Engineering Economy

Lecturer: Engr. Eisley John Tiongson

ENGINEERING ECONOMY
→The analysis and evaluation of the factors that will affect the
economic success of engineering projects which will insure the best
use of capital.
Consumer Goods and Services → those products or services that are
directly used by people to satisfy their wants
Producers Goods and Services → used to produce consumer goods and
services or other producers' goods.
Necessities → those products or services that are required to support
human life and activities.
Luxuries → those products or services that are desired by humans.
ENGINEERING ECONOMY
Demand → the quantity of a certain commodity that is bought at a
certain price at a given place and time.
Elastic Demand → occurs when a decrease in selling price result in a
greater than proportionate increase in sales.
Inelastic Demand → occurs when a decrease in the selling price
produces a less than proportionate increase in sales.
Unitary Elasticity of Demand → occurs when the mathematical
products of volume and price is constant.
ENGINEERING ECONOMY
Perfect Competition → occurs in a situation where a commodity or
service is supplied by a number of vendors and there is nothing to
prevent additional vendors to entering the market.
Monopoly → the opposite of perfect competition. It exists when a
unique product or service is available from a single vendor and that
vendor can prevent the entry of all others into the market.
Oligopoly → exists when there are so few suppliers of a product or
service that action by one will almost inevitably result in similar action
by the others.
SIMPLE INTEREST
Interest → the amount of money paid for the use of borrowed capital,
or the income produced by money which has been loaned.
Simple Interest → calculated using the principle only ignoring any
interest that had been occurred in preceding periods. In practice,
simple interest is paid in short term loans in which the time of the loan
is measured in days.
SIMPLE INTEREST
𝑰 = 𝑷𝒊𝒏
Where:
𝐼 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑃 = 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑜𝑟 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑊𝑜𝑟𝑡ℎ
𝑖 = 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑛 = 𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑

𝑭=𝑷+𝑰
𝐹 = 𝑃 + 𝑃𝑖𝑛
𝑭 = 𝑷(𝟏 + 𝒊𝒏)
Where:
𝐹 = 𝐴𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒𝑑 𝑎𝑚𝑜𝑢𝑛𝑡 𝑜𝑟 𝐹𝑢𝑡𝑢𝑟𝑒 𝑊𝑜𝑟𝑡ℎ
SIMPLE INTEREST
(a) Ordinary Simple Interest → computed on the basis of 12 months of 30
days each or 360 days a year. (1 interest period = 360 days)

𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒅𝒂𝒚𝒔
𝒏=
𝟑𝟔𝟎

(a) Exact Simple Interest → based on the exact number of days in a year,
365 days. (1 interest period = 365 and 366 days for Leap Year)

𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒅𝒂𝒚𝒔
𝒏=
𝟑𝟔𝟓
𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒅𝒂𝒚𝒔
𝒏= (𝒇𝒐𝒓 𝑳𝒆𝒂𝒑 𝒀𝒆𝒂𝒓)
𝟑𝟔𝟔
Examples
1. P4,000 is borrowed for 75 days at 16% per annum simple interest.
How much will be due at the end of 75 days?
2. A deposit of P110,000 was made for 31 days. The net interest after
deducting 20% withholding tax is P890.36. Find the rate of return
annually.
3. Agnes Abanilla was granted a loan of P20,000 by her employer CPM
Industrial with an interest of 6% for 180 days on the principal
collected in advance. The corporation would accept a promissory
note of P20,000 non-interest for 180 days. If discounted at once,
find the proceeds of the note.
4. What will be the future worth of money after 12 months, if the sum
of P25,000 is invested today at simple interest rate of 1% per
month?
Examples
5. If you borrowed money from your friend with simple interest of 12%,
find the present worth of P50,000, which is due at the end of 7 months.
6. Annie buys a television set from a merchant who ask P1,250 at the
end of 60 days. Annie wishes to pay immediately, and the merchant
offers to compute the cash price on the assumption that money is
worth 8% simple interest. What is the cash price?
7. A bank charges 12% simple interest on a P300 loan. How much will
be repaid if the loan is paid back in one lump sum after three years?
 Cash inflow/ Positive Cash outflow/ Negative
CASH FLOW DIAGRAM cash flow/ Receipt cash flow/ Disbursement

SAMPLE: A loan of P100 at simple interest of 10% will become P150 after 5 years.
Cash flow Diagram on the viewpoint of the lender

Cash flow Diagram on the viewpoint of the lender

COMPOUND INTEREST
→Defined as the interest of loan or principal which is based not only
on the original amount of the loan or principal but the amount of
loan or principal plus the previous accumulated interest.

