Engineering Sciences and Allied Subjects Area 1: Engineering Economy
ENGINEERING ECONOMICS m = 24 compounded semi-monthly
m = 360 compounded daily
m=8 compounded semi-quarterly
B. Effective Rate of Interest for Continuous Compounding:
MODULE NO. 1 SIMPLE INTEREST
Simple interest – is an interest on a loan or principal that is based
only on the original amount.
A. Ordinary Simple Interest
ie = effective rate of interest
r = continuous compounding rate
MODULE NO. 3: COMPOUND INTEREST
B. Future Worth, F
Compound interest – is an interest due that is added to the
principal and thereafter and earns an additional interest.
I = interest earned 0 1 2 n
P = principal (present worth)
i = interest rate (annual)
n = number of years or fraction of a year
P
Note: For ordinary simple interest, the interest is based on one
banker’s year: F
1 banker year = 360 days = 12 month
1 banker month = 30 days A. Future Worth
C. Exact Simple Interest
B. Single Payment Compound Amount Factor
D. Future Worth, F
Single Payment Compound Amount Factor 1 i n
Note: For exact simple interest, the interest is based on actual C. Present Worth
numbers, and there are 365 days in ordinary year and 366 days in
leap year.
D. Single Payment Present Worth Factor
MODULE NO. 2: EFFECTIVE RATE OF INTEREST
Effective Rate of Interest - is the actual rate of interest applied
I = interest per period
on a principal during a one year period.
n = number of interest periods
Nominal Rate of Interest – is the basic annual rate of interest.
E. Future Worth for Continuous Compounding
A. Effective Rate of Interest:
F. Single Payment Compound Amount Factor
ie = effective rate of interest
i = nominal rate of interest
m = number of compounding period in one year
Values of m for different modes of compounding:
m = 1 compounded annually
m = 2 compounded semi-annually MODULE NO. 4: ORDINARY ANNUITY
m = 4 compounded quarterly
m = 12 compounded monthly Ordinary annuity – is one annuity where the payments are made
m = 6 compounded bi-monthly at the end of each period beginning from the first period.
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Engineering Sciences and Allied Subjects Area 1: Engineering Economy
P
0 1 2 n
0 1 2 3 4 n
A A A
P
F
A. Present Worth:
A A A A A
B. Uniform Series Present Worth Factor MODULE NO. 7: PERPETUITY
Perpetuity – is a type of annuity with perpetual payments.
0 1 2
C. Future Worth:
A A A
P
F
D. Uniform Series Compound Amount Factor
P = present worth
A = annuity payments per period
i = interest per period
MODULE NO. 8: ANNUITY WITH CONTINUOUS
COMPOUNDING RATE
MODULE NO. 5: DEFERRED ANNUITY
0 1 2 n
Deferred Annuity – is an annuity where the first payment is made
several periods after the beginning of the annuity.
0 1 2 3 4 5 n
A A A
P
F
A A A A
P A. Present Worth
B. Equal Payment Series Present Worth Factor
MODULE NO. 6: ANNUITY DUE
Annuity due – is a type of annuity where the payments are made
at the beginning of each period starting from the first period.
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Engineering Sciences and Allied Subjects Area 1: Engineering Economy
C. Future Worth Cn – salvage value
n – economic life
e rn 1 d – annual depreciation
F A
e r 1 B. Total Depreciation after “m” years.
D. Equal Payment Series Compound Amount Factor Dm d(m)
Equal Payment Series Compound Amount Dm – total depreciation after m years
d – annual depreciation
e rn 1
Factor m – number of years
er 1
C. Book Value after “m” years:
E. Capital Recovery Factor
er 1 Cm Co Dm
A P
1 e rn
Cm – book value after m years
er 1 Co – first cost
Capital Recovery Factor Dm – total depreciation after m years’
1 e rn
F. Sinking Fund Factor
er 1
A F MODULE NO. 10: SINKING FUND DEPRECIATION
e rn 1
This method of depreciation is assumed that a sinking fund is
er 1 established in which funds will accumulate for replacement
Sinking Fund Factor purposes.
e rn 1
Co
Cm
Cn
MODULE NO. 9: STRAIGHT LINE DEPRECIATION 0 2 3 m n
1
In straight line depreciation method, depreciation is charged
uniformly over the life of an asset. We first subtract residual
value of the asset from its cost to obtain the depreciable amount.
d d d d d
The depreciable amount is then divided by the useful life of the
asset in number of accounting periods to obtain depreciation
A. Annual depreciation:
expense per accounting period. Due to the simplicity of the
straight line method of depreciation, it is the most commonly
used depreciation method. (C0 Cn )i
d
(1 i)n 1
Co
d – annual depreciation
Cm Co – first cost
Cn Cn – salvage value
0 i – interest rate
1 2 3 m n
n – economic life
B. Total Depreciation after “m” years.
d d d d d
(1 i)m 1
Dm d
A. Annual Depreciation i
Co Cn
d Dm – total depreciation after m years
n d – annual depreciation
m – number of years
Co – first cost
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Engineering Sciences and Allied Subjects Area 1: Engineering Economy
C. Book Value after “m” years: MODULE 12 DECLINING BALANCE METHOD
This method is also called constant percentage method of the
Cm Co Dm Matheson Formula.
A. Rate of Depreciation:
Cm – book value after m years
Co – first cost Cn Co(1 k)n
Dm – total depreciation after m years’
Co – first cost
Cn – salvage value
n – economic life
k – rate of depreciation
MODULE NO. 11: SUM-OF-THE-YEARS METHOD
OF DEPRECIATION B. Book Value at the end of mth year.
