ENGINEERING

ECONOMICS
ENGR. GIAN CARLO M. BONGCALES, RMEE
What is defines as the analysis and evaluation
of the monetary consequences by using the
theories and principles of economics to
engineering applications, designs and projects?
A. Economic Analysis C. Engineering economy
B. Engineering cost analysis D. Design cost analysis

ENGR GIAN CARLO M. BONGCALES, RMEE

What is defines as the analysis and evaluation
of the monetary consequences by using the
theories and principles of economics to
engineering applications, designs and projects?
A. Economic Analysis C. Engineering economy
B. Engineering cost analysis D. Design cost analysis

ENGR GIAN CARLO M. BONGCALES, RMEE

ENGINEERING ECONOMICS

analysis and evaluation of the factors that will

affect the economic success of engineering
projects to the end that a recommendation can be
made which will ensure the best use of capital.

ENGR. GIAN CARLO M. BONGCALES, RMEE 4

TOPICS FOR TODAY

• Interest
• Annuity
• Depreciation
• Capitalized Cost
• Break-even Analysis

ENGR. GIAN CARLO M. BONGCALES, RMEE 5

 a graphical representation of cash flows drawn on time scale.
𝐶𝑎𝑠ℎ 𝑓𝑙𝑜𝑤 = 𝑟𝑒𝑐𝑒𝑖𝑝𝑡𝑠 − 𝑑𝑖𝑠𝑏𝑢𝑟𝑠𝑒𝑚𝑒𝑛𝑡𝑠

Cash Flow ↑ receipts or receivables (positive cash flow or cash in flow)

Diagram ↓ disbursements (negative cash flow or cash out flow)

ENGR. GIAN CARLO M. BONGCALES, RMEE 6

A loan of Php100 at simple interest rate of 10%
per annum will become Php150 after 5 years.

ENGR. GIAN CARLO M. BONGCALES, RMEE 7

A loan of Php100 at simple interest rate of 10%
per annum will become Php150 after 5 years.
Lender Borrower

ENGR. GIAN CARLO M. BONGCALES, RMEE 8

SIMPLE INTEREST

𝐼 = 𝑃𝑖𝑛
Where:
P = Principal amount / Present worth
i = interest rate per period
n = number of interest period

ENGR. GIAN CARLO M. BONGCALES, RMEE 9

SIMPLE INTEREST

𝐹 =𝑃+𝐼
𝐹 = 𝑃 + 𝑃𝑖𝑛

𝑭 = 𝑷 𝟏 + 𝒊𝒏

ENGR. GIAN CARLO M. BONGCALES, RMEE 10

Types of Simple Interest
Ordinary Simple Interest Exact Simple Interest
Based on 1 banker’s year Based on exact number of days in a given year.

Banker’s year = 12 months of 30 days each 𝒅

𝐧= (𝑓𝑜𝑟 𝑛𝑜𝑟𝑚𝑎𝑙 𝑦𝑒𝑎𝑟)
1 Banker’s year = 360 days 𝟑𝟔𝟓

𝒅
𝐧= (for leap year)
𝒅 𝟑𝟔𝟔
𝐧=
𝟑𝟔𝟎 Leap Years must meet the following criteria:

• Must be exactly divisible by 4 (e.g. 2020)

• Must not be exactly divisible by 100 (e.g. 2100)

• But can be exactly divisible by 400 (e.g. 2000)

ENGR. GIAN CARLO M. BONGCALES, RMEE 11

A man borrowed ₱4000 for 75 days at 16% per annum interest rate. How much will be due at the
end of 75 days?
A. ₱4186.43 C. ₱4133.33
B. ₱5124.64 D. ₱5625.43

ENGR GIAN CARLO M. BONGCALES, RMEE

A man borrowed ₱50,000 from the bank and agreed to pay the loan at the end of 9 months. The
bank discounted the load and gave him ₱40,000 in cash. What was the rate of discount? The rate of
interest and the rate of interest in one year?
A. 20%, 22.5%, 33.3% C. 10%, 25%, 30.3%
B. 20%, 22%, 30% D. 20%, 25%, 33.3%

