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Im Engineering Economy 2
Im Engineering Economy 2
BY
FACULTY OF ENGINEERING SCIENCES DEPARTMENT, ESD 2020
Engr. Maricar B. Carreon Engr. Babinezer D. Memoracion
Engr. Eduardo O. Dadivas Engr. Jimmy L. Ocampo
Engr. Carmelita I. Durias Engr. Ruben A. Pureza
Engr. Angela L. Israel Engr. Roland C. Viray
ENGINEERING ECONOMY
INSTRUCTIONAL MATERIAL
THE OVERVIEW
This instructional material (IM) for Engineering Economy will give the students a good
understanding on what is the time value of money like the present worth and future relation and
how rate of interest affects their respective values. Likewise, it will also show the importance of
equation of value and its use to solve various problems in this subject. Similarly, it will also show
the different types of annuity and how depreciation changes the worth of a property due to passage
of time. It will also give the importance of break-even point in decision making whether a company
can make or break in its operation.
Several sample problems are presented as guide to solve the problems in the assessments at the
end of each module which eventually will give the student a chance to master the use of formulas
as presented in this instructional material.
This instructional material (IM) for the subject Engineering Economy will discuss the topics which
are commonly given in the Engineering Board Examination such as;
1. Simple Interest
2. Compound Interest
3. Present Worth (P) and Future Worth (F) Relations
4. Discount and Rate of Discount
5. Importance of Equation of Value
6. Annuity and Amortizations
7. Arithmetic and Geometric Gradients
8. Capitalized cost
9. Bond Value Calculation
10. Depreciation and Depletion
11. Break-Even Analysis and Profit Computation
COURSE MATERIALS:
1. Engineering Economy by de Garmo
2. Engineering Economy by Blank et.al.
3. Engineering Economy by Arreola
4. Engineering Economy by Sta Maria
5. Simplified Engineering Economy by Ocampo et.al.
6. Engineering Economy by Engr. Jimmy L. Ocampo at youtube.com
1
MODULE 1
LEARNING OBJECTIVES:
After the completion of Module 1, it is expected that the student have understand the
following:
1. Simple and Compound Interest
2. Present Worth (P) and Future Worth (F) relations
3. Discount and Rate of Discount
4. Importance of Equation of Value
ENGINEERING ECONOMY
- it deals with the use and application of economic principles in the analysis of
engineering decisions.
a. Ordinary SI
Basis: 30 days / month
360 days / year
12 months / year
b. Exact SI
Basis: 365 days / year
366 days / leap year
FORMULAS:
1. I = Pin
2. F = P (1 + in)
where,
I = interest, P
P = present worth or principal amount, P
i = rate of interest, reported as percent per unit time (yr) and used as
decimal in computation, % per unit time, e.q. 5% per year
n = no. of interest periods, the duration or time usually in years.
F = future worth or accumulated amount, P
2
EXAMPLES:
1. What is the interest of 8600P after 4 years at 12% simple interest rate?
Solution:
use, I = Pin
where,
P = 8600P
i = 12% “per year” = 0.12
n = 4 years
hence,
I = 8600(0.12)(4) = 4128P
2. 5000P will become how much after one year at simple interest of 15%?
Solution:
use, F = P (1 + in)
where,
P = 5000P
i = 15% “per year” = 0.15
n = 1 year
hence,
F = 5000 { 1 + (0.15) (1) }
F = 5750P
3. Find the present worth with a total interest of 5000P after 2 years at simple interest
rate of 6.25%.
Solution:
use, I = Pin
where,
I = 5000P
i = 6.25% “per year” = 0.0625
n = 2 years
hence,
5000 = P (0.0625) (2)
P = 40,000 P
4. In how many years will the investment to double its value at 5% simple interest?
Solution:
use, F = P (1 + in)
where,
F = 2P
i = 5% “per year” = 0.05
hence,
2P = P (1 + 0.05n) n = 20 years
5. A man deposited 10,000P in a bank at 10% per annum for 3 years, 8 months and 25
days. Find the ordinary simple interest.
3
Solution:
use, I = Pin
where,
P = 10,000P
i = 10% “per year” = 0.10
1𝑦𝑟 1𝑦𝑟
n = 3 years + 8 months x + 25 days x
12 𝑚𝑜𝑠 360 𝑑𝑎𝑦𝑠
n = 3.74 years
hence,
I = 10000 (0.10) (3.74)
= 3740P
6. 10,000P was deposited in a bank at 10% per annum from Jan 15,2020 to Oct 25,2020.
Find the accumulated amount based on exact simple interest computation.
Solution:
use, F = P(1 + in)
where,
P = 10,000P
i = 10% per year = 0.1
n = ? year
2020
Count the no of days covered by the deposit, = 505 “exact”
4
hence,
2020 is a Leap year and 366 days / Leap year
n = 284 days
284
n= = 0.776 yr
366
hence,
F = 10000 { 1 + (0.1)(0.776) } = 10776P
7. A price tag of 1500P is payable in 70 days but if paid in 35 days it will have a 5%
discount. Find the rate of interest.
Solution:
use, F = P (1 + in)
4
where,
F = 1500P
P = 1500 – 0.05 (1500)
P = 1425P
1𝑦𝑟
n = 35 days ( ) = 0.0972 yr
360 𝑑𝑎𝑦𝑠
hence,
1500 = 1425 { 1 + i (0.0972) }
i = 0.5415 = 54.15% per yr
1. Nominal Rate of Interest ( j ) = the rate of interest that specifies the no of interest
periods in one year.
Ex:
j = 12% compounded quarterly (n1 = 4) --- i = 3% per quarter
FORMULA:
𝒋
i=
𝒏𝟏
where n1 = no. of interest periods in one year.
annually 1
semi-annually every 6 mos 2
quarterly every 3 mos 4
bi-monthly every 2 mos 6
monthly 12
daily 365
FORMULAS:
a. ie = ( 1 + i )n1 - 1
𝒋
b. ie = ( 1 + )n1 – 1
𝒏𝟏
Importance of ie
1. To identify which interest rate is higher
2. To convert an interest rate to other method of compounding.
NOTE: Two interest rates are equal if their effective rates are equal.
