ENGINEERING

ECONOMY
CONTENT

PRESENT ECONOMYSTUDIES
MONEY TIME RELATIONSHIPS
ANNUITIES
CONTINUOS COMPOUNDING
UNIFORM ARITHMETIC GRADIENT
CAPITALIZED COST
AMORTIZATION
DEPRECIATION
PRESENT ECONOMY STUDIES
In connection with surfacing a new highway, A contractor estimates
that it will cost $ 1.15 per cubic yard per mile (yd3-mile) to haul
the asphalt paving material from the mixing plant to the job site
factors relating to the two site alternatives are as follows
(production costs at each site are the same).
Cost Factor Site A Site B
Average hauling distance 6 miles 4.3 miles
Monthly rental of site $ 1,000 $ 5,000
Cost to set up and remove $ 15,000 $ 25,000
equipment
Hauling expense $ 1.15 / yd3-mi $ 1.15 / yd3-mi
Flag person Not required $ 96 / day
The Job requires 50,000 cubic yards of mixed asphalt paving
material. It is estimated that four months (17 weeks of five
working days per week) will be required for the job. Compare
the two sites in terms of their fixed, variable costs. Which is the
better site? For the selected site, how many cubic yards of paving
material does that the contractor have to deliver before starting
to make a profit if paid $ 8.05 per cubic yard delivered to the
job site?
GIVEN:
Cost Factor Site A Site B
Average hauling distance 6 miles 4.3 miles
Monthly rental of site $ 1,000 $ 5,000
Cost to set up and remove $ 15,000 $ 25,000
equipment
Hauling expense $ 1.15 / yd3-mi $ 1.15 / yd3-mi
Flag person Not required $ 96 / day

•17 weeks of five working days per week

•50, 000 cubic yards of mixed asphalt paving material

REQUIRED:
A. To determine which is the better site
B. Amount of paving material in cubic yards that the contractor
have to deliver before starting to make a profit if paid $
8.05 per cubic yard delivered to the job site?
SOLUTION:
A.) Which is the better site
SITE A SITE B
For the monthly rent

For the hauling expenses:

For the Flag person:

None

Fixed variable Site A Site B

Monthly rate
Cost to set up and
remove equipment
Hauling expense
Flag person $0
Total
Thus the site B which has the larger fixed costs, has the smaller total cost for the Job.
SOLUTION:
B.)The contractor will begin to make a profit at the point where the total revenue
equals total cost as function of the cubic yards of the asphalt pavement mixed
delivered.
Based on Site B, we have:
`

DISCUSSION:
Therefore, site B is better than site A because the total cost of B is less than
site A. By using site B the contractor will begin to make a profit on the job after
delivering 17,149 yd3 of material.
PRESENT ECONOMY STUDIES

A machine part to be machined may be made either from

an alloy of aluminum or steel. There is an order for 8000
units. Steel costs ₱ 3.80 per kg, while aluminum costs ₱ 8.70
per kg, if steel is used. The steel per unit weighs 110 grams;
for aluminum, 30 grams. When steel is used, 50 units can be
produced per hour; for aluminum, 80 units per hour with the
aid of tool costing ₱ 640, which will be useless after the
8,000 units are finished the cost of the machine and
operator is ₱ 10.80 per hour. If all other costs are identical.
Determine which material will be more economical.
GIVEN:
•Number of orders = 8,000 units
•Cost of the machine and operator = ₱ 10.80 per hour
STEEL ALUMINUM
₱ 3.80 per kg ₱ 8.70 per kg
110 grams / unit 30 grams / unit
50 units / hr. 80 units / hr.
none Tool aid: ₱ 640

REQUIRED:
The material that will be more economical
SOLUTION:
FOR STEEL FOR ALUMINUM
Cost per unit: Cost per unit:

Thus, Aluminum allow which has smaller total cost will be more economical

DISCUSSION:
Selection of material plays an important role in economy studies one
should choose a material that will result in the most economical product and will
give the best result.
PRESENT ECONOMY STUDIES

The ore of gold mine in the mountain province contains on

the average, 0.5 gram of gold per ton. One method of
processing costs ₱ 1,650 per ton and recovers 93% of the
gold, while another method costs only ₱ 1,500 per ton and
recovers 81% of the gold. If gold can be sold at ₱ 8,500
per gram, which method is better and by how much?
GIVEN:
0.5 gram of gold per ton of ore
Cost of gold = ₱ 8,500 / gram
First method = ₱ 1,650 / ton; recovers 93% of the gold
Second method = ₱1,500 / ton; recovers 81% of the gold

REQUIRED
A. Comparison of two methods
B. Difference between the net worth of the two methods
SOLUTION:
FIRST METHOD SECOND METHOD

INCOME

NET
WORTH

Difference between their net worth:

Thus, the first method is better since it has a bigger net worth than
the second method by ₱ 360

DISCUSSION:
The first method produced a better output because the percent of
recovery is higher than the second method though its processing cost is higher
than the second method
PRESENT ECONOMY STUDIES

A company manufactures 1,000,000 units of a product

yearly. A new design of the product will reduce materials
cost by 12%. But will increase processing cost by 2%. If
materials cost is ₱ 120 per unit and processing will cost ₱
0.40 per unit, how much can the company afford to pay for
the preparation of the new design and making changes in
equipment?
GIVEN:
1,000,000 units of a product
Percent reduction of material cost = 12%
Percent increase in processing cost = 2%
Materials cost = ₱ 1.20 / unit
Processing cost = ₱ 0.40 / unit

REQUIRED:
Cost that the company afford to pay for the preparation of the new
design and making changes in equipment
SOLUTION:
Solving for the decrease in material cost

Solving for the increase in processing cost:

Thus the company can afford to pay by ₱136,000

DISCUSSION:
The company can afford to pay for the preparation of the new design
and making changes in equipment since the value of decrease in material cost is
much higher than the cost increase in processing.
PRESENT ECONOMY STUDIES

A certain masonry dam requires 200 000 cubic meter of

gravel for its construction. The contractor found two possible
sources for the gravel with the following data:
Source A Source B
Ave. distance, gravel pit to dam 3 km 1.2 km
site
Gravel cost/cu.m at pit ---------- P10.00
Purchase price of pit P800 000 ----------
Road construction necessary P450 000 NONE
Overburden to be removed at ---------- 90 000 cu.m
P4.20/cu.m
Hauling cost/cu.m P4.00 P4.00

Which of the two sites will give lesser cost?

