MODULE 21: ENGINEERING ECONOMY

Simple Interest only the principal earns interest

types of simple Interest :

I.
Ordinary based on 30 days mo or 360 days yr key Formulas :

2. Exact based on 365 days normal year or 366 days leap yr . I = Pin * if unit of i. is

* Rule of 400 applied to year ending with 00 F =P + I not

given ,
use

* Rule of 4- applied to year not ending with 00

per year

examples
:

1- Year year

1900 ÷ 400 4.75 not ÷ 4 506 leap

=
2024 =

2000 ÷ 400 = 5 leap 1990 ÷ a = 497.5 not

2100
÷ 400=5.25 not 1992 ÷ 4 = 498 leap

2020 ÷ 4 = 505 leap

2. Find the ordinary simple interest on FIOOO for 8m05 and 20 days at an interest rate of 10% .

I = Pin

2° / yr
I = 1000 0.1 8 -1 MOS × =P -12.22
30 12m05

3. Find the exact simple interest 71000 which was deposited on Jan 8 1990 4 withdrawn on Oct
on , .
8,1992 .

365 -8 366 -

31 -

8) -

30 -

31
I =
1000 O .
, + " + = F- 274.85
365 366

1990 1991 1992

Compound Interest both the principal on the interest earns interest

key Formulas :

* cont .

compounding

Ht#
¥
P
-

F =p I + in F =
Pe
in
10=100 i = lot .
per yr
,

simple vs compound

100-110=110 100-110=100

A A A
I + in 1 ein l +10--120 -111=121
g. , , F- A-

i I
e -
I + 10=130 -112.1--133.1

6
26
36 " ein -
l
Iti ) l -
n
n -16

i
n
ei -
I
F--6 p :b
i
ei -
l

types of compound Interest :

1. Effective % per year compounded yearly

2. Nominal % Per year not compounded yearly

3. Discounted Advanced deducted Rate

4. Add on Kate
 examples :

4. Find the effective interest rate that is equivalent to 12% compounded yearly .

12% PYCQ ≈ ieff PYCY

P n

I I yr 12 4 6 bimos
: Mos =
QT = =
24s Mo = 2 SA

4 '
° /2
in I ii
'

f- =p / + = 1 It = 1 It =
0.1255=12.55-1 eff .

PQCQ PYCY

5. Find the nominal Interest compounded semi that is equivalent to 12% effective interest rate
monthly .

i. % PYCSMO . ≈ 12 -1 eff PYCY

.

24
i "

f- =
, , = I -10.12 ; i = 0.1136 ≈ 11.36% CSMO
24

PSMCSM

6. Discounted If i 20% discounted equivalent

-

Interest Rate what is the eff interest rate ?

-

.
.
,

loan Payment
n = 1 yr
principal

*
""
"

p = I #
Interest f- =P / Iti )
'
F = 1.2 0
1=0.8 Iti )

i :O . 25 = 25-1 .
PYCY

F = I

1- 0.2

7. Add on Rate . Find the equivalent effective interest rate to I -1 .

per month add on for 36 Mos .

loan , P =
736

Monthly Payment , A :
1=36 =
FI -
36
"
tyr
-
-
12m05

"
"

736 n ( Iti ) -
I f- =p ( Iti )
= + 0-01 36 = # 1.36 Mo
for 36m05 .
py , ;) , =p
zy i " "&

I + i = I t 0.01767
pycy PMCM
36 / + i 36-1
36 1=36 36 I + i =
1.36 i. = 23.4 -1 .
pycy
i
PMCM
loan
# 0s
I =
0.01767=1.767 % PMCM

payment
1.36
FI .
36

Case Analysis
:
Money ,
time .
Rate

theory of Equivalence at the focal date , the equivalent amounts of alternative payments a re equal

examples :

8. An Php 40,000 may be purchased on installment plan by paying Php 10,000 down payment
engene costing ,

Php 5,000 at the end of 1st year , and 5 equal payments at the end of 2nd year .
Determine the amount of

payments if it is 10% effective .

" ✗
I =
to -1 eff Fao ,< =P i 40000 70,862.44
=
I + I I
.

-10 .
=

40,000

Cash
1 2 3 4 5 6

Inst
5,000 "
A A A- A ᵗ
A " + " / 1 -10.1 1
10,000
FA :
A = A = 6. 1 A
, ☐ , ,

b- yrs

£
Fsk = 5000 I + 0 . I =
8052.55
6 yrs

f- 10k =
10000 1+0 -
I 6=17715.60
f- cash ≈ First

70862.44=6.117+8052.55+17715.60

A =
7392.51
MODULE 22: ENGINEERING ECONOMY
9. A loan be amortized
was to by 4 end of year payments forming an ascending pattern . The initial

Payment wa s to be Php 5000 and the difference between the successive payments is Php 400 .

