SOLVED PROBLEMS IN ENGINEERING ECONONOMY Charlie A. Marquez, PTE AUGUST 2014SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 ENGINEERING ECONOMY - the analysis and evaluation of the factors that will affect the economic success of engineering projects to the end that a recommendation can be made which will ensure the best use of capital. FORMULAS IN ENGINEERING ECONOMY SIMPLE INTEREST — the interest on a loan that is based only on the principal. Usually ‘used for short-term loans where the period is measured in days rather than years. T=Pni o F=P+I=P+Pni F=Pa+m) a) where: nterest P ~ principal or present worth n= number of interest periods rate of interest per interest period = accumulated amount or future worth, ‘TYPES OF SIMPLE INTEREST ORDINARY SIMPLE INTEREST - interest is computed on the basis of 12 months of 30 days each which is equivalent to 360 days a year. In this case, the value of a that is used in the preceding formulas may be computed as: a "= 360 where is the number of days the principal was invested ENACT SIMPLE INTEREST — interest is computed based on the exact mmber of days in a given year which is 365 days for a normal year and 366 days during a leap year (which occurs every 4 years, or if it is a century year, it must be divided by 400), Note that during leap years, February has 29 days and 28 days only during a normal year. In this case, the value of m that is used in the preceding formulas may be computed as: a "= 365 fora normal year a n 366 fora leap yearSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 DISCOUNT — discount in simple terms is the interest deducted in advance. It is the difference between the amount a borrower receives in cash (present worth) and the amount he ays in the frture (future worth), Discount = Future Worth — Present Worth D=F-P ) Rate of discount is the discount on one unit of principal for one unit of time. airaty =) E d 6) Where: d= rate of discount ~ rate of interest for the same period COMPOUND INTEREST — interest which is based on the principal plus the previous accumnlated interest. It may also be defined as ‘interest on top of interest.” This is usually used in commercial practice especially for longer periods, (CASH FLOW DIAGRAMS — a graphical representation of cash flows drawa on a time scale. ‘eceipts (positive cash flow or cash inflow) | = disbursements (negative cash flow or cash outflow) F=P(+i)" © PSFGHy" =P Where: F = future amount of money P = present worth or principal rate of interest per interest period ‘n= number of interest periods (144)? = single payment compound amount factor asiy* ingle payment present worth factorSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 RATE OF INTEREST — the cost of borrowing money or the amount earned by a unit principal per unit time, ‘TYPES OF RATES OF INTEREST NOMINAL RATE OF INTEREST — is the basic annual rate of interest. It specifies the rate of interest and the number of interest periods in one year. E: (8) Where: rate of interest per interest period nominal rate of interest ‘m= number of compounding periods per year EFFECTIVE RATE OF INTEREST — is the actual or the exact rate of interest earned on the principal during a one-year period. ERI=(14)"—1 (9) ‘Where: ERi = effective rate of interest, CONTINUOUS COMPOUNDING — based on the assumption that cash payments occur once ‘per year but compounding is continuous throughout the year. EQUATION OF VALUE ~ this is obtained by setting the sum of the values on a certain comparison or focal date of one set of obligations to the sum of the values on the same date of another set of obligations.SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 ANNUITIES ~ a series of equal payments occurring at equal interval of time. TYPES OF ANNUITIES ORDINARY ANNUITY ~ this type of annuity is one where the payments are made at the end of each period beginning from the first period. AAAA Finding F when A is given: F=atasy-1/ ay Finding P when A is given: P= AqLatiy" }/i} 02) Where: F = future worth of an annuity A =a series of periodic, equal amounts of money P = present worth of an annuity interest rate per interest period n= number of interest periods DEFERED ANNUITY — this type of anmity is one where the first payment is made several periods after the beginning of the annuity. Po Fr AAAAA Finding F when A is given:SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 FHAqay 1/9049" 4) Finding P when A is given: P= Agasiy" 1/G+)" (14) PERPETUITY ~ is an annuity wherein the payments continue indefinitely. > nde P= Ag{L-(1+iy™ | /i} = Ag(L-(1+iy ? | / i} bet us CAPITALIZED COST ~ this is one of the most important applications of perpetuity. The capitalized cost of any property is the sum of its first cost and the present worth of all costs for replacement, operation, and maintenance for a long period or forever. Case 1: No Replacement, maintenance and/or operation every period. CC=FCHP 16) Where: CC = capitalized cost FC = first cost P ~ present worth of perpetual operation and maintenance Case 2: Replacement only, no operation and maintenance ec=FC#X 017) X=s/@Hy1 (1s) Where: X = present worth of perpetual replacement $= amount needed to replace the property every k periodSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 k= periodic replacement GRADIENT ~ A series of disbursements or receipts that increases or decreases in each succeeding period by a constant amount | t P Pa Po P=Pa+Po P=A(PIA, i%,n) + G(P/G, i%, n) as) Po= GPG, in) = 61°C (LAC Where: Pa ~ present worth of an annuity Pg = present worth of gradient CAPITAL FINANCING WITH BONDS. BONDS — a financial security note issued by businesses or corporations and by the government as a means of borrowing long-term fund. It may also be defined as a long-term note issued by the lender to the borrower stipulating the terms of repayment and other conditions BOND VALUE — the value of a bond is the present worth of all fature amounts that are expected to be received through ownership of the bond. METHODS OF BOND RETIREMENT 1. The corporation may issue another set of bonds equal to the amount of bonds due for redemption. 