑛−1 =
σ𝑥=0 1 + 𝑖 𝑥 σ10−1
𝑥=0 1 + 4% 𝑥

𝑑 = ₱791.26
EXAMPLE PROBLEM 25
An equipment costs ₱10,000 with a salvage value of ₱500 at the
end of 10 years. Calculate the annual depreciation cost by sinking
fund method at 4% interest.
a.) ₱917.26 c.) ₱791.26
b.) ₱917.62 d.) ₱791.62
DECLINING BALANCE METHOD
• Also known as Matheson’s formula or fixed percentage method.
𝑑𝑛 = 𝑘 𝐹𝐶 1 − 𝑘 𝑛−1
𝑆𝑉 = 𝐹𝐶 1 − 𝑘 𝐿
𝐵𝑉𝑛 = 𝐹𝐶 1 − 𝑘 𝑛
𝐷𝑛 = 𝐹𝐶 − 𝐵𝑉𝑛
where:
k – rate of depreciation
DECLINING BALANCE METHOD
For the calculator technique (MODE → STAT → e^x),
x (time) y (BV)
0 FC
L SV
DECLINING BALANCE METHOD
𝐵𝑉𝑛 = 𝑛 𝑦ො
𝐷𝑛 = 𝐹𝐶 − 𝐵𝑉𝑛
𝑑𝑛 = 𝑛 − 1 𝑦ො − 𝑛 𝑦ො
EXAMPLE PROBLEM 26
Using Matheson’s method, determine the book value at the end of 4
years of an equipment costing ₱7350 having a life of 8 years and a
salvage value of ₱350.
a.) ₱1,604 c.) ₱1,640
b.) ₱1,406 d.) ₱1,460
EXAMPLE PROBLEM 26
Solution: Using calculator technique, MODE → STAT → e^x.
x y
0 7350
8 350
𝐵𝑉4 = 4𝑦ො = ₱1603.90
EXAMPLE PROBLEM 26
Using Matheson’s method, determine the book value at the end of 4
years of an equipment costing ₱7350 having a life of 8 years and a
salvage value of ₱350.
a.) ₱1,604 c.) ₱1,640
b.) ₱1,406 d.) ₱1,460
EXAMPLE PROBLEM 27
An equipment costing ₱620,000 has a life of 10 years. Using
declining balance method, the book value at the end of 5 years is
found to be ₱121,983.61. What is the salvage value of this
equipment?
a.) ₱21,000 c.) ₱23,000
b.) ₱22,000 d.) ₱24,000
EXAMPLE PROBLEM 27
Solution: Using the reverse engineering method, substitute the
choices in the calculator in order to get the book value of
121983.61.
x y
0 620000
10 ?
EXAMPLE PROBLEM 27
At SV = 21000,
𝐵𝑉5 = 5𝑦ො = ₱114105.21
At SV = 22000,
𝐵𝑉5 = 5𝑦ො = ₱116790.41
At SV = 23000,
𝐵𝑉5 = 5𝑦ො = ₱119415.24
EXAMPLE PROBLEM 27
At SV = 24000,
𝐵𝑉5 = 5𝑦ො = ₱121983.61

Therefore, SV = 24000.
EXAMPLE PROBLEM 27
An equipment costing ₱620,000 has a life of 10 years. Using
declining balance method, the book value at the end of 5 years is
found to be ₱121,983.61. What is the salvage value of this
equipment?
a.) ₱21,000 c.) ₱23,000
b.) ₱22,000 d.) ₱24,000
EXAMPLE PROBLEM 28
A machine having a certain first cost has a life of 10 years and a
salvage value of 6.633% of the first cost at the end of 10 years. If it
has a book value of ₱58,914 at the end of 6th year, how much is the
first cost of the machine if the constant percentage of declining
value is used in the computation for its depreciation. (Matheson’s
Method)
a.) ₱600,090 c.) ₱100,400
b.) ₱300,049 d.) ₱900,540
EXAMPLE PROBLEM 28
Solution: Using the reverse engineering method, substitute the
choices in the calculator in order to get the book value of 58914.