The what
loan was renegotiated to provide equal end of year payments . If the interest rate is 15% ,

the ?
was annual payments
"
I -1in -
I
1-10-15 I
- <,
-
n
i 0.15
1=6--6
= 400 ' 2469
i o . ,, FA ≈ FB
36
26
6=400 "
^ "

¥
Option
1=5000
5K " +
2496+24966.88=4.993 A
1=24966 .gg
' + ° 15
Fsk
-

A
: A
1 2 3 4 0 15
5530.47
.

A =

Option "
"

!
' + I I -10.15 I
B A A
-

A
A fan : A = µ = 4.993A
0.15

10 A loan be by 10 equal end of payments of P- 1000 each If i 10%

may paid year
-
-
.
.
,

a. What 5 equal end of year payments starting at the end of 6th year will equitably pay the said loan ?

" "°
" " 1+0.10 -
I
FA : A =/ ooo = 15987.42
0.10
f- A ≈ FB
scheme
A 2
I 3 4 5 6 7 8 9 10
15987.42=6 . / A

scheme
B
A A A A A
I -1in I 1+0.105-1 A =
2620.89
FB = A
i
= A = 6.1A
0.10

b. What 5 equal end of year payments starting at the end of 3rd year will equitably pay the said loan ?

f- ☐ = 15987.42

Scheme
A 2
I 3 4 5 6 7 8 9 10
^ 5

i.
' + _
' 1+0 ' -1
Scheme
'

pen, , , A = A = 6.1A
B o , ,
A A A A A

f- End 7
}
"

Find / ◦ =
Fend > Iti ) = 6.1A (1-10.1) = 8.12A

f- A ≈ f- B

15987.42=8 -12A

A = 1968.89

C- What 10 equal end of semi -

annual payments starting at the end of 3rd year will equitably pay the said loan ?

f- ☐ = 15987.42

Scheme
A 2
it .
PSACSA = 10% PYCY
1 3 4 5 6 7 8 9 10

f=P( Iti )n :( + i ) 2=(1+0.1)

'
Scheme * semi -
annual
D
payments
A A A A A
must be
f- End -1.5 PSACSA
I =
0.0488=4.88-1 . PSACSA

f- End 10

"

(1-10.0488) -

I f- a. ≈ 1=13
Find 7.5 =
A =
12.508A
g. o¢gg 15987.42=15.872 A

"

f- End 10=12.50817-(1+0.0488) =
15.872A A = 1004.10

Perpetuity
A A A A A

Withdrawal
1 2 3 4
infinity
A pi
. . .

Perpetuity
Fund P
 example :

Find first payment is due the of year at

11 .
the present amount of a perpetuity of Php 1000 whose at end 5th

intererest rate of 10%

"
F =P /I + i)
1 2 3 4 5 6 7 8 . . .
✗ A 1000
, ☐ ooo
Pg
,
: , "
, g. , 10000 =
Po (1+0.1)
A
VA VA +
A
+
A
+
A
✗

Po = 6830.13
Pg

Po

Investment Bond security money

• bail bond

construction bond
•

◦ bid bond

with middleman bank without middleman direct

bond
investor investor
contract
Periodic Payment With
Businessman Businessman
interest High Interest
tender
Periodic dividend ,d at end of bond

tender Bank period for n periods , d=rp

2% 28% borrower
borrower
creditor creditor
Price RP at the
Redemption .
end of

borrowed
nth
deposit "
period

capita / ""
ing price
'

of bond

>
selling Price face value par value ,
P

example :

12 . A 71000 bond will mature in 10 years with a rate of 10% payable annually is to be redeemed at 71040 at the

end of this period If it sold for determine the this

.
n ow FH2O , yield at price .

'°
1=1--1120 I + i
investor
bond
money #

contract °""

Businessman
tender
Periodic dividend ,d at end of bond 112012-10
period for n periods , d=rP
"°
borrower " " '
"
creditor
money 100 F ,◦o : 100
RP =
1040 i
in
sP=
1120 RP= 1040

1000 Fi =
1=10+1040
p
_

D= rp = 0 I 1000 = 100 "°

('
.

" + ' '

1120 / Iti ) : 100 +1040 ; i = 8.45 %

MODULE 23: ENGINEERING ECONOMY

Deprivation dr =
Dn * DF distribution factor

I. Straight Line Method t

DF =
n

examples :

13 A Xerox machine its life print 3M

.

costing 775000 with salvage value of 710000 at the end of can

sheets . If it had printed took sheets , find the total depreciation of said machine at that time .