𝒎
𝒊𝒏
𝑭 = 𝑷(𝟏 + 𝒊𝒏) ; 𝒊 =
𝒎
Where:
𝐹 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑊𝑜𝑟𝑡ℎ
𝑃 = 𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑜𝑟 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑊𝑜𝑟𝑡ℎ
𝑖 = 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡; 𝑖𝑛 = 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
𝑛 = 𝑦𝑒𝑎𝑟𝑠 𝑜𝑓 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑝𝑒𝑟𝑖𝑜𝑑; 𝑚 = 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑝𝑒𝑟𝑖𝑜𝑑
COMPOUND INTEREST
𝑪𝒐𝒎𝒑𝒐𝒖𝒏𝒅𝒊𝒏𝒈 𝑷𝒆𝒓𝒊𝒐𝒅
𝒎 = 𝟏 𝑖𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
𝒎 = 𝟐 𝑖𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑠𝑒𝑚𝑖 − 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
𝒎 = 𝟒 𝑖𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦
𝒎 = 𝟔 𝑖𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑏𝑖 − 𝑚𝑜𝑛𝑡ℎ𝑙𝑦
𝒎 = 𝟏𝟐 𝑖𝑓 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦

𝑬𝒇𝒇𝒆𝒄𝒕𝒊𝒗𝒆 𝑹𝒂𝒕𝒆, 𝑬𝑹
𝒊𝒏 𝒎
𝑬𝑹 = (𝟏 + ) −𝟏
𝒎
Examples
1. A man borrowed P100,000 at the interest rate of 12% per annum,
compounded quarterly. What is the effective rate?
2. What is the corresponding effective rate of 18% compounded semi-
quarterly?
3. Mandarin Bank advertises 9.5% account that yields 9.84% annually. Find
how often the interest is compounded.
4. What is the future worth of the amount of P12,800 in 4 years at 5%
compounded quarterly?
5. On his 6th birthday, a boy is left an inheritance. The inheritance will be
paid in a lump sum of P10,000 on his 21st birthday. What is the present
value of the inheritance as of the boy’s 6th birthday, if the interest is
compounded annually? Assume 4% nominal rate of interest.
6. How long (in years) will it take money to quadruple if it earns 7%
compounded semi-annually?
Examples
7. Alexander Michael owes P25,000 due in 1 year and P75,000 due in 4
years. He agrees to pay P50,000 today and the balance in 2 years. How
much must he pay at the end of two years if money is worth 5%
compounded semi-annually?
8. If P500,000 is deposited at a rate of 11.25% compounded monthly,
determine the compounded interest after 7 years and 9 months.
9. You borrow P3,500 for one year from a friend at an interest rate of
1.5% per month instead of taking a loan from a bank at a rate of 18%
per year. Compare how much money you will save or lose on the
transaction.
10. What is the present worth of two P100 payments at the end of the
third year and fourth year? The annual interest rate is 8%.
DISCOUNT
→The difference between the present worth and the worth of the
paper at some time in the future the interest paid in advance.
𝑫=𝑭−𝑷

