Baccay, Rowell V.

Engineering Economy

BSME -IV Problem Set

CHAPTER IV

METHODS OF FINANCING AND ENTERPRISE

1. A bond issue of P200,000.00 in 10yr bonds, in P1,000 units, paying 16% nominal interest in semi-annual
payments, must be retired by use of sinking fund that earns 12% compounded semi-annually. What is
the total semi-annual expense?

Solution:
16 % 12%
F = P200,000 r= = 8% i= = 2%
2 2
n= (10) (2) =20

F
A= F
A,i %,n

P 200,000
A= F
A , 6 % ,20

200,000
A= 1.0620 −1
0.06
A=5436.911

I=Fr

I= (200,000) (0.08) =P16,0000

Total Semi-annual expenses =A+I

=5436.911 + 16,000

=P21,436.911

Ans.

2. A man wants to make 14% nominal interest compounded semi-annually on a bond investment. How
much should the man be willing to pay now for a 12%. P10,000.00-bond will mature in 10 yrs and pays
interest semi-annually?

Solution:

14 % 12%
F = P10,000 i= = 7% r= = 6%
2 2
I =Fr
 I = (10,000) (0.06) =P600

P10,0000

P600 P600 P600 P600 P600

0 1 2 3 19 20

P = Fr (F/A, i%, n) + C (P/F, i%, n)

P = P600 (F/A, 7%, 20) + P10,000 (P/F, 7%, 20)

1−(1+ 0.07)−20
P = 600 [ ] + 10,000 ¿]
0.07
P =P8,940.59

Ans.

3. You purchased a 5,000 bond for 5,100. The bond pays 200/yr. It is redeemable for 5,050 after 10yrs.
What is the rate of interest on your investment?

Solution:

I = Fr = 200
P = 5, 000
C = 5, 050

P = Fr (F/A, i%, n) + C (P/F, i%, n)

5, 000 = 200(F/A, i%, 10) + C (P/F, i%, 10)

5, 000 = 200 ) + 5, 050 (1 + i)-10

i = 0.040829 = 4. 08%
Ans.
 CHAPTER V

SELECTION ON PRESENT ECONOMY

1. A machine used for cutting materials in a factory has the following outputs per hour at various speeds
and required periodic tool regrinding at the intervals cited.
Speed Output per Hour Tool Regrinding
A 200 pieces every 8 hrs
B 280 pieces every 5 hrs
A set of tools costs P1,260 and can be ground twenty times. Each regrinding costs P54.00 and the time
needed to regrind and change tools is 1hour. The machine operator is paid P35.00per hour, including the time
the tool is changed. The tool grinder who also sets the tools to the machine is paid P40.00/hour. The hourly
rate chargeable against the machine is P38.00, regardless of machine speed. Which speed is the most
economical?

Solution:

Machine A: Machine B:
Outputs per cycle: 200(8) = 1600 Outputs per cycle: P280(5) = P1400
Cycle time: 8+1 = 9hours Cycle time: 5 + 1 = 6 hours
Operator: P35(9) = P315 Operator: P35(6) = P210
Sets tool: P40(1) = P40 Sets Tool: P40(1) = P40
Tools costs: P1260/20 = P63 Regrinding Tools costs: P1260/20 =P63
cost: P54
Regrinding cost: P54
Rate of machine: 38(5) =P190
Rate of machine: P38(8) =P304
Total cost: P557
Total cost: P776
Cost per piece: 557/(1400) = P0.3978
Cost per piece: 776/ (1600) = P0.485

Comparing the cost per piece of each machine,

P0.485 – P0.397857 = P0.087143

We can conclude that the machine B is more economical than machine A by P0.087 per piece.

Ans.

2. An executive receives an annual salary of P600,000 and his secretary a salary of P180,000. A certain task can
be performed by the executive working alone in 4 hours. If the delegates the task to his secretary it will require
him 30 minutes to explain the work and another 45 minutes to check the finished work. Due to the
unfamiliarity of the secretary to the task, it takes her an additional time of 6 hours after being instructed.
Considering salary costs only, determine the cost of performing the task by each method, if the secretary works
2,400 hours a year and the executive 3,000 hours a year.

Solution:

If the executive works alone:

Annual salary = P600,000.00

Time to finish the work = 4hrs

Annual working hrs = 3,000hrs/yr

Rate per hr = (P600,000/yr)/(3,000hrs/yr) = P200.00/hr

Cost of performimg the task =( P200.00/hr) * (4,000hrs) = P800.00

therefore;
P800.00 ans.

