ENGINEEERING ECONOMICS

Engineering Economy
• Engineering economics is the process of determining whether an
engineering project is to be undertaken or modified with the goal of
obtaining the best utilization of capital resources taken into account
some pertinent facts
• It is the analysis and evaluation of the monetary consequences by
using the theories and principles of economics to engineering
applications, designs and projects.
Necessity and Luxury
• Necessities – refers to the goods and services that are required to
support human life, needs and activities.
• Luxuries – are those goods and services that are desired by human
and will be acquired only after all the necessities have been
satisfied.
Market
Market is the place where the buyers and sellers come together

Market Seller Buyer

Perfect
Many Many
Competition
Monopoly One Many
Monopsony Many One
Duopoly Two Many
Duopsony Many Two
Oligopoly Few Many
Oligopsony Many Few
SUPPLY AND DEMAND
•Supply
• Is the quantity of a certain commodity that is
offered for sale at a certain price at a given place
and time

•Demand
• Is the quantity of a certain commodity that is
brought at a certain price at a given place and time
SUPPLY AND DEMAND
Law of Supply
and Demand
This states that
under conditions
of a perfect
competition, the
price of a
product will be
that value where
supply is equal
to the demand
SUPPLY AND DEMAND
Law of
Diminishing Returns
This states that when
one of the factors of
production is fixed in
quantity, increasing the
other factors of
production will result in
a less than
proportionate increase
in the output
CASH FLOW DIAGRAM
• Is a graphical representation of cash flows drawn
on a time scale
Interest

• From the borrower’s viewpoint, it is defined as the

amount of money paid for the use of borrowed
capital

• From the lender’s viewpoint, it is the income

generated by the money which has been lent
I. SIMPLE INTEREST
ΠOrdinary Simple Interest
 SIMPLE INTEREST
 Exact Simple Interest
 SIMPLE INTEREST
 Exact Simple Interest

? Note:
Leap years occur every four
years, except for years
ending in 00 that are not
divisible by 400.
Sample Problem 1
Determine the ordinary simple interest on P5,000
for 9 months and 10 days if the rate of interest is
12%.

A. 857.14
B. 547.67
C. 687.33
D. 466.67
Sample Problem 1
Determine the ordinary simple interest on P5,000
for 9 months and 10 days if the rate of interest is
12%.

A. 857.14
B. 547.67
C. 687.33
D. 466.67
Sample Problem 2
Jeffrey buys an electric fan from a merchant who
asks P1,250 at the end of 60 days (cash in 60
days). Jeffrey wishes to pay immediately and the
merchant offers to compute the cash price on the
assumption that money is worth 8% simple
interest. What is the cash price today?

A. 1,233.55 C. 987.56
B. 1,225.56 D. 1,325.56
Sample Problem 2
Jeffrey buys an electric fan from a merchant who
asks P1,250 at the end of 60 days (cash in 60
days). Jeffrey wishes to pay immediately and the
merchant offers to compute the cash price on the
assumption that money is worth 8% simple
interest. What is the cash price today?

A. 1,233.55 C. 987.56
B. 1,225.56 D. 1,325.56
Sample Problem 3
A man borrowed P10,000 from a loan firm at a
simple interest of 15%. If the interest is to be
deducted from the loan at the time the money is
borrowed and at the end of 1 year he has to pay
back P10,000. Calculate the actual rate of
interest.

A. 15.26% C. 12.14%
B. 17.65% D. 11.23%
Sample Problem 3
A man borrowed P10,000 from a loan firm at a
simple interest of 15%. If the interest is to be
deducted from the loan at the time the money is
borrowed and at the end of 1 year he has to pay
back P10,000. Calculate the actual rate of
interest.

A. 15.26% C. 12.14%
B. 17.65% D. 11.23%
Sample Problem 4
Determine the exact simple interest on P10,000
for the period from January 15 to June 20, 2004,
if the rate of simple interest is 14%.