5
EXAMPLES:
1. A bank charges 1.5% per month on credit card. Find (a) the nominal rate of interest
compounded monthly (b) the effective rate of interest (c) the equivalent nominal rate of
interest which is compounded quarterly.
Solution:
𝑗
a) i=
𝑛1
where,
i = 1.5% per month
n1 = 12
j=?
hence,
𝑗
1.5 =
12
j = 18% compounded monthly
b) ie = ( 1 + i )n1 - 1
hence,
ie = ( 1 + 0.015)12 – 1
ie = 0.1956
ie = 19.56% “per year”
2. A bank advertises 9.5% account that yields 9.84% annually. Find how often is the
interest compounded?
Solution:
j = 9.5% compounded n1 = ?
ie = 9.84%
use,
𝑗
ie = ( 1 + )n1 – 1
𝑛1
0.095
0.0984 = ( 1 + )n1 – 1
𝑛1
by ES, Shift solve
n1 = 3.88 ≈ 4
hence,
9.5% is compounded quarterly
6
3. Find the nominal rate, which is converted quarterly could be used instead of 12%
compounded semi-annually.
Solution:
12% compounded semi-annually to __% compounded quarterly
ie (quarterly) = ie (semi-annually)
n1 = 4 n1 = 2
j=? j = 0.12
𝑗 0.12
( 1 + )4 – 1 = ( 1 + )2 – 1
4 2
j = 0.1183 = 11.83% compounded quarterly
1 2 3
___ǀ___ǀ___ǀ___ _ _ n
i
F
FORMULAS:
1. F = P ( 1 + i )n
2. P = F ( 1 + i )-n
where,
( 1 + i )n = Single Payment Compound Amount Factor or
Future Value Factor (FVF)
( 1 + i )-n = Single Payment Present Value Factor (PVF)
EXAMPLES:
1. In 1906, an original painting of Picasso has a market price of 600P and in 1995 its
price has increased to 29,000,000P. What is the rate of interest of the painting?
Solution:
F = P(1 + i)n
where,
F = 29,000,000
P = 600P
n = 1995 – 1906 = 89 years
hence,
29,000,000 = 600(1 + i )89
i = 0.1288
i = 12.9%
7
2. If 10,000P is invested at 12% interest compounded monthly, find the 1st yr interest.
Solution:
j = 12% compounded monthly (n1 = 12)
𝑗 12
i= =
𝑛1 12
i = 1% per month
I = F – P ------------------------ 1
where,
F = P (1 + i)n
P = 100,000P
i = 0.01
n = 1 yr = 12 mos
hence,
F = 100,000(1 + 0.01)12 = 112682.5P
subst. values to 1,
I = 112682.5 – 100,000
= 12682.50P
3. After how many years will an investment triple if invested at 10% per annum, net of
deduction, compounded quarterly?
Solution:
F = P(1 + i )n
where,
F = 3P
j = 10% compounded quarterly (n1 = 4)
10
i= = 2.5% per quarter
4
hence,
3P = P(1 + 0.025)n
n = 44.5 quarters
1𝑦𝑟
in yrs n = 44.5 quarters ( ) = 11.12 yrs
4 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑠
8
EXAMPLE:
2. What is the future worth of 10,000P when invested at the rate of 12% compounded
continuously for 5 yrs?
Solution:
use, F = Pejn = 10000 e0.12(5)
F = 18221.19P
TOPIC 5 – DISCOUNT, D
- it is the difference between the future worth (F) and the present worth (P)
FORMULAS:
1. D = F – P
Rate of Discount, d = the discount on one unit in one unit of time.
P = 1(1+i)-1
CFD
________________ n = 1
0
F = 1P
hence,
𝑫
2. d = 1 – (1 + i)-1 or =
𝑭
𝒅 𝑫
3. i = or =
𝟏−𝒅 𝑷
EXAMPLE:
1. What is the corresponding rate of interest for 18% simple discount rate?
Solution:
𝑑
use, i =
1−𝑑
where,
d = 18% = 0.18
hence,
0.18
i= = 0.2195
1 − 0.18
i = 21.95%
9
TOPIC 6 – EQUATION OF VALUE, EV
- it is the resulting equation when comparing two sets of obligations at a certain
point of comparison called focal date.
EV at a focal date,
∑↑=∑↓
where,
∑ ↑ = sum of cash inflow
∑ ↓ = sum of cash outflow
NOTE: Use EV to solve unknown in a CFD.
EXAMPLE:
1. 12,000P is borrowed now at 12% interest. The 1st payment is 4000P and is made 3
years from now. Find the balance on the debt immediately after the 1st payment.
Solution:
draw CFD
12000
12000 (1.12)3
4000P
B = ? “balance”
set up EV at 3,
∑↑=∑↓
10
2nd Solution:
12000P
i = 12% = 0.12
3
0
4000P
4000(1.12)-3
B
-3
B(1.12)
2. An investment pays 6000P at the end of the 1st year, 4000P at the end of the 2nd year
and 2000P at the end of the 3rd year. Compute the present value of the investment if a
10% rate of return is required.
Solution:
draw CFD
1 2 3 yr
0 _____ǀ_____ǀ_____ǀ_
2000P
4000P
6000P
11
ASSESSMENT 1
1. A man wishes to accumulate 3722P after is payable at once, if the bank gave him a
5 yrs, 8 months and 28 days. How much discount of 6%.
should be deposited by the man in a bank if
the ordinary simple interest is 15% per 12. Find the cash price of a generator which
annum? was bought in installment basis that requires
a down payment of 50,000P and payment of
2. A man deposited 2000P in a bank at the 30,000P after 1 yr, 40,000P after 2 yrs and a
rate of 15% per annum from March 21,1996 final payment of 76,374.34P after 4 yrs at a
to October 25,1997. Find the exact simple rate of 15% per annum.
interest.
13. A man made a loan of 100,000P at a rate
3. A bank charges 1.5% per month on a loan. of 15% per annum and promise to pay it
Find the equivalent nominal rate of interest. according to the following manner, 30,000P
at the end of 1st yr, unknown payment at the
4. A financing company charges 1.5% per end of 2nd yr and a final payment of
month on a loan. Find the equivalent effective 76,374.38P at the end of 4th yr. Find the
rate of interest. unknown payment made by the man.