GIVEN:
See the values in the table above
Gravel required for construction = 200 000 cu.m

REQUIRED:
The source that will give lesser cost

SOLUTION:
Solving for the total cost
For A:
Purchase price of the gravel pit = P800 000
Road construction = P450 000
Hauling cost = (200 000m3) (P4.00/m3) (3km) = P2 400 000
TOTAL COST = P3 650 000
For B:
Gravel cost at pit = (200 000m3) (P10.00/m3) = P2 000 000
Overburden removal = P378 000
Hauling cost = P960 000
P3 338 000
Thus, source B will give lesser cost since its total cost is smaller than source A.
PRESENT ECONOMY STUDIES

Two workers, A and B, produce the same product on identical

machines. A receives P25.00 per hour and he produces 100 units
per hour. B is able to produce 120 units per hour. The machine
rate or cost of operation of the machines used by them is
P100/hour.

(A) Determine the cost per piece for worker A

(B) Determine the hourly wage of worker B in order that his cost
per piece will equal that of A.
GIVEN:
Worker A rate = P250/hour
Units produced by worker A = 100 units/hour
Units produced by worker B = 120 units/hour
Machine rate = P100/hour

REQUIRED:
A. Cost per piece for Worker A
B. Hourly wage of Worker B in order that his cost per piece will
equal that of A

SOLUTION:
Solving for the cost per piece for Worker A:
= Rate of Worker A + Machine rate
Units Produced by Worker A
= P25.00/hour + P100.00/hour
100 units/hour
= P1.25/unit
The cost per piece for Worker A is P1.25
For the hourly wage of Worker Bin order that his cost per piece will be equal
that of A:
Let W be the hourly wage of Worker B
P1.25 = W + P100/hour
PC 120pcs/hour
W = P50.00/hour

The hourly wage of Worker B is P50.00

DISCUSSION:
The hourly wage of Worker B is higher than Worker A’s if the cost per
piece is equal since the unit per hour produced by Worker B is higher than A’s.
PRESENT ECONOMY STUDIES

A machine used for cutting materials in a factory has the following

outputs per hour at various speeds and requires periodic tool
regrinding at the intervals cited.
Speed Output per hour Tool regrinding
A 200 pieces Every 8 hours
B 250 pieces Every 7 hours
C 280 pieces Every 5 hours
A set of tools costs P1800 and can be ground twenty times. Each
regrinding costs P18.00 and the time needed to regrind and change
tools is 1 hour. The machine operator is paid P28.00 per hour,
including the time the tool is changed. The tool grinder who also sets
the tools to the machine is paid P25.00 per hour. The hourly rate
chargeable against the machine is P54.00, regardless of machine
speed. Which speed is the most economical?
GIVEN:
The parameters given at the table
Tool cost = P1800
Each regrinding cost = P18.00
Time required to regrind and change tools = 1 hour
Machine operator rate = P28.00/hour
Tool grinder rate = P25.00/hour
Hourly rate chargeable against the machine = P54.00

REQUIRED:
The most economical speed
SOLUTION:
FOR SPEED A
Output per hour = 200pcs
Pieces produced in 8 hours = (200pcs/hour) (8hours) = 1600pcs
Cost of production:
Tool cost = P1800/20 = P90.00
Regrinding cost = P18.00
Machine operator = (8+1) hrs (P28.00hrs) = P252.00
Tool grinder = (1hr) (P25/hr) = P25.00
Machine cost = (8hrs)(P54/hr) = P432.00
TOTAL COST = P817.00

Cost per piece = Total Production cost

Pcs produced in 8 hrs
= P817.00
1600 pcs
Cost per piece = P0.510625/pc
FOR SPEED B:
Output per hour = 250pcs
Pieces produced in 7 hours = (250pcs/hour) (7hours) = 1750pcs
Cost of production:
Tool cost = P1800/20 = P90.00
Regrinding cost = P18.00
Machine operator = (7+1) hrs (P28.00hrs) = P224.00
Tool grinder = (1hr) (P25/hr) = P25.00
Machine cost = (7hrs) (P54/hr) = P378.00
TOTAL COST = P735.00

Cost per piece = Total Production cost

Pcs produced in 7 hrs
= P735.00
1750 pcs
Cost per piece = P0.42/pc
FOR SPEED C:
Output per hour = 280pcs
Pieces produced in 5 hours = (280pcs/hour) (5hours) = 1400pcs
Cost of production:
Tool cost = P1800/20 = P90.00
Regrinding cost = P18.00
Machine operator = (5+1) hrs (P28.00hrs) = P168.00
Tool grinder = (1hr) (P25/hr) = P25.00
Machine cost = (5hrs) (P54/hr) = P270.00
TOTAL COST = P571.00

Cost per piece = Total Production cost

Pcs produced in 8 hrs
= P571.00
1400 pcs
Cost per piece = P0.4078571429/pc
Thus, speed C is the most economical since it has the lowest cost per piece
Discussion:
The number of output per hour has a great effect for the cost per piece in
different duration
PRESENT ECONOMY STUDIES

A man decide to paint his house himself after office hours.