ENGR GIAN CARLO M. BONGCALES, RMEE

Compute how much is the interest on ₱3,000.00 from Jan 15 to June 20,2007, if rate of simple
interest is 14%.
A. ₱179.51 C. ₱149.81
B. ₱239.51 D. ₱154.51

ENGR GIAN CARLO M. BONGCALES, RMEE

The loan was for 15 months at 16.8% interest a year and repayment on a loan was ₱12,100.00, how
much was the principal?
A. ₱8,500.00 C. ₱9,500.00
B. ₱10,000.00 D. ₱10,500.00

ENGR GIAN CARLO M. BONGCALES, RMEE

SIMPLE VS COMPOUND INTEREST

ENGR. GIAN CARLO M. BONGCALES, RMEE 16

COMPOUND INTEREST
Future Value, F Present Value, P

−𝑛
𝐹=𝑃 1+𝑖 𝑛 𝑃 =𝐹 1+𝑖

ENGR. GIAN CARLO M. BONGCALES, RMEE 17

 NOMINAL RATE OF INTEREST, r
specifies the rate of interest and number of interest period in one year.
Let’s say we have a nominal rate of interest of 12% compounded ____________ for 5 years.
Number of
Effective interest per Total number of compounding,
compounding
compounding period, I n
per year, m
Formula r/m I t(m) n
Annually 1 0.12/1 0.12 5(1) 5
Semi-annually 2 0.12/2 0.06 5(2) 10
Quarterly 4 0.12/4 0.03 5(4) 20
Monthly 12 0.12/12 0.01 5(12) 60
Weekly 52 0.12/52 0.0023 5(52) 260
Daily 360 0.12/360 0.0003 5(360) 1800
ENGR. GIAN CARLO M. BONGCALES, RMEE 18
COMPOUND INTEREST
Future Value, F Present Value, P

𝑟 𝑡∙𝑚 𝑟 −𝑡∙𝑚
𝐹 =𝑃 1+ 𝑃 =𝐹 1+
𝑚 𝑚

Where:
i = interest rate, i = r/m
n = interest period, n = t·m

ENGR. GIAN CARLO M. BONGCALES, RMEE 19

Effective Rate of Interest, ER

actual rate of interest on the principal in one year.

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑎𝑟𝑛𝑒𝑑 𝑖𝑛 𝑜𝑛𝑒 𝑦𝑒𝑎𝑟

𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡, 𝐸𝑅 =
𝑃𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙 𝑎𝑡 𝑡ℎ𝑒 𝑏𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟

𝑟 𝑚
𝐸𝑅 = 1 + −1
𝑚

ENGR. GIAN CARLO M. BONGCALES, RMEE 20

Determine how long will it take money to double itself if invested at 5% compounded annually?
A. 11 C. 25
B. 13 D. 14

ENGR GIAN CARLO M. BONGCALES, RMEE

A man wishes his son to receive ₱500,000 ten years from now. What amount should he invest now if
it will earn interest 12% compounded annually during the first five years and 15 % compounded
quarterly during the next 5 years?
A. ₱135,868.18 C. ₱532,868.18
B. ₱315,868.28 D. ₱145,868.18

ENGR GIAN CARLO M. BONGCALES, RMEE

You deposit ₱1,000 into a 9% account today. At the end of two years, you will deposit another
₱3,000. In five years, you plan a ₱4,000 purchase. How much is left in the account one year after the
purchase?
A. ₱1,211.83 C. ₱1,551.83
B. ₱1,155.86 D. ₱2,151.83

ENGR GIAN CARLO M. BONGCALES, RMEE

A businessman bought a lot worth ₱1,000,000 if paid in cash. On the installment basis, he paid a
down payment of ₱200,000; ₱300,000 at the end of one year; ₱400,000 at the end of three years and
a final payment at the end of five years. What was the final payment if the interest was 20%?
A. ₱792,576.00 C. ₱972,576.00
B. ₱297,456.00 D. ₱297,665.00