2. The corporation may set up a sinking fund into which periodic deposits of equal amounts are made. The accumulated amount in the sinking fund is equal to the amount needed to retire the bonds at the time they are due. ne F r o 12 net yh ; Fro Fr Frog,SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 AA AA P ASFIPIA, %,2) (20) PaFr[Lasyy+cas* 2D Where: A= periodic deposit into the sinking fund F = amount needed to retire the bonds, face / par value C= redemption price (often equal to F) r ond rate i= investment rate or yield per period P = purchase price of the bond / value of the bond u periods before redemption. DEPRECIATION ~ the decrease in the value of a physical property with the passage of time. TYPES OF DEPRECIATION 1. Physical depreciation — this is due to the reduction of the physical ability ofan equipment or asset to produce results. 2. Functional depreciation — this is due to the lessening in the demand for the function which the property was designed to render. METHODS OF DEPRECIATION 1. Straight Line Method — this method assumes that the loss in the value is directly proportional to the age of the equipment or asset. Co-Cn (22) D@ECo-lm/ ay G=G=D, (24) Where: d~‘anmual depreciation charge Co = original cost of the property C= scrap value / salvage valueSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 L = useful life of the property D,= accumulated depreciation up to n years, C_~ book valne at the end of n years. 2. Sinking Fund Method — in this method, it is assumed that a sinking fund is established in which funds will accumulate for replacement purposes. d= Co-Go@/CH 25) De=d(1+i-1 (26) C= Co-Da 7) Note: all parameter definitions are the same with SLM. 3. Declining Balance Method — in this method, it is assumed that the anmual cost of depreciation is a fixed percentage of the book value at the beginning of the year. This method is also called the constant percentage method or the Matheson Formula. (0) a=ccee ab Where: k = decline rate, whose value must always be < 1 and the salvage value must not be zero. 4. Double Declining Balance Method — this method is very similar to DBM but the decline rate, k, is replaced by 2/T. Ca= CofA) G3) 5. SUM-OF-THE-YEARS’ DIGIT METHOD (SYD) 4d, = (Co ~ Cr)(reverse digitl® digits) (34) n(n +1) alge G5)SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 6. SERVICE-OUTPUT METHOD ~ this method assumes that the total depreciation that has taken place is directly proportional to the quantity of output of the property up to that time d= (CoCL/DQ) — 36) where: T = total units of output up to the end of life a DEPLETION ~ depletion cost is the reduction of the value of a certain natural resource such as mines, oil, quarries, etc. due to the gradual extraction of its contents. ‘otal number of units of output during the nth year METHODS OF COMPUTING DEPLETION CHARGE 1. UNIT OR FACTOR METHOD - this method is dependent on the initial cost of the property and the number of units in the property. initial cost of proper G7) 2. PERCENTAGE OR DEPLETION ALLOWANCE METHOD Depletion charge = Fixed percentage of Gross Income (38) Depletion charge ~ SOY ofthe Net Taxable Lacome (39) INVESTMENT OF CAPITAL METHODS OF MAKING ECONOMY STUDIES 1. RATE OF RETURN (ROR) METHOD ~ this method is a measure of the effectiveness of an investment of capital, When this method is used, it is necessary to decide whether the computed rate of return is sufficient to justify the investment. If the computer ROR is = RORjgq¥ the proposed investment is justified. Conditions: 1. A single investment of capital is made at the beginning of the first year. 2. The capital invested is the total amount of capital investment required to finance the project. 3. There is identical revenue and cost date for each year.SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 Net Annual Profit Capital Invested (40) 2. ANNUAL WORTH METHOD — in this method, interest on the original investment is included as a cost. If the excess if annual cash inflows over annual cash outflows is = 0, the proposed investment is justified. Same conditions apply as the ROR method. 3. PRESENT WORTH (PW) METHOD ~ this method is based on the concept of present worth. If the present worth of net cash flows is = than 0, the proposed project is economically justified. 4. PAYBACK PERIOD METHOD ~ this is the length of time required to recover the first cost of an investment from the net cash flow. investment — salvage value net annual cash flow (41) COMPARING ALTERNATIVES - METHODS OF COMPARING ALTERNATIVES 1. ROR ON ADDITIONAL INVESTMENT ~ in this method, if the ROR on additional investment is > than the ROR required, then the alternative requiring an additional investment is more economical and therefore, should be chosen. annual net savings (dditional investment (42) 2. ANNUAL COST (AC) METHOD — to use this method, the annual cost of the alternatives including interest on capital is determined. The alternative with the least annual cost is chosen. This applies only to alternatives which has a uniform cost data for each year and a single investment of capital at the beginning of the project. 3. EQUIVALENT UNIFORM ANNUAL COST (EUAC) METHOD - in this method, all cash flows must be converted to an equivalent uniform anmual cost. The alternative with the least EUAC should be selected. This method is flexible and can be used for any type of alternative selection problems. 4. PRESENT WORTH COST (PWC) METHOD -— in this method, determine the present worth of the net cash outflows for each alternative for the same period of time, The alternative with the least PW should be selected.SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 5. PAYBACK PERIOD METHOD ~ in this method, the payback period for each alternative is computed. The alternative with the shortest payback period is adopted. BREAK-EVEN ANALYSIS ~ this is used in situations where the cost of two or more alternatives may be affected by a common variable, BREAK-EVEN POINT ~ is the value of the variable for which the costs of the alternatives will be equal. Cr=fiand =f) (43) To Break-Even, Income ~ fixed costs + variables cost (x) (44) Income = fixed costs + variables cost (x) + profitloss (45) Income = fixed costs + variables cost (x) + dividends ~ profit/loss. (46) ertain specified total cost applicable to alternative 1 ertain specified total cost applicable to alternative 2 common independent variable affecting alternatives 1 & 2SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 SIMPLE INTEREST AND DISCOUNT 1. Determine the ordinary simple interest on P10,000 for 9 months and 15 days if the rate of interest is 6%. a. PATS c. P467.21 b. P468 d.NOTA SOLUTION: 1=Pni Solving for the number of