He can paint 25sq.m per hour on the average. It takes him
15 minutes to prepare his materials and 20 minutes to keep
materials after painting. If there are 900sq.m to be painted,
how long will it take him to paint his house if he devotes 2.5
hours each day?
GIVEN:
Average speed = 25sq.m per hour
Time to prepare the materials = 15 minutes
Time to keep the materials = 20 minutes
Area to be painted = 900sq.m
Time devoted to paint each day = 2.5 hours

REQUIRED:
Time it will take the man to paint his house

SOLUTION:
No. of hours required to paint the house:
= 900m2
25m2/hr
= 36 hours
Net time devoted for painting:
= 2.5 hours – (15min + 20 min) (1hr/60 min)
= 1.916666667 hrs/day
 No. of days:
= 36 hours
1.9167 hrs/day
No. of days = 19 days

It will take 19 days for the man to paint his house

DISCUSSION:
The number of days to finish painting the house is too long. Maybe it’s
better if the man increases the time per day or to add number of worker to
decrease the number of working days
MONEY-TIME RELATIONSHIPS

Determine the ordinary simple interest on P10,000 for 9

months and 10 days if the rate of interest is 12%.
GIVEN:
Principal Amount= P 10,000
Rate of Interest= 12%
Number of Days= 9months & 10 days

REQUIRED:
Ordinary Simple Interest

SOLUTION:
Ordinary Simple Interest= Pi (d/360)
Where d=9 months (30days/months) + 10 days
d= 280 days
Substituting:
Ordinary Simple Interest= P 10 000(0.12)(280/360)
= P 933.33
Thus, the ordinary simple interest is P 933.33
DISCUSSION:
To compute for the ordinary simple interest, use the formula I= Pi(d/360) where
P is the principal amount, i is the rate of interest expressed in decimal form and d is the
number of days in the interest period.
MONEY-TIME RELATIONSHIPS

Determine the exact simple interest on P5,000 for the

period from January 15 to June 20,1993, if the rate of
simple interest is 14%.
GIVEN:
Principal Amount= P5,000
Rate of Interest= 14%
Period= January 15 to June 20,1993

REQUIRED:
Exact Simple Interest

SOLUTION:
For the number of Days:
January 16-31 = 16 Days
February 1-28 = 28 Days
March 1-31 = 31 Days
April 1-30 = 30 Days
May 1-31 = 31 Days
June 1-20 = 20 Days
Total = 156 Days
Since 1993 is an ordinary year, use the formula Exact Simple interest=
Pi(d/365)
Substituting:
Exact Simple Interest = Pi(d/365)
= P 5,000(0.14) (156/365)
Exact Simple Interest= P 299.18

Therefore the Exact Simple Interest is P299.18

DISCUSSION:
In this problem, it is important to know the number of days in
each month and it is also a must to know if the year during the interest
period is an ordinary year or a leap year because the formula that will
be used depend on it.
MONEY-TIME RELATIONSHIPS

Compute the total amount of P1000 due after 3 years using:

a. Simple interest rate of 10% per year
b. Interest rate of 10% compounded yearly
Also, fill in the table shown below for the compound interest
and :
AMOUNT AT THE INTEREST AMOUNT AMOUNT AT THE
PERIOD BEGINNING OF1 FOR PERIOD END OF THE PERIOD
THE PERIOD
1
2
3
GIVEN:
Principal Amount = P1000
Number of Years = 3 years
Simple Interest Rate = 10% per year

REQUIRED:
Total amount of P1000 due after 3 years using simple interest rate
of 10% per year and interest rate of 10% compounded yearly

SOLUTION:
I = Pin F= P1000+P300
= P1000(0.10)(3) F=P1300
I = P300
Thus, the total amount of P1000 due after 3 years using simple interest rate
of 10% per year is P1300.

F= P(1+i)n
= P1000 (1+0.10)3
= P1331
For the table:
Interest amount for Period 1 = Pi
= P1000(0.10)
=P100
Amount at the end of Period 1= P+Pi
= P1000 + P100
= P1100
Interest amount for Period 2 = Pi
= P1100(0.10)
=P110
Amount at the end of Period 2= P+Pi
= P1100 + P110
= P1210
Interest amount for Period 3 = Pi
= P1210(0.10)
=P121
Amount at the end of Period 3= P+Pi
= P1210 + P121
= P1331
For the table:
AMOUNT AT THE INTEREST AMOUNT AT THE
PERIOD BEGINNING OF1 AMOUNT FOR END OF THE
THE PERIOD PERIOD PERIOD
1 1000 100 1100
2 1100 110 1210
3 1210 121 1331

Thus, the total amount of P1000 due after 3 years using interest rate of 10
% compounded yearly is P 1331.

DISCUSSION:

It can be noticed that the cumulative amount of interest owed is a

linear function of time until the interest is repaid.
MONEY-TIME RELATIONSHIPS

If the sum of P 12,000 is deposited in an account earning

interest at the rate of 9% compounded quarterly, what will it
become at the end of 8 years
GIVEN:
Principal Amount= P12,000
Rate of Interest= 9% compounded quarterly
No. of years= 8 years

REQUIRED:
Total amount of P12,000 after 8 years having an interest rate of
9% compounded quarterly

SOLUTION:
F = P (1+r/m) nm
= P 12,000 (1+ 0.09/4) 8x4
F = P 24,457.24
Thus, P 12 000 will be P 24,457.24 after 8 years

DISCUSSION:
If the principal amount of P 12,000 will have an interest of 9%
compounded quarterly, it will be P24,457.24 after 8 years.
MONEY-TIME RELATIONSHIPS

At a certain interest rate compounded quarterly, P1 000 will

amount to P 4500 in 15 years. What is the amount at the end
10 years?
GIVEN:
Principal Amount=P 1000
Total Amount after 15 years= P 4500
Compounded Quarterly= m=4

REQUIRED:
Amount of P 1000 after 10 years

SOLUTION:
F15 = P (1+i) nm
P 4500 = P 1000 (1+i) 15x4
=
1.0253848 = 1+i
1.0253848-1= i
i= 0.0253848= 2.53848%
 Getting the Future Amount after 10 years
F10 = P 1000 (1+ 0.0253848)10x4
F10= P 2725.17
Thus, P 1000 will be P 2725.17 after 10 years.

DISCUSSION:
In order to solve the problem, we need to solve first the rate of interest in
15 years, the after that use the rate of interest that computed in solving for
the future amount after 10 years using the formula F=P(1+i)nm.
MONEY-TIME RELATIONSHIPS
Consider a situation in which we borrow $8,000 and agree to repay it in
four years at an interest rate of 10% per year.