ENGR GIAN CARLO M. BONGCALES, RMEE

A person pays interest on a loan semi-annually at the nominal annual interest rate of 16%. What is
the effective annual interest rate?
A. 15.5% C. 16%
B. 16.5% D. 16.64%

ENGR GIAN CARLO M. BONGCALES, RMEE

What nominal rate compounded quarterly could be used instead for 15% compounded semi-
annually?
A. 13.725% C. 14.567%
B. 14.125% D. 14.728%

ENGR GIAN CARLO M. BONGCALES, RMEE

ANNUITY
An annuity is a series of payments made at equal intervals.

Types of Annuity
1. Ordinary Annuity
2. Annuity Due
3. Deferred Annuity
4. Perpetuity

ENGR. GIAN CARLO M. BONGCALES, RMEE 27

 The payments are made at
ORDINARY ANNUITY the end of each period

Future Value, F Present Value, P

𝐴 𝑛
𝐴 −𝑛
𝐹= 1+𝑖 −1 𝑃 = 1− 1+𝑖
𝑖 𝑖

Where:
A = annual payments
i = interest rate
n = number of annual payments

ENGR. GIAN CARLO M. BONGCALES, RMEE 28

 The payments are made at
ORDINARY ANNUITY the end of each period

Future Value, F Present Value, P

𝐴 𝑟 𝑡∙𝑚 𝐴 𝑟 −𝑡∙𝑚
𝐹=𝑟 1+ −1 𝑃=𝑟 1− 1+
Τ𝑚 𝑚 Τ𝑚 𝑚

Where:
r = nominal interest rate
m = number of compounding per year
t = number of years

ENGR. GIAN CARLO M. BONGCALES, RMEE 29

 The payments are made at
ANNUITY DUE the beginning of each period
Future Value, F Present Value, P

𝐴 𝑛
𝐴 𝑛 − 𝑛−1
𝐹= 1+𝑖 −1 𝑃= 1+𝑖 −1 1+𝑖
𝑖 𝑖

ENGR. GIAN CARLO M. BONGCALES, RMEE 30

 The payments are made at
ANNUITY DUE the beginning of each period
Future Value, F Present Value, P

𝐴 𝑟 𝑡∙𝑚 𝐴 𝑟 𝑡𝑚 𝑟 − 𝑡𝑚−1
𝑃= 𝑟 1+ −1 1+
𝐹=𝑟 1+ −1 𝑚 𝑚
Τ𝑚 𝑚 𝑚

ENGR. GIAN CARLO M. BONGCALES, RMEE 31

DEFERRED ANNUITY The payment is deferred on a certain
number of periods after the first.

Future Value, F Present Value, P

𝐴 𝑛
𝐴 𝑛 −𝑛′
𝐹= 1+𝑖 −1 𝑃= 1+𝑖 −1 1+𝑖
𝑖 𝑖

n
n’
ENGR. GIAN CARLO M. BONGCALES, RMEE 32
DEFERRED ANNUITY The payment is deferred on a certain
number of periods after the first.

Future Value, F Present Value, P

𝑡∙𝑚 −𝑡 ′ 𝑚
𝐴 𝑟 𝐴
𝑃= 𝑟 1+
𝑟 𝑡𝑚
−1 1+
𝑟
𝐹=𝑟 1+ −1 𝑚 𝑚
Τ𝑚 𝑚 𝑚

t
t’
ENGR. GIAN CARLO M. BONGCALES, RMEE 33
 is an annuity in which the
PERPETUITY payment continue indefinitely.