days: n= (9 X 30) + 15 = 285 days 285 1 = (10,000)(360)(0.06) = P475 2. Determine the exact simple interest on P20,000 for the period from January 15 to November 15, 2012 if the rate of simple interest is 5%. a. P847.22 .P833.33 b. P835.16 d.NOTA SOLUTION: 1=Phi Solving for the number of days: January 15-31 = 16 days February = 29 (2012 is a leap year) March =31 April =30 May =31 June =30 July =34 August =31 September =30SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 October =31 November 1-15 = 15 days Total n = 305 days 1=Phi 305 1 = (20,000)(366)(0.05) = P833.33 3. You loan from a bank the amount of P100,000 with a rate of simple interest of 20% but the interest was deducted from the loan at the time the money was borrowed. If at the end of 1 year, you have to pay the full amount of P100,000, what is the actual rate of interest? a. P80,000 ¢.i= 20% b.i=25% d. NOTA SOLUTION: Interest = (0.20)(100,000) = 20,000 Amt, received = 100,000 - 20,000 = 80,000 1=Pni 20,000 = 80,000(1)i i= 25% ANOTHER SOLUTION: F=P(1+ni) 100,000 = 80,000[1+(1)i] 1.25- 1= 0.25 = 25% 4. Mr. Dee Jay borrowed money from the bank and he received the amount of P18,420 and promised to repay P20,000 at the end of 10 months. Determine the rate of simple interest. = 10.29% 8.58%SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 b. P= 1,580 d. NOTA SOLUTION: F=P(1+ni) 10 20,000 = 18,420[1+(12 i] 1= 10.29% 5. If P50,000 is borrowed for 90 days at 8% per annum simple interest. How much will be due at the end of 90 days? a. P50,986 c. P51,000 b.i=8% d. NOTA SOLUTION: F = P(14ni) 90 F = 50,000[1+360(0.08)] F =P51,000 6. On his recent birthday on April 18, 2012, Cai was given by his mother a certain amount of money as birthday present. He decided to invest the said amount on a 12% exact simple interest. If the investment will mature on Christmas day at an amount of P15,000, how much did Cai receive from his mother on his birthday? a. P13,859.37 c. P15,000 b. P13,841.47 d. NOTA SOLUTION Solving for the number of days, n April 18-30 = 12 days May =31 June = 30SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 July =31 August == 31 September = 30 October = 31 November = 30 December 1-25= 25 Total = 251 days F =P(14ni) 251 18,000 = P[1+366(0.12)] P = P13,859.37 7. Carle borrowed money from Cy with simple interest of 12%. Find the present worth of P50,000 which is due at the end of 6 months. a. P74,691.18 c. PA7,169.81 b. P50,000 d. NOTA SOLUTION: F = P(14ni) 50,000 = P[1+(6/12)(0.12)] P= 47,169.81 8. A loan of P5,000 is made for a period of 15 months at a simple interest rate of 15%. What future amount is due at the end of the loan period? a. P5,750.00 . P5,600.00 b. P5,937.50 d. NOTA SOLUTION: F = P(14ni)SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 F = 5,000[1+(15/12)(0.15)] F = P5,937.50 9. Ciel borrowed P20,000 from the bank and promised to pay the amount after one year. He received the amount of P19,200 after the bank collected an advance interest of P800. What was the rate of discount and the rate of interest that the bank collected in advance? c. P19,200; P20,000 d. NOTA SOLUTION: Solving for the rate of discount, d = Interest (1) / Future Amount d= 800 / 20,000 = 4% Solving for the rate of interest, =a 0.04 i=1-004 i= 4.17% 10. You pawned your PSP for P5,000 and agreed to pay the amount at the end of 9 months. The pawnshop gave you P4,000 cash after deducting the interest in advance. What was the rate of discount? a. i= 20% c.d = 20% b.d=25% d. NOTA SOLUTION: d = Interest (1) / Future Amount 5,000 — 4,000 5,000SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 d= 20% 11.What was the rate of interest for the problem in # 10? c. d=25% d. NOTA COMPOUND INTEREST / EQUATION OF VALUE 12. If the sum of P15,000 is deposited in an account earning interest at the rate of 8% compounded quarterly, what will it become at the end of 5 years? a. P22,039.92 c. P22,289.21 b. P32,866.85, d. NOTA SOLUTION: F=P(1+)" F = 15,000[1+(0.08/4)]*> F = P22,289.21 13.An employee has a promissory note, due 5 years hence, whose maturity value is P70,000. If the rate of interest is 12% compounded semi-annually, what is the value of this note now? a. 39,720.82 c. P96,675.79 b. 39,087.63 d. NOTA SOLUTION:SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 P= F(14i)" P = 70,000[1+(0.12/2)}7° P = P39,087.63, 14. IEdeas is planning to expand its operations and plans to purchase a parcel of land on which to construct a building for their review center, which they will need 5 years hence. The current costs are: land: P2M; building: P3.5M. Since these are not needed immediately, the company plans to defer the purchase of the land and the construction of the building until they are needed. If the value of the land and the cost of the building are expected to appreciate at the rates of 10% and 8% per annum, respectively. What will be the total cost of the investment after 5 years? a. P8,580,275.74 c. P8,363,668.27 b. P7,244,668.37 d. NOTA SOLUTION: Solving for the future worth of the land, F=P(i+i)" F = 2,000,000(1.10)° = 3,221,020 Solving for the future worth of the building, F=P(i+)" F = 3,500,000(1.08)° = 5,142,648.27 Total cost of investment after 5 years = 3,221,020 + 5,142,648.27 = Total cost of investment after 5 years = P8,363,668.27 15.A debt of P150,000 was paid for as follows: 40,000 at the end of 3months, P50,000 at the end of 12 months, P30,000 at the end of 15 months, and a final payment F at the end of 21 months. If the rate of interest is 12% compounded quarterly, find the final payment F. a. P15,774.56 c. P12,359.52 b. P187,745.58 d. NOTA 150,000SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 SOLUTION: ° y | 40,000 30,000 V 50,000 F Using *21” as focal point i=r/m=0.12/4 = 0.03/quarter F + 30,000(1.03)? + 50,000(1.03)’ + 40,000(1.03)° — 150,000(1.03)" F = 15,774.56 16. Adriste Philippines, Inc. expects to retire an existing machine at the end of 2013 and will replace it with a new machine for the same task at an estimated cost of P600,000. The old machine can be sold for P50,000 when it is replaced. To provide for replacement, the company intends to deposit the following amounts in an account earning interest at 8% compounded quarterly: 200,000 at the end of 2010 150,000 at the end of 2011 P100,000 at the end of 2012 What additional amount is needed at the end of 2013 to purchase the new machine? a. P15,774.56 c. P12,359.52 b. P35,952.12 d. NOTA 1600,000-50,000 SOLUTION 2010 2011 2012 | Vv i = 0.08/4 = 0.02/quarter r 200,000 F F + 100,000(1.02)' + 150,000(1.02)* + 200,000(1.02)"? = 600,000 - 50,000 F = P12,539.52 17. If P500,000 is invested at 8% interest compounded quarterly, how many years will it take for this amount to accumulate to P900,000? a. 29.68 ©. 