5. A nominal rate of 12% compounded 14. Find the present worth of the following
monthly is equal to an effective rate of ____. payments, 5000P after 1 yr, 4000P after 2
yrs, 8000P after 4 yrs at a rate of 12% per
6. Convert 16% compounded semi-annually annum.
to equivalent nominal rate which is
compounded daily. 15. Find the amount of the following
payments at the end of 5th yr, 3000P at the
7. Find the accumulated amount of 1000P end of 1st yr, 4500P at the end of 2nd yr and
after 5 yrs when deposited in a bank at a rate 6000P at the end of 4th yr if money worth 12%
of 16% compounded monthly. per annum.
8. How long in yrs will a certain sum of money 16. How many yrs will it take for a certain sum
to triple its amount when deposited at a rate of money to triple its amount when deposited
of 12% compounded annually? at a rate of 12% compounded continuously?
9. How much should be deposited in a bank 17. A bank is advertising 9.5% accounts that
at a rate of 12% compounded continuously yield 9.84% annually. How often is the
for 5 yrs if its accumulated amount is interest compounded?
9110.60P?
18. A man borrows 2000P for 6 yrs at 8%. At
10. An effective rate of interest, which is the end of 6 yrs, he renews the loan for the
12.75%, is equivalent to what percent if amount due plus 2000P more for two yrs at
compounded continuously. 8%. What is the lump sum due?
12
purchase. How much is left in the account at the end of one year. Revenue of 150,000P
one year after the purchase? will be generated at the end of years 1 and 2.
What is the net present value of this business
if the effective annual interest rate is 10%?
20. Consider a business which involves the
investment of 100,000P now and 100,000P
ANSWERS TO ASSESSTMENT 1
13
MODULE 2
LEARNING OBJECTIVES:
After the completion of Module 2, it is expected that the student have understand the
following:
1. Annuity and Amortization
2. Types of Annuity
3. Arithmetic and Geometric Gradients
4. Bond Value and Capitalized Cost
TYPES OF ANNUITY
P i
1 2 3
0 _______________ _ _n
A A A A = P / unit time
FORMULAS:
−𝒏
𝟏−(𝟏 + 𝒊)
1. P = A { 𝒊
}
𝒏
(𝟏 + 𝒊) −𝟏
2. F = A { 𝒊
}
where,
(1 + 𝑖)𝑛 −1 𝐹
= ( 𝐴 , 𝑖%, 𝑛) – is called series of payments
𝑖
Compound Amount Factor
1− (1 + 𝑖)−𝑛 𝑃
= ( 𝐴 , 𝑖%, 𝑛) – is called series of payments
𝑖
Present Value Factor
14
EXAMPLES:
A = 3942.44P / month
2. A young engineer borrowed 10000P at 12% interest and paid 2000P per annum for
the last 4 yrs. What does he have to pay at the end of 5th yr in order to pay his loan?
Solution:
draw CFD
10000P
1 2 3 4 5
0
A A A A
A = 2000P/yr
PA
x=?
x(1.12)-5
set-up EV at zero
∑↑=∑↓
1000 = PA + x(1.12)-5 ------------------- 1
where,
−𝑛
1−(1+𝑖)
PA = A { 𝑖
}
−4
1−(1.12)
PA = 2000 { } = 6074.70
0.12
subst. to 1
1000 = 6074.70 + x(1.12)-5
x = 6917.72P
15
Solution:
draw CFD
PA
A A A = 200k P/yr
0
1 2 3
i=?
350kP
set-up EV at zero
∑↑=∑↓
PA = 350k
−𝑛
1−(1+𝑖)
A{ } = 350k
𝑖
−3
1−(1+𝑖)
200k { 𝑖
} = 350k
by ES, i = 0.3268
= 33% per yr
4. To maintain a structure with a life of 20 yrs, it is necessary to provide the following for
repairs; 20000P at the end of 5th yr, 30000P at the end of 10th yr and 40000P at the end
of 15th yr. If money is worth 10% compounded annually, determine the equivalent uniform
annual maintenance cost for the 20 yr period.
Solution:
draw CFD
1. P i = 10% per yr
5 10 15
0
20kP
30kP
40kP
2.
𝟏−(𝟏.𝟏)−𝟐𝟎
P=A{ } --------------- 1
𝟎.𝟏
0 20 yrs
A A A A=?
16
at CFD #1 set up EV at zero
P = 20k(1.1)-5 + 30k(1.1)-10 + 40k(1.1)-15
P = 33560.41P,
subst. to 1 at CFD 2,
−20
1−(1.1)
33560.41 = A { 0.1
}
A = 3942P / yr
2. Deferred Annuity – type of annuity where payments are made several periods
after the annuity has started (late amortizations).
CFD
P
m n
1 2 m
0 1 2 3 n
0'
A A A A
EXAMPLES:
P = 187400P i = 5% per yr
m=9 n=8
1 2 9 10
0 01 1 2 3 n=8
A A A A=?
use,
−𝑛
1−(1 + 𝑖)
P=A{ 𝑖
} (1 + i)-m
subst. values,
−8
1−(1.05)
187400 = A { 0.05
} (1.05) -9
A = 44980.56P/yr
17
2. A student needs 4000P per year for four years to attend college. Her father invested
5000P in a 7% account for her education when she was born. If the student withdraws
4000P at the end of her 17th, 18th, 19th and 20th years, how much money will be left in the
account at the end of her 21st yr?
Solution:
B = ? (balance)
draw CFD
A A A A
1 2 3 16 17 18 19 20
0
01 1 2 3 4 21
m = 16 n=4
5000P
i = 7% “per year”
B = 1700P
= 1700P
CFD
P
1 2 3 4
n=∞
0
A A A A
FORMULA:
𝑨
P=
𝒊
18
EXAMPLES:
1. What present sum would be needed to provide for annual end of year payments of
150,000 P each forever at an interest of 8%?
Solution:
𝐴
use, P =
𝑖
150000
P=
0.08
P = 1875000P
2. What amount of money deposited 50 yrs ago at 8% interest would now provide a
perpetual payment of 10000P per year?