A. 600.54 C. 500.5
B. 850.54 D. 700.45
Sample Problem 4
Determine the exact simple interest on P10,000
for the period from January 15 to June 20, 2004,
if the rate of simple interest is 14%.

A. 600.54 C. 500.5
B. 850.54 D. 700.45
Sample Problem 5
Determine the exact simple interest on P1,000
for the period from January 10 to October 28,
2005 at 12% interest.

A. 63.87 C. 85.57
B. 95.67 D. 56.47
Sample Problem 5
Determine the exact simple interest on P1,000
for the period from January 10 to October 28,
2005 at 12% interest.

A. 63.87 C. 85.57
B. 95.67 D. 56.47
II. RATES OF INTEREST
ΠNominal Rate of Interest (NRI):
Nominal rate of interest specifies the rate of interest and the number of
interest periods per year.
II. RATES OF INTEREST
 Effective Rate of Interest (ERI):

Ž Equivalent rates
For two nominal rates to be equal, their effective
rates must be equal.
II. RATES OF INTEREST
Effective Rate of Interest for Continuous
Compounding:

r
ERI = e - 1
Sample Problem 6
Find the nominal rate compounded monthly
which is equivalent to 12% compounded
quarterly.

A. 11.89%
B. 10.57%
C. 12.78%
D. 12.67%
Sample Problem 6
Find the nominal rate compounded monthly
which is equivalent to 12% compounded
quarterly.

A. 11.89%
B. 10.57%
C. 12.78%
D. 12.67%
Sample Problem 7
If a nominal interest rate per year is 12%, and
compounding is continuous, what is the
effective interest rate per year?

A. 0.127% C. 11.275%
B. 1.000% D. 12.75%
Sample Problem 7
If a nominal interest rate per year is 12%, and
compounding is continuous, what is the
effective interest rate per year?

A. 0.127% C. 11.275%
B. 1.000% D. 12.75%
III. COMPOUND INTEREST
ΠFuture Worth, F:
Where: (for both cases)

F = future worth
P = Present worth
i = Effective interest rate per
interest period (per month,
 Present Worth, P: per quarter, per year,
etc)
n = Total number of
compounding periods
m = mode of compounding
r = specified nominal rate
t = number of years
For Continuous Compounding
Sample Problem 8
By the conditions of a will, the sum of P25,000 is
left to a girl to be held in trust by her guardian
until it amounts to P45,000. When will the girl
receive the money if the fund is invested at 8
percent compounded quarterly.

A. 6 years C. 7 years
B. 8 years D. 9 years
Sample Problem 8
By the conditions of a will, the sum of P25,000 is
left to a girl to be held in trust by her guardian
until it amounts to P45,000. When will the girl
receive the money if the fund is invested at 8
percent compounded quarterly.

A. 6 years C. 7 years
B. 8 years D. 9 years
Sample Problem 9
What is the future worth of P12,000 deposited in
an account earning interest at the rate of 9%
compounded quarterly for 8 years.

A. 20,500.23
B. 25,400.56
C. 24,457.24
D. 23,642.56
Sample Problem 9
What is the future worth of P12,000 deposited in
an account earning interest at the rate of 9%
compounded quarterly for 8 years.

A. 20,500.23
B. 25,400.56
C. 24,457.24
D. 23,642.56
Sample Problem 10
A man possesses a promissory note whose
maturity value is P6700, due in 3 years hence. If
the rate of interest is 10% compounded semi-
annually, what is the value of this note now?

A. 4,000 C. 3,000
B. 6,000 D. 5,000
Sample Problem 10
A man possesses a promissory note whose
maturity value is P6700, due in 3 years hence. If
the rate of interest is 10% compounded semi-
annually, what is the value of this note now?

A. 4,000 C. 3,000
B. 6,000 D. 5,000
Sample Problem 11
A P2,000 loan was originally made at 8% simple
interest for 4 years. At the end of this period, the
loan was extended for three years without the
interest being paid, this time at a rate of 10%
compounded semi-annually. How much should
the borrower pay at the end of 7 years?

