GE301 Unit 4

Chapter 6: Basic Methods for

Making Economy Studies

George Y. Chao Jr.

Assistant Professor
Department of Chemical Engineering
University of Santo Tomas
Basic Methods for Making Economy Studies

1. The Rate of Return (ROR) Method

2. The Annual Worth (AW) Method
3. The Present Worth (PW) Method
4. The Future Worth (FW) Method
5. The Payback Period Method
Rate of Return (ROR) Method
The Annual Worth (AW) Method

To compute for the total annual costs…get the

sum of…

1. annual depreciation
2. other annual costs including operations,
maintenance, taxes, and others

3. Interest on capital or
Minimum Required Profit
The Present Worth (PW) Method

To compute for the total annual cash outflows

get the sum of…

1. annual depreciation
2. annual costs including operations,
maintenance, taxes, and others

3. Interest on capital or
Minimum Required Profit
The Future Worth (FW) Method

To compute for the total annual cash outflows

get the sum of…

1. annual depreciation
2. other annual costs including operations,
maintenance, taxes, and others

3. Interest on capital or
Minimum Required Profit
Payback Period (PP) Method
Problem 6-1 on page 90
Making Economy Studies
(6-1) An investment of ₱270,000 can be made in a
project that will produce a uniform annual revenue of
₱185,400 for 5 years and then have a salvage value of
10% of the investment. Out-of-pocket costs for
operation and maintenance will be ₱81,000 per year.
Taxes and insurance will be 4% of the first cost per
year. The company expects capital to earn not less
than 25% before income taxes. Is this a
desirable investment? What is the payback
period of the investment?
Problem 1
Problem 2

Problem 3

Problem 4

Problem 5

Problem 6
Problem 7