Plan 1 $2,000 of loan principal is repaid at the end of each year one
through four.
Plan 2 indicates that none of the loan principal is repaid until the end of the
fourth year.
Plan 3 requires that we repay equal end-of-year amounts of $2,524.
Plan 4 shows that no interest and no principal are repaid for the first three
years of loan period. Then at the end of the fourth year, the original loan
principal plus the accumulated interest for the four years is repaid in a
single lump-sum amount.

Determine which of the four (4) plans by which the principal of this loan
(i.e.,$8,000) and the interest on it can be repaid is the most economical.
GIVEN:
Principal Amount = $8,000
Rate of Interest = 10%
No. of Years = 4 years
Plan 1-4

REQUIRED:
The most economical plan

SOLUTION:
For Plan 1
P1= $8000 ; Pi = $800
P2=P1- $2000 = $6000 ; Pi2 =$600
P3=P2- $2000 = $4000 ; Pi3 =$400
P4=P3- $2000 = $2000 ; Pi4 =$200
TOTAL = $20000 ; = $2000
For Plan 2
P1= $8000 ; Pi = $800
P2= $8000 ; Pi2 = $800
P3= $8000 ; Pi3 = $800
P4= $8000 ; Pi4 = $800
TOTAL = $32000 ; $3200

For Plan 3
P1 = $8000 ; Pi = $800
P2 = P1(1+i)- $2524 = $6276 ; Pi2 = $627.6
P3 = P2(1+i)- $2524 = $4380 ; Pi3 = $438
P4 = P3(1+i)- $2524 = $2294 ; Pi4 = $229.4
TOTAL = $20960 ; $209.6
For Plan 4
P1 = $8000 ; Pi= $800
P2 = P(1+i) = $8800 ; Pi2 = $880
P3= P(1+i) = $9860 ; Pi3 = $986
P4= P(1+i) = $10648 ; Pi4 = $1065
TOTAL = $37130 ; $3713
Thus, the most economical is plan 1.
MONEY-TIME RELATIONSHIPS

What payment “X” 10 years from now is equivalent to a

payment of P1,000 six years from now, if interest is 15%
compounded (a) annually, and (b) monthly?
GIVEN:
Rate of Interest = 15%
Principal Amount = P1000
No. of Years (A) = 6 years
No. of Years (B) = 10 years

REQUIRED:
Payment “X” (Principal Amount B)

SOLUTION:
(A)
Equate their present values
@ 10 years @ 6 years
=(X)(1.15)-10 =(1000)(1.15)-6
(X)(1.15)-10 = P1000 (1.15)-6
X = P1749.01

Therefore, P1749.01 is the payment equivalent to P1000 if compounded

annually.
(B)
i=15% ÷ 12 months = 1.25%
n1 = 10 years x 12 months/yr = 120 months
n2 = 6 years x 12 months/yr = 72 months

Substituting:
X(1+0.0125)-120 = P10009(1+0.025)-72
X = P1815.35

Therefore, P1749.01 is the payment equivalent to P1000 if compounded

annually.

DISCUSSION:
It can be noticed that the higher the number of periods, the higher the
equivalent value will be.
MONEY-TIME RELATIONSHIPS

Before evaluating the economic merits of a proposed

investment, the XYZ Corporation insists that its engineers
develop a cash flow diagram of the proposal. An investment of
$10,000 can be made that will produce uniform annual
revenue of $5,310 for five years and then have a market
value of $2,000 at the end of year five. Annual expenses will
be $3,000 at the end of each year for operating and
maintaining project. Draw a cash flow diagram for the five-
year life of the project. Use the corporation’s viewpoint.
GIVEN:
Amount of Investment = $10,000
Annual Revenue = $5,310
Market Value = $2,000
Annual Expenses = $3,000

REQUIRED:
Cash flow diagram for the five year life of the project

CASH FLOW DIAGRAM:

DISCUSSION:
The cash flow diagram shows the revenues and expenses of XYZ
corporation for 5 years.
MONEY-TIME RELATIONSHIPS

Calculate the effective rate corresponding to each of the

following rates:
(a) 9% compounded semi-annually
(b) 9% compounded quarterly
(c) 9% compounded bi-monthly
(d) 9% compounded monthly
(e) 9% compounded continuously
GIVEN:
Rate of Interest = 9%

REQUIRED:
Effective Rate

SOLUTION:
A) ERI = (1+0.09/2)2-1 = 9.2025%
B) ERI = (1+0.09/4)4-1 = 9.3083%
C) ERI = (1+0.09/6)6-1 = 9.3443%
D) ERI = (1.0.09/12)12-1 = 9.3807%
E) ERI = (e(0.09)(1))-1 = 9.4174%

DISCUSSION:
In this problem, the ERI is directly proportional to the compounding
period.
MONEY-TIME RELATIONSHIPS

Compare the accumulated values at the end of 10 years if

P100 is invested at the rate of 12% per year compounded
annually, semi-annually, quarterly, monthly, daily, and
continuously.
GIVEN:
Principal Amount = P100
Interest Rate = 12%
No. of years = 10 years
REQUIRED:
Comparison of the accumulated values using the given conditions

SOLUTION:
•Annually
i = 12%/1=12%
F = P(1+i)m = P100(1.12)10 = P310.58
•Semi-Annually
i = 12%/2=6%
ERI = (1+i)n-1 = (1+0.06)2-1 = 0.1236
F = P100(1.1236)10 = P320.71
•Quarterly
i = 12%/4=3%
ERI = (1+i)n-1 = (1+0.03)4-1 = 0.1255
F = P100(1.1255)10 = P326.18
•Monthly
i = 12%/12=1%
ERI = (1+i)n-1 = (1+0.01)12-1 = 0.1268
F = P100(1.1268)10 = P329.97
•Daily
i = 12%/365 = 3/9125%
ERI = (1+i)n-1 = (1+3/9125)-1 = 0.1275
F = P1000(1.1275)10 = P331.95
•Continuously
F = Pern = P100e(.12)(10) = P332.01
Thus, it can be noticed that the continuously compounded amount has
the highest value.