14.84 b. 7.42 d. NOTA SOLUTION:SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 F=P(t+i)" 900,000 = 500,000[1+(0.08/2)]" 1.8 = 1.02" n=In18/In 1.02 n= 29.68 quarters / 4 n=7.42 years 18.Charlie wishes to bequeath his youngest son P200,000 ten years from now. What amount should he invest now if it will earn interest of 6% compounded annually during the first 5 years and 8% compounded quarterly during the next 5 years? a. P200,000 c. P100,576.67 b. P134,594.27 d. NOTA SOLUTION: P =F (14) P = 200,000(1+(0.08/4)}"* (1.06)° P= P100,576.67 19. Find the nominal rate compounded monthly which is equivalent to 16% compounded quarterly. What is the corresponding effective rate? a. 1=15.79% ; E b. i=15.97% 16.98% c. r=16.98% ; Eri=15.97% 98% d. NOTA SOLUTION: Note: For two nominal rates to be equal, their corresponding effective rates must also be equal. Nominal Rate Effective Rate ¢ 0.16 (1+72)?-1 = (i+ 4-4SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 1472 = 1.040) r= 15.79% compounded quarterly Solving for ERi, 0.16 ERi=(1+ 4 )* 6.98% 20.What payment X 10 years from now is equivalent to a payment of P500,000 7 years from now, if interest rate is 12% compounded semi-annually? a. P221,150.05 c. P709,259.56 b. P155,902.36 d. NOTA 7 10 SOLUTION: v x NOTE: For two future amounts to be equal, their corresponding present values must also be equal. 500,000[1+(0.12/2)]7" = x[1+(0.12/2)]7" X = P709,269.56 21.At a certain interest rate compounded annually, P100,000 will become P450,000 in 15 years. What is the amount at the end of 10 years? a. P272,638.68 c. P100,000.00 b. P450,000.00 d. NOTA Fix 450,000 SOLUTION: - «a 5 || 15 F=P(1+i)" 100,000 450,000 = 100,000(1+i)® 450,000/100,000 = (1+i)>SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 i=1-(4.5)'"% i= 10.55% solving for Fo, Fy = 100,000(1.1055)'° Fo = P272,638.68 22. Compare the accumulated values at the end of 5 years if P100,000 is invested at the rate of 12% per year compounded annually, semi-annually, quarterly, monthly, daily, and continuously. Which gives the highest return interest. a. ANNUALLY c. CONTINUOUSLY b. DAILY d. NOTA ) Fennuol = 100,000(1.12)° = P176,234.17 1b) Feemi-annuat = 100,000(1.06)°? = P179,084.77 ©) Fauartery = 100,000(1.03)°* = P180,611.24 4). Finonmy = 100,000(1.01)" = P181,669.67 €) Foaly = 100,000[1+(0.12/365)}" = P182,193.91 f) Feontinuously = 100,000e°"7 = P182,211.88 ANNUITIES 23.In preparation for the college education of his son, DJ plans to deposit equal amounts money for five consecutive years starting one year from now. If he wants his son to be able to withdraw P1,000,000 ten years from now at 8% interest compounded annually. what is the amount of each deposit? a. P190,651.28 c. P116,010.09 b. P161,010.09 d. NOTA Fio= 1M. SOLUTION:SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 AAA AA Using today as focal point, take the present worth of the annuity. P-A([1-(14i) ]/i} A{(1-(1.08)°/0.08} = 1,000,000(1.08)"? A=P116,010 Using year “5” as focal point A{{(1.08)° — 10.08} = 1,000,000(1.08)* A=P116,010 24.A farmer bought a farm and he paid P100,000 cash and agreed to pay P20,000 at the end of each 6 months for 5 years. He failed to pay the first 5 payments. At the end of 3 years, he is required to pay the seller the entire debt consisting of his accumulated and future liabilities, otherwise the farm will be foreclosed, What must he pay if money is worth 14% compounded semi-annually? a. P200,863.70 c. P68,661.62 b. P197,018.73 d. NOTA SOLUTION: Let X — amount the farmer must pay to settle his entire indebtedness. X= Fs + Ps X = 20,000[(1.07° - 1)/0.07] + 20,000[1-(1.07)°%0.07] X = 115,014.7802 + 82,003.9487 X = P197,018.7289 25.IEDeas constructed its building 6 years ago financed by a 10-year bank loan of P10M with 12% annual interest rate compounded monthly. The company has paid all the monthly instalments for the past 6 years. However, to reduce the amount of instalment payments, it was decided to refinance the balance of the loan through an insurance company. The new loan is for 10 years with interest at 8% compounded quarterly. A service charge of 5% will be added to the loan amount. Determine the balance on the original mortgage and the amount of the quarterly payments to the insurance company.SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 a. 209,119.55; P5,448,161.75 c. P5,448,161,75 b. P5,448,161.75; P209,119.55 d. NOTA SOLUTION: 120 AARAA A Solving for the balance on the original loan, 10M = A (PIA,12%,120) A= P143,470.9938 Balance on the original loan = present worth of all future payments from period 73 to period 120. Prp = 143,470.9939[(1-1.01)/0.1)] = P5,448,161.7 New Loan = P5,448,161.7 + service charge New loan = 5,448, 161.7 + (0.05 X P5,448, 161.7) = P5,720,569.84 Solving for the quarterly payments to the Insurance Company, P5,720,569.84 ta 40 AAAAA A SOLUTION: Solving for the quarterly payments to the Insurance Company, 5,720,569.84 = A(PIA,2%,40) A= P209,119.5496SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 26.Bright Futures Inc. will make the following disbursements for their retiring employees: 500,000 on Dec. 31, 2011 P1,000,000 on Dec. 31, 2012 P2,000,000 on Dec. 31, 2013 To accumulate these sums, a sinking fund was established by making equal year-end deposits starting Dec. 31, 2006 up to the end of 2013. If the fund ears 8% compounded annually, what is the required amount of the annual deposits? a. P344,395.77 c. P106,366 b. P3,633,200 d. NOTA 2M SOLUTION 00k 2" 2006 0 2013 AAA AA A Using “2013” as focal point A[(1.08°-1)/0.08] = 2M + 1M(1.08)' + 500,000(1.08) A = 3,363,200 / 10.6366 = P344,395.7656 27.Cella invests P100,000 for the college education of her 3-year old son, Ciel. If the fund ears 12% effective interest rate, how much will Ciel get each year starting from his 18" to his 22™ birthday? a. P324,486.82 c. P324,483.37 b. P135,574.26 d. NOTA SOLUTION: Using *22* as focal point Al(1.12°-1)/0.12] = 100,000(1.12)"°SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 A= P135,574.2616 28.Carle buys a piece of property for P100,000 down payment and 10 deferred semi-annual payments