Dr

Dn -6500°
'

13110 : Fc Dr 65000
=

= 75,000 Bvr 0.5 3

Bin = 511=10000

0.5M 3M Dr __
Flo 833.33

14 A lathe machine FO.IM it

.

costing P- 3M with salvage value of at the end of 20 years , can be used

for 5000 hrs in its entire life . Find the accumulated depreciation after using it for 1000 hrs .
 Diooo 2.9M
=
Dn -2.9M
'

BVo=FC 1000 hrs 5000 hrs

=
3M
Bin = 511=0 .IM 171000 = # 0.58M

1000 hrs 5000 hrs

20 years

15 . A company purchased a telecommunication equipment for a total of Php 950M . This amount includes

freight and installation charges which amounts to 10% Of the said figure .
If the equipment is to be depreciated

ove r a period of 15
years with 0 salvage value .
Find the depreciation charge during 8th year .

d'
a.
'

.dz d Dn
°"
"

" =
#
Dn
-

960M I 15
13110 FC
_

: d
"

✓
do

= 960M
Bin
-

_
511=0 960
D= =
# 64M
I 2 3 4 5 6 7 8 9 10 11 12 13 1415 1 5

2.
Sinking Fund Method

b. i. =
6-1 .
effective

I
"
°

Dn
'

.dz
¥
it
¢ ,

BVo=FC
µ
#
Dn
-

_
960M I -1in I
✓
do

= 960M
0.06 960
Bin -511=0
-

D=
"£

10 11 12 13 1415 I -10.06 -
/
I 2 3 4 5 6 7 8 9
" " "

F- A-

/ t.tt t.tt t.tt ↓ f. f. ↓

. . ,

d d d d
( ' + i )
"
-1 d :P 41.28M
/ Iti )8 -
l Dn =D
☐ , , i
i

Non -
uniform or Non -

equal Methods

3. Sum of the Years Digit Method

C. Yrs Digit D -
F .
D= Dn # DF

I 15
120

2 14120

3120
'
3 element
pp ,

' 2- elements
4 2120
11
5 120

"◦
6
120
SYD : -2 elements or
7 9
120

8 8,20 960*8120 =P 64M hit Mn total # of elements

SYD =

9 7120 2

10 6120

11 5120
4
12 120

13 3120

14 2120
"
15 120

SYD :
120

Uniform or
equal methods

4.
Declining Balance Method Bits are in GP whose common ratio , r is :

'

SV
n I
r= DF =

FC i -1in -
I

d- Yr End BY

0 FC 018=1311 , -

B. V8

Dn
-

900M >
13110 Fc •
_
-
_

I Fcr 6° 60
a,
dog = 960 -960
= 960M 960 960
i. BY
Bvg Bin =
511=60

m FC * rm
78
dg = * 44.42M
 5. Double Bits in GP ratio is :
Declining Balance Method are whose common , r

2
r= 1-
h

7
°
e.
&
018--960 I -

% -
960 I -

15
= # 47.01M

Economic Feasibility Studies

Profit =
Income -

Expenses ; I E Orc

ROR -

rate of Return

equivalent of interest rate to investment

NAP -

net annual profit

examples :
16 A machine
.
costs Php 100,000 with SV of Php 10,000 after 10 yrs . If the annual maintenance and operation

cost amounts
'

amounts to Php / 0,000 ,

tax and insurance to Php 2,000 .
If the machine will deliver an annual

revenue of Php 30,000 i -15%

-

a- What is the AC . PC ,
FC ?

171=301000 iDn 0.15 90000

( 1+0 / g) 10-1=4432.68
d : =

☐ 10--9014
FC -

-
look Mth 0 =
10000 (high ,
, .

511=1014
/◦
yr ,
th I =
2000 O.CC : min . real .
Profit : IFC =
0.15 100000=15000

AC =
10000+20001-4432.68+15000=31432.68

" '°

( Iti )
-
I (1+0.15) -
I 682200.28
µ , , FC =
31432.68 PC :
"
i 0.15 (1+0.15)
"
f- =P ( Iti ) FC =
682200.28 PC = 157753.35

b. What is the annual nor th ,

PW ,
FW ?
"°
AW :
Al AC 30000 1+0 / 5) I -29088.73
31432.68
-
= - .
-

Ew , ,
,, } , .gg pw ,
"
AW __
-1432.68
0.1 5 (1-10.15)

FW = -29088.73 PW = -

7190.29

c. What is the KOR ?

NAP =
At -
AC Net Annual Profit
12012 :

NAP = 30000 FC
10000+2000-14432.68

NAP = 13567.32 13567.32

ROR :

100000

12012=13.57-1 .
I =/ 5 -1 .

i. not feasible

* Either of the methods used as long as

it is not feasible in one method ,

it is not feasible in all methods .