DISCUSSION:
The accumulated values are directly proportional to the compounding time.
MONEY-TIME RELATIONSHIPS

A man borrows P10,000 from a loan firm. The rate of simple

interest is 15%, but the interest is to be deducted from the loan
at the time the money is borrowed. At the end of one year he
has to pay back P10,000. What is the actual rate of interest?
GIVEN:
F = P10,000
Rate of interest = 15%

REQUIRED:
Actual Rate of Interest

SOLUTION:
P = P10,000 - 0.15(10,000)
P = P8500
=
1+i = 1.1764705882
i = 0.1764705882 x 100
i = 17.64705882%
Therefore, the actual rate of interest is 17.64705882%
DISCUSSION:
The man shall get P8,500 after the interest has been deducted. The interest
used in the problem was 15% but the actual rate of interest is higher at
17.65%.
ANNUITIES

Suppose you make 15 equal annual deposits of $1,000 each

into a bank account paying 5% interest per year. The first
deposit will be made one year from today. How much money
can be withdrawn from this bank account immediately after the
15th deposit?
GIVEN:
A = $1,000
i = 5%
n = 15

REQUIRED:
Amount of money that can be withdrawn after the 15th deposit

CASH FLOW DIAGRAM

SOLUTION:
F=A

F = $1,000
F = $21,578.56
Therefore, $21,578.56 can be withdrawn after the 15th deposit.

DISCUSSION:
The formula of the future cost when annuity is given was used in
the problem in order to get the amount of money that can be withdrawn
after the 15th deposit.
ANNUITIES

Suppose that your rich uncle has $1,000,000 that he wishes to

distribute to his heirs at the rate of $100,000 per year. If the
$1,000,000 is deposited in a bank account that earns 6%
interest per year, how many years will it take to completely
deplete the account? How long will it take if the account earns
8% interest per year instead of 6%?
GIVEN:
P = $1,000,000
A = $100,000
i = 6% and 8%

REQUIRED:
Number of years before the depletion of the account

CASH FLOW DIAGRAM

SOLUTION:
A) For 6% interest:
P=A
$1,000,000 = $100,000
n = 15.7252 years
B) For 8% interest:
P=A
$1,000,000 = $100,000
n = 20.91 years

Therefore, the account will be depleted in 15.7252 years at 6% interest

rate and 20.91 years at 8% interest rate.

DISCUSSION:
It can be drawn from the solution that as the rate of interest
increases, the number of years also increases.
ANNUITIES

An enterprising student is planning to have personal savings

totalling $1,000,000 when she retires at age 65. She is now
20 years old. If the annual interest rate will average 7% over
the next 45 years on her savings account, what equal end-of-
year amount must she save to accomplish her goal?
GIVEN:
F = $1,000,000
i = 7%
n = 65-20 = 45 years

REQUIRED:
End-of-year amount to accomplish her goal

CASH FLOW DIAGRAM

SOLUTION:
A=F
A = $1,000,000
A = $3,499.570995
Therefore, she must save $3,499.570955 yearly to have $1,000,000 at
the age of 65.

DISCUSSION:
The formula for annuity when given the future value was used in
order to find the end-of-year amount needed to accomplish her goal.
DEFERRED ANNUITIES

A person buys a piece of property for P100,000 down

payment and ten deferred semi-annual payments of P8,000
each starting three years from now. What is the present value
of the investment if the rate of interest is 12% compounded
semi-annually?
GIVEN:
A= P 8000
P= P100 000
i= 12 %
m= 2
n=10

REQUIRED:
Present value of investment

CASH FLOW DIAGRAM:

SOLUTION:
For P1:
P1= A ( )
= P 8 000 ( )
P1= P 58 880.69641
ForP2:
P2= P1
P2 =P 58 880.69641
P2 =P 43 999.08162
For PT:
PT= P0 +P2
PT= P 100 000 + P 43 999.08162
PT= P 143 999.08162
The present value of investment is P 143 999.08162

DISCUSSION:
To solve for the present value of the investment bring all the
expenses to the year zero
DEFERRED ANNUITIES

A businessman borrowed P300,000 with the interest at the rate

of 6% compounded semi-annually. He agrees to discharge his
obligation by paying a series of 8 equal semi-annual
payments, the first being due at the end of 5 1/2 years. Find
semi-annual payment.
GIVEN:
P = P 300, 000
i = 6% (compounded semi-annually)
n=8
REQUIRED:
Semi-annual payment
CASH FLOW DIAGRAM:
SOLUTION:
Solving for P1:
P1= F = P
=P 300 000
P1= F = P 403 174. 9135
Solving for A:
A=P( )
= P 403 174.9135 ( )
A= P 57 434.84229
Thus, the semi-annual payment is P 57 434.84229

DISCUSSION:
To get the semi-annual payment get the future worth of the given
present worth and make it as annuity.
DEFERRED ANNUITIES

A commercial building can be acquired at a down payment of

P500,000 and a yearly payment of P100,000 at the end of
each year for a period of 10 years, starting at the end of 5
years from the date of purchase. If money is worth 12%
compounded yearly, what is the cash price of the commercial
building?
GIVEN:
A= P100 000
P= P500 000
n= 10 years
i= 12%

REQUIRED:
Cash price of the commercial building

CASH FLOW DIAGRAM:

SOLUTION:
P1= A ( )
P1= P 100 000 ( )
P1= P 565 022.3028

PT=P1 + P 500 000

PT =P 565 022.3028 + P 500 000
PT = P 859 081.8882

Thus the cash price of the commercial building is P 859 081.8882

DISCUSSION:
The cash flow shows a deferred annuity
ANNUITY DUE

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 P200,000 each year for 5 years, each
payment being made at the beginning of each year. The
second bidder offered to pay P120,000 the first year,
P180,000 the second year, and P270,000 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?
GIVEN:
n= 5 years
I= 12 %
A1 = P 200 000
P2 = P 120 000

REQUIRED:
The bid the owner of the plant should accept

CASH FLOW DIAGRAM:

SOLUTION:

For the first bidder:

P1= A ( )
P1= P200 000 ( )
P1= P807 469.8693

For the second bidder:

P2= P 120 000 + P180 000 + P270 000 ( )
P2= P859 727.1807
Thus the owner of the manufacturing plant should accept the offer of the
second bidder

DISCUSSION:
To compare the offers of the bidders. We must solve either the present
or future value of their bid
ANNUITY DUE

A man will deposit P200 with savings and loan association at

the beginning of each 3 months for 9 years. If the association
pays interest at the rate of 5.5% quarterly. Find the sum to his
credit just after the last deposit.
GIVEN:
A = P200
n = 9 years
i = 5.5%

REQUIRED:
Sum of his credit

CASH FLOW DIAGRAM:

SOLUTION:

F= P9363
Thus, the sum of his credit is P9363.