A. 3,574 C. 2,537
B. 3,537 D. 2,573
Sample Problem 11
A P2,000 loan was originally made at 8% simple
interest for 4 years. At the end of this period, the
loan was extended for three years without the
interest being paid, this time at a rate of 10%
compounded semi-annually. How much should
the borrower pay at the end of 7 years?

A. 3,574 C. 2,537
B. 3,537 D. 2,573
Sample Problem 12
If P1,000 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, respectively.
A. 6%, 12%
B. 10%, 10.562%
C. 12%, 12.616%
D. 13%, 13.256%
Sample Problem 12
If P1,000 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, respectively.
A. 6%, 12%
B. 10%, 10.562%
C. 12%, 12.616%
D. 13%, 13.256%
Sample Problem 13
If the nominal interest rate is 3 percent, how
much is P5000 worth in 10 years in a
continuously compounded account?

A. P6,350
B. P7,650
C. P8,500
D. P6,750
Sample Problem 13
If the nominal interest rate is 3 percent, how
much is P5000 worth in 10 years in a
continuously compounded account?

A. P6,350
B. P7,650
C. P8,500
D. P6,750
Sample Problem 14
How long will it take for an investment to double
its amount if invested at an interest rate of 6%
compounded bi-monthly?

A. 10 years
B. 12 years
C. 13 years
D. 14 years
Sample Problem 14
How long will it take for an investment to double
its amount if invested at an interest rate of 6%
compounded bi-monthly?

A. 10 years log k
B. 12 years n=
log(1 + i)
C. 13 years
D. 14 years
Sample Problem 15
How long will it take money to triple itself if
invested at 8% compounded annually?

A. 14 years C. 15 years
B. 16 years D. 12 years
Sample Problem 15
How long will it take money to triple itself if
invested at 8% compounded annually?

A. 14 years C. 15 years
B. 16 years D. 12 years
IV. Annuities
Annuity is a series of equal payments “A” made at
equal intervals of time..
ΠOrdinary Annuity
- the type of annuity where the payments are made at the end of
each period
ü Future Worth of Ordinary Annuity:

ü Present Worth of Ordinary Annuity:

➋ Deferred annuity
- is the type of annuity where the first payment is made later than the first
or is made several periods after the beginning of the annuity.
ü Future Worth of Deferred Annuity:

ü Present Worth of Deferred Annuity:

➌ Annuity Due
- is the type of annuity where the payment is made at the beginning of
each period
ü Future Worth of Annuity Due:

ü Present Worth of Annuity Due:

➍ Perpetuity
- is an annuity in which the periodic payments
continue indefinitely.
ü Present Worth of Perpetuity:
Sample Problem 16
How much money you invest today in order to
withdraw P2000 annually for 10 years if the
interest rate is 9%?

A. 12,835.32
B. 12,785.45
C. 12,563.25
D. 12,586.47
Sample Problem 16
How much money you invest today in order to
withdraw P2000 annually for 10 years if the
interest rate is 9%?

A. 12,835.32
B. 12,785.45
C. 12,563.25
D. 12,586.47
Sample Problem 17
An employee obtained a loan of P10,000 at the
rate of 6% compounded annually to repair a
house. How much must he pay monthly to
amortize the loan within a period of ten years?

A. 110.22 C. 125.25
B. 112.02 D. 121.22
Sample Problem 17
An employee obtained a loan of P10,000 at the
rate of 6% compounded annually to repair a
house. How much must he pay monthly to
amortize the loan within a period of ten years?

A. 110.22 C. 125.25
B. 112.02 D. 121.22
Sample Problem 18
Ernest invests P10,000 now for the college
education of his 2- year old son. If the fund earns
14% effective, how much will the son get each
year starting from his 18th to the 22nd birthday?

A. 20, 894.23 C. 20,567.98

B. 20,791.64 D. 20,587.43
Sample Problem 18
Ernest invests P10,000 now for the college
education of his 2- year old son. If the fund earns
14% effective, how much will the son get each
year starting from his 18th to the 22nd birthday?