of P10,000 each starting three years from now. What is the present value of the investment if the rate of interest is 8% compounded semi-annually? a. P166,665.65 c. P60,165.45 b. P691,665.56 d. NOTA SOLUTION: P = 100,000 + 10,000{(1-1.04""yo.04][1.045] P = P166,665.65 29.Sir DJ spent the following amounts for the maintenance of the machine he bought: P4,000 each year for the 1°" five years, P6,000 each year for the next five years. In addition, he spent P15,000 for overhauling at the end of the 4" year and another P20,000 for overhauling at the end of the 8" year. If money is worth 6% compounded annually, what was the equivalent uniform annual cost for the 10-year period? a. P8,174.54 c. P60,165.45 b. P16,849.46 d. NOTA SOLUTION: Solve for the present worth of all future payments, P = 4,000[(1-1.06°)/0.06] + 6,000[(1-1.06°)0.06][1.067] + 15,000(1.06)* + 20,000(1.06)* P = P60,165.4471 Solving for the equivalent uniform annual cost, A= (60,165.4471)(0.06) / (1-1.06"%) A= P8,174,5421 30. UST Hospital purchased a CT Scan machine on the basis of guaranteed performance. However, initial tests indicate that the operating cost will beSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 oo 5,000 more per year than guaranteed. If the expected life of the machine is 20 years and money is worth 15%, what deduction from the purchase price would compensate UST for the additional operating cost? P13,269.99 c. P31,296.66 P84,590.92 d. NOTA SOLUTION: P =5,000((1-1.15°)/0.15) P = P31,296.6574 31.A brand new car can be purchased with a down payment of P150,000 and equal instalments of P18,000 each paid at the end of every month for the next 36 months. If money is worth 12% compounded monthly, determine the equivalent cash price of the car. . P150,000 ©. 168,000 P691,935.09 d. NOTA SOLUTION: Cash Price = 150,000 + 18,000{(1-1.01)/0.01] Cash Price = P691,935.0907 32.A brand new house and lot costs PSM if paid in cash. On the instalment plan, the buyer should pay 30% down and 20 quarterly instalments. The first payment due at the end of the 1" year. If money is worth 12% compounded quarterly, determine the amount of quarterly instalments. |. P257,069.41 c. P3.5M . P4.85M d. NOTA SOLUTION 5M = 1.5M + A[(1-1.037°)/0.03][1.03°] A= P257,069.41 33.You have a building for rent and you were offered two options by a prospective client:SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 A) P1.2M a year for 6 years, the rent being paid at the beginning of each year. B) P300,000 for the 1* year, P400,000 for the 2" year, P500,000 for the 3" year, and P600,000 a year for the next three years. All rentals are paid at the beginning of each yeer. If money is worth 12%, which is the better offer? a. OFFERA c. SAME OFFER b. OFFER B d. NOTA SOLUTION: OFFER A: Poffo = 1.2M + 1.2M[(1-1.12°Y/0.12] Pottera = P5,526,731.443 OFFER B: Porters = 300,000 + 400,000(1.12") + 500,000(1.127) + 600,000{(1-1.12°)/0.12](1.127) Potters = P2,204,574.91 Therefore, choose Offer Al PERPETUITY & CAPITALIZED COST 34. It costs P500,000 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 to P100,0007 a. PAM c. PIM b. P5M d. NOTA SOLUTION: Savings = P500,000-100,000 = 400,000 P =A/1=400,000/0.10 P= PAMSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 36.For its maintenance, a bridge in NLEX requires P250,000 at the end of 3 years and annually thereafter. If money is worth 8%, determine the capitalized cost of all future maintenance a. P214,334.71 c. P3,125,000 b. P2,679,183,81 d. NOTA SOLUTION: Capitalized Cost = (250,000/0.08)(1.08)? Capitalized Cost = PP2,679,183.81 36.API installed a new steam boiler at a total cost of P1.5M and is estimated to have a useful life of 10 years. It is estimated to have a scrap value of P50,000 at the end of its life. If interest is 8% compounded annually, determine its capitalized cost. a.P1.5M c. P1.45M b. P2,751,159.48 d. NOTA SOLUTION: Capitalized Cost = FC + X (present worth of perpetual replacements) Solving for X X= (FC CyM{(14i)41] X = (1.5M — 50,000) / [(1.08)"°-1] = P1,251,159.48 Capitalized Cost = 1.5M + 1,251,159.48 Capitalized Cost = P2,751,159.48 37.The capitalized cost of a certain piece of equipment was found to be P1.42M. The rate of interest is 12% with a salvage value of P100,000 at the end of its useful life of 10 years. Assuming that the cost of perpetual replacement remains constant, determine the original cost of the equipment. a. P994,973.76 c.1.42M b. P47,487.89 d. NOTA SOLUTION: CC=FC+XSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 X= (FC - Cyyl(14)-1] 1.42M = FC + (FC — 100,000) / (1.12"°-1) 1.42M = FC + 0.4749FC — 47,4868 FC = P994,973.76 38.DJ & Charlie Foundation wishes to set-up a trust fund to provide the following expenditures: P15M for the lot and the building and PSM for the initial equipment of a Methods and Ergonomics Laboratory; P1M for the annual operating costs every year; and P3M for the purchase of new equipment and replacement of some equipment every 5 years beginning 5 years from now. If money is worth 10% compounded annually, how much money should be put into the fund? a. P34,913,924.42 c. P24M b. P30M. d. NOTA SOLUTION: CC=FC+P+X Solving for P P= 1M/0. =P10M Solving for the present worth of perpetual replacement, X X = 3M/ (1.10°—1) = 4,913,924.42 CC=FC+P+X CC = (15M + 5M) + 10M + 4,913,924.42) Amount of money that should be put into the fund = CC = P34,913,924.42 39.A fund is to be donated by APIEMS Foundation to provide annual scholarships to deserving Industrial Engineering students. The fund will grant P500,000 each for the first 5 years, P800,000 for each of the next 5 years, and P1M each year thereafter. The scholarship will start one year after the fund is established. If the fund earns 8% interest, what is the amount of the donation? a. P1,996,355.02 c. P2,173,897.09 b. P9.96M d. NOTASOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 SOLUTION: Solving for the amount of the donation, X X = 500,000(P/A,8%,5) + 800,000(P/A,8%,5)(P/F,8%,5) + (1M/0.08)(1.08) X = 500,000(3.9927) + 800,000(3.9927)(0.6806) + (1M/0.08)(1.08)"? X = P9,960,170.71 GRADIENT 40.IEdeas signed a contract to lease a building at P60,000 a year with an annual increase of P1,000 a year for 5 years. Payments are to be made at the end of each year, starting one year from now. If money is worth 8%, what lump sum paid today is equivalent to the 5-year lease-payment plan? a. 246,935.03 ¢. P7,372.43 b. P239,562.60 d. NOTA