Cm Co(1 k)m
Co
Cm – book value after m years
Co – first cost
Cn k – rate of depreciation
m – any year between year 0 and year n
0 1 2 3 m n
C. Depreciation Charge during the mth year.
dm Cm1 Cm
d3
d2 dm – depreciation during a particular year “m”
d1 Cm–1 – book value of the preceding year
Cm – book value of the current year “m”
A. Depreciation Charge during mth year:
n m 1 D. Total depreciation after mth years
dm (Co Cn)
SYD
Dm Co Cm
d – depreciation charge during a particular year m
Dm – total depreciation after m years’
Co – first cost
Co – first cost
Cn – salvage value
Cm – book value after m years
n – economic life
m – any year between year 0 to year n
SYD – sum of the years from year 0 to year n
n(n 1)
Note: SYD MODULE 13 DOUBLE DECLINING BALANCE METHOD
2
B. Total Depreciation after m years: A. Depreciation Rate
n(2n m 1 2
Dm (Co Cn) k
2(SYD ) n
Dm – total depreciation after m years k – depreciation rate
Co – first cost
Cn – salvage value
n – economic life B. Book Value at the end of mth year
m – any year between year 0 to year n
Cm Co(1 k)m
C. Book Value at mth year
Cm Co Dm
Cm – book value after m years
Co – first cost
k – rate of depreciation
Cm – book value after m years m – any year between year 0 and year n
Co – first cost
Dm – total depreciation after m years’
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Engineering Sciences and Allied Subjects Area 1: Engineering Economy
C. Depreciation Charge during the mth year. expressed in monetary terms. All benefits and costs should be expressed
in discounted present values.
dm Cm1 Cm
Annual Benefits
Benefit - Cost Ratio
dm – depreciation during a particular year “m” Annual Costs
Cm–1 – book value of the preceding year
Cm – book value of the current year “m”
D. Total depreciation after mth years Benefits - Disbenefits
Benefit - Cost Ratio
Costs
Dm Co Cm
Note: Benefit-Cost ratio must be greater than 1.0 for the project to
Dm – total depreciation after m years’
be acceptable.
Co – first cost
Cm – book value after m years MODULE 16 GRADIENT
Cash flows that increase or decrease by a constant amount are
considered arithmetic gradient cash flows.
The amount of increase or decrease is called the gradient
MODULE 14 BONDS
Arithmetic Gradient
A bond is a written contract to pay a certain redemption value (R) 0 n
1 2 3
on a specified redemption date and to pay equal dividends
periodically.
A
P A+G A+2G
A+3G
P
F
0 1 2 3 n
A. Present Worth
(1 i)n 1 G (1 i)n 1 n
P A
D D D D D (1 i)n i i (1 1)n i
(1 i)n
F do not memorize
R
A geometric gradient is when the periodic payment increases (or
A. Dividend decreases) by a constant percentage.
D F(r)
MODULE 17 BREAK-EVEN ANALYSIS
D = dividend
F = face value of the bond An analysis to determine the point at which revenue
r = bond rate or dividend rate received equals the costs associated with receiving
B. Price of the bond
the revenue. Break-even analysis calculates what is
known as a margin of safety, the amount that
(1 i)n 1 revenues exceed the break-even point. This is the
R
P D amount that revenues can fall while still staying
(1 i) n (1 i)n i
above the break-even point.
P = price of the bond (present worth) Sales
amount
R = redemption value of the bond
i = rate of return (pesos)
n = number of interest period
Break-even
Point
MODULE 15 BENEFIT COST RATIO Expenses
A benefit-cost ratio (BCR) is an indicator, used in the formal discipline
of cost-benefit analysis, that attempts to summarize the overall value for
money of a project or proposal. A BCR is the ratio of the benefits of a Fixed Costs
project or proposal, expressed in monetary terms, relative to its costs, also
quantity
(pieces) 5
Engineering Sciences and Allied Subjects Area 1: Engineering Economy
A. Break-even MODULE 19 INFLATION
Sales Expenses
Inflation is the decrease in purchasing power of money.
Sales are the amount of goods sold A. Combined interest-inflation rate
Expenses are the cost of producing the goods
ie i f if
B. Profit
ie = combined interest-inflation rate
Profit Sales - Expenses i = rate of interest
f = rate of inflation
C. Expenses B. Future worth
Expenses Fixed Costs Variable Costs F P(1 ie )n
Fixed Costs are business expenses that are not dependent on the
level of goods or services produced by the business.
Depletion is the reduction in the cost of wasting assets such as
mines, oil and gas wells.
Variable Costs are costs that change in proportion to the good or
service that a business produces
MODULE 20 PRESENT ECONOMY
MODULE 18 CAPITALIZED COST AND ANNUAL COST Profit
Capitalized Cost, CC Profit = Selling price – capital
The present worth of cost associated with an asset for an infinite
period of time.
Percent profit
CC
profit
% profit x100%
Cn Capital
Discount
0 1 2 3 n
Discount = Tag Price – Selling price
OM OM OM OM OM Percent Discount
discount
%discount
Co tag price
OM (Co Cn)
CC Co
i (1 i)n 1
CC = capitalized cost
Co = first cost
OM = operation/maintenance cost
Cn = salvage value
i = interest (rate of return)
Annual Cost, AC
The equivalent annual cost of operating a given asset at a given
interest rate.
(Co Cn)i
AC (FC)i OM
(1 i)n 1