* From ✗ pertz

ENGINEERING ECONOMY
Interest

For a borrower the amount of money paid for the use of the borrowed capital

for a lender the income produced by the money which has been loaned

I. simple Interest the interest is

earned
linearly proportional to the initial amount of the loan ,
interest rate and the

number of interest periods for which the principal is committed

I = Pin no of F =P -1 I =p -1 Pin =P It in
years
.

interest rate

a. Ordinary = 360 days

b. Exact = 365 days NLY

,
366 days Y)

II. compound Interest whenever an interest earned by the principal is not paid at the end of each interest

period , and added to the principal ,

and therefore will also earn interest for the
succeeding periods .

nominal
n
total no .
◦ f period rate
no .
of Mt
1 r
Ieff
years r
p p , , j P= F j Mt I
, , ' n = : t
1
, + in m m
rate of interest per period compounding period

annually
:
m :L
quarterly
: m -4
-

semi -

monthly
:
m = 24

monthly bi-monthly :m=6

:
semi m=2 m =
12
annually
-
:

examples :

1- A loan of Ftooo is of
made for a period 15 months at a
simple interest rate of 15% .
What future

amount is due at the end of loan period ?

a. 5937.5 b. 497 7.75 c. 6420.5 d. 3005.5

P = 5000 F =P It in

lyr g-
f- = 5000 I t 0.15 54
n = 15 m o st =
Yrs
12m05 4
f- =
5937.5

i -

_
15-1 .

2 What will be the future interest of 710000 at i. 8% Per annum considering the withholding
after a
year =
.

tax on
savings deposit in the Philippines ?

a. 875 b. 740 C- 640 d. 800

I = Pin = 10000 0.08 I = 800 w o tax

tax = 800×20-1 .
= 160

T.net = 800 160=640 w tax

3. Find the simple interest on * tooo for the period January 20,1992 to October 28,2005 at 15% interest .

p : 5000 LY
1992 : Jan 20 -

Dec 31 ,

i. =
15% n = 366-20=346 days I = Pin

346 301 2005 :

Jan I -

Oct 28 , NLY I = 5000 0.15 13.77

n= +12-1 = 13.77
366 365 n = 365 3-30-31 = 301 I = 10327.51

1993 -
2004 : n = 12 yrs

We classify interest rate which specifies the actual rate interest principal 1
may for year is
4. on on the ,

a. rate of return b. effective rate c. exact interest rate d- nominal rate

5. 15% when
compounded semi -

annually will have effective rate of

a. 15T .
b. 15.56% c. 14.5% d. 13.5%

r = 15 -1 M &
.
r ° /£
i.
"

= It I = I + I = 0.1556 = 15 56%
eff
-
.

m 2
m : 2
 6 .
What interest rate compounded monthly is equivalent to 10-1 .
effective rate

a- 10.58-1 .
b. 9.75-1 . c. 9.57-1 .
d. 8.9J .

r = 10% r
M

Ieff = It
m
1

m -12
-

12
p
0 .
/ D= I + -
I
12

r = 0.0957 =
9. 571 .

7 Mr Cruz borrowed 75000 from his classmates and to pay the loan at the end of / year
agreed
' .
.

a. What is the rate of discount ? b. What is the rate of interest ?

✗ = 5000 amount to bor row f- =P Iti ) or d

i. =

5000 -4000 5000=4000 I + i l -

d
d% = ✗ 100 = 20-1 .

go , , I = 25% ◦ '
2
i. .
=
0.25--257 .

I -
O -
2

8. Engr . Cruz needs 750000 for his new contracting business .

✗ 92
lending institution is willing to

lend interest
him the money for lyr at 12.5% discounted .
ABC rural bank is
willing to
charge him

14% with the principal and interest payable at the end of the year .
third financial institution

is
willing to lend him at 11.8% Per year compounded monthly ,
while 4th lending company is

asking / 2% per year compounded quarterly .

Which offer is best for him ?
,

✗ YZ 12.5-1 . discounted interest 3rd 11.8 compounded monthly

0 .
125 "
◦ " 8
j jeff
'

= ✗
100=14.29 = I +
-
I =
12.46%
1- 0.125 12

ABC 14% simple interest 4th 12% compounded quarterly

i "
=
14 -1 .
◦ ' '2
ieff = I +
1=12.55-1 .

9. How many years a re required for F2O0O to increase by 73000 it interest rate is
pegged at 12%

compounded semi
annually ?
-

a. 4 b. 5 c. 8 d. 10
Mt
r
P =
2000 F =P I +
I
m

F =
2000+3000=5000
&ᵗ
° ' 12
i. = 12% CSA 5000=2000 It -
I
2

M =
2

t =
7.86 ≈ 8 years

Annuity periodic payment equal amount , equal interval of time

a. Ordinary Annuity at the end of period

"

/ + in , Ford = Pord Iti * can be used when

Ford = A
I -1in
^
i interval of
" + " / compounding
Ford = A =

i payment period

b. Annuity Due at the

beginning of every period
^ "
'
/ + i I ' " + " t
Pord j
PAD = / + =
A ' + " FAD :
Ford Iti = A / + i
/ + in i i

c. Deferred Annuity
 periods

A A A
n = 2
Ford
n = n
Ford

examples :

extinction of
II. The
gradual debt through a
sequence of equal periodic payments is called

a. annuity b. Obligation c. amortization d. debt

12 .
Annual Payments which a re made at the beginning of each period .

a.
annuity due b. deferred annuity c. ordinary annuity d. amortization

13 How much do 10 72000 payments amount at present if interest rate 10%

quarterly is
.