SOLUTION: P=PatPo 1,000 P = 60,000[(1-1.08°)/0.08] + 0.08 {{(1.08°-1)/0.08}-5}(1.08)° P = P246,935.03 41.Find the equivalent annual payment of the following obligations at 12% interest: End of Year | Payment (Pesos) 100,000 80,000 60,000 40,000 20,000 ARON a. EUAC = 127,940.32 c. P64,507.68 b. EUAC = 360,477.62 d. NOTA SOLUTION:SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 P=PatPo 20,000 P = 100,000(P/A,12%,5) - 0.12 {[(1.12-1)/0.12}-5)(1.12)° P = 360,477.62 — 127,940.32 = 232,537.2994 EUAC = 232,537.2994(0.12) / (1-1.12°) UAC = P64,507.68 42.Two brothers, Cy and Ciel decided to save money in a fund that earns 8% interest compounded annually but on different ways. Cy decided to save money by making an end of year deposit of P10,000 on the 1° year, P11,000 on the 2 year, 12,000 on the 3" year, and so on increasing the next year’s deposit by P1,000 until the end of 10 years. Ciel decided to save by just making annual deposits of P14,000 annually for 10 years. Who has more savings at the end of 10 years? a.cY ©. SAME b. CIEL d. NOTA SOLUTION: Solving for the saving of Cy after 10 years, Poy=Pa+ Po 1,000 Pxy = 10,000(P/A,8%,10) + 0.08 {[(1.08"°-1)/0.08}-10}(1.08)° P.y = 67,100.81 + 25,976.83 = 93,077.64 Savings of Cy after 10 years, Fio F4o = 93,077.64(1.08)'° = P200,947.65 Solving for the saving of Ciel after 10 years, Poi = Pat Po Port = 14,000(P/A,8%, 10) Porat = P93,941.14 Savings of Ciel after 10 years, FroSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 F10 = 93,941.14(1.08)"° = P202,811.87 Therefore, Ciel has more savings at the end of 10 years! 43. As an IE consultant for the World Bank you are earning an average annual salary of $5M for 10 years. A private company would like to acquire your services and offers you an initial salary of $3M but is increasing at the rate of $400,000 annually. If money is worth 10%, are your going to accept the offer? a. YES, ACCEPT THE OFFER c. P93,941.14 b.NO, Don't accept the offer. d. NOTA SOLUTION: Solving for the present worth of your salary as a consultant for the WB, Pyys = SM(P/A,10%, 10) = 30,722,835.53 Solving for the present worth of the private company's offer, Pcompeny = Pa + Pc Peompany = 3M (P/A,10%,10) = 20,130,244.20 + 490,000 CTO {((1.10'°-1)/0.10]-10}(1.10)” Pcompany = 30,520,976.79 Pwe > Peompany; Therefore, do not accept the offer! 44.An Industrial Engineer wrote a best selling book in IE and was offered two alternatives by a publishing company for the rights to publish and sell his book. The 1* offer was a single lump sum payment of P3.5M. The 2™ offer was an initial payment of P2.5M plus 4% of the gross receipts for the next 5 years estimated to be as follows End Of Year | Gross Receipts (Pesos) | _ 4% of Gross Receipts(Pesos) 1 10M ‘400,000 2 8M 320,000 3 6M 240,000 4 4M 160,000SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 5 I 2M 80,000 After the 5" year, the author will not receive further royalties. If money is worth 10%, which alternative should he select? a. Choose Offer 1 c. Get them both b. Choose Offer 2 d. NOTA SOLUTION: OFFER 1: P3.5M OFFER 2: 2.5M + 4% of the gross receipts for the next 5 years, P=Pa+Po 80,000 P = 2.5 + 400,000(P/A,10%,5) - “0.10 {[(1.10-1)/0.10}-5}(1.10)° P = 4,565,258.12 Porrer2 > Porrer1 , THEREFORE, choose Offer 2! CAPITAL FINANCING WITH BONDS 45.APIEMS Corporation is establishing a sinking fund for the purpose of accumulating a sufficient capital to retire its outstanding bonds at maturity. The bonds are redeemable in 10 years and their maturity value is P10M. How much should be deposited each year if the fund pays interest at the rate of 4%. a. P10M c. P832,909.44 b. P400,000 gd. NOTA SOLUTION: Maturity Value = 10M Fio = AF ,4%,10) 10,000,000 = Af(1.04"°-1)/0.04] A= 832,909.44 46.PIIE Corporation issued 5,000 bonds of P1,000 face value each, redeemable at par at the end of 10 years. To accumulate the funds required for redemption, theSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 company established a sinking fund consisting of annual deposits, the interest of the fund being 5%. What was the principal in the fund at the end of 7 years? a. P397,522.64 c. P5M b. P3,236,632.68 d. NOTA SOLUTION: C= (5,000X1,000) = 5M Solving for the accumulated amount after 7 years, F7 Fo = A(AF,5%,10) 5,000,000 = A(1.05'°-1)/0.05] A= 397,522.64 F, = 397,522.64[(1.05"-1)/0.05] F, = P3,236,632.68 47.You were offered a Land Bank certificate with a face value of PIM. The bond is bearing an interest of 6% per year payable semi-annually and due in 5 years. If you want to earn 8% semi-annually, how much are you willing to pay for the certificate? a. PIM c. P30,000 b. P918,891.04 d. NOTA SOLUTION: P = Fr(PIAi%,n) + C(14i)" Fr = (1M)(0.06/2) = 30,000 P = 30,000[(1-1.047°)/0.04] + 1M(1.04)?" P= P918,891.04 48.A 100,000, 6% bond pays dividend semi-annually and will be redeemed at 120% on December 31, 2015. If you bought this bond on December 31, 2011 to yield 5% interest compounded semi-annually, find the price of the bond.SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 a. P120,000 c. P21,510.41 b. P98,489.59 d. NOTA SOLUTION: P = Fr(PIAi%,n) + C(14i)" Fr = (100,000)(0.06/2) = 3,000 C= 100,000(1.2) = 120,000 P = 3,000[(1-1.0257")/0.025] + 120,000(1.025)7"* P= P120,000 49.You want to make 14% nominal interest compounded quarterly on a bond investment. How much are you willing to pay now for a 12%, P100,000 bond that will mature in 5 years and pays interest quarteriy? a. P100,000 c. P92,893.80 b. P50,256.59 d. NOTA SOLUTION: P = Fr(P/A,i%,n) + C(14i)* Fr = (100,000)(0.12/4) = 3,000 P = 3,000[(1-1.035°")/0.035] + 100,000(1.035)°* P = P92,893.80 50.You bought a bond having a face value of P10,000 for only P9,000. The bond rate was 14% nominal and interest payments were made to you semi-annually for a total of 7 years. At the end of this period, you sold the bond at a price that yielded 16% nominal on your investment. For how much did you sell the bond? a. P9,484.30 ©. 