ENGR. GIAN CARLO M. BONGCALES, RMEE 34

A television set is available on an easy installment plan. The down payment is ₱3,000 and the
installment payment are ₱500 each payable at the end of every three months for three years. If
interest is 6% compounded quarterly, what is the equivalent cash price of the television?
A. ₱8,453.75 C. ₱5,550.50
B. ₱9,353.75 D. ₱7,250.50

ENGR GIAN CARLO M. BONGCALES, RMEE

An Electrical Engineer obtained a loan of P50,000.00 at the rate of 6% compounded annually in
order to repair his mistress' house. How much must the Electrical Engineer pay monthly to amortize
the loan within a period of ten years?
A. ₱560.90 C. ₱550.90
B. ₱505.90 D. ₱507.90

ENGR GIAN CARLO M. BONGCALES, RMEE

A man borrows Php100,000 at 10% effective annual interest. He must pay back the loan over 30
years with uniform monthly payments due on the first day of each month. What does the man pay
each month?
A. Php 840 C. Php 870
B. Php 850 D. Php 880

ENGR GIAN CARLO M. BONGCALES, RMEE

What is the future sum of annuity of P 1,000.00 deposited at the end of every six months for 5 years
if the interest rate is 12% compounded semi-annually?
A. ₱13,180.79 C. ₱12,348.09
B. ₱23,043.34 D. ₱26,403.32

ENGR GIAN CARLO M. BONGCALES, RMEE

Annual maintenance costs for a particular section of highway pavement are P 100,000. The
placement of a new surface would reduce the annual maintenance cost to P 25,000 per year for the
first five years and to P 50,000 per year for the next five years. The annual maintenance after ten
years would again be P 100,000. If maintenance costs are the only saving, what maximum
investment can be justified for the new surface? Assume at 4%
A. ₱517,000 C. ₱520,000
B. ₱417,000 D. ₱512,000

ENGR GIAN CARLO M. BONGCALES, RMEE

A house and lot is being sold and the payments are on installment basis of ₱400,000 each year for 5
years. If the payments are to be made at the beginning of each year, how much is the cash price of
the property? Assume that money is worth 20% compounded annually?
A. ₱1,435,493.83 C. ₱1,355,493.54
B. ₱1,345,943.57 D. ₱1,546,439.50

ENGR GIAN CARLO M. BONGCALES, RMEE

How much money must you deposit today in an account earning 10% compounded annually so that
you can withdraw ₱25,000 yearly indefinitely starting at the end of the 10th year?
A. ₱106,024.4 C. ₱160,043.4
B. ₱180,024.4 D. ₱176,086.4

ENGR GIAN CARLO M. BONGCALES, RMEE

How much money must you invest today in order to withdraw Php1000 per year for 10 years if the
interest rate is 12%.
A. Php4,800 C. Php5,650
B. Php5,808 D. Php6,145

ENGR GIAN CARLO M. BONGCALES, RMEE

DEPRECIATION
A reduction or fall in the value of an asset due to constant use and passage
of time.

Depreciation Methods
1. Straight Line Methods
2. Sinking Fund Method
3. Declining Balance Method
4. Sum-of-years digits (SYD) Method

ENGR. GIAN CARLO M. BONGCALES, RMEE 43

STRAIGHT LINE METHOD assumes that the loss in value is directly
proportional to the age of the property.

Total Depreciation = 𝑪𝑶 − 𝑪𝑳
𝑪𝑶
𝑪𝑳
L
Depreciation per year, d
𝐶𝑂 − 𝐶𝐿
𝑑=
Useful Life = L
𝐿

ENGR. GIAN CARLO M. BONGCALES, RMEE 44

STRAIGHT LINE METHOD assumes that the loss in value is directly
proportional to the age of the property.

𝑪𝑶
Depreciation up to m years, 𝑫𝒎
𝑪𝑳
𝐷𝑚 = 𝑑 ∗ 𝑚
L
Book value at the end of n years, 𝑪𝒏
𝐶𝑛 = 𝐶𝑂 − 𝐷𝑚

ENGR. GIAN CARLO M. BONGCALES, RMEE 45

SINKING FUND METHOD a sinking fund is established in which funds will
accumulate for replacement.

