Professional Documents
Culture Documents
Engineering Economy
Engineering Economy
Engineering Economy
F=P+I
Where:
I = interest
P = principal or present worth
F = accumulated amount or future worth
Interest and Money-Time Relationships
Cash-Flow Diagrams
Example 1:
Determine the ordinary simple interest on P 20,000 for 9 months
and 10 days if the rate of interest is 12%.
Ans. P 1,866.67
Interest and Money-Time Relationships
Simple Interest
Example 2:
Determine the (a) ordinary and (b) exact simple interests on P
100,000 for the period January 15 to June 20 2012 if interest is
15%.
Ans. (a) P 6,541.67; (b) P 6434.43
Interest and Money-Time Relationships
Simple Interest
Example 3:
Calculated the exact interest on an investment of P 2,000.00 for a
period from January 30 to September 15, 2001 if the rate of interest
is 10%.
Ans. P 124.93
Interest and Money-Time Relationships
Simple Interest
Example 4:
If P 4000 is borrowed for 75 days at 16% per annum. How
much will be due at the end of 75 days?
Ans. P 4133.33
Interest and Money-Time Relationships
Simple Interest
Example 5:
How long will it take for a deposit of P 1, 500.00 to earn P 186 if
invested at the simple interest rate of 7 1/3%?
Ans. 1.6909 years
Interest and Money-Time Relationships
Simple Interest
Example 6:
If you borrow money from your friend with simple interest of
12%, find the present worth of P 20,000 at the end of 9 months.
Ans. P 18,348.60
Interest and Money-Time Relationships
Simple Interest
Assignment 1:
(CE Board) A deposit of P 110,000 was made for 31 days. The
net interest after deducting 20% withholding tax is P 890.36. Find
the rate of return annually.
Interest and Money-Time Relationships
Simple Interest
Assignment 1:
(CE Board) A deposit of P 110,000 was made for 31 days. The
net interest after deducting 20% withholding tax is P 890.36. Find
the rate of return annually.
Ans. 11.75%
Interest and Money-Time Relationships
Compound Interest
Future Worth, F:
The interest earned is F = P(1+i)n
computed every end of each
interest period (compounding Where:
period) and the interest earned
for that period is added to the i = effective interest per interest
principal. period
i=
ER = = = (1+i )n - 1
Equivalent Rates:
ER1 = ER2
Interest and Money-Time Relationships
Compound Interest
Example 1:
The amount of P 20,000 was deposited in a bank earning an
interest rate of 6.5% per annum. Determine the total amount at
the end of 7 years if the principal and interest were not
withdrawn during this period.
Ans. P 31,079.73
Interest and Money-Time Relationships
Compound Interest
Example 2:
A man expects to receive P 25,000 in 8 years. How much is that
money worth now considering interest at 8% compounded
quarterly?
Ans. P 13,265.83
Interest and Money-Time Relationships
Compound Interest
Example 3:
How many years will P 100,000 earn a compounded interest
of P 50,000 if interest is 9% compounded quarterly?
Ans. 4.56 years
Interest and Money-Time Relationships
Compound Interest
Example 4:
A sum of P 1,000.00 is invested now and left for eight years, at
which time the principal is withdrawn. The interest has accrued is
left for another eight years. If the effective annual interest rate is
5%, what will be the withdrawal amount at the end of the 16th
year?
Ans. P 705.42
Interest and Money-Time Relationships
Compound Interest
Example 5:
If money is worth 5% compounded quarterly, find the equated
time for paying a loan of P 150,000 due in one year and P 280,000 in
2 years.
Ans. 1.6455 years
Interest and Money-Time Relationships
Compound Interest
Example 6:
How long will it take money to double itself if invested at 5%
compounded annually?
Ans. 14.2 years
Interest and Money-Time Relationships
Compound Interest
Example 7:
Compute the equivalent rate of 6% compounded semi-
annually to a rate compounded quarterly.