410.453.66 b. P26,434.75 d. NOTA SOLUTION:SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 P = Fr(PIA,i%,n) + C(1+i)" Using “14” as focal point 9,000(1.08)"" = (10,000)(0.14/2){(1.08"*-1)/0.08] + C C= P9,484.30 DEPRECIATION AND DEPLETION A. Straight Line Method 51.A machine costsP80,000 and an estimated life of 10 years with a salvage value of P5,000. What is the book value after 5 years using the straight line method? a. P42,500 c. P7,500 b. P75,000 d. NOTA SOLUTION: d= (Cy Ci) /L = (80,000-5,000) / 10 = 7,500 Ds = nd = (5)(7,500) = 37,500 Cs=Co- Ds Cs = 80,000-37,500 Cs = P42,500 52.A knitting machine is purchased for P500,000. The salvage value in 10 years is 100,000. Whats the total depreciation in the first 6 years using the SLM? a. P40,000 c. P400,000 b. P240,000 d. NOTA SOLUTION: d = (Co— Ci) / L = (500,000-100,000) / 10 = 40,000 Do = nd = (6)(40,000)SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 Ds = 240,000 53. The cost of a Tajima embroidery machine is P1.2M and the cost of installation is P50,000. If the salvage value is 10% of the cost of the machine at the end of 10 years, determine the book value at the end of the 3° year. Use SLM. a. P339,000 c. P1.25M b. P911,000 d. NOTA SOLUTION: Co = 1.2M + 50,000 = 1,250,000 Cx = (0.10)(1.2M) = 120,000 d= (Co Ci) /L = (1,250,000-120,000) / 10 = 113,000 D, = 3(113,000) = 339,000 C3 = 1,250,000 - 339,000 C3=P911,000 B. Sum-of-the-Year’s Digit Method 54. linking machine is purchased for P20,000. It is estimated to have a useful life of 10 years and a salvage value of P10,000. Find the depreciation for the 1° year using the SYD method a. P10,000 c. 1,818.18 b. P18,812 d. NOTA SOLUTION: (Co- Gi) dy = {10 / [10(10#1)/2]}(20,000-10,000) dy = P1,818.18 55.Zach’s Corporation purchased a Jacquard machine for P6M, freight and installation charges amounted to 3% of the purchase price. If the machine will beSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 depreciated over a period of 10 years with a salvage value of 6%, determine the depreciation cost during the 5"" year using the SYD method. a. P633,730.91 c. 360,000 b. P6.18M d. NOTA SOLUTION: reverse digit (digits (C.-C) da Co = 6M + (0.03)(6M) = 6,180,000 C. = (0.06)(6.18M) = 370,800 (digits = n(n+1)/2 = 10(10+1)/2 = 55 Reverse digit: 1 0 2 8 3 8 4 7 oy 6 5 7 4 8 3 9 2 10 i ds = (6/55)( 6,180,000-370,800) ds = P633,730.91 56.Kaizen Corporation makes it a policy that for any new equipment purchased, the annual depreciation cost should not exceed 20% of the 1% cost at any time with no salvage value. Determine the service life necessary if the depreciation method used is the SYD. a.7 YEARS c.9 YEARS b. 8 YEARS d. NOTASOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 SOLUTION: dy .20C, 2. nat dn = 2 (Co- Ci) 0.20C, = 2Co/n#1 n #1 = 20.206, n=9yrs. C. DECLINING BALANCE METHOD (MATHESON FORMULA) 57.A stop watch used for TMS has a selling price of P1,500. If its selling price is expected do decline at a rate of 10% per year due to obsolescence, what will be its selling price after 3 years? P1,093.5 c. P150.50 P1,500 d. NOTA SOLUTION: k=1- eo a} C3 s[c3 (1-0.10)8 = (1250098 C3 = (0.90)°(1,500) Cy = P1,093.5 58.A circular linking machine costing P45,000 has a book value of P4,500 when retired at the end of 10 years. Depreciation cost is computed using a constant percentage of the declining book value. What is the annual rate of depreciation in %. a. P4500 ©. K=20.57% b. P45,000 d. NOTASOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 SOLUTION: k= 20.57% 59.A generator costing P750,000 depreciates in value each year by 20% of its value. Find its book value when the generator is 5 years old a. P245,760 c. 750,000 b. P150,000 d. NOTA SOLUTION: C5 = Co(t-K)? Cs = 750,000(1-0.20) Cs = P245,760 D. SINKING FUND METHOD 60.An electric sewing machine costs P10,000 with a salvage value of P500 at the end of 10 years. Calculate the annual depreciation cost by the sinking fund method at 5% interest. a. P755.29 c. P500 b. P755,293.5 d. NOTA SOLUTION: d= Co~Ci/ (F/AI%,L) d = (10,000-500)(0.05) / (1.05"°— 1)SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 d= P755.29 61.A set of Wire Bond machine costs $500,000. This amount includes freight and installation charges estimated at 10% of the original price. If the machine shall be depreciated over a period of 10 years with a salvage value of $5,000, and money is worth 6% per year, what is the annual depreciation charge? a.41,348.04 c. P545,000 b. P37,554.64 d. NOTA SOLUTION: d= Co- CL! (F/Ai%,L) d= (600,000 ~ 5,000)(0.06) /(1.06"° - 1) d= P37,554.64 62. A steam boiler was bought for P300,000. Other expenses including freight and installation amounted to P20,000. The boiler is expected to have a life of 12 years with a salvage value of 10% of the purchase price. Determine the book Value at the end of 10 years using the Matheson formula at 8% annual interest. a. P15,281.55 c. P320,000 b. P98,622.80 d. NOTA SOLUTION: Co = 300,000 + 20,000 = 320,000 Ci = (0.10)(300,000) = 30,000 4d = (320,000-30,000)(0.08) / (1.08"2-1) = 15,281.5549 Dio = [(1.08'°-1)/0.08] = 221,377.1996 Cro = 320,000 ~ 221,377.1996 Cio = P98,622.80 E. DOUBLE DECLINING BALANCE METHODSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 63.A Die Attach machine was bought for $200,000 and used it for 10 years. What is the book value of the machine after 5 years if the salvage value is $20,000 using the double deciining balance method? a. P13,107.2 c. P65,536 b. P200,000 d. NOTA SOLUTION. Ca= Cft-(2/Ly" C5 = 200,000[1-(2/10))° Cs = P65,536 64. Determine the total depreciation up to the end of 6 years for a large dryer that costs P50,000 when new and has an estimated salvage value of P2,000 at the end of 10 years by the double declining balance method a. P36,892.8 c. P46,892.18 b. P56,308.12 d. NOTA SOLUTION: Do = Co~ [Co(1-2/L))] Dz = 50,000 — [50,000(1-2/10)°] Dg = P36,892.80 F, SERVICE-OUTPUT METHOD 65. Julie's Bakeshop bought a loaf bread machine for P500,000 on June 1, 2010. It is estimated that it will have a useful life of 10 years, a scrap value of P10,000, production of 400,000 loaves of bread and working hours of 150,000. The company uses the machine for 15,000 hours in 2010 and 20,000 hours in 2011 The machine produces 40,000 loaves in 2010 and 50,000 loaves in 2011 Compute the depreciation in 2011 using (a) service-output method (b) working hours method. a, P61,250; P65,333.33 c. P56,366.66;P61.520SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 b. P25,000; 65,000 d. NOTA SOLUTION: a) dn = [(Co-CrT](Qn) deots = [(500,000-10,000)/400,000) X (50,000) aot = P61,250 b) da = [(Co-CiVH](Qn) daot1 = [(500,000-10,000)/150,000] x (20,000) daot1 = P65,333.33 G. DEPLETION 66. Balatok Mines has a total gross income for a particular year of P100M. The taxable income after taking all deductions except for depletion is P20M. What is the allowable depletion allowance for that