L From Future Worth of Ordinary Annuity,

𝐴 𝑛
𝐹= 1+𝑖 −1
𝑖

𝑑 𝐿
𝐶𝑂 − 𝐶𝐿 = 1+𝑖 −1
𝑖

𝑪𝑶 − 𝑪𝑳 Depreciation per year, d

𝐶𝑂 − 𝐶𝐿
𝑑=
1+𝑖 𝐿 −1
𝑖

ENGR. GIAN CARLO M. BONGCALES, RMEE 46

SINKING FUND METHOD a sinking fund is established in which funds will
accumulate for replacement.

Depreciation up to m
years, 𝑫𝒎
𝑑
𝐷𝑚 = 1+𝑖 𝑚−1
𝑖

Book value at the end

of n years, 𝑪𝒎
𝐶𝑚 = 𝐶𝑂 − 𝐷𝑚

ENGR. GIAN CARLO M. BONGCALES, RMEE 47

 where assets are depreciated at a

DECLINING BALANCE METHOD

higher rate in the initial years than
in the subsequent years.

Use the Matheson Formula

𝐿 𝐶𝐿 𝑚 𝐶𝑚
𝑘 =1− 𝑘 =1−
𝐶0 𝐶0

Where: k = constant percentage

This method cannot have a salvage value of zero

ENGR. GIAN CARLO M. BONGCALES, RMEE 48

 This method takes the
asset's expected life and

SUM-OF-YEARS DIGITS (SYD) METHOD

adds together the digits
for each year

Total Depreciation = 𝑪𝑶 − 𝑪𝑳

𝑪𝑶 Corresponding depreciation charges:

𝑳
First year: 𝒅𝟏 = 𝑪𝑶 − 𝑪𝑳
𝑪𝑳 σ 𝒚𝒆𝒂𝒓
L
𝑳−𝟏
Second year: 𝒅𝟐 = 𝑪𝑶 − 𝑪𝑳 σ
𝒚𝒆𝒂𝒓
Useful Life = L
𝑳−𝟐
Annual depreciation Third year: 𝒅𝟑 = 𝑪𝑶 − 𝑪𝑳 σ 𝒚𝒆𝒂𝒓
charge is decreasing.
𝑳 𝑳+𝟏
ENGR. GIAN CARLO M. BONGCALES, RMEE Where:σ 𝒚𝒆𝒂𝒓 = 49
𝟐
A machine has an initial cost of Php50,000 and a salvage value of Php10,000 after 10 years. What is
the straight-line depreciation rate as a percentage of the initial cost?
A. 4% C. 10%
B. 8% D. 12%

ENGR GIAN CARLO M. BONGCALES, RMEE

A machine has an initial cost of Php50,000 and a salvage value of Php10,000 after 10 years. What is
the book value after five years using straight-line depreciation?
A. Php12,500 C. Php22,300
B. Php16,400 D. Php30,000

ENGR GIAN CARLO M. BONGCALES, RMEE

A lathe machine costs ₱300,000 with a salvage value of ₱15,000 is expected to last for 28,500 hours
in period for 5 years. In the first year of service it was used for 8000 hours. Compute the
depreciation for the first year and the book value at the end of the first year.
A. BV = 240,000 & D = 90,000 C. BV = 220,000 & D = 80,000
B. BV = 290,000 & D = 85,000 D. BV = 260,000 & D = 80,000

ENGR GIAN CARLO M. BONGCALES, RMEE

Determine the book value at the end of 4 years of a machine costing ₱20,000 having a serviceable
life of 8 years and a salvage value of ₱2000 at the end of that time. Use SYD method
A. Php7,000 C. Php9,000
B. Php8,000 D. Php10,000

ENGR GIAN CARLO M. BONGCALES, RMEE

A machine costing ₱720,000 is estimated to have life of 10 years. If the annual rate of depreciation is
25%, determine the total depreciation using the constant percentage method or declining balance
method.
A. Php689,454.26 C. Php679,454.27
B. Php677,964.27 D. Php678,764.26