x y
0 FC
10 (6.633%)(FC)
EXAMPLE PROBLEM 28
At FC = 600090,
𝐵𝑉6 = 6𝑦ො = ₱117826.34
At FC = 300049,
𝐵𝑉6 = 6𝑦ො = ₱58914
At FC = 100400,
𝐵𝑉6 = 6𝑦ො = ₱19713.32
EXAMPLE PROBLEM 28
At FC = 900540,
𝐵𝑉6 = 6𝑦ො = ₱176819.03
Therefore, FC = 300049.
EXAMPLE PROBLEM 28
A machine having a certain first cost has a life of 10 years and a
salvage value of 6.633% of the first cost at the end of 10 years. If it
has a book value of ₱58,914 at the end of 6th year, how much is the
first cost of the machine if the constant percentage of declining
value is used in the computation for its depreciation. (Matheson’s
Method)
a.) ₱600,090 c.) ₱100,400
b.) ₱300,049 d.) ₱900,540
DOUBLE DECLINING BALANCE
METHOD
𝑑𝑛 = 𝑘 𝐹𝐶 1 − 𝑘 𝑛−1
𝑆𝑉 = 𝐹𝐶 1 − 𝑘 𝐿
𝐵𝑉𝑛 = 𝐹𝐶 1 − 𝑘 𝑛
𝐷𝑛 = 𝐹𝐶 − 𝐵𝑉𝑛
where:
k = 2/L
DOUBLE DECLINING BALANCE
METHOD
For the calculator technique (MODE → STAT → e^x),
x (time) y (BV)
0 FC
L 𝟐
𝑳
𝑭𝑪 𝟏 −
𝑳
DOUBLE DECLINING BALANCE
METHOD
𝐵𝑉𝑛 = 𝑛 𝑦ො
𝐷𝑛 = 𝐹𝐶 − 𝐵𝑉𝑛
𝑑𝑛 = 𝑛 − 1 𝑦ො − 𝑛 𝑦ො
EXAMPLE PROBLEM 29
An earth moving equipment that cost ₱90,000 will have an
estimated salvage value of ₱18,000 at the end of 8 years. Using
double-declining balance method, compute the book value and the
total depreciation at the end of the 5th year.
a.) ₱21,357.42; ₱68,642.58 c.) ₱24,362.48; ₱65,637.52
b.) ₱15,830.34; ₱74,169.66 d.) ₱19,442.78; ₱70,557.22
EXAMPLE PROBLEM 29
Solution: Using calculator technique, MODE → STAT → e^x.
x (time) y (BV)
0 90000
L 𝟐
𝟖
𝟗𝟎𝟎𝟎𝟎 𝟏 −
𝟖
EXAMPLE PROBLEM 29
Solve for the book value at the end of the 5th year.
𝐵𝑉5 = 5𝑦ො = ₱21357.42
Solve for the total depreciation at the end of the 5th year.
𝐷5 = 𝐹𝐶 − 𝐵𝑉5 = 90000 − 5𝑦ො
𝐷5 = ₱68642.58
EXAMPLE PROBLEM 29
An earth moving equipment that cost ₱90,000 will have an
estimated salvage value of ₱18,000 at the end of 8 years. Using
double-declining balance method, compute the book value and the
total depreciation at the end of the 5th year.
a.) ₱21,357.42; ₱68,642.58 c.) ₱24,362.48; ₱65,637.52
b.) ₱15,830.34; ₱74,169.66 d.) ₱19,442.78; ₱70,557.22
EXAMPLE PROBLEM 30
A lathe machine has an estimated salvage value of ₱10,000 at the
end of its useful life of 8 years. Compute the first cost of the
machine if the total depreciation at the end of 4th year using double
declining balance method is ₱957,031.25.
a.) ₱1,100,000 c.) ₱1,300,000
b.) ₱1,200,000 d.) ₱1,400,000
EXAMPLE PROBLEM 30
Solution: Using the reverse engineering method, substitute the
choices in the calculator in order to get the total depreciation of
957031.25.
x y
0 FC
8 8
2
𝐹𝐶 1 −
8
EXAMPLE PROBLEM 30
If FC = 1100000,
𝐷4 = 1100000 − 4𝑦ො = ₱751953.125
If FC = 1200000,
𝐷4 = 1200000 − 4𝑦ො = ₱820312.50
If FC = 1300000,
𝐷4 = 1300000 − 4𝑦ො = ₱888671.875
EXAMPLE PROBLEM 30
If FC = 1400000,
𝐷4 = 1400000 − 4𝑦ො = ₱957031.25
Therefore, FC = 1400000
EXAMPLE PROBLEM 30
A lathe machine has an estimated salvage value of ₱10,000 at the
end of its useful life of 8 years. Compute the first cost of the
machine if the total depreciation at the end of 4th year using double
declining balance method is ₱957,031.25.
a.) ₱1,100,000 c.) ₱1,300,000
b.) ₱1,200,000 d.) ₱1,400,000
SUM-OF-THE-YEARS’-DIGITS
(SYD) METHOD
𝐿 𝐿+1
𝑆𝑌𝐷 =
2
𝐹𝐶 − 𝑆𝑉
𝑑𝑛 = 𝐿− 𝑛−1
𝑆𝑌𝐷
∞
𝐹𝐶 − 𝑆𝑉
𝐷𝑛 = ෍ 𝐿− 𝑛−1
𝑆𝑌𝐷
𝑛=1
𝐵𝑉𝑛 = 𝐹𝐶 − 𝐷𝑛
SUM-OF-THE-YEARS’-DIGITS
(SYD) METHOD
For the calculator technique (MODE → STAT → _+Cx2),