?
Compounded quarterly
a. 18354.12 b. 20510 C. 17504.13 d. 18512.15

A = 2000

4/2.5)
r : 10% Iti
^
-
I 1+0.1 -
, '°
2000
4 or
p ,
g, =
"◦° Caltech E
1+4,1 412.54g;)
✗ Period
0.1
M :
4 I -1in i ✗ = ,
, +
4

t = to ÷ 4--2.5 yrs 10=17504.13 10--17504.13

14 An individual that interest at of

.

makes 5 annual deposits of 72000 in a savings account pays a rate

4% per year . One year after making the last deposit the interest rate changes to 6% per year . Five years after

the last deposit .

the accumulated money is withdrawn from the account ,
how much is withdrawn ?

0 I ᵗ
2 3 4 5 6 7 8 9 10
1-10-04 -
I
f- A = f- g- =
2000 =
10832.65
0.04
2000 2000 2000 2000 2000

" "

±,
1=6
r -6-1
-
. 1=6--1--5 It i. = 10832.65 1-10-04 =
11265.95

-10.066=14223
4% "
✓ =

t.io f- 10--1=6 It is = 11265.95 I

15 A father of
.
a boy deposited to a trust company a sufficient amount of money on the day his son wa s

born so that the boy could receive five annual payments of * 10,000 each for his college tuition fees

starting with his 18th birthday . How much did the father deposited ? i =
12%

U21n2 "
"
" + ◦ " °
"

"

f- = 10000 =
63528.47 at 1=22
10K 10K 10K 10K ☐
10K
0 . 12

Po
PA
n -17
-

I
FA
PO =
1=22 22
= 5250.12
n -22
-

, +, ,
, ,

A father of
16 .
a boy deposited to a trust company a sufficient amount of money on the day his son wa s

born so that the boy could receive five annual payments of * 10,000 each for his college tuition fees

starting with his 18th birthday . What if the son elects not to withdraw the annual payments and

decided to withdraw single his did the boy

a lump sum amount on 25th birthday . How much receive

as the single payment ?

¥1819202122 2,3 2,4 2,5 1=25 =

1=22 I + I
^

3
10K 10K 10K 10K
Fyg 63,528.47
10K
= 1-10-12
Po
Pa 1=25
Fagg :
89252.93
FA = f-22

n :3

n=8
17 .
An equipment which costs 740000 is to be purchased thru a series of 10 semi -
annual payments , where

the is the equipment is released will be

first payment due 6 Mos .
the first 6 payments 6000 each ,

while the remaining 4 equal payments will liquidate the remaining balance . What is the amount of

the last 4
payments if the interest rate is 15% compounded semi-annually ?

Yrs 0 I 2 3 4 5 Or
Period I is µ F 213 ) Caltech
ie i ¢8,9 p'
°
1 µ
1-10-15 ,
, 6 6000
?g
P"
6k 6k 6K 6K 6K 6K
PA =
6000
21 } ) ,,
=
28163.08 = [ O ' 15 ✗
◦ o
. ,

✗ = , 1 +
10k , , 2
✗ ✗ ✗ ✗ 2 2

b- =3 n = 6 Periods
p✗
,

26 )
0.15
I It -
I 1
2
40000 :
PA +
Px = 28163.08 -1 ✗ 0.15213)
, + in O ' 15 4 0 .
15 , +
I + 2
2 2

modifying
✗ =
5454.21
factor

18 A vacant lot has been leased at 720000 year with annual increase of FIJOO for 8 yrs
per an
.
.

Payments are to be made at end of each year . What lump sum should be paid today would be

equivalent to the 8 year lease payment plan ? i= > %

Annuity
:

F
/
&
&
1-10-07 -
I 20000
annuity
20k p, =
20000 Or = [ = 119425.97
80.0 >
✗
✗ = , , + o.o >
21.5k
/ +0.07

23k

Po
Gradient :

b ' + in -1 ,
Pg = -

Po =
PA + Pu i i i -1in

Po =
119425.97+28183.41 1500 I -10.078 -

I 1

Pb = -
8 =
28183.41
g
Po =
147609.38 0.07 0.07 , + o.o ,

* alternate solution :

n=h
At n I 6
-82 20000 -1 8 I 1500
-
-

-2 = = 147609.38
n : I I -1in ✗ =/
, + o.o >
✗

19 PICE wishes to scholarship Foundation by period semi annual deposits

set up a
making uniform end
. -

of 75000 the fund is provide withdrawals

for 20 yrs . to the foundation 5 equal end of year starting
at the end of the 16th year .
At 8% compounded semi -

annually , find the uniform amount to be withdrawn .