Ans. 5.96% ≈ 6% compounded quarterly
Interest and Money-Time Relationships
Compound Interest
Example 8:
If P5, 000.00 shall accumulate for 10 years at 8% compounded
quarterly. Find the compounded interest at the end of 10 years.
Ans. P 6,040.20
Plates
Simple Interest
1. A man buys an electric fan from a merchant that charges P1500.00 at the
end of 90 days. The man wishes to pay cash. What is the cash price if money
is worth 10% simple interest?
3. P 1000.00 becomes P 1500.00 in three years. Find the simple interest rate.
2. A student plan to deposit P1, 500 in the bank now and another P3, 000
for the next 2 years. If he plans to withdraw P5, 000 3 years after his last
deposit for the purpose of buying shoes, what will be the amount of
money left in the bank after one year of his withdrawal? Effective annual
interest rate is 10%.
3. If the interest rate of a certain account is 6.5%, compute the (a) single
payment present worth factor; and (b) single payment compound amount
factor at the end of 18 years.
Interest and Money-Time Relationships
Continuous Compounding Interest
F = Pert
Example 1:
P 100,000 is deposited in a bank that earns 5% compounded
continuously. What will be the amount after 10 years?
Ans. P 164,872.13
Interest and Money-Time Relationships
Continuous Compounding Interest
Example 2:
Money is deposited in a certain account for which interest is
compounded continuously. If the balance doubles in 6 years,
what is the annual percentage rate?
Ans. 11.55%
Interest and Money-Time Relationships
Continuous Compounding Interest
Example 3:
A man wishes to have P 40,000 in a certain fund at the end of 8
years. How much should he invest in a fund that will pay 6%
compounded continuously?
Ans. P 24, 751.34
Interest and Money-Time Relationships
Continuous Compounding Interest
Example 4:
If the effective annual interest rate is 4%, compute the
equivalent nominal interest compounded continuously.
Ans. 3.922%
Interest and Money-Time Relationships
Continuous Compounding Interest
Example 5:
What is the nominal rate of interest compounded continuously
for 10 years if the compound amount factor is 1.34986?
Ans. 3%
Interest and Money-Time Relationships
Continuous Compounding Interest
Example 6:
Deposits of P35,000.00, P48,000.00 and P25,000.00 were
made in a savings account eight years, five years, and two years
ago, respectively. Determine the accumulate amount in the
account today if a withdrawal of P55,000.00 was made four years
ago. The applied interest rate is 11% compounded continuously.
Ans. P 113,330.66
Interest and Money-Time Relationships
Discount
It is the difference between the
future worth of a certain commodity
and its present worth.
2 Types of Discount:
• Trade Discount – discount offered
by the seller to induce trading.
• Cash Discount – is the reduction on
the selling price offered to a buyer
to induce him to pay promptly.
Interest and Money-Time Relationships
Discount
Discount
Rate – is the discount on
D=F–P
one unit of principal per unit of
time.
where:
D = amount of discount
F = accumulated amount or
future worth
P = principal or present worth
Interest and Money-Time Relationships
•Discount
The relationship between discount
rate and interest rate becomes:
If the commodity is discounted
in a certain period of time: and
where:
d = discount rate for the period
involved
For n years i = rate of interest for the same
period
Interest and Money-Time Relationships
Discount
Example 1:
Mr. T borrowed money from the bank. He receives from the
bank P 1,340 and promised to pay P 1,500 at the end of 9 months.
Compute: (a) Simple interest rate; and (b) Discount Rate.
Ans. (a) 15.92%; (b) 13.73%
Interest and Money-Time Relationships
Discount
Example 2:
Find the discount if P 2,000 is discounted for 6 months at 8%
simple discount.
Ans. P 80
•Inflation
In an inflationary economy, the
It is the increase in the prices buying power of money decreases as
for goods and services from one cost increases:
year to another, thus decreasing the
purchasing power of money. If interest is computed as the same
time that inflation is occurring:
where:
F = future worth of today’s present
where: amount P
FC = future cost of a commodity f = annual inflation rate
PC = present cost of a commodity n = number of years
i = rate of interest
f = annual inflation rate
n = number of years
•Inflation
where:
f = annual inflation rate
i = rate of interest
= rate of interest that can take care of the cost of money and
inflation
Interest and Money-Time Relationships
Inflation
Example 1:
A man invested P 130,000 at an interest rate of 10%
compounded annually. What will be the final amount of his
investment, in terms of today’s peso, after 5 years, if inflation
remains the same at the rate of 8% per year?