DISCUSSION:
The cash flow starts at zero since the deposit begins at the beginning of
each month.
ANNUITY DUE

At what interest rate payable quarterly will payments of P500

at the beginning of each 3 months for 7 years discharge a
debt of P12,500 due immediately?
GIVEN:
A = P500
P = P12 500

REQUIRED:
Interest Rate

CASH FLOW DIAGRAM:

SOLUTION:

Thus, the interest rate is 3.44%.

DISCUSSION:
To determine the interest rate, the formula for annuity due, finding P
when A is used.
ANNUITY DUE

Under a factory savings plan, a workman deposits P25 at the

beginning of each month for 4 years, and the management
guarantees accumulation at 6% compounded monthly. How
much stands to the workman's credit at the end of 4 years?
GIVEN:
A = P25
N = 4 years
i = 6%
m = 12

REQUIRED:
Amount that stands to the work man's credit

CASH FLOW DIAGRAM:

SOLUTION:

Thus, the workman’s credit is P1359.21

DISCUSSION:
To solve for the problem, use the formula for annuity due finding F when
given A.
PERPETUITY

To maintain a bridge, P5,000 will be required at the end of 3

years and annually thereafter. If money is worth 8%,
determine the present worth of all future maintenance.
GIVEN:
A = P5,000
I = 8%

REQUIRED:
Present worth of all future maintenance

CASH FLOW DIAGRAM:

SOLUTION:

Thus the present of all future maintenance is P53 583.6727

DISCUSSION:
Since it was a deferred annuity, convert all the cost into one present
value on the zeroth year.
CONTINUOS COMPOUNDING

Suppose that one has a present loan of $1,000 and desires to

determine what equivalent uniform yearly payments could be
obtained from it, from 10 years the nominal interest rate is
20% compounded continuously.
GIVEN:
P = $1,000
N = 10 years
i = 20%
m=∞

REQUIRED:
Amount of equivalent end-of-year payments

CASH FLOW DIAGRAM:

SOLUTION:

A= $ 256.056196

Thus, the equivalent end-of-year payment is $ 256.056196

DISCUSSION:
The problem used the compounding capital recover to find the end-of-
year equivalent
CONTINUOS COMPOUNDING

An individual needs $12,000 immediately as down payment

on a new home. Supposed that he can borrow this money from
his insurance company. He must repay the loan in equal
payments every six months over the next eight years. The
nominal interest being charged is 7% compounded
continuously. What is the amount of each payment?
GIVEN:
P = $12,000
N = 8 years
i = 7%

REQUIRED:
Amount of each payment every six months

CASH FLOW DIAGRAM:

SOLUTION:

A=P[ ]

= $12000 [ ]

A = $996.8412799

Thus, the payments every six months is $996.84.

DISCUSSION:
In this problem, perpetuity formula was used to solve for the payment.
UNIFORM ARITHMETIC GRADIENT

Find the present worth of all the cash disbursement using

gradient interest formulas if money is worth 15% per annum
annual cash disbursement increase by P1000 every year
thereafter, until the end of the fourth year the first cash
disbursements amounts to P5000.
GIVEN:
i = 15%
G = P1000
FC = P5000

REQUIRED:
Present worth of all the cash disbursement

CASH FLOW DIAGRAM:

{

SOLUTION:

PG = G {
= P1000 {

PG = P3786.435869 + P5000
PG = P8786.435869

Thus, the present worth of all the cash disbursement is P8786.44.

DISCUSSION:
Using the gradient to present equivalent conversion factor & adding
P5000 on it, the present worth can be obtain.
UNIFORM ARITHMETIC GRADIENT

Suppose a man receives an initial annual salary of P12,000

increasing at the rate of P1,000 a year. If money is worth
10%, determine his equivalent uniform salary for a period of
8 years.
GIVEN:
G = P1000
i = 10%
n = 8years
P = P12000

REQUIRED:
Equivalent uniform salary

CASH FLOW DIAGRAM:

SOLUTION:

AG = G [ - ]

= P1000 [ - ]

AG = P3004.478594 + P12000
AG= P15004.478594

Thus, the equivalent uniform salary is P15004.48.

DISCUSSION:
Since the required is the equivalent uniform salary, the uniform series
conversion factor was used.
UNIFORM ARITHMETIC GRADIENT

The year-end operating and maintenance costs of a certain

machine are estimated to be P2,000 the first year and to
increase by P500 each year during its 4 years life. If capital is
worth 12%, determine the equivalent uniform year-end costs.
GIVEN:
P = P2000
G = P500
N = 4 years
i = 12%

REQUIRED:
Equivalent uniform year-end cost

CASH FLOW DIAGRAM:

SOLUTION:

AG = G [ - ]

= P500[ - ]

AG = P679.43 + P2000
AG= P2679.43

Thus, the equivalent uniform year-end cost is P2679.43.

DISCUSSION:
To solve for the equivalent uniform salary, use the uniform series
conversion factor.
CAPITALIZED COST

Determine the capitalized cost of a structure that required an

initial investment of P 1500 000 and an annual maintenance
of P 150 000 interest is 15%.
GIVEN:
FC=P1 500 000
A=P150 000
I=15%

REQUIRED:
Capitalized cost

CASH FLOW DIAGRAM:

SOLUTION:

Thus, the capitalized cost is P 2 500 000.