0.082120)
Yrs 0 I 2 3 4
16 /7 18 19 20 , + 1
2
l # É " I "
Fgk
= 5000 = 475127.58
0.08
2
5k

Fsk =
FA at 20th yr
At yearly )
I -10.8165 -

◦ ◦ °
& 475127.58 = A

ieff
'

= It -

I =
0.0816=8.16 % 0.816
2

A =
80730.60

20 . A civil engineer borrowed from a bank 7100,000 at the rate 12% compounded annually
in order to finance his contracting business .

a. How much he pay annually to amortize the loan within a period of 5-

years ?

m
-

_ I t =
5 yrs

ᵗ
" + ° " "" '
"
100000 17=27,740.97
'

= A
£ ,
I -10.12 0.12

b. How much he pay quarterly to amortize the loan within a period of 5-

years ?

4 12% C. A
Jyvg
=
M =
t : .
r% c. Q .

)
ieff =
ieff 2 "
1+0-11491415 1

0,12
-

, "
, + = 1 +
100000 = A
4 0.1149 415) 0.1149
r' , +
r2 4 4
I + =
1 +
Mi
Mz r =
11.49% c. Q . A =
6642.59
 C- How much must he within
pay
monthly to amortize the loan a period of 5-
years ?

M -12
-

-1=5 yrs

)
12% C. A. r -1
. C. M .
1+0-113911215
12
,

,
100000=17
0.1139 1215) 0.1139
° / ' 2 " , +

1 12 12
1 + = +

, 12 A = 2193.57

r =
11.39% c. M .

Depreciation loss or decrease of value in the physical properties due to passage of time and use

BV Book Value Dn Total Depreciation

-

=
_

B.Yo : First lost FC dk =

depreciation
, per year

BVN :
salvage Value ,
SY

Uniform Depreciation

1.
straight line method equally distributed

BVK +
Dk =
FC
Dn FC SV Caltech :
syntax :
dk = =

n n
FC -

su Y = At B ✗ linear BVK =
ky^
BVK = Fc k
h
DK : dk K Dk = OF -

try
Dn : FC Sy DK = FC BY dk =
dk -

dk
-
i

examples :

21.1 .
ABC construction bought an equipment for * 60000 with a
salvage value of 710000 . The equipment is

expected to have a life of 10 years .

Using all methods .

find the following
depreciation
a.
charge during the 6th year . I __ 10%
yr K BVK dk Dk

b. accumulated
depreciation for a period of 6 yrs .
0 60000

C. BY at the end of 6 years I

.

55000 5000 5000

FC : 60000 50000 5000 10000

2

n =
10 yrs economic life 3 5000
45000 15000

511=10000 4 40000 5000 20000

60000 -

10000
5 35000 5000 25000
dk = =
5000
,,
6 30000 5000 30000

Dk = 5000 k 5000
7 25000 35000

* alternative solution mode -3-2

8 20000 5000 40000

✗ K Y BVK 1346=6 § 9 15000 5000 45000

0 FC -60000 Die FC -1346 Oy^ 6y^

-
= = -

n to 10000 5000 50000

-

n - 10 SV =
10000 016=13115 -1346=59^-6 )

2.
Sinking Fund Method

Dn : FC SV I -1in -1
FC -

su i
Dn -

_
dk dk "

n
BVK +
Dk =
FC i / + i -
1

examples
:

21.2 . FC : 60000 FC -

SV I 60000 -

10000 0.10
dk : = = 3137.27
h '°

n =
10 yrs economic life Iti -
I 1+0.1 -
I

511=10000
"
" + ° " " '
"

0
☐ 3--3137.27 = 24205.95
I 2 3 4 5 6 7 8 9 10
0.1
/ I 1 I 1 1 I
1 I 1 I

I 1 I 1 I 1 I 1 I 1 I
dk

1346=60000-24205.95--35794.05
Dn - 50k
Non -

Uniform Depreciation
3. Sum of the Years Digit

dk : DF ◦
Dn FC -

su k 2h -
k -11 Caltech : syntax :
BYK :
FC -

Dn n Ith Mode -3-3 quad BVK =

ky^
Dk : E weight
SOYD Dk = OF -

try

dk =
dk -
i
-

dk

examples
:

21.3 . FC : 60000 10 DF Yr K BVK dk Dk

guy , , [ ✗ =
gg
✗ =L
n =
10 yrs economic life 0 60000

'°
I
511=10000 55 55000 5000 5000

Soyp
-
_

% a. + an
a
55 50000 5000 10000
2
8
5 10 55 3 45000 5000 15000
d6= 50000=4545.45
= I -110=58 >
g- g- 2 55 4 40000 5000 20000

°
500° 55 5 35000 5000 25000
☐6 =
10-19-18 -17+6+5=40909.09
£
g- g- 5000
g- g- 6 30000 30000

4
BY 6=60000-40909-09--19090.91 55 7 25000 5000 35000
3
* alternative solution mode -3-3 55 8 20000 5000 40000

◦
9
✗ K Y BVK 1346 =
6y^ 55 15000 5000 45000

"
0 FC -60000 Die FC -1346 Oy^ 6y^
-
=
55 n to 10000 5000 50000
-
= -
_

n -10 SV 10000 016=13115-1346--59^-6 )

-

n -11=11 10000

4.
Declining Balance Method
"
K
BVK : FC I -
R
SV n
Caltech :
syntax :
BVk= Fc
FC
rate of depreciation y=AB× BVK =
ky^
"
SV
Dk =
Of -

try
12--1 -

FC
dk =
dk -
i
-

dk

examples
:

"
21.4 FC : 60000 "°
10000
.