Solution:
draw CFD
Pp= 𝟏𝟎𝟎𝟎𝟎
𝟎.𝟎𝟖
A A A = 10000P/yr
i = 8% “per yr”
0
50 ∞
1 2 3
P(1.08)50
P
set-up EV at 50
∑↑=∑↓
10000
= P (1.08)50
0.08
P = 2665.15P
4. Annuity Due – type of annuity where payments started at the beginning of the annuity
periods
P CFD
i
1 2 3 n
0
A A A A A
19
FORMULAS:
𝟏−(𝟏+𝒊)−(𝒏−𝟏)
1. P = A { + 𝟏}
𝒊
(𝟏+𝒊)(𝒏+𝟏) −𝟏
2. F = A { − 𝟏}
𝒊
EXAMPLE:
1. A man borrows 100000P at 10% effective annual interest. He must pay back the loan
over 30 yrs with uniform monthly payments due on the first day of each month. What
amount does the man pay each month?
Solution:
ie = 10% ----------- i = ?
use, ie = (1 + i)n1 – 1
0.10 = (1 + i)12 – 1
i = 7.974x10-3
or i = 0.7974% per month
1−(1+𝑖)−(𝑛−1)
P=A{ + 1}
𝑖
n = 30 yrs = 360 mos
subst. values,
1−(1+7.974 𝑥 10−3 )−359
100000 = A { + 1}
7.974 𝑥 10−3
A = 839.18 P/month
EXAMPLE:
1. A man deposits 5000P each year into his savings account that pays 5% nominal
interest compounded continuously. How much will be the worth of the account at the end
of 5 years?
Solution:
𝑒 𝑗𝑛 − 1
F=A{ }
𝑒𝑗 − 1
20
where,
A = 5000P/yr
n = 5 yrs
j = 5% compounded continuously = 0.05
hence,
𝑒 0.05(5) − 1
F = 5000 { }
𝑒 0.05 − 1
F = 27698.40P
CFD
1 2 3 n
0
A
A+G
A+2G
A+(n-1)G
where,
G = common difference
FORMULAS:
1. P = PA + PG
𝟏−(𝟏+𝒊)−𝒏
where, PA = A { }
𝒊
𝑮 𝟏−(𝟏+𝒊)−𝒏
PG = { − 𝒏(𝟏 + 𝒊)−𝒏 }
𝒊 𝒊
2. F = FA + FG
(𝟏+𝒊)𝒏 −𝟏
where, FA = A{ }
𝒊
𝑮 (𝟏+𝒊)𝒏 −𝟏
FG = { − 𝒏}
𝒊 𝒊
EXAMPLE:
1. A farmer buys a tractor. There will be no maintenance cost the 1st yr as the tractor is
sold with one years free maintenance. The 2nd yr the maintenance is estimated at 2000P.
In the subsequent yrs the maintenance cost will increase by 2000P per year. How much
would need to be set aside now at 5% interest to pay the maintenance cost on the tractor
for the first 6 yrs of ownership?
21
Solution:
draw the CFD
1 2 3 4 5 6
0
0k
2k
4k
6k
8k
10k
A = 0P G = 2k
P = PG = ? n=6
i = 5% = 0.05
use,
𝐺 1−(1+𝑖)−𝑛
P = PG = { − 𝑛(1 + 𝑖)−𝑛 }
𝑖 𝑖
subst. values,
2𝑘 1−(1.05)−6
P= { − 6(1.05)−6 }
0.05 0.05
P = 23936P
1 2 3 n
0
A
A(1+r)
A(1+r)2
A(1+r)n – 1
22
2. if i = r
𝑨𝒏
P=
𝟏+𝒊
EXAMPLE:
1. A young man has decided to go into business at age 40. He wishes to accumulate
200000 P at that age. On his 25th birthday he deposits a certain amount and will increase
the deposit by 10% each year until the 40th yr. If the fund can be invested at 9.6%
compounded annually, how much should his initial investment be?
Solution:
draw CFD
200kP
i= 9.6%, r = 10%
25 26 27 40
0 1 2 15
x=? (𝟏+𝒓) (𝟏.𝟏)
w= = = 1.00365
(𝟏+𝒊) (𝟏.𝟎𝟗𝟔)
A = x(1.1)
x(1.1)2
PGG x(1.1)15
set-up EV at zero
∑↑=∑↓
x + PGG = 200k(1.096)-15
𝑥(1.1) 1 − (1.00365)15
x+ { } = 200k(1.096)-15
1.096 1 − 1.00365
solve for x
x = 3074.85P
CFD
C ------ if not given, C ≃ F
n = maturity period
I I I
P = bond value = ?
23
FORMULA:
set-up EV at zero
𝟏 − (𝟏+𝒊)−𝒏
P=I{ } + C (1+i)-n
𝒊
EXAMPLE:
1. A 1000P face value bond pays dividend of 110P at the end of each yr. If the bond
matures in 20 yrs, what is the approximate bond value at an interest of 12% per yr
compounded annually?
Solution:
1 − (1+𝑖)−𝑛
use, P=I{ } + C (1+i)-n
𝑖
where, I = 110P/yr i = 12% per yr = 0.12
n = 20 yrs C ≃ F = 1000P
1 − (1.12)−20
hence, P = 110 { } + 1000(1.12)-2 = 925.31P
0.12
FORMULA:
𝑴𝑪 𝑪𝑹 𝑹𝑪
CC = FC + + +
𝒊 (𝟏+𝒊)𝒌 −𝟏 (𝟏+𝒊)𝑳 −𝟏
NOTE:
1. if Life L yrs is given and RC is not given,
use, RC ≃ FC – CR – SV
where, SV or CL = salvage value
2. k is a factor of L
EXAMPLES:
1. A machine costs 80000P and with a salvage value of 20000P at the end of useful life of
20 yrs. The annual operating costs is 18000P. Find the capitalized cost of the machine at
an interest rate of 10% per annum.
Solution:
𝑀𝐶 𝐶𝑅 𝑅𝐶
use, CC = FC + + +
𝑖 (1+𝑖)𝑘 −1 (1+𝑖)𝐿 −1
where,
FC = 80kP SV = 20kP L = 20 yrs i = 10%
MC = 18kS/yr CR = 0 RC = ?