Ans. P 142,491
Interest and Money-Time Relationships
Inflation
Example 2:
What is the uninflated present worth of a P 200,000 future
value in two years if the average inflation rate is 6% and interest
rate is 10%.
Ans. P 147,107
Plates
Continuous Compounding Interest
1. If money is invested at a nominal rate of interest of 8% for a period
of 4yrs. (a) What is the effective rate if it is compounded
continuously. (b) What is the value of the compound amount factor
if it is compounded continuously.
2. What is the nominal rate of interest compounded continuously for
8 years if the present worth factor is equal to 0.6187835.
Inflation
3. If the inflation rate is 6%, cost of money is 10%, what interest rate
will take care of inflation and the cost of money.
4. In year zero, you invest P 10,000 in a 15% security for 5 years.
During that time, the average annual inflation is 6%. How much, in
terms of year zero will be in the account at maturity.
Plates
Discount
1. An engineer promised to pay P 36,000 at the end of 90 days. He
was offered a 10% discount if he pays in 30 days. Find the rate of
interest.
Review Quiz
1. What is the principal amount if the amount of interest at the end
of 2 ½ years is P45,000 for a simple interest rate of 6% per
annum?
2. Which of the following has the greatest effective rate? Show your
solution per interest rate given.
a. 12.31% compounded quarterly
b. 12.20% compounded monthly
c. 12.35% compounded annually
d. 12.32% compounded semi-annually
3. A certain nominal annual interest rate has an effective rate of
19.722% when compounded continuously. What is its effective
rate if compounded bi-monthly?
Annuities
Ordinary Annuity
Ordinary Annuity – a type of annuity were equal payments are made at
the end of each period.
Annuity Due
Annuity Due – a type of annuity were equal payments are made at the
beginning of each period.
Deferred Annuity
Deferred Annuity – a type of annuity where the first payment is made
several periods after the beginning of annuity.
Annuities
Perpetuity
Perpetuity – a type of annuity in which payments continue
indefinitely.
The functional symbol is called the “uniform series compound
amount factor”.
Example 1:
Find the annual payment to extinguish a debt of P 100,000
payable for 6 years at 12% interest annually.
Ans. P 24,322.57
Annuities
Ordinary Annuity
Example 2:
What annuity is required over 12 years to equate to a future
amount of P 200,000? i = 8%.
Ans. P 10,539.00
Annuities
Ordinary Annuity
Example 3:
Mr. Y bought a house and lot for $ 2,800,000 with a
downpayment of $ 300,000. Interest is 5% to be paid for 30 years
on a monthly basis. Compute the amount of monthly payment.
Ans. $ 13,420.54
Annuities
Ordinary Annuity
Example 4:
An annual payment is made for 10 years with an annual interest rate of
8%. Compute the following:
(a) Uniform series present worth factor;
(b) Capital recovery factor;
(c) Uniform series compound amount factor;
(d) Sinking fund factor
Ans. (a) 6.710; (b) 0.149; (c) 14.487; (d) 0.069
Annuities
Ordinary Annuity
Example 5:
A piece of machinery can be bought for P 10,000 cash, or for P
2,000 downpayment and payments of P 750 per year for 15 years.
What is the annual interest rate of the time payments?
Ans. 4.6%
Annuities
Ordinary Annuity
Example 6:
If P500.00 is invested at the end of each year for 6 years, at an
annual interest rate of 7%, what is the total peso amount available
upon the deposit of the sixth payment?