If the executive delegates the work to his secretary:

Annual salary of the executive = P600,000.00

Annual salary of the secretary = P180,000.00

Annual working hrs of the executive = 3,000 hrs/yr

Annual working hrs of the secretary = 2,400 hrs/yr

Rate per hr of the executive = (P600,000/yr)/(3,000 hrs/yr) = P200.00

Rate per hr of the secretary = (P180,000/yr)/(2,400 hrs/yr) = P75.00

Cost for performing the work= (200.00/hr x1.25 hrs) + (75.00/hr x6.5 hrs) = P737.50

P737.50
Ans.

CHAPTER VI
BASIC METHODS FOR MAKING ECONOMY STUDIES
 1. An investment of 270,000 can be made in a project that will produce a uniform annual revenue of
185,400 for 5 yrs and then a salvage value of 10% of the investment. Out of pocket costs for operation
and maintenance will be 81,000/yr. Taxes and insurance will be 4% of the first cost/yr. The company
expects capital to earn not less than 25% before income taxes. Is this a desirable investment? What is
the payback period of the investment?

Solution:

Present Worth of Cash Flow = (185,000) (P/A, 25 %, 5) + (270,000) (P/F, 25%, 5 %)

1−(1+ 0.25)−5
= (185,400) ( ) + (270,000)¿]
0.25

=P507,439.872

Annual Cost = 81,000 + 270,000(0.4)

=91,800

0 1 2 3 4 5

P91,800 P91,800 P91,800 P91,800 P91,800

P270,000

1−(1+ 0.25)−5
Present worth of outflows = 270,000 + 91,800 ( )
0.25

=516,875.904

The present worth of the net cashflow is less than zero 507,439.872-516,875.904= -9436.032 then the
investment is not satisfied.

Ans.

investment−salvage value
Payback period =
net annual cash flow

Total Annual Cost = 21,000 + (270,000) (0.04)

=91,800
Net Annual Cash flow =185,400 – 91,800

=93,800

270,000−27,000
Payback period =
93,800

Payback period =2.6 years Ans.

2. A gasoline driven pump and an electric power pump are being considered for use in a mine for
a period of 10yrs. The data are as follows:
Gasoline Electric
First cost 12,000 25,000
Life in yrs 5yrs 10yrs
Salvage value 1,000 2,000
Annual Operating Cost 3,200 1,800
Annual repairs 600 400
Annual taxes(% of Co) 3% 3%
If money is worth 12% compounded annually, which would you recommend on the basis of
annual cost?

Solution:

By Annual Cost Method

Gasoline

Depreciation = = 1, 731.52

0.12

Operating Cost = 3, 200

Repair = 600
Tax = 12, 000(0.03) = 400
Interest on capital = 12, 000(0.12) = 1, 440

Total Cost = 7, 331.52

Electric

Depreciation = = 1,253.6541

0.12

Operating Cost = 1, 800

Repair = 400
 Tax = 25, 000(0.03) = 750
Interest on capital = 25, 000(0.12) = 3, 000

Total Cost = 5, 403.6541

Gasoline > Electric, Choose Electric Power Pump Ans.

3. An electric cooperative is considering the use of concrete electric pole in the expansion of its
power distribution lines. A concrete pole costs 18,000 each and will last 20yrs. The company
is presently using creosote wooden poles which cost 12,000/pole and will last 10yrs. If money
is worth 12%, what is the savings in choosing the most economical pole?

Given:

Creosoted Wood pole Concrete pole

First Cost 12,000 18,000
Salvage Value 0 0
Estimated Life 10 years 20 years

i = 12%

Solution:

By ROR Method

Annual Cost:

Creosoted Wood pole:

Depreciation = = 683.81

0.12

Total Annual Cost = 683.81

Concrete pole:
=249.81
Depreciation =
0.12
Total Annual Cost = 249.81

Annual Savings = 683.81 - 249.81 = P 434.00 Ans.

Additional Investment = 18, 000 – 12, 000 = P 6, 000

Compare creosoted wood pole to concrete pole.

ROR on Additional Investment on Concrete pole x 100%

= 7.23% < 12%

ROR is less than the interest rate.

Answer: Creosoted Wood pole should be used

4. A concrete mixer can be driven by a diesel engine or a gasoline engine described as follows:

Diesel Engine Gasoline Engine

First cost 1.6M 25,000
Life in years 10yrs 4yrs
Fuel for 8hrs 5 gal 40 liters
Operator 350/8hrs 350/8hrs
Repairs and maintenance 500/day 300/day
If money is worth 10% compounded quarterly, which do you think is more profitable to
acquire? Assuming you will use the mixer only for 6yrs? At the end of the life of the engines their
value is zero. Depreciate by straight line method. Assume 300working days in 1 yr.