RC = FC – SV – CR = 80 – 20 – 0 = 60kP
subst. value,
18𝑘 60𝑘
CC = 80k + + = 270475.77P
0.10 (1.1)20 −1
24
2. A dam was constructed for 200kP. The annual maintenance cost is 5kP. Find the
capitalized cost of the dam at an interest rate of 5% per annum.
Solution:
𝑀𝐶 𝐶𝑅 𝑅𝐶
use, CC = FC + + +
𝑖 (1+𝑖)𝑘 −1 (1+𝑖)𝐿 −1
where,
FC = 200kP CR = 0 i = 5%
MC = 5kP/yr RC = 0
hence,
5𝑘
CC = 200kP + = 300000P
0.05
25
ASSESSMENT 2
1. Find the accumulated amount of the 7. A wealthy man donated a certain amount
ordinary annuity paying an amortization of of money to provide scholarship grants to
1000P per month at a rate of 12% deserving students. The fund will grant
compounded monthly for 5 years. 10,000P per year for the first 10 years and
20,000P per year on the years thereafter.
2. What present sum is equivalent to a series The scholarship grants started one year after
of 1000P annual end-of-year payments, if a the money was donated. How much was
total of 20 payments are made and interest is donated by the man if the fund earns 12%
12%? interest.
3. A man made ten annual-end-of year 8. What amount of money deposited 40 years
purchases of 1000P common stock. At the ago at 12% interest would now provide a
end of 10th year he sold all the stock for perpetual payment of 10,000P per annum?
12000P. What interest rate did he obtain on
his investment? 9. A company rent a building for 50,000P per
month for a period of 10 years. Find the
4. A piece of property is purchased for accumulated amount of the rentals if the
10000P and yields a 1000P yearly profit. If rental for each month is being paid at the start
the property is sold after 5 years, what is the of each month and money is worth 12%
maximum price to break-even if the interest compounded monthly.
is 6% per annum?
10. The amount of the perspective investor
5. A condominium unit can be bought at a pay for a bond if he desires an 8% return on
down payment of 150000P and a monthly his investment and the bond will return 1000P
payment of 10000P for 10 years starting at per year for 20 years and 20,000P after 20
the end of 5th year from the date of purchase. years is
If money is worth 12% compounded monthly,
what is the cash price of the condominium 11. A machine costs 50,000P. Find the
unit? capitalized cost if the annual maintenance
and operational cost is 5000P and money
6. The owner of the quarry signs a contract to worth 15% per annum.
sell his stone on the following basis. The
purchaser is to remove the stone from the 12. A machine cost 50,000P. Find the
certain portion of the pit according to a fixed capitalized cost if the annual maintenance
schedule of volume, price and time. The cost is 5000P and cost of repair is 4000P
contract is to run 18 years as follows. Eight every 4 years and money worth 12% per
years excavating a total of 20,000 m per year annum.
at 10P per meter, the remaining ten years,
excavating a total of 50,000 m per year at 13. A building cost 10 million and the salvage
15P per meter. On the basis of equal year- value is 150,000P after 25 years. The annual
end payments during each period by the maintenance cost is 60,000P costs of repair
purchaser, what is the present worth of the pit is 200,000P every 5 years. Find the
to the owner on the basis of 15% interest? capitalized cost if money worth 15% per
annum.
26
14. A salesman earns 1000P on the 1st interest, find the amount of the account at the
month, 1500P on the 2nd month, 2000P on end of 15 years.
the 3rd month and so on. Find the
accumulated amount of his income at the 10th 18. Twenty-five thousand pesos is deposited
month if money worth 12% compounded in a savings account that pays 5% interest,
monthly. compounded semi-annually. Equal annual
withdrawals are to be made from the account,
beginning one year from now and continuing
15. A man wishes to accumulate a total of forever. Find the maximum amount of the
500,000P at the age of 30. On his 20th equal annual withdrawal.
birthday, he deposited a certain amount of
money at a rate of 12% per annum. If he 19. What amount of money deposited 50
increases his deposit by 10% each year until years ago at 8% interest would now provide
the 30th birthday, how much should his initial a perpetual payment of 10000P per year?
deposit be?
20. A man buys a motor cycle. There will be
16. If 2000P is deposited in a savings no maintenance cost the first year as the
account at the beginning of each of 15 years motor cycle is sold with one year free
and the account draws interest at 7% per maintenance. The 2nd year the maintenance
year, compounded annually. Find the value is estimated at 2000P. In subsequent years
of the account at the end of 15 years. the maintenance cost will increase by 2000P
per year. How much would need to be set
17. A man deposits 1000P every year for 10 aside now at 5% interest to pay the
years in a bank. He makes no deposit during maintenance costs of the motor cycle for the
the subsequent 5 years. If the bank pays 8% first 6 years of ownership?
ANSWERS TO ASSESSMENT 2
27
MODULE 3
LEARNING OBJECTIVES:
After the completion of Module 3, it is expected that the student have understand the
following:
1. Depreciation and Depletion
2. Common Methods to Calculate depreciation
3. Methods of Evaluating Depletion
4. Hoskold’s Formula for Valuation
EXAMPLES:
1. A machine costing 1.8M P has a life of 8 yrs. Using SLM, the total depreciation at the
end of 4th year is 800kP. Determine the salvage value of the machine.
Solution:
𝑛
use, DN = (C0 – CL)
𝐿
for n = 4,
4
D4 = (C0 – CL)
8
subst. values,
1
800k = (1.8M – CL)
2
CL = 200000P
2. A drill press is purchased for 10000P and has an estimated life of 12 yrs. The salvage
value at the end of 12 yrs is estimated to be 1300P. Using SLM, compute the book value
of the drill press at the end of 8 yrs.