x (time) y (BV)
0 FC
L SV
L+1 SV
SUM-OF-THE-YEARS’-DIGITS
(SYD) METHOD
𝐵𝑉𝑛 = 𝑛 𝑦ො
𝐷𝑛 = 𝐹𝐶 − 𝐵𝑉𝑛
𝑑𝑛 = 𝑛 − 1 𝑦ො − 𝑛 𝑦ො
EXAMPLE PROBLEM 31
An asset is purchased for ₱50,000. Its estimated life is 10 years
after which it will be sold for ₱12,000. Find the depreciation for the
first year using sum of the years digit method.
a.) ₱6,909.1 c.) ₱9,609.1
b.) ₱6,609.1 d.) ₱9,909.1
EXAMPLE PROBLEM 31
Solution: Using calculator technique, MODE → STAT → _+Cx2.

x y
0 50000
10 12000
10 + 1 12000
EXAMPLE PROBLEM 31
Solve the depreciation for the first year,
𝑑𝑛 = 𝑛 − 1 𝑦ො − 𝑛 𝑦ො
𝑑1 = 0𝑦ො − 1𝑦ො
𝑑1 = 6909.1
EXAMPLE PROBLEM 31
An asset is purchased for ₱50,000. Its estimated life is 10 years
after which it will be sold for ₱12,000. Find the depreciation for the
first year using sum of the years digit method.
a.) ₱6,909.1 c.) ₱9,609.1
b.) ₱6,609.1 d.) ₱9,909.1
EXAMPLE PROBLEM 32
A machine cost ₱7,350 has a life of 8 years and has a salvage value
of ₱350 at the end of 8 years. Determine its book value at the end
of 4 years using SYD method.
a.) ₱3,476.90 c.) ₱6,543.21
b.) ₱2,294.44 d.) ₱5,455.01
EXAMPLE PROBLEM 32
Solution: Using calculator technique, MODE → STAT → _+Cx2.