By ,
, 60000 = 20476.73
n =
10 yrs economic life 60000

511=10000
136--60000-20476.73=39523-27

" °°°°%°
016 :
Bvg -

BV ,
=
60000
-

20476.73=4018.17
60000

* alternative solution mode -3-6

✗ K Y BVK 13116=6 §
0 FC -60000 Die FC -13116 Oy^ 6y^
-
= = -

n -10 SV 10000 016=1345-1346--59^-6 )

-

5. Double
Declining Balance Method
"
BVK : FC I -
R
2 * when K :O , BVO = FC
R=
n
rate of depreciation k=n , BVn≠sV

examples
:

6
21.5 FC : 60000
2
.

131/6--60000 1- = 15728.64
10
n =
10 yrs economic life

511=10000 176--60000-15728.64=44271.36
£
&
dy :
Bug -

BV = 60000 I - -
15728.64=3932.16
10
6. MACRS Modified Accelerated Cost Recovery System Bin =/ SX

§
dk =
Fc •
K I 2
k ,
= I kz =
I -
K ,

2 n
BVK =
FC -

DC

DK Rule 2
Idk FC
= :
= •
-2k
Kz : 1 ki Kz
- -

'
n
always 2 depreciation

at the start

:
examples

2- CE Board May 2018 .

Using the MARCS .

Compute the depreciation on the third year .

FC = 600000 I 2 2
µ, ,
(1) = 0 -20 I -0.2-0.32
kz
:
2 g-
=
0.192
SV =
60000 g

Life = J years 2 013=0.192 600000

I 0.20--0.32
K2
-

:
g-
013=115200

examples
:

Xpertz Review Center It is estimated that it will have a

22 .
purchased a
photocopying machine for 7100000 .

life of of production 500000 copies and of

useful 10 yrs ,
salvage value 75000 , of
working hours

120000 .
The center uses the machine for 15000 hrs on the first year and 20000 hrs on the 2nd year .

the machine produces 40000 copies on the first year and 25000 copies on the 2nd Determine the
year .

depreciation after 9 service

2
years using SIM on working Hours ,
-

Output Method .

total SV = 5000 Production -100k copies

Dep =D ,

FC FC -54=95000 Working Hrs =

120K hrs
= 12K hrs yr
=
100000 Dn :

n =
10

a. SLM b. service -

Output Method Yr Production w .

Hours

95000 di 95000 I 40000 15000

dk 9500 d' >" ◦°
'

= = =
= '

10 sooooo
qoooo 2 25000 20000

D2 =
di +
dz dz 95000
=
I d2 ' 4750
21000
D2 =
Idk sooooo C.
working Hours

D. 2--19000 D2 di dry =
12310 D2 95000
-
- +

15K -120k 120000

Or
D2 9800°
=
; ☐2=12350
40k -150k 500000 D2 = 27708.33

The Material
23 .
cost of producing CD is as follows : cost =
# 10 each
,
labor cost =P 2.50 each , other

Fl to If the fixed cost is how CDs

cost each expenses 7 75000 per month many must be
= -
.
,

produced and sold each month for break even if each CD is sold at 740 each ?

"
Cost :
FC : 75000 Cost = Revenue even
*

MC : 10 unit '° "

7512=4017

}
10-12.5+1.5 ✗ +

q
•

Variable ,C
-

LC = 2.50 unit : ✗ = 2884.615 units

Revenue
cost
Breakeven
1. to un , ,
≈ 2885 units
=
◦ ( ✗
SP :P 40 unit

24 equipment
.
An costs * 12000 .
It has an estimated
salvage value at the end of life of 71000 .

Determine depreciation charge the 3rd yr it has economical life d- Use

the during if an
yrs . SYD .