28
Solution:
Cn = C0 – DN
𝑛
Dn = (C0 – CL)
𝐿
𝑛
Cn = C0 - (C0 – CL)
𝐿
for n=8 L = 12
C0 = 10kP CL = 1.3kP
subst. values
8
C8 = 10k – ( 10k – 1.3k)
12
C8 = 4200P
CFD
C0 - CL
i Dn
0 1 2 3 n L
d d d d d
using,
(1+𝑖)𝑛 −1
F=A{ }
𝑖
FORMULAS:
(𝑪𝟎 − 𝑪𝑳 ) 𝒊
1. d =
(𝟏 + 𝒊)𝑳 −𝟏
𝒊
where, = Sinking Fund Factor, SFF
(𝟏 + 𝒊)𝑳 −𝟏
(𝟏+𝒊)𝒏 −𝟏
2. Dn = d { } or
𝒊
(𝟏+𝒊)𝒏 −𝟏
Dn = (C0 – CL)
(𝟏+𝒊)𝑳 −𝟏
3. Cn = C0 – Dn
EXAMPLE:
1. An equipment cost 10kP with a salvage value of 500P at the end of 10yrs. Calculate
the annual depreciation cost by sinking fund method if interest rate is 4%.
Solution:
(𝑪𝟎 − 𝑪𝑳 ) 𝒊
use, d=
(𝟏 + 𝒊)𝑳 −𝟏
29
where,
C0 = 10kP
CL = 500P
L = 10 yrs
i = 4% = 0.04
hence,
(10𝑘 − 500)(0.04)
d=
(1.04)10 −1
d = 791.26P
FORMULAS:
𝟐(𝑳 − 𝒏 + 𝟏)
1. dn = (C0 – CL) ----------
𝑳(𝑳 + 𝟏)
Ocampo’s Formula
𝒏(𝟐𝑳 − 𝒏 + 𝟏)
2. Dn = (C0 – CL) -----------
𝑳(𝑳 + 𝟏)
3. Cn = C0 - Dn
EXAMPLES:
1. An asset is purchased for 120kP, its estimated life is 10 yrs, after which it will be sold
for 12k P. Find the depreciation for the 2nd yr using sum of the years digit method.
Solution:
2(𝐿 − 𝑛 + 1)
use, dn = (C0 – CL)
𝐿(𝐿 + 1)
for n=2 C0 = 120kP
L = 10 CL = 12kP
hence,
2(10 − 2 + 1)
d2 = (120k – 12k) = 17672.73P
10(11)
2. What is the book value of equipment purchased 3 yrs ago for 15kP if it is depreciated
using sum of the years digit method and the expected life is 5 yrs?
Solution:
Cn = C0 – Dn
𝑛(2𝐿 − 𝑛 + 1)
Dn = (C0 – CL)
𝐿(𝐿 + 1)
for n=3 C0 = 15kP
L=5 CL = 0
hence,
3{2(5) − 3 + 1}
D3 = (15k – 0) = 12kP
5(6)
C3 = C0 – D3 = 15k – 12k = 3000P
30
d. Declining Balance Method, DBM
or Matheson’s Formula or Constant Percentage Method
▪ d varies from yr to yr
▪ N/A if CL = 0
▪ by Principle of Geometric Progression
FORMULAS:
1. Constant percentage
𝑳 𝑪 𝒏 𝑪
k=1- √𝑪𝑳 = 1 - √𝑪𝒏
𝟎 𝟎
n–1
2. dn = C0k (1 – k)
𝒏
𝑪𝑳 𝑳
3. Cn = C0 (1 – k)n = C0 ( )
𝑪𝟎
4. CL = C0 (1 – k)L
5. Dn = C0 { 1 – (1 - k)n }
EXAMPLE:
1. A radio service panel truck initially costs 560kP. Its resale value at the end of 5 th yr is
estimated at 150kP. Find the depreciation charge on the second year by Declining
Balance Method.
Solution:
use, dn = C0k (1 – k)n – 1
𝐿 𝐶𝐿
k=1- √𝐶
0
for L = 5yrs
C0 = 560kP
CL = 150kP
5 150𝑘
k=1- √ = 0.2316
560𝑘
hence, for n = 2
d2 = (560k) (0.2316) (1-0.2316)1
d2 = 99658.41P
31
EXAMPLE:
1. A machine costs 100kP and the useful life is 10 yrs. Find the depreciation charge at
the 3rd yr Double Declining Balance Method.
Solution:
2𝐶0 2 𝑛−1
dn =
𝐿
(1 − 𝐿)
for n=3
L = 10
C0 = 100kP
2(100𝑘) 2 2
d3 =
10
(1 − 10)
d3 = 12800P
f. Service-Output Method
EXAMPLE:
1. An asphalt and aggregate mixing plant having a capacity of 50 m3/hr costs 2.5M P. It
is estimated to process 800k m3. If its scrap value is 100kP, determine (a) the
depreciation chargeable per batch of m3. (b) the depreciation chargeable per batch of
50m3. (c) the total depreciation during a certain yr if it processed 60k m3.
32
Solution:
𝑑 𝐶0 − 𝐶𝐿 (2.5𝑀−100𝑘)𝑃
a. = = = 3 P/m3
𝑚3 𝑇 800𝑘 𝑚3
𝑑 𝑃 50𝑚3
b. = (3 3 ) ( ) = 150 P/batch
𝑚3 𝑚 𝑏𝑎𝑡𝑐ℎ
𝐶0 − 𝐶𝐿 2.5𝑀−100𝑘
c. Dn = ( 𝑇
)Tn = ( 800𝑘
) (60k) = 180000P
FORMULA:
SC = Cn ---- Resale Value or Trade-In Value
where,
Cn = book value after n yrs when replacement occur.
EXAMPLE:
1. A machine was purchased 5 yrs ago at a cost of 120k P. Its estimated salvage value
at the end of 10 yrs is 10k P. If it is sold now for 30k P, what is the sunk cost if the
depreciation method used is straight line method?
Solution:
SC = Cn --- Resale Value
for n=5
Resale Value = 30k P
SC = c5 – 30k -------- 1
by SLM,
Cn = C0 – Dn
𝑛
Dn = (C0 – CL)
𝐿
for n=5 C0 = 120k P
L = 10 CL = 10k P
5
D5 = (120k – 10k)
10
D5 = 55k P
C5 = C0 – D5
C5 = 120k – 55k = 65k P
subst. values to 1
SC = 65k – 30k
SC = 35000 P
FORMULA:
𝟏 − (𝟏+𝒊)−𝑳
DTS = d { } (TR)
𝒊
33
where,
d = constant depreciation charge per yr which
can be evaluate by SLM or SFM.
TR = tax rate
EXAMPLE:
TOPIC 4 – DEPLETION
- the decrease in worth of a natural resources (e.q. mine)
due to gradual extraction of each content.