𝑹𝒂𝒕𝒆 𝒐𝒇 𝑫𝒊𝒔𝒄𝒐𝒖𝒏𝒕
𝒅 = 𝟏 − 𝟏 − 𝒊 −𝟏
𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕
𝒅=
𝒑𝒓𝒊𝒏𝒄𝒊𝒑𝒂𝒍
𝒅
𝒊=
𝟏−𝒅
INFLATION
→Is the increase in the prices for goods and services from one year to
another thus decreasing the purchasing power of money.
𝑭𝑪 = 𝑷𝑪(𝟏 + 𝒇)𝒏
→In an inflation economy, the buying power of money decreases as
cost increase, Thus
𝑷
𝑭=
Where:
𝐹 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑊𝑜𝑟𝑡ℎ; 𝑃 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑊𝑜𝑟𝑡ℎ
𝑃𝐶 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦
𝐹𝐶 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑑𝑖𝑡𝑦
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠; 𝑓 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒
Examples
1. A man borrowed P5,000 from a bank and agreed to pay the loan
the at the end of one year. The bank discounted the loan and gave
him P4,000 in cash. What is the rate of discount? What was the rate
of interest?
2. An economy is experiencing inflation at an annual rate of 8%. If this
continues, what will P1,000 be worth two years from now, in terms
of today’s pesos?
ANNUITY
→Consists of a series of equal payment made at intervals of time.
TYPES OF ANNUITY
Ordinary Annuity → one where the equal payments are made at the
end of each payment period starting from the first period.
Deferred Annuity→ one where the payment of the first amount is
deferred a certain number of periods after the first.
Annuity Due→ one where the payments are made at the start of each
period, beginning from the first period.
Perpetuity→ an annuity where the payment periods extend forever or
in which the periodic payments continue indefinitely
ANNUITY
Ordinary Annuity
𝒏
𝑨 −𝒏
𝑨 𝟏 + 𝒊 −𝟏
𝑷= 𝟏− 𝟏+𝒊 =
𝒊 𝒊 𝟏+𝒊 𝒏
𝑨
𝑭= 𝟏+𝒊 𝒏−𝟏
𝒊
Deferred Annuity
𝑨 −𝒏
𝑷= 𝟏− 𝟏+𝒊 (𝟏 + 𝒊)−𝒎
𝒊
Annuity Due
𝑨 −𝒏
𝑨 𝟏+𝒊 𝒏−𝟏
𝑷=𝑨+ 𝟏− 𝟏+𝒊 =𝑨+
𝒊 𝒊 𝟏+𝒊 𝒏
Perpetuity
𝑨
𝑷=
𝒊
Examples
1. A piece of machinery can be bought for P100,000 cash or for P2,000
downpayment and payments of P750 per year for 15 years. What is the
annual interest rate for the time payments?
2. A manufacturing firm wishes to give each 80 employees a holiday bonus.
How much is needed to invest monthly for a year at 12% nominal
interest rate compounded monthly, so that each employee will receive a
P2,000 bonus?
3. An instructor plans to retire in exactly one year and want an account that
will pay him P25,000 a year for the next 15 years. Assuming a 6% annual
effective interest rate, what is the amount he would need to deposit
now?(The fund will be depleted after 15 years)
4. A man inherited a regular endownment of P100,000 every end of 3
months for 10 years. However, he may choose to get a single lump sum
payment at the end of 4 years. How much is this lump sum if the cost of
money is 14% compounded quarterly?
DEPRECIATION
→The reduction or fall in the value of an asset or physical property during
