UNIVERSITY OF SAN JOSE-RECOLETOS
Magallanes St. Cebu City
MIDTERM OUTPUT
FOR
ENGINEERING ECONOMY
Submitted by:
Jimenez, John Feil
Lañas, James Bryle
Malapitan, Joseph Mark
Medilo, Carmelite Natividad
Melicor, Johnessa Kathlyn
(MWF 5:30 PM – 6:30 PM)
Submitted to:
Engr. Elvielyn G. Nakila, IE
I. PROBLEM RECOGNITION, DEFINITION AND EVALUATION
Mr. Cruz, one of the well-known business man, plans to lease a building having an area of
9687.52 sq. ft. with a non-cancelable lease of 5 years (with the economic life of 6 years) which
he aims to start on February 18, 2012 with an interest rate of 5%. However, for the benefit of
his tenant and to himself, prior to the start of the business, he plans of two alternatives to run
his leasing smoothly. First is through finance lease wherein the tenant will annually pay the
rental of ₱157,409.73 every January 18 th. On the other hand, Operational lease wherein he
leases the building for the same as five years with a fair value of ₱1,032.26 a 6 year economic
life. The lease calls for annual lease payments of ₱150,000.00 each year and the implicit
interest known to Mr. Cruz is 5%.
II. DEVELOPMENT OF THE FEASIBLE ALTERNATIVES
For the problem with regards to leasing land or building, there are two alternatives used.
First alternative would be “capital lease or finance lease”, basically it is described to be like an
asset on a company’s balance sheet or the business of gaining (profit). The conditions of a
capital lease agreement show that the advantages and risks of proprietorship are moved to the
tenant. A capital lease is considered as a “buy” or “purchase” from the viewpoint of the
individual who is renting and as advance from the stance of the individual who is offering the
rent, for accounting purposes. Meanwhile, the second alternative is the “operating lease”, it is a
cost that remaining parts of the accounting report. Think of a capital lease as more like owning
a piece of property and think of an operating lease as more like renting a property. Operating
leases are now called “service leases”, these are utilized for present moment renting and for
resources that are innovative or in which the innovative changes, similar to lands and buildings.
The rental expense of a working lease is viewed as a “operating expense”. In simple terms, we
are showing the two sides of how leasing a land or building works when it comes to buyer and
owner’s perspective.
III. CASHFLOW OF EACH ALTERNATIVES
FINANCIAL ALTERNATIVE
OPERATIONAL ALTERNATIVE
IV. SELECTION OF A CRITERIA
a.) If the applied strategy does not experience lost.
b.) If the applied strategy can increase the market value of the building.
c.) If the applied strategy is a long term of short term.
V. ANALYSIS AND COMPARISON OF THE ALTERNATIVES
COMPARISON OF ALTERNATIVES
Engineering economic analysis is basically concerned about cost-decrease choices,
finding the most affordable approach to satisfy certain prerequisites, or limiting the whole of
anticipated misfortunes in addition to the given investment.
There are two different alternatives being used; Capital lease and Operating lease. In
comparing these alternatives there are two common methods; present worth, and annual cost.
Each of these is subject to a chose loan cost or markdown rate to change incomes at various
focuses in time.
A. Present Worth
In a current worth comparison of alternatives, the costs related with every alternative
investment are all converted to a present sum of money, and the least of these values
represents the best alternative. Annual costs, future installments, and inclinations must be
brought to the present.
Thus, plan B has greater present worth.
B. Annual Cost
To compare alternatives by annual cost, all incomes are changed to a progression of
uniform installments. Current consumption, future expenses or receipts, and slopes must be
changed over to annual costs. If a lump-sum cash flow occurs at some time other than the
beginning or end of the economic life, it must be changed over in a two-venture measure: first
moving it to the present and afterward spreading it consistently over the life of the
undertaking.
CAPITAL LEASE OPERATING LEASE
Thus, operating lease is the least-cost alternative.
VI. SELECTION OF THE PREFFERED ALTERNATIVE (CONCLUSION)
Most engineers can review the "logical technique", which includes five unmistakable
stages: perception, issue definition, detailing of theory, experimentation, and verification. A
similar sequence of clear defined steps is involved in carrying out the economic analysis of a
project: understand and define the problem, integrated system, interpret the data, devise
the alternatives, evaluate the alternatives, identify the best alternative, suggest the best
alternative. With all the shown data, it is concluded that “operating lease” is the preferred
alternative for it has greater present worth and less cost at end of period.