ENGR GIAN CARLO M. BONGCALES, RMEE

A VOM has a selling price of P400.00. If the selling price is expected to decline at a rate of 10% per
annum due to obsolescence, what will be its selling price after 5 years?.
A. Php234,196 C. Php236,196
B. Php235,196 D. Php237,196

ENGR GIAN CARLO M. BONGCALES, RMEE

A firm bought an equipment for ₱56,000. Other expenses including installation amounted to ₱4,000
The equipment is expected to have a life of 16 years with a salvage value of 10% of the original cost.
Determine the book value at the end of 12 years using sinking fund method at 12% interest.
A. Php28,618.38 C. Php25,518.37
B. Php29,518.38 D. Php29,618.78

ENGR GIAN CARLO M. BONGCALES, RMEE

CAPITALIZED COST
Capitalized Cost of any property, is the sum of the first cost and the present
worth of all costs of replacements, operation and maintenance for a long time or
forever.
Case 1: No replacement, only maintenance and/or operation every period
Capitalized cost = First Cost + Present worth of cost of perpetual operation
and/or maintenance
Case 2: Replacement only, no maintenance and/or operation every period
Capitalized cost = First Cost + Present worth perpetual replacement
Case 3: Replacement , maintenance and/or operation every period
Capitalized cost = First Cost + Present worth perpetual replacement + Present
worth of cost of perpetual operation and/or maintenance

ENGR GIAN CARLO M. BONGCALES, RMEE

CASE 2 (Replacement only, no maintenance
and/or operation every period)
𝐴 𝑛
𝐹= 1+𝑖 −1
𝑖
Where:
𝐹=𝑆
𝐴 = 𝑋𝑖

𝑋𝑖 𝑘
𝑆= 1+𝑖 −1
𝑖

Present worth of perpetual replacements

𝑺
𝑿=
𝟏+𝒊 𝒌−𝟏
ENGR GIAN CARLO M. BONGCALES, RMEE
A bridge is constructed for 20 million pesos. The estimated annual maintenance cost is P 400,000.
the interest rate is 8% per annum, what is the capitalized cost of the bridge?
A. Php24,000,000 C. Php26,000,000
B. Php25,000,000 D. Php27,000,000

ENGR GIAN CARLO M. BONGCALES, RMEE

A new engine was installed by a textile plant at cost of P 300,000 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 P 30,000. Determine
its capitalized cost if interest is 18% compounded annually?
A. Php327,694.1737 C. Php374,607.1768
B. Php324,604.1738 D. Php374,604.1738

ENGR GIAN CARLO M. BONGCALES, RMEE

Determine the capitalized cost of an engineering laboratory which requires Php 10,000,000 for
original construction; Php 1,000,000 at the end of every year for the first 6 years and then Php
1,200,000 each year thereafter for operating expenses and Php 5,000,000 every five years for
perpetual replacement of equipment. Interest is 12% per annum.

ENGR GIAN CARLO M. BONGCALES, RMEE

BREAKEVEN

ENGR. GIAN CARLO M. BONGCALES, RMEE 63

BREAKEVEN

ENGR. GIAN CARLO M. BONGCALES, RMEE 64

A company which manufactures electric motors has a production capacity of 200 motors a month.
The variable cost are ₱150.00 per motor. The average selling price of the motors is ₱275.00. Fixed
costs of the company amount to ₱20,000.00 per month which includes taxes. Find the no. of motors
that must be sold each month to break even.
A. 140 motors C. 160 motors
B. 150 motors D. 170 motors

ENGR GIAN CARLO M. BONGCALES, RMEE

A company produces a gear that is commonly used by several lawn owner manufacturing
companies. The base cost of operation (rent, utilities,etc.) is 750,000 per year. The cost of
manufacturing is $1.35 per gear. If these gears are sold at $7.35 each, how many must be sold each
year to break even?
A. 65,000 per year C. 100,000 per year
B. 90,000 per year D. 125,000 per year

ENGR GIAN CARLO M. BONGCALES, RMEE

END OF PRESENTATION

ENGR. GIAN CARLO M. BONGCALES, RMEE 67