Solution:

I= 0.1028 converting 10 % compounded quarterly to annually

By annual cost method

Annual cost

Diesel engine

Depreciation =1.6M/10 =160,000

Operator = 350x300 =105,000

Repair = 500x300 =150,000

Interest on capital=1,600,00x0.1038 =166,080

Total cost =581,080

Gasoline engine

Depreciation=25000/4 =6250

Operator=350x300 =105,000

Repair =300x300 =900,000

Interest on capital=25000X0.1038 =2595

Total cost =203,845

Diesel engine>gasoline engine , choose gasoline engine

CHAPTER VII
COMPARING ALTERNATIVES

1. It is estimated that insulation of steam pipes in a factory will reduce fuel bill as much as 20%.
The cost of the insulation is P900,000 installed and the annual cost of taxes and insurance is 5%
of the initial cost. Without the insulation, the annual fuel bill is P1,800,000. If the insulation is
worthless after 6 years use, and a minimum return of 12% is desired, would it be worthwhile to
invest in the insulation?

Solution:

By ROR Method

Annual Cost

W/ Insulation:

Depreciation = = 110, 904.3635

12
Tax and Insurance = 900, 000 (0.05) = 45, 000

Fuel Bill = 1.8 M(0.8) = 1, 440, 000

Total Annual cost = 1, 595, 904.3635

Annual Saving = 1.8M - 1, 595, 904.3635 = 204, 095.6365

ROR = x100% = 22.67%

22.67% > 12% , It is worth it to invest in the insulation.

2. An existing machine in a factory has an annual maintenance cost of P140,000. A new and more
efficient machine will require an investment of P290,000 and is estimated to have a salvage
value of P60,000 at the end of 8 years. Its annual expenses for maintenance and upkeep, etc. a
total of P100,000. If the company expects to earn 12% on its investment, will it be worthwhile
to purchase the new machine using the a) present worth method? b) rate-of-return method?

Solution:
a) By Present Worth Method

Machine A

Annual cost = 140, 000

PWCA = 140, 000 ( = 695, 464

Machine B

Annual cost = 100, 000

PWCB = 290, 000 + 100, 000(

= 290, 000 + 100, 000(4.9676) – 60, 000(0.4038)

= 762, 532

PWCA < PWCB, Don’t purchase the new machine.

b.) By ROR Method

Machine B

Depreciation = = 18, 700

12
Maintenance Cost = 100, 000

Total Annual Cost = 118, 700

Annual saving = 140, 000 - 118, 700 = 21, 300

ROR = x 100% = 7.34%

7.34% < 12% , Don’t purchase the new machine.

3. An economic study of a proposed light oil recovery plant to recover light oils from a gas
manufacturing firm has the following data:
a.) Total investment P1,800,000
b.) Total Annual expenses P500,000
c.) Average Annual sales = 730 tons of light oils and derivatives
 d.) A local chemical firm guarantees to purchase 3o tons monthly of benzene, one of the
light oils, at a price of P50,000 per ton.
e.) Paint factories guarantee 30 tons monthly purchase of light oil derivatives. The factories
import their present supply at an average cost of P7,000 per ton.
f.) The balance of oils can be sold to drug, rubber, plastic, and other companies at P7,500
ton.
Determine: a) the annual net profit
b) the recovery period of the investment
c) will you recommend such a project? Justify
Solution:

Annual sales

= 30 tons/month x 12 month/year x 5, 000/tons = 1.8M

=30 tons/month x 12 month/year x 7, 000/tons = 2.52M
= 10 tons x 7, 500/tons = 75, 000

Total Annual Sales = 4.395M

a.) the annual net profit

= Annual sales – Annual Expense

= 4.395M – 500, 000

= 3.895M

b.) the recovery period of the investment

Net Annual Cash flow = Profit – Total Expenses

= 3.895M – 500, 000

= 3.395M

Payback Period =

= 0.5301 years or 6 ½ months

c) will you recommend such a project? Justify

Based on the computation for the recovery period of the capital, the project is highly recommended.
 4. A certain company needs a new delivery truck and has two choices: a gasoline engine truck
costing P1,600,000, and a diesel engine truck costing P1,950,000. The diesel engine truck is
guaranteed to save P0.20 per kilometer less than the gasoline engine truck. From previous
experience, it is known that the truck 40,000 kilometers annually. If each truck has a salvage
value at the end of 5 years of 10% of first cost and a sinking fund at 8% can be set up to provide
for replacement after this time and if money is worth 12% to the company, which would you
recommend?
Solution:

I will recommend the gasoline truck

Explanation:
Gasoline truck cash outlow = 1600000-10%=1440000
Diesel truck outlow= 1950000-10%=1755000
Annual saving in diesel truck = 8000
Present value of saving = 8000(100/108)5=8000x3.60=28800
So th cost will be at present value is 1755000-28800= P1726200

If we compare the cost the gasoline truck is much cheaper than diesel truck.