the course of its working life and due to the passage of time.
METHODS OF COMPUTING DEPRECIATION
Straight Line Method → it is assumed that the loss in value is directly
proportional to the age of the equipment or asset.
Sinking Fund Method → it is assumed that a sinking fund is established in
which funds will accumulate for replacement purposes.
Declining Balance Method → it is assumed that the annual cost of
depreciation is a fixed percentage of the book value at the beginning of the
year.
Sum of Years’ Digit (SYM) →respective depreciation changes every year.
DEPRECIATION
Straight Line Method
𝑪𝑶 − 𝑪𝑳
𝒅=
𝑳
𝑫𝒏 = 𝒏𝒅; 𝑪𝒏 = 𝑪𝑶 − 𝑫𝒏
Where:
𝐷𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑛 𝑦𝑒𝑎𝑟𝑠
𝑑 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑂 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the beginning of the year
𝐶𝑛 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the end of the nth year
𝐶𝐿 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒
𝐿 = 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒 𝑖𝑛 𝑦𝑒𝑎𝑟𝑠
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
DEPRECIATION
Sinking Fund Method
𝒅
𝑫𝒏 = [ 𝟏 + 𝒊 𝒏 − 𝟏]
𝒊
𝑪𝒏 = 𝑪𝑶 − 𝑫𝒏
(𝑪𝑶 −𝑪𝑳 )(𝒊)
𝒅=
(𝟏 + 𝒊)𝑳 −𝟏
Where:
𝐷𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑛 𝑦𝑒𝑎𝑟𝑠
𝑑 = 𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
𝐶𝑂 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the beginning of the year
𝐶𝑛 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the end of the nth year
𝐶𝐿 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠; 𝐿 = 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
DEPRECIATION
Declining Balance Method
𝑫𝒏 = 𝒌𝑪𝒐 (𝟏 − 𝒌)𝒏−𝟏
𝑪𝒏 = 𝑪𝑶 (𝟏 − 𝒌)𝒏 ; 𝑪𝑳 = 𝑪𝑶 (𝟏 − 𝒌)𝑳
𝑳 𝑪𝑳 𝒏 𝑪𝒏
𝒌=𝟏− =𝟏−
𝑪𝒐 𝑪𝒐
Where:
𝐷𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑛 𝑦𝑒𝑎𝑟𝑠
𝑘 = 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
𝐶𝑂 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the beginning of the year
𝐶𝑛 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the end of the nth year
𝐶𝐿 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠; 𝐿 = 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
DEPRECIATION
Double Declining Balance Method
𝒏−𝟏
𝟐 𝟐
𝑫𝒏 = 𝑪𝒐 𝟏 −
𝑳 𝑳
𝒏 𝑳
𝟐 𝟐
𝑪 𝒏 = 𝑪𝑶 𝟏 − ; 𝑪𝑳 = 𝑪𝑶 𝟏 −
𝑳 𝑳
𝑳 𝑪𝑳 𝒏 𝑪𝒏
𝒌=𝟏− =𝟏−
𝑪𝒐 𝑪𝒐
Where:
𝐷𝑛 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑓𝑡𝑒𝑟 𝑛 𝑦𝑒𝑎𝑟𝑠
𝑘 = 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑝𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒
𝐶𝑂 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the beginning of the year
𝐶𝑛 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 at the end of the nth year
𝐶𝐿 = 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑎𝑡 𝑡ℎ𝑒 𝑒𝑛𝑑 𝑜𝑓 𝑡ℎ𝑒 𝑙𝑖𝑓𝑒
𝑛 = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠; 𝐿 = 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
DEPRECIATION
Sum of Years’ Digit (SYM)