Ans. P 3,576.65
Plates
Ordinary Annuity
1. For having been loyal, trustworthy and efficient, the company has offered a
superior a yearly gratuity pay of P 20,000.00 for 10 years with the first
payment to be made one year after his retirement. The supervisor, instead,
requested that he be paid a lump sum on the date of his retirement less
interest that the company would have earned if the gratuity is to be paid on
yearly basis. If interest is 15%, what is the equivalent lump sum that he
could get?
Example 1:
A man agrees to make equal payments at the beginning of each
6 months for 10 years to discharge a debt of P 50,000 due now. If
money is worth 8% compounded semiannually, find the semiannual
payment.
Ans. P 3,537.58
Annuities
Annuity Due
Example 2:
To accumulate a fund of P 80,000 at the end of 10 years, a man
will make equal annual deposits in the fund at the beginning of
each year. How much should he deposit if the fund is invested at
5% compounded annually?
Ans. P 6,057.49
Annuities
Annuity Due
Example 3:
Determine the present worth and the accumulated amount of
an annuity consisting of 6 payments of P120, 000 each, the
payment are made at the beginning of each year. Money is worth
15% compounded annually.
Ans. P = P 522,259; F = P 1,208,016
Annuities
Annuity Due
Example 4:
If money is worth 4% compounded semiannually, find the
present amount of an annuity due paying P 5,000 semiannually for
a term of 3.5 years.
Ans. P 33,007.15
Plates
Annuity Due
1. A farmer bought a tractor costing P 25,000 payable in 10 semi-
annual payments, each installment payable at the beginning of
each period. If the rate of interest is 26% compounded semi-
annually, determine the amount of each installment.
2. A certain manufacturing plant is being sold and was submitted for
bidding. Two bids were submitted by interested buyers. The first
bid offered to pay P 200,000 each year for 5 years, each payment
being made at the beginning of each year. The second bid offered
to pay P 120,000 the first year, P 180,000 the second year, and P
270,000 each year for the next 3 years, all payments being made at
the beginning of each year. If money is worth 12% compounded
annually, which bid should the owner of the plant accept?
Perpetuity
Perpetuity – a type of annuity in which payments continue
indefinitely.
Where:
P = value or sum of money at
present
A = series of periodic equal
amount of payments
i = interest rate per interest
period
Annuities
Perpetuity
Example 1:
Find the present worth of perpetuity of P 5,200 payable
monthly if the interest is 16% compounded monthly.
Ans. P 390,000
Annuities
Perpetuity
Example 2:
Find the present value of a perpetuity of P 15,000 payable
semiannually if money is worth 8% compounded quarterly.
Ans. P 371,287
Annuities
Perpetuity
Example 3:
If money is worth 12% compounded quarterly, what is the
present value of the perpetuity of P1,000 payable monthly?
Ans. P100,993.78
Deferred Annuity
•Deferred
Annuity – a type of annuity where the first payment is
made several periods after the beginning of annuity.
Deferred Annuity
•
Where:
P = value or sum of money at present
F = value or sum of money at some future time
A = series of periodic equal amount of payments
i = interest rate per interest period
n = number of interest periods/number of equal payments
m = number of interest periods when there is no payment made
Deferred Annuity
•A. Present Worth
P1 =
P=
Deferred Annuity
•B. Future Worth
F=
F2 = F(1 + i)4
Annuities
Deferred Annuity
Example 1:
A boy is entitled to 10 yearly endowments of P30,000 each
starting at the end of the eleventh year from now. Using an interest
rate of 8% compounded annually, what is the value of these
endowment now?
Ans. P93,241.98
Annuities
Deferred Annuity
Example 2:
A man invested P100,000 every end of the year for 10 years, then
waited for another 10 years for his money to grow. If his
investments earned 8% after tax compounded annually, what
would be the sum of his investments and earnings at the end of
the 20th year in pesos.
Ans. P 3,127,540.18
Annuities
Deferred Annuity
Example 3:
A parent on the day that child is born wishes to determine
what lump sum would have to be paid into an account bearing
interest of 5% compounded annually, in order to withdraw P
20,000 each on the child’s 18th, 19th , 20th and 21th birthdays?