x y
0 7350
8 350
8+1 350
EXAMPLE PROBLEM 32
Solve the book value at the end of four years.
𝐵𝑉𝑛 = 𝑛 𝑦ො
𝐵𝑉4 = 4𝑦ො
𝐵𝑉4 = 2294.44
EXAMPLE PROBLEM 32
A machine cost ₱7,350 has a life of 8 years and has a salvage value
of ₱350 at the end of 8 years. Determine its book value at the end
of 4 years using SYD method.
a.) ₱3,476.90 c.) ₱6,543.21
b.) ₱2,294.44 d.) ₱5,455.01
EXAMPLE PROBLEM 33
An equipment costs ₱7,000 has a life of 8 years and a salvage
value of “x” after 8 years. If the book value of the equipment at the
4th year is equal to ₱2,197.22, compute the salvage value “x” using
the sum of the years digit method.
a.) 594 c.) 350
b.) 430 d.) 290
EXAMPLE PROBLEM 33
Solution: Using the reverse engineering method, substitute the
choices in the calculator in order to get the book value of 2197.22
at 4 years.
x y
0 7000
8 SV
8+1 SV
EXAMPLE PROBLEM 33
If SV = 594,
𝐵𝑉4 = 4𝑦ො = 2373.44
If SV = 430,
𝐵𝑉4 = 4𝑦ො = 2255
If SV = 350,
𝐵𝑉4 = 4𝑦ො = 2197.22
EXAMPLE PROBLEM 33
If SV = 290,
𝐵𝑉4 = 4𝑦ො = 2153.89
Therefore, SV = 350.
EXAMPLE PROBLEM 33
An equipment costs ₱7,000 has a life of 8 years and a salvage
value of “x” after 8 years. If the book value of the equipment at the
4th year is equal to ₱2,197.22, compute the salvage value “x” using
the sum of the years digit method.
a.) 594 c.) 350
b.) 430 d.) 290
ENGINEERING
ECONOMY

BONDS
BONDS
• A bond is a certificate of indebtedness of a corporation usually
for a period not less than ten years and guaranteed by a
mortgage on certain assets of the corporation or its subsidiaries.
METHODS OF BOND RETIREMENT

• The corporation may issue another set of bonds equal to the

amount of bonds due for redemption.
• The corporation may set up a sinking fund into which periodic
deposits of equal amount are made. The accumulated amount in
the sinking fund is equal to the amount needed to retired the
bonds at the time they are due.
METHODS OF BOND RETIREMENT

Let:
A – periodic deposit to the sinking fund
F – accumulated amount, the amount needed to retire the
bond
i – rate of interest in the sinking fund
r – bond rate per period
I – interest on the bonds per period
METHODS OF BOND RETIREMENT

A + I – total periodic expense

METHODS OF BOND RETIREMENT
METHODS OF BOND RETIREMENT

For the total periodic expenses,

𝐹𝑖 𝐹
𝐴= 𝑛
= 𝑛−1
1+𝑖 −1 σ𝑥=0 1 + 𝑖 𝑥

𝐼 = 𝐹𝑟
BOND VALUE
• The value of a bond is the present worth of all future amounts
that are expected to be received through ownership of the bond.
Let:
F – face or par value
C – redemption or disposal price (often equal to F)
r – bond rate per period
n – number of periods before redemption
BOND VALUE
i – investment rate or yield per period
P – value of the bond n periods before redemption
BOND VALUE
BOND VALUE
For the value of the bond n periods before redemption,
1+𝑖 𝑛−1 −𝑛
𝑃 = 𝐹𝑟 𝑛
+𝐶 1+𝑖
𝑖 1+𝑖
𝑛
−𝑥 −𝑛
𝑃 = 𝐹𝑟 ෍ 1 + 𝑖 +𝐶 1+𝑖
𝑥=1
EXAMPLE PROBLEM 34
A bond value ₱200,000 in 10-year bonds, in ₱1,000 units, paying
16% nominal interest in semiannual payments, must be retired by
the use of a sinking fund that earns 12% compounded
semiannually. What is the total semiannual expense?
a.) ₱21,437 c.) ₱23,688
b.) ₱22,245 d.) ₱24,712
EXAMPLE PROBLEM 34
Solution: For the total semiannual expense,
𝐹
𝐴 + 𝐼 = 𝑛−1 𝑥
+ 𝐹𝑟
σ𝑥=0 1 + 𝑖
200000 16%
𝐴+𝐼 = 𝑥
+ 200000
12% 2
σ20−1
𝑥=0 1+
2
𝐴 + 𝐼 = ₱21436.91 ≈ ₱21437
EXAMPLE PROBLEM 34
A bond value ₱200,000 in 10-year bonds, in ₱1,000 units, paying
16% nominal interest in semiannual payments, must be retired by
the use of a sinking fund that earns 12% compounded
semiannually. What is the total semiannual expense?
a.) ₱21,437 c.) ₱23,688
b.) ₱22,245 d.) ₱24,712
EXAMPLE PROBLEM 35
A man wants to make 14% nominal interest compounded
semiannually on a bond investment. How much should the man be
willing to pay now for a 12%, ₱10,000-bond that will mature in 10
years and pays interest semiannually?
a.) ₱8,236.12 c.) ₱8,732.43
b.) ₱8,468.78 d.) ₱8,940.60
EXAMPLE PROBLEM 35
Solution: Solve the present amount.
𝑛
−𝑥 −𝑛
𝑃 = 𝐹𝑟 ෍ 1 + 𝑖 +𝐶 1+𝑖
𝑥=1
20 −𝑥 −20
12% 14% 14%
𝑃 = 10000 ෍ 1+ + 10000 1+
2 2 2
𝑥=1