particular year? Use percentage of gross income for iron ore of 15% a. P1OM c. P25M b. PISM d. NOTA SOLUTION: Using depletion allowance method d = Fixed percentage of Gross income OR 50% of Net Taxable Income d= (0.15)(100M) = 15M OR d= (0.50)(20M) = 10M Therefore, d = P10MSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 67. Philex Oil Refinery developed an oil well which is estimated to contain 7M barrels of oil at an initial cost of $75M. What is the depletion charge during the year where it produces 1M barrels of oil? Use the Unit or Factor Method in computing depletion. a. PIM ©. P10.7143M b. P7.5M d. NOTA SOLUTION: Using Unit or Factor method, d = (initial cost of property / total units in property)(units sold during the year) d= (75M /7M)(1M) d= P10.7143M. INVESTMENT OF CAPITAL A. ROR METHOD 68. A company estimates that insulation of steam pipes in the factory will reduce the fuel bill by as much as 25%. The cost of the insulation is P100,000 installed and the annual cost of taxes and insurance is 6% of the first cost. Without the insulation, the annual fuel bill is P200,000. If the insulation is worthless after 5 years of use, and a minimum return on investment of 10% is desired, would it be worthwhile to invest in the insulation? Solve using the ROR method. a. ROR = 10%, yes invest c. ROR = 7.62%, do not invest b. ROR = 27.62%, yes invest. d. NOTA SOLUTION Annual Savings = (0.25)(200,000) = P50,000 Annual Costs: Dep’n = (100,000-0)(0.10/(101°-1) = 16,379.75 Tal = (0.06)(100,000) = 6,000SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 TAC = 22,379.75 ROR = net annual savings / capital invested ROR = (50,000 - 22,379.75) / 100,000 ROR = 27.62% > 10% Therefore, it is worthwhile to invest in the insulation! 69.An investor buys a land for P1M and constructs a three-door apartment for students worth PSM. He estimates that the annual receipts from the apartment to be P1.2M and annual expenses to cover taxes, insurance, and maintenance of the apartment to be P100,000. He also estimates that the land can be sold for P3M at the end of 10 years. If his money is now earning 8% interest before taxes, will this property earn enough for the investment to be justified? Use ROR method. a, ROR = 1.6%, not justified c. ROR = 13.06%, justified b. ROR = 16.03%, justified d. NOTA SOLUTION: Annual Income = 1.2M Annual Costs: Dep’nians = (1M-3M)(0.08)/(1.08"°-1) = -138,058.98 Dep’nnigg = (5M-1M)(0.08)/(1.08"°-1) = 276,117.95 O&M = 100,000 TAC = 238,058.97 ROR = (1.2M — 238,058.97) / 6M ROR = 16.03% > 8%; therefore, investment is justified! B. ANNUAL COST METHOD 70.An investment of P3M can be made in a business that will produce a uniform annual revenue of P1.2M for five years and then have a salvage value of 10% of the investment. Operations and maintenance will be P100,000 per year. Taxes and insurance will be 5% of the first cost per year. The investor expects to earnSOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 not less than 20% before income taxes. Is this a good investment? Use the annual cost method. a. P2,112,825.2; good investment! c. -P912,825.199; do not invest! b. P1.2M; good investment d. NOTA, SOLUTION: Annual Income: P1.2M Annual Costs: Dep’n = [3M-(0.10°3M)|(0.20) / (1.20°-1) = 362,825.20 08M = 100,000 Tal = (0.05°3M) Min Req'd Profit = (0.20°3M) = 600,000 TAC = P2,112,825.199 Difference = -P912,825.199; therefore, not a good investment! 71.You are considering building a 25-unit apartment near a Call Center. If you want a return of 25%, will this be a good investment? Other related data are shown below: Land 5,000,000 Building 10,000,000 Study period 25 years Cost of land after 25 years 20,000,000 Cost of building after 25 years P1,000,000 Rent per unit per month P8,000 Maintenance per unit per year P1,000 Property taxes 2% Insurance 1% a. P2.4M; good investment c. P4.219M; good investment b. -P1.918M; do not invest d. NOTASOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 SOLUTION: Annual Income: ,000°25"12 = 2.4M Annual Costs: Dep 'niang = (SM-20M)(0.25) /1.257°-1 = -14,220.8242 Dep’ihigg = (10M-1M)(0.25) / 1.25%-1 = 8,532.4945 O&M = 1,000*25 = 25,000 Taxes = 0.02°15M = 300,000 Insurance = 0.01*15M = 150,000 MRP = 0.25*15M = 3.75M Total Annual Cost = P4,219,311.67 Difference = 2.4M - 4,219,311.67 = -P1,819,311.67 therefore, not a good investment! C, PRESENT / FUTURE WORTH METHOD 72.A project capitalized for P5,000,000 is expected to earn a uniform annual revenue of P1,000,000 in 10 years. The cost of operation and maintenance is P 100,000 a year, taxes and insurance will cost 3% of the first cost per year. If the company expects its capital to earn 12% income before taxes, would you recommend investing in the project? Use the PW method. a. PWincome < PWeests; don't 6. PWincome = PWeosts ; invest invest b. PWincome > PWoosts: invest d. NOTA SOLUTION: PWincomo = 1M(P/A,12%,10) = 1M[(1-1.12)/0.12] = 5,650,223.03 PWeosis = 5M + [(100,000+(0.03"5M)][(1-1.12)/0.12] = 6,412,555.76 Since PWincame < PWeasis ; therefore; do not invest!SOLVED PROBLEMS IN ENGINEERING ECONOMY | 2014 73.A proposed project will require the immediate investment of P500,000 and is estimated to have year-end revenues and costs as follows: Year Revenue (P) Costs 1 750,000 600,000 2 900,000 770,000 3 1,000,000 750,000 4 950,000 800,000 5 600,000 470,000 An additional investment of P200,000 will be required at the end of the 2™ year. The project will terminate at the end of the 5" year, and the assets are estimated to have a salvage value of P250,000 at that time. If interest is 12% per year, is this a good investment? Use the PWC method. a. PWincome < PWeesis; don't C. PWincome = PWeesis; invest invest b. PWincome > PWeesis; invest d. NOTA SOLUTION: PWincome = 150,000(1.12)" + 250,000(1.12)* + 150,000(1.12)* + 803,000(1.12)* PWorcome = 862,845.11 PWeasis = 500,000 + 70,000(1.12)? PWeosis = 555,803.57 Since PWrrcone > PWersts ; therefore; it is a good investment! D. PAYBACK PERIOD METHOD 74.A proposed manufacturing plant will require a fixed capital investment of PEM and an estimated working capital of P1M. Annual depreciation is estimated to be 5% of the fixed capital investment. If the annual profit is P3M, determine the rate of retum on the total investment and the minimum payback period. a. ROR = 38.57%; Payback —_c. ROR = 35.57%; Payback Period = Period = 2.33 years 3.33 years b. ROR = 28.75%; Payback d. NOTA Period = 3.23 years