𝑫𝒏 = 𝒅𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝒇𝒂𝒄𝒕𝒐𝒓 𝒕𝒐𝒕𝒂𝒍 𝒅𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏

𝒓𝒆𝒗𝒆𝒓𝒔𝒆 𝒅𝒊𝒈𝒊𝒕
𝑫𝒏 = (𝑪𝑶 − 𝑪𝑳 )
𝒔𝒖𝒎 𝒐𝒇 𝒅𝒊𝒈𝒊𝒕𝒔
Where:
𝑛(𝑛 + 1)
𝑠𝑢𝑚 𝑜𝑓 𝑑𝑖𝑔𝑖𝑡𝑠 𝑜𝑟 𝑠𝑢𝑚 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 =
2
𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔
𝑫𝒏 = (𝑪𝑶 − 𝑪𝑳 )
𝒔𝒖𝒎 𝒐𝒇 𝒚𝒆𝒂𝒓𝒔
Examples
1. A small machine has an initial cost of P20,000, a salvage value of
P2,000 and a life of 10 years. Determine the annual depreciation.
(SLM)
2. The machine has an initial cost of P50,000 and salvage value of
P10,000 after 10 years. Find the book value after 5 years using
straight line depreciation. (SLM)
3. An asset is purchased for P9,000 and its estimated life is 10 years,
after which it will be sold for P1,000. Find the book value during the
third year if sum-of-years digit depreciation is used. (SYM)
4. A machine costing P720,000 is estimated to have a book value of
P40,545.73 when retired at the end of 10 years. Depreciation cost is
computed using fixed constant percentage of the declining book
value. What is the annual rate of depreciation in percentage?
(DBM)
Examples
4. The original cost of a certain piece of equipment is P150,000 and it is
depreciated by 10% sinking fund method. What is the annual
depreciation charge if the book value of the equipment after 10 years is
the same as if it had been depreciated at P14,000 each year by straight-
line formula. (SLM-SFM)
5. A company purchases an asset for P10,000 and plans to keep it for
20 years. If the salvage value is zero at the end of the 20th year, what is
the depreciation in the third year? Use sum of the years digits
depreciation.
Basic Methods for Making Economy Studies
1. A computerized machine shop will require a fixed capital
investment of P8M and a estimated working capital of P1.5M. Upon
evaluation, the annual depreciation is estimated to be 8% of the
fixed capital investment. If annual profit is P2M, what is the rate of
return on the total investment?
2. 2. A machine shop installs a new lathe machine that costs of
P1,800,000. The machine shop expects annual gross revenue to
increase P500,000 while it incurs an annual expense of P50,000 for
the machine operations and maintenance. What is the payback
period?
Basic Methods for Making Economy Studies
3. An existing machine in a factory has an annual maintenance cost of
P40,000. A new and more efficient machine will require an investment
of P90,000 and is estimated to have a salvage value of P30,000 at the
end of 8 years. Its annual expenses for maintenance and upkeep, etc.
total of P22,000. 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? Or (b) rate of return method?
4. A contractor can purchase a dump truck for P850,000. It is estimated
that if sold at the end of 7 years, it will have a value of P100,000. Its
estimated annual maintenance cost is P12,000 and daily operating
expenses are estimated to be P320, including the wage of the driver. It
is also possible to hire a similar unit for P1,200 a day including fuel cost.
If money is worth 10%, how many days a year must the dump truck be
used to justify the purchase of the truck?
BREAK-EVEN ANALYSIS
In engineering economy many situations are encountered with 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 cost for the
alternatives will be equal .

𝑪𝟏 = 𝒇𝟏 𝒙
𝑪𝟐 = 𝒇𝟐 𝒙
Where:
𝐶1 = 𝑐𝑒𝑟𝑡𝑎𝑖𝑛 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑎𝑝𝑝𝑙𝑖𝑐𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑙𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑣𝑒 1
𝐶2 = 𝑐𝑒𝑟𝑡𝑎𝑖𝑛 𝑠𝑝𝑒𝑐𝑖𝑓𝑖𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑎𝑝𝑝𝑙𝑖𝑐𝑎𝑏𝑙𝑒 𝑡𝑜 𝑎𝑙𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑣𝑒 2
𝑥 = 𝑐𝑜𝑚𝑚𝑜𝑛 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑎𝑓𝑓𝑒𝑐𝑡𝑖𝑛𝑔 𝐴𝑙𝑡𝑒𝑟𝑛𝑎𝑡𝑖𝑣𝑒𝑠 1 & 2
Examples
1. Steel drum manufacturer incurs a yearly fixed operating cost of
P200,000. Each drum manufactured cost P160 to produce and sells
P200. What is the manufacturer’s break even sales volume in drums
per year?
2. JRT Industries manufactures automatic voltage regulators at a labor
cost of P85 per unit and material cost of P350 per unit. The fixed
charges on the business are P15,000 per month and the variable
costs are P20 per unit. If the automatic voltage regulators are sold
to retails at 580 each, how many units must be produced and sold
per month to breakeven?
Examples
3. Compute for the number of locks that an ice plant must be able to sell per
month to break even based on the following data:
Cost of electricity per block = P20.00
Tax to be paid per block = P2.00
Real Estate Tax = P3500.00 per month
Sales and Wages = P25,000.00 per month
Others = P12,000.00 per month
Selling Price of Ice = P55.00 per block
4. A company which manufactures electric motors has a production capacity
of 200 motors a month. The variable costs are P150 per motor. The average
selling price of the motors is P275. Fixed costs of the company amount of
P20,000 per month which includes taxes. How many motors must be sold
each month to break even?