METHODS OF CALCULATION
1. Per Unit or Factor Method
FORMULA:
𝑪𝟎 − 𝑪𝑳
dn = ( ) Sn
𝑻
where,
C0 = orig. cost
CL = salvage value
T = total no. of units available
Sn = no. of units extracted and sold at n period
EXAMPLE:
1. A mining company invested 25M P to develop an oil well which us estimated to contain
1M barrels of oil. During a certain yr, 200k barrels were produced from this well. Compute
the depletion charge during the year.
Solution:
𝐶0 − 𝐶𝐿
dn = ( ) Sn
𝑇
34
where,
C0 = 25M P
CL = 0
T = 1M barrels
Sn = 200k barrels
hence,
25𝑀 −0
dn = ( ) (200k)
1𝑀
dn = 5MP
EXAMPLE:
1. The total gross income of an oil company is 30MP. The taxable income after deducting
all expenses excluding depletion is 11.8MP. Determine the allowable depletion allowance
for the year. The percentage allowance for oil is 22% of the gross income.
Solution:
a. Based on Gross Income
dn = 0.22 (30M) = 6.6MP
b. Based on net Income
dn = 0.5 (11.8M) = 5.9MP
* by comparison of results of a and b, dn = 5.9MP
TOPIC 5 – VALUATION
- the process of estimating the cost of a natural resources which is done by authorized
individual called appraiser.
FORMULA:
(𝑷−𝑪𝑳 )𝒊
A = Pr + ------------ Hoskold’s Formula
(𝟏+𝒊)𝑳 −𝟏
where,
A = net annual income
P = estimated cost of mine
r = rate of return
CL = salvage value
i = interest on the sinking fund
L = life, yrs
35
EXAMPLE:
1. A timber tract will yield an annual income of 1MP for 10 yrs after which the timber tract
will be exhausted. The land can be sold for 120kP. If a prospected buyer wishes to earn
12% on his investment and can deposit money in a sinking fund at 6%, determine the
maximum price he could pay for the tract.
Solution:
(𝑃−𝐶𝐿 )𝑖
A = Pr +
(1+𝑖)𝐿 −1
where,
A = 1MP
L = 10 yrs
r = 12%
i = 6%
CL = 120kP
(𝑃−120𝑘)(0.06)
1M = P(0.12) +
(1.06)10 −1
solve for P, P = 5151961.37P
36
ASSESSMENT 3
1. A brand new car costs 500,000P and the 9. A tractor costs 800,000P and whose
salvage value is 10% of the original cost after salvage value is 40,000P after 10 years. Find
20 years. Find the book value of this car after the total depreciation after 6 years by
5 years by straight line method. declining balance method.
2. A generator set costs 500,000P and the 10. A generator costs 500,000P and whose
salvage value is 10% of the original cost after salvage value is 10,000P after 20 years. Find
20 years, find the depreciation charge per the book value after 12 years by sum of the
year if money worth 12%. year’s digit method.
3. A car costs 500,000P and the salvage 11. A personal computer costs 60,000P and
value is 10% of the original cost after 20 the salvage value is 5000P after 10 years.
years. Find the depreciation charge at the 8th Find the book value after 6 years if money
year by sum of the year’s digit method worth’s 12% per annum.
(SYDM).
12. A car costs 800,000P 4 years ago and the
4. A lathe machine cost 650,000P and the salvage value is 50,000P 6 years from now.
salvage value is 65,000P after 20 years, find If it is to be replaced by a new one and the
the depreciation charge at the 5th year by trade in value is 450,000P find the sunk cost
Matheson’s Formula, (Declining Balance if money worth’s 12%.
Method, DBM).
13. To develop a timberland containing
5. A pump costs 50,000P and the useful life 2,000,000 trees required an initial investment
is 10 years. Find the book value after 8 years of 30,000,000P. In a certain year, 400,000
by double declining balance method trees were cut off. Find the depletion charge
(DDBM). during the year.
6. A concrete hollow blocks (CHB) machine 14. A mining company has a gross income of
cost 40,000P and the salvage value is 4000P 32,000,000P per month from the production
after 6 years. If it can make 108,000 pieces of iron core. All expenses, excluding
of hollow blocks within the useful life, find the depletion expenses, amount of 26,000,000P
depreciation charge at the year 1999 if it per month. If the fixed depletion rate of iron
made 15,000 pieces only. core is 15%, what is the monthly depletion
allowance?
7. A car costs 500,000P and the salvage
value is 50,000P after 20 years. Find the 15. Ten hectares of timberland will yield an
book value after 5 years if money worth 12% annual profit of 1,000,000P for 10 years, after
per annum. which the timber will be exhausted. The land
can be sold for 12,000P per hectare. If the
8. A motor costs 60,000P and the salvage prospective buyer wishes to earn 15% on his
value is 6000P after 10 years. If it was used investment and can deposit money in a
for 28,800 hours within the useful life, find its sinking fund at 8%, determine the maximum
depreciation at the year 1998 if its total price he could pay for the timberland.
operating hours were 2520.
37
16. A machine cost 100,000P and with a constant percentage in the declining book
useful life of 25 years. Find the book value value.
after 3 years by using double declining
balance method. 19. A machine cost 80,000P and the salvage
value is 20,000P after 20 years. Find the
17. A machine cost 80,000P and the salvage sinking fund factor if interest rate is 8% per
value is 20,000P after 20 years. Find the year.
book value after 2 years by using sum of the
years digit method. 20. A machine cost 80,000P and the salvage
value is 20,000P after 20 years. Find the
18. A machine cost 80,000P and the salvage depreciation charge by sinking fund method
value is 20,000P after 20 years. Find the if interest rate is 8% per year.
ANSWERS TO ASSESSMENT 3
38
MODULE 4
LEARNING OBJECTIVES:
After the completion of Module 4, it is expected that the student have understand the
following:
1. Evaluation of Break Even Point
2. Calculation of Profit
EXAMPLES:
1. A steel drum manufacturer incurs a yearly fixed operating cost of 200kP. Each drum
manufactured costs 160P to produce and sells for 200P. What is the manufacturer’s break-
even sales volume in drums per year?