DISCUSSION:
Capitalized cost is the sum of the first cost and perpetual or present
worth of the expenses.
CAPITALIZED COST

A new engine was installed by a textile plant at a cost of

P300 000 and projected to have a useful life of 15 years at
the end of its useful life, it is estimated to have a salvage value
of P30 000. Determine its capitalized cost if interest is 18%
compounded annually?
GIVEN:
FC= P300 000
K=15 years
SV= P30 000
I= 18%

REQUIRED:
Capitalized Cost

CASH FLOW DIAGRAM:

SOLUTION:

Thus, the capitalized cost is P324 608.1738

DISCUSSION:
In this case, replacement only, no maintenance or repair therefore
capitalized cost is the sum of the first cost and replacement fee.
CAPITALIZED COST

Determine the capitalized cost of a research laboratory which

requires P500 000 for original construction, P100 000 at the
end of every year for the first 6 years and then P120 000
every each year thereafter for operating expenses, and P500
000 every 5 years for replacement of equipment with the
interest at 12% per annum.
GIVEN:
FC= P5000 000 Q1= P120 000
A= P100 000 n2= 5 years
n1= 6 years Q2= P500 000
i= 12%

REQUIRED:
Capitalize cost

CASH FLOW DIAGRAM:

SOLUTION:

Thus, the capitalized cost is P6 573 645.787

DISCUSSION:
The capitalized cost is obtained by adding the first cost. The operating
cost & replacement cost.
CAPITALIZED COST

Corrosive liquids are transported through pipes in a factory.

Ordinary pipes will have an installed cost of P30 000 and
their useful life is 3 years. Stainless steel pipes are highly
resistant to the corrosive effect of the liquids and are being
considered as an alternative these pipes are estimated to have
an installed of P55 000. Scrap value is zero in each case if the
money is worth 8% and assuming replacement costs to be the
same as the original prices, what should be the useful life of
the stainless steel pipes to have equal capitalized cost as the
ordinary pipes?
GIVEN:
Ordinary Pipe
FC= P30 000
K= 3 years
I= 8%
Stainless Steel
FC= P55 000
I=8%
REQUIRED:
Useful life of stainless steel pipe

CASH FLOW DIAGRAM:

SOLUTION:

Thus, the useful life of a stainless steel pipes is must be 6.17 years.

DISCUSSION:
Since the installed cost of stainless steel pipe is higher than ordinary
pipes and by assuming an equal capitalized cost, the useful life of stainless steel
is longer.
AMORTIZATION

A debt P10 000 with interest at the rate of 20% compounded

semiannually is to be amortized by 5 equal payments by the
end of each 6 months, the first payment is to be made after 3
years. Find the semiannual payment and construct an
amortization schedule.
GIVEN:
P= P10 000
I=20%
N=5 years

REQUIRED:
Semiannual payment and amortization schedule

CASH FLOW DIAGRAM:

SOLUTION:

Thus, the semiannual payment is P4248.484808

DISCUSSION:
First, to solve for the semiannual payment, use the formula under
deferred annuity finding A when n P.
AMMORTIZATION SCHEDULE

Outstanding Interest Due at the

Period Principal At the End of the Period Payment Principal Repaid
Beginning of the at the EndPeriod
Period
1 P10 000 P1 000
2 P11 000 P1 100
3 P12 100 P1 210
4 P13 310 P1 331
5 P14 641 P1 464.1
6 P16 105.10 P1 610.51 P4248.484808 P2 637.974808
7 P13 467.12519 P1 346.712519 P4248.484808 P2 901.772289
8 P10 565.3529 P1 056.53529 P4248.484808 P3 191.949518
9 P7 373.403382 P737.3403382 P4248.484808 P3 511.1447
10 P3 862.258912 P386.2258912 P4248.484808 P3 862.258917
TOTAL P11 242.42404 P21242.42404 P16 105.10
DEPRECIATION
Straight Line Formula

On Jan. 1, 1996, the purchasing engineer of Cement Co.

purchased a new machine at a cost of P140, 000.00.
Depreciation has been computed by straight line method
based on an estimated useful life of five years and residual
scrap value of P12, 800.00.
On Jan.2, 1996 extraordinary repairs (which were almost
equivalent to a rebuilding of machinery) were performed at a
cost of P30, 400.00. Because of the thorough going nature of
these repairs, the normal life of the machinery was extended
materially. The revised estimate of useful life four years from
Jan. 1996.
Determine the adjusted provision for depreciation on Dec. 31,
1996. Assume payment in cash for the machine and
extraordinary repairs.
GIVEN:
First Cost, FC = P14000
Period, n = 5yrs
Salvage Value, SV = P12800
Repair Cost = P30400

REQUIRED:
To determine the adjusted provision for depreciation on Dec. 31, 1981

CASH FLOW DIAGRAM:

SOLUTION:
Using Straight Line Method of Depreciation,
FC  SV
d1  n

P140000  P12800
d1 
5
d1= P25440 per year
After 3 years, total depreciation = d1(3)
Total depreciation, T  P25440 / year 3 years 
Total depreciation, T  P76320.00
Solving for the adjusted provision for depreciation on Dec. 31, 1981 (d),
FC  T  P30400  SV
d
2
( P140000  P76320)  P30400  P12800
d
2
d  P 40640.00
DISCUSSION:
Total depreciation from 1978 to 1983 must be initially solved using the
straight line method of depreciation. After which, solving for the adjusted
provision for depreciation on Dec. 31. These values will be divided by two, since
there is a period of two years from 1981 to 1983, where the repair cost and
scrap values were designated.
DEPRECIATION
Sinking Fund Formula

A plant erected to manufacture socks has a first cost of

P10000000 with an estimated value of P1000000 at the end
of 25 years. Find its appraised value to the nearest P100 by
sinking fund method, assuming an interest rate of 6% at the
end of (1) 10 years (2) 20 years.
GIVEN:
First Cost, FC  P10000000
Estimated Value, SV  P100000
Period, n years = 25
nterest rate, i = 6%

