SOUTHERN LUZON STATE UNIVERSITY

COLLEGE OF ENGINEERING
Lucban, Quezon
PRELIMINARY TERM - Activity No. 1
Name: Macalalag, John Lloyd H. BEE01 – Engineering Economics Score:
rd
Course/Year/Section: BSME/3 year/GN Date: September 18, 2020
GENERAL INSTRUCTION: Answer the following questions. Complete solution is required. Box only your final answer.

1. A couple (which happens to be your close friends) bought a small apartment building for Php5 million in a
college town. They spent Php500,000 of their own money for the building and obtained a mortgage from a
local bank for the remaining Php4.5 million. The annual mortgage payment to the bank is Php525,000. The
couple also expects the annual maintenance on the building and grounds will be Php750,000. There are
four apartments (two bedrooms each) in the building that can be rented for Php18,000 per month. Refer to
the seven-step procedure to answer these questions:
a. Does the couple have a problem? If so, what is it?
b. What are their alternatives (identify at least three)?
c. Estimate the economic consequences and other required data for the alternatives in Part (b).
d. Select a criterion for discriminating among alternatives, and use it to advise the couple on which course
of action to pursue.
e. Attempt to analyze and compare the alternatives in view of at least one criterion in addition to cost.
f. What should the couple do base on the information you and they have generated?
ANSWERS:
a. Define the problem:
The problem of the couple is about the annual income of all the apartments being rented were not
enough to cope the annual mortgage of the bank and the building maintenance. They will generate a
loss of Php 411,000 from the target having no profit.
b. Develop your alternatives:
The alternatives would appear to be:
Alternative 1 Alternative 2 Alternative 3

Raise the rent up to Look for a much lower
Php 27,000 to cope the cost maintenance
expenses and gain a contractor on the
profit of Php 21,000 highest value of Php
annually. 250,000 annually. With
this they can get a profit
of Php 89,000 annually.
Stay with the rent of
Php 18,000 then let
the tenants pay the
electric bills and the
water to reduce the
annual
maintenance.

Assumptions:
 Raising the monthly fee would not be an issue for the tenants as long as the landlord will
handle the monthly electric bills and the water bills as for alternative 1.
 Looking for a much cheaper maintenance contractor or do the maintenance will have the
same result of satisfaction for the tenants.
 In contrary with alternative 1, the tenants will comply if they are said to be responsible for the
monthly electric bills and the water bills.

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 c. Development of prospective outcomes:
The expected cash flows of each alternatives are as follows:

Alternative 1
CASH FLOW - OPERATIONS
CASH RECEIVED FROM
TENANTS MONTHLY BILL Php. 27,000
×4
108,000
×12
Php. 1,296,000 Php. 1,296,000
CASH PAID FOR
ANNUAL MORTGAGE Php. 525,000
ANNUAL BUILDING MAINTENANCE Php. 750,000 Php. 1,275,000
NET CASH FLOW OPERATIONS Php. 21,000

Alternative 2
CASH FLOW - OPERATIONS
CASH RECEIVED FROM
TENANTS MONTHLY BILL Php. 18,000
×4
72,000
×12
Php. 864,000 Php. 864,000
CASH PAID FOR
ANNUAL MORTGAGE Php. 525,000
ANNUAL BUILDING MAINTENANCE Php. 250,000 Php. 775,000
NET CASH FLOW OPERATIONS Php. 89,000

Alternative 3
CASH FLOW - OPERATIONS
CASH RECEIVED FROM
TENANTS MONTHLY BILL Php. 18,000
×4
72,000
×12
Php. 864,000 Php. 864,000
CASH PAID FOR
ANNUAL MORTGAGE Php. 525,000
ANNUAL BUILDING MAINTENANCE Php. 750,000 supposed

10,000 per unit

×4
40,000
×12
480,000 will be less
to the supposed
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 maintenance, therefore

Php. 750,000
- 480,000
270,000 Php. 795000

NET CASH FLOW OPERATIONS Php. 69,000

d. Development of Prospective Outcomes

Based on the cash flow results, alternative 2 has the highest annual income but also
the hardest to execute because nowadays contractors are wise especially when it comes to
annual deals. Another point is the Electric bills and water bills are not constant. Meaning
expenses will not easily be calculated. On the other hand, alternative 1 will somehow be
problematic on the tenants and may cause a lot of issues. Therefore the best alternative to
pursue is alternative 3, for a reason that separating monthly rent to the utility expense can be
much easier to explain to the tenants. Also, the annual income of alternative 3 is much higher
than the alternative 1 even it both claims a raise in the tenants monthly expense.

e. Analysis and Comparison of Alternatives

Alternative 1 is eliminated Alternative 2 is eliminated Alternative 3 is a good

because alternative 3 have
the same method of solving
the problem but having a
greater effect on annual
income and less problematic
issues.
because it will be difficult to alternative because it is
find a contractor that will possible to convince the
agree to a Php. 250,000 tenants to pay for their utility
annual deal. Another is the expense and might gain a
utility expense is not stable much greater annual income.
and might sometimes hit
above average usage and
result to a much greater
expense.

f. Monitoring the Performance of Your Choice

Moving to a much cheaper maintenance might lead to substandard or poor
maintenance and result to a much greater problem. Therefore separating rent and utility
expense is good move because the maintenance of the building itself will not be
compromised and the tenants will also be safe from any natural disasters.

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