Solution:
let x = no of drums needed per year at BEP
use, S(x) = C + V(x)
200x = 200k + 160x
Solve for x,
x = 5000
2. A company manufactures bookcases that it sells for 65P each. It costs 35kP per yr to
operate its plant. This sum includes rent, depreciation charges on equipment and salary
payments. If the additional cost to produce one bookcase is 50P, how many cases must
be sold each year for the company to avoid taking a loss?
Solution:
let x = no of bookcases needed per year at BEP
S(x) = C + V(x)
65x = 35k + 50x
x = 2334
3. A piece of property is purchased for 10kP and yields 1kP yearly profit. The property is
sold after 5 years. At 6% interest, what is the minimum price to break-even?
39
Solution:
draw CFD
S(1.06)-5
S = ? “selling price”
PA
A A A A A = 1KP/yr
0 1 2 3 4 5 (yrs)
i = 6% “per year”
10kP
set-up EV at zero
∑↑=∑↓
PA + S(1.06)-5 = 10k
1 − (1.06)−5
1k { } + S(1.06)-5 = 10k
0.06
S = 7745.16P
4. Project A requires 100kP now. Project B requires an 80kP investment now and an
additional 40kP investment later. At 8% interest, what is the BEP on the timing of the
additional 40k later?
Solution:
at BEP, the present worth of projects A and B must be equivalent.
PB
n=?
0
40kP
80kP
where,
PA = 100kP
EV at zero PB = 80k + 40k (1.08)-n
hence,
100k = 80k + 40k (1.08)-n
n = 9 yrs
2. Unhealthy Point - it is a point in economic study where the sales volume is just enough
to pay the dividends.
FORMULA:
S(x) = C + V(x) + D
40
where,
D = payment of dividends usually P/yr
3. Profit Calculation
FORMULA:
Sales = Fixed cost + Variable cost + Dividend + Profit
Capital
or Profit = Sales – Capital
EXAMPLE:
1. A company assembling small radio produced and sold 100 units per month. It costs
800P to produce a unit which is sold at 1200P. If the company has a fixed cost of 20kP per
month and pays 10% on its 10k shares with a par value of 200P/share dividends, calculate
the profit or loss of the company.
Solution:
Profit = Sales – Expenses or Capital ---------- 1
in 1month,
1200𝑃
Sales = ( ) (100 units) = 120kP
𝑢𝑛𝑖𝑡
Expenses = Fixed cost + Production cost + Dividend
Fixed cost = 20kP
800𝑃
Production cost = ( 𝑢𝑛𝑖𝑡 ) (100 units) = 80kP
200𝑃 1𝑦𝑟
Dividend = { (0.10)(10k shares) } ( ) (12 𝑚𝑜𝑠 )
𝑠ℎ𝑎𝑟𝑒 𝑦𝑟
= 16666.67 P/yr
hence,
Expenses = 116666.67P
subst. values to 1,
Profit = 3333.33P
2. An investor is considering a stock portfolio that costs 55P. If he invests in the portfolio,
there is a 0.5 probability that he will receive a total revenue of 20P. If that event does not
occur, he will receive a total revenue of 100P, what will be the investors expected profit if
he decides to invest?
Solution:
Profit = Income or Sales – Capital or Expenses
where,
Income = 0.5(20) + 0.5(100) = 60P
Capital = 55P
hence,
Profit = 60 – 55 = 5P
41
ASSESSMENT 4
1. A concrete hollow blocks (CHB)plant has 6. A certain firm has a capacity to produce
an overhead cost of 150,000P per month. 650,000P units of a certain product per year.
The material cost is 3.75 per unit and labor At present, it is operating at 62% capacity.
cost 2.25 per unit. How many units should be The firm’s annual income is 4,160,000P.
made per month to break-even if the selling Annual fixed cost is 1,920,000P and the
price is 7.50 per unit. variable costs are equal to 3.56 per unit.
What is the annual profit or loss?
2. A high voltage gloves manufacturer
produces a pair of gloves at labor cost of 15 7. A shoe manufacturer produces a pair of
and a material cost of 40 a pair. The fixed shoes at a labor cost of 90P a pair and
charges on the business are 90,000P a materials cost of 80P a pair. The fixed
month and the variable cost are 15 a pair. If charges of the business are 90,000P a month
the gloves sell for 160 a pair, how many pairs and the variable cost is 40P a pair. If the
must be produced per month by the shoes sell for 300P a pair, how many pairs
manufacturer to break-even? must be produced each month by the
manufacturer to break-even?
3. A steel drum manufacturer incurs a yearly
fixed operating cost of 2,000,000P. Each 8. A plant has capacity of producing 8000
drum manufacturer cost 160P to produce and units per month of a product, which it sells for
sells for 200P. What is the manufacturers 1.50P per unit regardless of output. The
break-even sales volume in drums per year? monthly fixed costs are 2800P and a variable
cost of 4800P at 75% capacity. What is the
4. The direct labor cost and direct material fixed cost per unit at the break-even point?
cost of certain product are 300P and 400P
per unit, respectively. Fixed charges are 9. A local company assembling stereo radio
100,000P per month and other variable costs cassettes produces 300 units per month at a
are 100P per unit. If the product is sold for cost of 800P per unit. Each cassette sells for
1200P per unit, how many units must be 1200P. If the firm makes a profit of 10% on
produced and sold to break-even? its 10,000P shares with a par value of 200P
per share, and the total fixed cost per month
5. A local factory assembling calculators is 20,000P what is the break-even point?
produces 400 units per month and sells them
at 1800P each. Dividends are 8% on the 10. Company A and B manufactures the
8000 shares with par value of 250P each. same article. Company A, relying mostly on
The fixed operating cost per month is machines has fixed expenses of 12000P per
25000P. Other costs are 1000P per unit. month and direct cost of 8 per unit. Company
Determine the number of units needed to be B, using more hand work, has fixed expenses
produced per month at unhealthy point. of 4000P and direct cost of 20 per unit. At
what monthly production rate will the total
cost per unit is the same for the two
companies?
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ANSWERS TO ASSESSMENT 4
1. 100000 6. 805320P
2. 1000 7. 1000
3. 50000P 8. 0.70
4. 250 9. 92
5. 48 10. 667
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