A. 20, 894.23 C. 20,567.98

B. 20,791.64 D. 20,587.43
Sample Problem 19
A farmer bought a tractor costing P25,000
payable in 10 semi-annual payments starting at
the beginning of each period. If the interest rate
is 26% compounded semi-annually, determine
the amount of each installment.

A. 5,047.30 C. 4,077.20
B. 4,654.21 D. 5,066.25
Sample Problem 19
A farmer bought a tractor costing P25,000
payable in 10 semi-annual payments starting at
the beginning of each period. If the interest rate
is 26% compounded semi-annually, determine
the amount of each installment.

A. 5,047.30 C. 4,077.20
B. 4,654.21 D. 5,066.25
V. Capitalized Costs
Capitalized Cost refers to the present worth of a
property that is assumed to last forever. The capitalized
cost of any property is the “sum of the first cost and
the present costs of perpetual replacement,
operation and maintenance”.
Capitalized Costs
Capitalized Costs
Capitalized Costs
Sample Problem 20
A telephone company installed a new equipment
that cost P150,000 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 P5,000.
If the interest is 12% compounded annually,
determine its capitalized cost.

A. P310,254.67 C. P281,425.76
B. P218,855.87 D. P301,425.76
Sample Problem 20
A telephone company installed a new equipment
that cost P150,000 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 P5,000.
If the interest is 12% compounded annually,
determine its capitalized cost.

A. P310,254.67 C. P281,425.76
B. P218,855.87 D. P301,425.76
Sample Problem 21
A machine is purchased for P100,000. If the annual
maintenance cost is P1,800, determine the
capitalized cost of perpetual service with an
interest rate of 8%.

A. P325,000 C. P523,000
B. P235,000 D. P532,000
Sample Problem 21
A machine is purchased for P100,000. If the annual
maintenance cost is P1,800, determine the
capitalized cost of perpetual service with an
interest rate of 8%.

A. P325,000 C. P523,000
B. P235,000 D. P532,000
VI. Depreciation
Depreciation is the decrease in the value of physical
property due to passage of time.
Methods of Computing Depreciation
➊ Straight Line Method
Straight line method of depreciation assumes
that the loss in value of the property is directly
proportional to the age of the property.
Methods of Computing Depreciation
 Sinking Fund Method
a depreciation method where an imaginary fund called
sinking fund is invested yearly at a rate of i to amount to (FC-
SV) at the end of the life of the property
Methods of Computing Depreciation
Ž Declining Balance Method
a constant percentage method or the
Matheson Formula
Methods of Computing Depreciation
Methods of Computing Depreciation
 Sum – of – the - years – digits Method (SYD)
assumes that the depreciation charge vary
directly to the number of years and inversely to the
SYD.
Sample Problem 22
An equipment costs P480,000 and has a salvage
value of 10% of its cost at the end of its economic
life of 35,000 operating hours. In the first year, it
was used for 4,000 hours. Determine its book
value at the end of the first year using straight
line method.

A. 430,629 C. 340,296
B. 403,269 D. 304,629
Sample Problem 22
An equipment costs P480,000 and has a salvage
value of 10% of its cost at the end of its economic
life of 35,000 operating hours. In the first year, it
was used for 4,000 hours. Determine its book
value at the end of the first year using straight
line method.

A. 430,629 C. 340,296
B. 403,269 D. 304,629
CALCULATOR SHORTCUT
Straight Line Method:
1. Mode – 3(STAT) – 2 (A+BX)
2. X Y
0 480000
35000 48000
3. 4000 – Shift – 1 – 5 – 5
4. =
5. 430628.5714
Sample Problem 23
23. A printing equipment costs P73,500 has a life
expectancy of 8 years and has a salvage value
of P3500 at the end of its life. The book value at
the end of “x” years is equal to P38,500. Using
straight line method of depreciation, solve for
the value of “x”.