𝑃 = ₱8940.60
EXAMPLE PROBLEM 35
A man wants to make 14% nominal interest compounded
semiannually on a bond investment. How much should the man be
willing to pay now for a 12%, ₱10,000-bond that will mature in 10
years and pays interest semiannually?
a.) ₱8,236.12 c.) ₱8,732.43
b.) ₱8,468.78 d.) ₱8,940.60
EXAMPLE PROBLEM 36
Mr. Romualdo bought a bond having a face value of ₱1,000 for
₱970. The bond rate was 14% nominal and interest payments were
made to him semiannually for a total of 7 years. At the end of the
seventh year, he sold the bond to a friend at a price that resulted a
yield of 16% nominal on his investment. What was the selling price?
a.) ₱1,365.05 c.) ₱1,154.03
b.) ₱1,483.07 d.) ₱1,242.01
EXAMPLE PROBLEM 36
Solution: Solve for the selling price,
F = 1000 i = 16%/2 = 8% r = 14%/2 = 7%
P = 970
𝐹𝑟 = 1000 7% = 70
EXAMPLE PROBLEM 36
𝑛
−𝑥 −𝑛
𝑃 = 𝐹𝑟 ෍ 1 + 𝑖 +𝐶 1+𝑖
𝑥=1
14
−𝑥 −14
970 = 70 ෍ 1 + 8% + 𝐶 1 + 8%
𝑥=1
𝐶 = ₱1154.03
EXAMPLE PROBLEM 36
Mr. Romualdo bought a bond having a face value of ₱1,000 for
₱970. The bond rate was 14% nominal and interest payments were
made to him semiannually for a total of 7 years. At the end of the
seventh year, he sold the bond to a friend at a price that resulted a
yield of 16% nominal on his investment. What was the selling price?
a.) ₱1,365.05 c.) ₱1,154.03
b.) ₱1,483.07 d.) ₱1,242.01
ENGINEERING
ECONOMY