Ans. P 30,941.73
Annuities
Deferred Annuity
Example 4:
An asphalt road requires no upkeep until the end of 2 years
when P60, 000 will be needed for repairs. After this P90, 000 will
be needed for repairs at the end of each year for the next 5 years,
then P120, 000 at the end of each year for the next 5 years. If
money is worth 14% compounded annually, what was the
equivalent uniform annual cost for the 12-year period?
Ans. P 79,245.82
Plates
Perpetuity
1. If money is worth 8%, determine the present value of a perpetuity
of P 1,000 payable annually with the 1st payment due at the end of 5
years.
2. It costs P 50,000 at the end of each year to maintain a section of
Kennon road in Baguio City. If money is worth 10%, how much
would it pay to spend immediately to reduce the annual cost by P
10,000?
Plates
Deferred Annuity
1. A lathe for a machine shop costs P 60,000, if paid in cash. On the
installment plan, a purchaser should pay P 20,000 downpayment
and 10 quarterly installments, the first due at the end of the first
year after purchase. If money is worth 15% compounded quarterly,
determine the quarterly installment.
2. A man invests P 10,000 now for the college education of his 2 year
old son. If the fund earns 14% effective interest rate, how much will
his son get each year starting from his 18th to the 22nd birthday?
Uniform Payment Series with Continuous Compounding
•For
an annuity compounded continuously, replace interest rate with the
effective rate for compounded continuously. Recall that:
Replacing the interest rate for the formula of ordinary annuity with ER,
the formula becomes:
Uniform Payment Series with Continuous Compounding
• and
Where:
P = Present Worth
F = Future Worth
r = nominal rate of interest
n = number of years
Uniform Payment Series with Continuous Compounding
•Compound
amount factor,
CAF =
Sinking Fund Factor,
SFF =
Present Worth Factor,
PWF =
Capital recovery factor,
CRF =
Annuities
Uniform Payment Series with Continuous Compounding
Example 1:
Determine the accumulated amount to an account paying P
5,000 annually (payments are made at the beginning of each
period) for 18 years if money is worth 8% compounded
continuously. Also determine the present worth.
Ans. P 209,452.57; P 49,625.13
Annuities
Uniform Payment Series with Continuous Compounding
Example 2:
Ryan invest P5,000 at the end of each year in an account which
gives a nominal annual interest of 7.5%, compounded continuously.
Determine the total worth of his investment at the end of 15 years.
Ans. P 133,545.58
Plates
Continuous Compounding for Discrete Payments
1. A boy deposited an amount of P600 each year in a local bank
that pays a nominal interest of “i”% per annum compounded
continuously. If he receives a total amount of P3323.81 after %
years,
a. Compute the value of “i”
b. What is the effective interest rate?
Where:
BVm = book value of a property at any time m
Dm = total depreciation of a property at any time m
DL = total depreciation at the end of its useful life
FC = first cost
SV = salvage or scrap value
Depreciation
Straight Line Method Where:
Straight Line Method –a d = depreciation at any year
method which assumes that Dm = total depreciation of a
the loss in value is directly property at any time m
proportional to the age of the
property. DL = total depreciation at the
end of its useful life
L = useful life in years
FC = first cost
SV = salvage or scrap value
Depreciation
Straight Line Method
Example 1:
A machine has an initial cost of P 50,000 and a salvage value
of P 10,000 after 10 years. Using Straight Line Method of
Depreciation:
(a) What is the annual depreciation?
(b) What is the book value after 5 years?
(c) What is the total depreciation after 3 years?
Ans. (a) P 4,000; (b) P 30,000; (c) P 12,000
Depreciation
Straight Line Method
Example 2:
An Engineer bought an equipment for P 500,000. He spent an
additional amount of P 30,000 for installation and other expenses.
The salvage value is 10% of the first cost. If the book value at the
end of 5 years is P 291,500 using straight line depreciation,
compute the life of the equipment in years.
Ans. 10 years
Depreciation
Straight Line Method
Example 3:
A machine which cost P 10,000 was sold as scrap after being
used for 10 years. The scrap value is P 500. Determine the total
depreciation at the end of 5 years.