A. 5 years C. 4 years
B. 6 years D. 3 years
Sample Problem 23
23. A printing equipment costs P73,500 has a life
expectancy of 8 years and has a salvage value
of P3500 at the end of its life. The book value at
the end of “x” years is equal to P38,500. Using
straight line method of depreciation, solve for
the value of “x”.

A. 5 years C. 4 years
B. 6 years D. 3 years
CALCULATOR SHORTCUT
Straight Line Method:
1. Mode – 3(STAT) – 2 (A+BX)
2. X Y
0 73500
8 3500
3. 38500 – Shift – 1 – 5 – 4
4. =
5. 4
Sample Problem 24
A broadcasting corporation purchased an
equipment that costs P7,000, last 8 years and has
a salvage value of P350. determine the book
value during the 4th using declining balance
method.

A. P1,711 C. P1,566
B. P5,166 D. P1,645
Sample Problem 24
A broadcasting corporation purchased an
equipment that costs P7,000, last 8 years and has
a salvage value of P350. determine the book
value during the 4th using declining balance
method.

A. P1,711 C. P1,566
B. P5,166 D. P1,645
CALCULATOR SHORTCUT
Declining Balance
1. Mode – 3 (STAT) – 6
2. X Y
0 7000
8 350
3. 4 – Shift – 1 – 5 – 5
4. =
5. 1565.247584
Sample Problem 25
A telephone company purchased a microwave radio
equipment for P6M. Freight and installation charges
amounted to 3% of the purchase price. If the equipment
shall be depreciated over a period of 8 years with a
salvage value of 5%, determine the depreciation charge
during the fifth year using the sum of the years digit
method.

A. 563,444.33 C. 635,333.33
B. 653,333.33 D. 536,444.44
Sample Problem 25
A telephone company purchased a microwave radio
equipment for P6M. Freight and installation charges
amounted to 3% of the purchase price. If the equipment
shall be depreciated over a period of 8 years with a
salvage value of 5%, determine the depreciation charge
during the fifth year using the sum of the years digit
method.

A. 563,444.33 C. 635,333.33
B. 653,333.33 D. 536,444.44
CALCULATOR SHORTCUT
Declining Balance
1. Mode – 3 (STAT) – 3
2. X Y
0 6M(1.03)
8 6M(0.05)
9 6M(0.05)
3. 4 – Shift – 1 – 5 – 5 minus 5– Shift – 1 – 5 – 5
4. =
5. 1565.247584
BREAK-EVEN ANALYSIS
•Break-even analysis is the method of
determining when costs exactly equal
revenue. The point where the total income
equals the total expenses is called the
break-even point
BREAK-EVEN ANALYSIS
Sample Problem 26
A manufacturer produces certain items at a
labor cost per unit of P315, material cost per
unit of P100, and variable cost of P3.00 per unit.
If the item has a selling price of P995, how many
units must be manufactured each month for the
manufacturer to break-even if the monthly
overhead is P461,600?

A. 500 C. 600
B. 700 D. 800
Sample Problem 26
A manufacturer produces certain items at a
labor cost per unit of P315, material cost per
unit of P100, and variable cost of P3.00 per unit.
If the item has a selling price of P995, how many
units must be manufactured each month for the
manufacturer to break-even if the monthly
overhead is P461,600?

A. 500 C. 600
B. 700 D. 800
Sample Problem 27
ABC Corporation manufactures book cases that
sells for P65.00 each. It costs ABC P35,000 per
year to operate its plant. This sum includes rent,
depreciation charges on equipment and salary
payments. If the cost to produce one bookcase
is P50, how many bookcases must be sold each
year for ABC to avoid taking loss?

A. 2334 C. 3234
B. 3243 D. 2344
Sample Problem 27
ABC Corporation manufactures book cases that
sells for P65.00 each. It costs ABC P35,000 per
year to operate its plant. This sum includes rent,
depreciation charges on equipment and salary
payments. If the cost to produce one bookcase
is P50, how many bookcases must be sold each
year for ABC to avoid taking loss?

A. 2334 C. 3234
B. 3243 D. 2344