BREAK-EVEN
BREAK-EVEN ANALYSIS
• In engineering economy, many situations are encountered where
the cost of two or more alternatives may be affected by a
common variable.
• Break-even point is the value of the variable for which the costs
for the alternatives be equal.
BREAK-EVEN ANALYSIS
𝐶1 = 𝑓1 𝑥 𝑎𝑛𝑑 𝐶2 = 𝑓2 𝑥
where:
C1 – certain specified total cost applicable to Alternative 1
C2 – certain specified total cost applicable to Alternative 2
x – a common independent variable affecting Alternative 1
and Alternative 2
BREAK-EVEN ANALYSIS
The break-even point is where C 1 and C2 are equal,
𝑓1 𝑥 = 𝑓2 𝑥
which may be solved for x, the break-even point.
BREAK-EVEN ANALYSIS
• Break-even chart is a graphical representation of break-even
analysis.
• The break-even point is the quantity of production at which the
income is equal to the total cost.
• It is the intersection of the income line and the total cost line on
the break-even chart.
BREAK-EVEN ANALYSIS
BREAK-EVEN ANALYSIS
EXAMPLE PROBLEM 37
The cost of producing a small transistor radio set consists of ₱23.00
for labor and ₱37.00 for materials. The fixed charges in operating
the plant are ₱100,000 per month. The variable cost is ₱1.00 per
set. The radio set can be sold for ₱75.00. Determine how many sets
must be produced per month to break-even.
a.) 7,141 sets c.) 7,143 sets
b.) 7,142 sets d.) 7,144 sets
EXAMPLE PROBLEM 37
Solution:
Let x – number of sets to be produced per month to break-even
Total income: 75x
Total cost: 23x + 37x + x + 100000
EXAMPLE PROBLEM 37
To break-even,
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
75𝑥 = 23𝑥 + 37𝑥 + 𝑥 + 100000
𝑥 = 7142.86 ≈ 7143
EXAMPLE PROBLEM 37
The cost of producing a small transistor radio set consists of ₱23.00
for labor and ₱37.00 for materials. The fixed charges in operating
the plant are ₱100,000 per month. The variable cost is ₱1.00 per
set. The radio set can be sold for ₱75.00. Determine how many sets
must be produced per month to break-even.
a.) 7,141 sets c.) 7,143 sets
b.) 7,142 sets d.) 7,144 sets
EXAMPLE PROBLEM 38
A company has a production capacity of 500 units per month and its fixed costs
are ₱250,000 a month. The variable costs per unit are ₱1,150 and each unit
can be sold for ₱2,000. Economy measures are instituted to reduce the fixed
costs by 10% and the variable costs by 20%. Determine the old and the new
break-even points? What are the old and the new profit at 100% capacity?
a.) 276; 242; ₱156,000; ₱388,000 c.) 253; 226; ₱184,000; ₱349,000
b.) 232; 212; ₱120,000; ₱330,000 d.) 294; 208; ₱175,000; ₱315,000
EXAMPLE PROBLEM 38
Solution: For the old break-even point and profit,
Let x – old break-even point
Income: ₱2000 per unit
Old fixed cost: ₱250000 per month
Old variable cost: ₱1150 per unit
EXAMPLE PROBLEM 38
Total income: 2000x
Total cost: 1150x + 250000
To break-even,
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
2000𝑥 = 1150𝑥 + 250000
𝑥 = 294.12 ≈ 294 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
EXAMPLE PROBLEM 38
For the old profit,
𝑂𝑙𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 = 2000 500 − 250000 − 1150 500
𝑂𝑙𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 = ₱175000 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
EXAMPLE PROBLEM 38
For the new break-even point and profit,
Let y – new break-even point
Income: ₱2000 per unit
New fixed cost: (250000)(0.90) = ₱225000 per month
Old variable cost: (1150)(0.80) = ₱920 per unit
EXAMPLE PROBLEM 38
Total income: 2000y
Total cost: 920y + 225000
To break-even,
𝑇𝑜𝑡𝑎𝑙 𝑖𝑛𝑐𝑜𝑚𝑒 = 𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
2000𝑦 = 920𝑦 + 225000
𝑥 = 208.33 ≈ 208 𝑢𝑛𝑖𝑡𝑠 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
EXAMPLE PROBLEM 38
For the new profit,
𝑁𝑒𝑤 𝑝𝑟𝑜𝑓𝑖𝑡 = 2000 500 − 225000 − 920 500
𝑂𝑙𝑑 𝑝𝑟𝑜𝑓𝑖𝑡 = ₱315000 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ
EXAMPLE PROBLEM 38
A company has a production capacity of 500 units per month and its fixed costs
are ₱250,000 a month. The variable costs per unit are ₱1,150 and each unit
can be sold for ₱2,000. Economy measures are instituted to reduce the fixed
costs by 10% and the variable costs by 20%. Determine the old and the new
break-even points? What are the old and the new profit at 100% capacity?
a.) 276; 242; ₱156,000; ₱388,000 c.) 253; 226; ₱184,000; ₱349,000
b.) 232; 212; ₱120,000; ₱330,000 d.) 294; 208; ₱175,000; ₱315,000
ENGINEERING
ECONOMY

GENERAL ENGINEERING AND APPLIED SCIENCES