Ans. P 4750
Depreciation
Straight Line Method
Example 4:
An equipment has a salvage value of P1M at the end of 50
years. The straight line depreciation charge is P2M.
(a) What is the first cost of the machine?
(b) What is the book value after 25 years?
(c) At what year will its total depreciation be P30M?
Ans. P 101M; P 51M; 15th year
Plates
Straight Line Method
1. What is the book value of electronic test equipment after 8 years
of use if it depreciates from its original value of P 120,000.00 to its
salvage value of 13% in 12 years? Use straight-line method.
2. The initial cost of paint sand mill, including its installation is,
P800 000.00. The BIR approved life of this machine is 10 years for
depreciation. The estimated salvage value of the mill is P 50,000.00
and the cost of dismantling is estimated to be P 15,000.00. Using
straight line depreciation, what is the annual depreciation charge
and what is the book value of the machine at the end of six years?
Depreciation
Sinking Fund Method
Sinking Fund Method – a method
which assumes that the sinking
fund established in which funds
will accumulate for replacement. Where:
d = depreciation at any year
Dm = total depreciation of a property at any
The total depreciation that has time m
been taken place up to any given DL = total depreciation at the end of its
time is assumed to be equal to useful life
the accumulated amount in the L = useful life in years
sinking fund at any time. FC = first cost
SV = salvage or scrap value
Depreciation
Sinking Fund Method
Example 1:
Given FC = 100,000, SV = 10,000, L = 10 years, i = 5%.
(a) Annual Depreciation, d.
(b) Book Value after 3 years.
(c) Book Value after 8 years.
Ans. P 7,155.41; P 77,442.56; P 31,672.21
Depreciation
Sinking Fund Method
Example 2:
An equipment cost P 100,000 with a salvage value of P 5,000 at
the end of 10 years.
Using Sinking Fund Method with interest rate= 4%.
(a) Compute the annual depreciation cost.
(b) Find the book values at years 1 to 4.
Ans. (a) P 7,912.64;
(b) P 92,087.36; P 83,858.21; P 75,299.90; P 66,399.26
Depreciation
Sinking Fund Method
Example 3:
A plant erected to manufacture socks with a first cost of P
10,000,000 with an estimated salvage value of P 100,000 at the end
of 25 years. Find the appraised value to the nearest 100 by
sinking fund method at 6% interest rate at the end of
a. 10 years
b. 20 years
Ans. P 7,621,600; P 3,362,200
Plates
Sinking Fund Method
1. A factory is constructed at a 1st cost of P 8,000,000 and with an
estimated salvage value of P 200,000 at the end of 25 years. Find its
appraised value to the nearest 100 at the end of 10 years by using
sinking fund of depreciation assuming an interest of 5%.
2. A machine that costs P75 000.00 five years ago now cost P45
864.31, when 7% interest is applied using the sinking fund formula.
Determine the salvage value of the machine for an estimated useful
life of 10 years.
Depreciation
Declining Balance Method
(Matheson’s Method)
Declining Balance Method – a
method which assumes that the Where:
annual cost of depreciation is a dm = depreciation at any time m
fixed percentage (k) of the BVm = book value of a property at any
salvage value at the beginning of time m
the year. Dm = total depreciation of a property at
any time m
L = useful life in years
Note: This method is not FC = first cost
applicable if there is no salvage SV = salvage or scrap value
value.
k = rate of depreciation
Depreciation
Declining Balance Method (Matheson’s Method)
Example 1:
A machine costing P 720,000 is estimated to have a book value of P
40,545.73 when retired at the end of 10 years. Depreciation cost is
computed using a constant percentage of the declining value.
(a) What is the annual rate of depreciation?
(b) What is the book value after 3 years?
(c) What is the depreciation charge at the 4th year?
(d) What is the total depreciation after 6 years?