SU * alternate solution :
mode 3- 3
f- 12000
-

C =
Dn = FC -

✗ K BVK
SV = 1000 Dn =
12000 -
1000 Y

n = 5
yrs Dn =
11000
° 12000 dz :B V2 -
BV }

dz = ? 5 1000
dz =
2J -

35
6 2200
SOY D= 1-12-13 -14-15=18 3 1000 dz =

013=1, ( 11000

013--2200
Bonds

the borrower
owner of the bond has paid two types of payments by the

Dividend of periodic interest receive

a. ,
D series payments the owner will until the bond is retired

b. Redemption R a single payment when the bond is retired or sold which sometimes equal to the
,

par value P Of the bond Redemption or

Disposal Price

T 1 I 1 I ↑
bond rate
Dividend
= r .
P D

Redemption Par Value

VB Bond Value R

examples :

25 . A man wants to make 14% nominal interest compounded semi-annually on a bond investment .
How much should

the man be willing to # ay n ow for a 12% FIOOOO bond that will mature in 10 yrs oh Pays interest semi-annually
i :
14% c. SA worth of money

12%-10000 bond D= 0.12 10000 1200

=
Yr

r
,
bond rate par value R Fine value D: 600 per semi annual

2110)
É'i / +
0.14
a
,

, '

VB :
600
2110)
+ / ° °O°
2110)
0.14 0.14 0.1<1
, ,
, ,
2 2 2

Vis R -10k
V13 =
8940.5985

26 Find the accumulated amount after 5 71000 invested at the rate of 10% per year
yrs of compounded
.

continuously .

1000000
f- = Pert m = ✗ ° '
' °
f- = 1000 I + = 1648.72
Mclaurin series n =
Jyvs 1000000

x
r p = 1000
It = er ◦ ' ' (5)
1648.72
ng f- =
1000 e.
=

r : 10% c. C

27 Find accumulated amount 7500 for 5 yrs with interest

the of per year compounded continuously
.

at the annual rate of 8%

5

A = too
yv
Equivalence
:
ieff =
ieff 1+0-0,833 -1
y ,
go ,
0.0833
r = 8% c. C. Mi =P , 8% C C -
.
my 1 , rj . c. A .

M2
V2
er '
: I +

Mz f- =
2952.59
I

V2
%
◦ '
◦

e. , +

8. 33 / A
'

V2 = .
C. .

28 . A
company bought equipment for * 60000 which includes installation on tax charges .
the equipment
is expected to have a life of 16 yrs with a salvage value of 10% of original cost . Determine the BV

at the of 12 yrs The is worth 12% interest

end .

money .

FC :
60000
n :/ 6 "°

h = 16 yrs # I -10.12 -

l
Diz =
1263.06
SV =
10% Fc =
6000 dk 0.12

i =
12 %
☐n
Diz :
30481.595

Dn : FC -

SV -54000
-

"
I -10.12 -

I B. V12 : 60000
-

30481.895
54000 =
dk
0.12 BV / 2=29518.404

dk =
1263.06
29 Two methods has been very effective in making rivet holes How holes will the cost be
.
.

many

equal given the following pertinent data ?

:
Drill Press

wstofequipment°ᵗi"PᵗessMU1tip1epunc÷ * 30000 f- 27500 Cost = 30000-1

35

hr 30
✗ holes

holes hr
holes
Rate 30 holes hr 4h01am in : 240 hr
Multiple Punch :

labor 735 hr 730 hr

✗ holes 1. 75
-130
additionalwstp-1.75hfcost-27s.ro hr 240 holes hr
+

hole
✗ holes

Cost DP = cost MP when ✗ < 3530 , say ✗ =

3500

Multiple punch is better

✗ ×
30000 -135 = 27500-130 +
1- 75✗
30 240
when ✗ 3530 i say ✗ = 3600

✗ =
3529.41 ≈ 3530 holes Drill press is better

30 . A new equipment wor th 7500000 with a salvage value of 750000 and must be replaced at the end of

each 10 yrs . If the annual maintenance required is 710000 , find the capitalized cost if money yields 5%

R :
depreciation = FC -

SV = reconstruction repair cost

11#njÉy
for equipments for construction
0M = 10k

R r
convert to perpetuity , apply ¥
took -50k
FC 500k
=
:
450k *
Annuity with :X is perpetuity
=
n

A R Ri
perpetuity ,P= =
A =

i -1in
I -1in I 1 l
-
-

om R 10000 500000-50000
CC = Fct + = ☐◦ ◦ ◦ + + = 1415541.175
i in 0.05
"
, ,
_

, 1+0.05 -
I

31 . A
company is considering equipment A as a
replacement for an old equipment .

Pertinent data are as follows :

First cost 200000 Net Annual Income Per year

Ropy ,

32000 total Investment

Annual Operating cost at present

Annual labor lost 50000 Net Annual Income = Total Annual Income Total Annual lost

Insurance 4 taxes 3%
expenses on depreciation

4%
Payroll Taxes Total Annual Income :
135500 I - 0.0 3 = 131435

Estimated life 10% total Annual cost :

32000 I - 0.0 3 operating cost

Estimated Annual Income 135500 t 50000 I -0.03 labor cost

Min .

required ROR 15% 200000 -

O 0.15 annual
+ no tax
'°
I -10.15 -
l depreciation

-94810.412s
131435 94810.4125
Ropy ,
✗ /◦ ◦ =
17.8% 15% i.
feasible
200000 1.03