REQUIRED:
To determine the appraised value toe the nearest P100, (book value)

CASH FLOW DIAGRAM:

SOLUTION:
Using Sinking Fund Method:
d 
FC  SV i
[1  i ^ n]  1

d
P10000000  P100000(0.06)
[(1  0.06)^ 25]  1
d  P180444.51  A
Solving for the book value after 10 years
[(1  i)^ n]  1
F  A 
 i 
[(1  0.06)^10]  1
F  P180444.51 
 0.06 
F  P 2378402.09
Let BV = Book Value
BV  FC  F
BV  P10000000  P 2378402.09
BV  P7621597.91
BV  P7621600
Solving for the book value after 20 years
[(1  i )^ n]  1
F  A 
 i 
[(1  0.06)^ 20]  1
F  P180444.51 
 0.06 
F  P6637757.98
Let BV = Book Value
BV  FC  F
BV  P10000000  P6637757.98
BV  P3362242.02
BV  P3362200
DISCUSSION:
First, solve for the its total depreciation after 25 years, and this will
serve as A in the next formula that will be used in getting the book values for 10
years and 20 years. Use the concept of (F/A, i%, n), then the solved value of F
will be deducted from the first cost, and this will serve as the book value. Note
that the final answer should be rounded off to the nearest hundreds, as mentioned
in the problem.
DEPRECIATION
MATHESON FORMULA or DECLINING BALANCE METHOD

The original cost of a certain machine is P150 000, has a life

of 8 years with a salvage value of P9 000. How much is the
depreciation on the 5th year, if the constant percentage of
declining value is used.
GIVEN:
First Cost, FC = P150 000
Period, n years = 8yrs
Salvage Value, SV =P9000

REQUIRED:
To determine the depreciation on the 5th year, d5

CASH FLOW DIAGRAM:

SOLUTION:
Using Matheson formula:
SV
k  1 n
FC
P9000
k  1 8
P150000
k  0.29649222173
Solving for d5, the formula to use is d5 =k(C5-1):
C5-1  FC1  k 5-1
C5-1 P1500001  0.29649222173 4
C5-1  P36742.35
Hence, depreciation on the 5th year, d5:
d5  k (C5-1)
d5  0.29649222173P36742.35
d5  P10893.82
DISCUSSION:
Solving for this type of problem uses the formulas stated in the Matheson
formula. First, solve for the value of k, then this value will be used in solving for
the book cost. Note that the period (n) will be deducted by 1, since it was
emphasized that the value asked was for the depreciation on the 5th year
DEPRECIATION
DOUBLE DECLINING BALANCE METHOD

Erectors Co. owns earth moving equipment that cost P90

000.00. After 8 years it will have estimated salvage value of
P18 000.00. Compute the depreciation charge for double rate
declining balance method for first two years and the book
value at the end of 5 years.
GIVEN:
First Cost, FC = P90 000
Period, n years = 8yrs
Salvage Value, SV =P18000

REQUIRED:

To determine the values of depreciation on the 1st and 2nd year, d1 and d2
respectively
To determine the book value at the end of 5 years, BV

CASH FLOW DIAGRAM:

SOLUTION:
Using double declining balance method:
k=2/n
k=2/8
k=0.25
To solve for the value of depreciation on the 1st year, use the formula
d1  FC k 1  k  1-1
d1  P900000.251
d1=P22500
To solve for the value of depreciation on the 2nd year, use the formula
d2  FC k 1  k  2-1
d2  P900000.251 0.25 1
d2=P16875
Book value at the end of 5 years,
BV=FC(1-K)^5
=P90000(1-0.25)^5
BV=P21537.22
DISCUSSION:
Double declining balance method is quite similar to Matheson formula, they just
differ on how the value of k is solved.
DEPRECIATION

Sum of The Years Method

A certain equipment costs P7000 has an economic life “n”

years and salvage value of P350 at the end of “n”years. If the
book value at the end of 4 years is equal to P2197.22,
compute the economic life of the equipmet using sum of the
years digit method.
GIVEN:
Co = P7000
Cn = P350
C4 = P2197.22

REQUIRED:
Economic life of the equipment

CASH FLOW DIAGRAM:

SOLUTION:
Since Co and C4 is given, we can get D4

Using quadratic formula:

Thus, economic equation life of equipment is 8 years.

DISCUSSION:
The equipment must have an economic life of 8 years for this to have a
book value pg P2197.22 at the end of it 4th year.
DEPRECIATION

Working Hours Method

A certain equipment costs P500000 when brand new has a

salvage value of “x” pesos and is expected to last for 23 000
hours in aperiod of 5 years. In the first year of service it was
used for 7 000 hours. If the book value of the equipment is
P360 000 at the end of first year, What is the value of “x”?
GIVEN:
Co = P7000
Total no. of hours = 23 000hours
First year = 7 000 hours
Cm = C1 = P360 000

REQUIRED:
Salvage value of the equipment

CASH FLOW DIAGRAM:

SOLUTION:
Equation 1

At the end of 1st year

Thus, the salvage value of the equipment is P40 000.

DISCUSSION:
We need to know first the depreciation per hour using the given value
then substitute it to the formula involving salvage cost.
DEPRECIATION

Service Output Method

A television company purchased machinery for P100

000 on July 1,1979. It is estimated that it will have a useful
life of 10 years; scrap value of P4 000, production of 400
000 units and working hours of 120 000.
The company uses the machinery for 14 000 hours in
1979 and 18 000 hours in 1980. The machinery produces 36
000 units in 1979 and 44 000 units in 1980. Compute the
depreciation for 1980 using service-output method.
GIVEN:
Co = P100 000
Cn = P4 000
No. of units produced in 1979 = 36 000
No. of units produced in 1980 = 44 000
Total units produced = 400 000

REQUIRED:
Depreciation for 1980

CASH FLOW DIAGRAM:

SOLUTION:
Depreciation per unit

Depreciation for 1980:

The depreciation for 1980 is P10 560.00

DISCUSSION:
In order to get the depreciation for 1980, solve first for the depreciation
per unit and multiply it to the no. of units produced in 1980.