Ans. (a) 0.25; (b) P 303,750; (c) P 75,937.50; (d) P 591,855.47
Depreciation
Declining Balance Method (Matheson’s Method)
Example 2:
An equipment has a first cost of P500,000 and the cost of
installation is P30,000. If the salvage value is 10% of the equipment
cost at the end of its useful life of 5 yrs. Compute the book value at
the end of the 3rd year.
Ans. P 128,526.95
Depreciation
Declining Balance Method (Matheson’s Method)
Example 3:
A machine having a certain first cost has a life of 10 years and a
salvage value of 6.633% of the first cost at the end of 10 years. If it
has a book value of P58,914 at the end of the 6th year, how much is
the first cost of the machine if the constant percentage of declining
value is used in the computation for its depreciation. (Sometimes
called Matheson’s method)
Ans. P 300,000
Depreciation
Declining Balance Method (Matheson’s Method)
Example 4:
A machine costing P720,000 is estimated to have a life of 10 yrs.
If the annual rate of depreciation is 25%, determine the total
depreciation using a constant percentage of the declining balance
method.
Ans. P 679,454.27
Plates
Declining Balance Method (Matheson’s Method)
1. A radio service panel truck initially costs P 56,000. If resale value
at the end of the fifth year is estimated at P 15,000. By means of the
Declining Balance Method, determine the yearly depreciation
charge for the first and second years.
Where:
Service-Output Method – a
method which assumes that the Dm = total depreciation of a
total depreciation that has property at any time
taken place is directly FC = first cost
proportional to the quantity of SV = salvage or scrap value
output of the property up to
that time. T = total units of output up to the
end of its life
Q = total number of units of
output at any time
Depreciation
Service-Output Method
Example 1:
An asphalt and aggregate mixing plant having a capacity of 50
cu.m. every hour costs P 2,500,000. It is estimated to process
800,000 cu.m. during its life. During a certain year it processed
60,000 cu.m. If its scrap value is P 100,000, determine the total
depreciation during the year and the depreciation cost chargeable
to each batch of 50 cu.m. using the service output method.
Ans. P 180,000.00; P 150.00
Depreciation
Service-Output Method
Example 2:
An equipment cost P480,000 and has a salvage value of 10% of
its cost at the end of its life of 36,000 operating hours in a period of
5 years. In the first year of service, it was used for 12,000 hours. If at
the end of the second year it was used for 15,000 hours, find the
depreciation at the end of the second year.
Ans. P 180,000
Depreciation
Working Hours Method
Example 3:
A machine was purchased at an original cost of P400,000 with a
salvage value of P20,000. Life of this machine is expected to last for
6 years. It was used for 4000 hrs in the first year, 6000 hrs in the
second year, and 8000 hrs in the third year. The machine is expected
to last for 38,000 hrs in a period of 6 yrs. Find the depreciation at
the end of the second year.
Ans. P 60,000
Constant Unit Method
Example 4:
A coin machine costing P200,000 has a salvage value of P20,000 at the
end of its economic life of 5 years. The schedule of production per year is as
follows:
Year Number of Coins
1 100,000
2 80,000
3 60,000
4 40,000
5 20,000
Determine the annual reserve for depreciation for 3rd year only.
Ans. P 36,000
Depreciation
•Modified
Accelerated Cost Recovery System, MACRS
Assumption: A shift from SL to DDM
(FC – 0)
d1 =
d = (FC – d )
2 1
d = (FC – d - d )
3 1 1
Depreciation
Modified Accelerated Cost Recovery System, MACRS
Example 1:
The cost of equipment is P500,000 and the cost of installation
labor, taxes and miscellaneous expenses is P30,000. If the salvage
value is 10% of the cost of equipment at the end of its life of 5 years,
compute the book value at the end of third year using MACRS
Method.
Ans. P 152,640
Depreciation
Modified Accelerated Cost Recovery System, MACRS
Example 2:
A certain machine cost P400,000 and has a life of 5 years and a
salvage value of P50,000 at the end of its expected life. Compute the
depreciation on the 3rd year using Modified accelerated cost
recovery system.
Ans. P 76,800
End of Depreciation
Review Quiz (1 whole)
A machine costs P 8,000 which last for 7 years with a salvage value
at the end of its life of P 355. Determine the depreciation charge
during the 4th year and the book value at the end of 4 years by:
(a) Straight Line Method;
(b) Declining Balance Method;
(c) SOYD Method;
(d) Sinking Fund Method with interest of 12%;
(e) Double Declining Balance Method
BASIC METHODS
FOR ECONOMY STUDIES
AND COMPARING
ALTERNATIVES
Payout Period
=
EXAMPLES
Example 1:
A broadcasting corporation was formed duly approved by the
Securities and Exchange office has a working capital of P 20 M and a
fixed capital of P 80 M. Annual depreciation amounts to P 5 M and
expected annual profit is P 16 M. Determine the recovery period in
years.
Ans. P 6.25 M
EXAMPLES
Example 2:
A fixed capital investment of P 10 M is required for a proposed
manufacturing plant and an estimated working capital of P 2.5 M.
Annual depreciation is 10% of the fixed capital investment. Which
of the following gives the payout period in years?
Ans. 2.86
EXAMPLES
Example 3:
A fixed capital investment of P 10 M is required for a proposed
manufacturing plant and an estimated working capital of P 2 M.
Annual depreciation is 10% of the fixed capital investment. If the
annual profit is P 2.5 M, what is the rate of return?
Ans. 20.83%
EXAMPLES
Example 4:
Candy bars are sold in a local store for 50 cents each. The factory
has P1000 in fixed cost plus 10 cents of additional expenses for each
candy bar made. Assuming all candy bars manufactured can be sold,
find the break-even point.
Ans. 2500 candy bars
EXAMPLES
Example :5
The cost of producing a small transistor radio set consists of P
23.00 for labor and P 37.00 for materials. The fixed charges in
operating the plant are P 100,000 per month. The variable cost is P
1.00 per set. The radio set can be sold for P 75.00 each. Determine
how many sets must be produced per month to break-even.
Review Problems
SITUATION 1
In his request to defer his payment, a man was ask to pay
P34,317.60 after 60 days for an appliance whose cash price is
P32,580.00. What simple interest rate was charged to him?
SITUATION 2
An engineer promised to pay P380,000 at the end of 120 days. He
was offered 12% discount if he pays in 45 days. Find the simple
interest rate.
Review Problems
SITUATION 3
What is the principal amount if the amount of interest at the end
of 2 ½ years is P45,000 for a simple interest rate of 6% per annum?
SITUATION 4
How many years are required for an amount of money to
quadruple if it is invested at 4% interest rate?
Review Problems
SITUATION 5
A certain nominal annual interest rate has an effective rate of
19.722% when compounded continuously. What is the effective rate
if compounded bi-monthly?
SITUATION 6
How often must a nominal rate of 18% be compounded in order
to yield 18.81% annually?
Review Problems
SITUATION 7
The effective rate on 25% compounded daily is nearest to ____.
SITUATION 8
A person borrowed P500,000 at an interest rate of 18%
compounded monthly. Monthly payments of P16,710 are agreed
upon. The length of the loan in months is closest to ____.
Review Problems
SITUATION 9
What quarterly payment is required over 15 years to equate with
a future amount P150,000? Assume interest rate of 6%
compounded continuously.
SITUATION 10
A man invests P750,000 in a 6% account today. What uniform
annual withdrawal can he make for 6 years starting 15 years from
now?
Review Problems
SITUATION 11
Find the present worth of perpetuity of P5200 payable monthly if
the interest is 16% compounded monthly.
SITUATION 12
A man borrowed P200,000 from his friend and agreed to pay
after 6 years at an interest rate of 10% per annum. How much
should the man deposit monthly in a bank in order to discharge his
depth, if the bank offers 6% annual interest rate?
Review Problems
SITUATION 13
Given the following data for construction equipment:
Initial Cost = P1,200,000.00
Economic life = 12 years
Estimated Salvage Value = P320,000
Determine the book value after seven years using:
a) SOYD
b) DDBM
c) Sinking Fund Method using 6% interest