Review Module – Engineering Economy

SIMPLE INTEREST GRADIENTS

A P200, 000 loan was made on January 10, 2024 and to be repaid Uniform Gradient
on October 15, 2024. Determine the amount to be paid 10. Miss Santos deposited P1,000 at the end of 2nd year and
1. With ordinary simple interest at 12% per year. increasing her deposit by 500 pesos each year until the end of the
2. With exact simple interest at 12% per year. tenth year in a savings account which earned 10% per annum.
What will be the present worth of his sayings?
3. A deposit of Php 110,000 was made for 31 days. The net interest
after deducting the 20% withhold tax is P 890.36 Find the rate of
return annually.
COMPUND INTEREST
4. Engr. Francis got into an emergency and needs P100,000 pesos
(ASAP). He talked to Melvin about lending him the said amount and
agreed, but Francis should pay him an interest rate of 10%
compounded quarterly. How much money does Francis owe Melvin
𝐴[(1 + 𝑖) − 1] 𝐺 (1 + 𝑖) − 1 𝑛
after 2 years? 𝑃= + −
𝑖(1 + 𝑖) 𝑖 𝑖(1 + 𝑖) (1 + 𝑖)
5. Sonny borrowed a certain amount on June 1990 from Romeo.
Two years later, Sonny borrowed again from Romeo an amount of Geometric Gradient
P 5,000. Sonny paid P 1,000 on June 1993 and discharged his 11. A mechanical contractor is trying to calculate the future worth of
balance by paying P 7,500 on June 1995. What was the amount personnel salaries over the next five years. He has four employees
borrowed by Sonny on June 1990 if the interest rate is 8% whose combined salaries thru the end of this year are $150,000. If
compounded annually?
he expects to give each employee a raise of 5% each year, the
ANNUITIES future worth of his employees' salaries at an interest rate of 12%
Ordinary Annuity per year is nearest to:
6. If $10,000 is borrowed and payments of $2000 are made each
year for 9 years, what is the interest rate?
7. Calculate the present worth for the following cash flow diagram if
the interest rate is 12%.

( ) ( )
𝑃=𝐴 𝑤ℎ𝑒𝑟𝑒 𝑖 ≠ 𝑔

𝑃= 𝑤ℎ𝑒𝑟𝑒 𝑖 = 𝑔
Deferred Annuity
8. On the day his grandson was born, a man deposited in a trust
company a sufficient amount of money so that his grandson could EFFECTIVE RATE OF INTEREST
receive five annual payments of P10,000 each for his college tuition
fees, starting with his 18th birthday. Interest at the rate of 12% SITUATION.
compounded annually was to pe paid on all amounts on deposit. Determine the effective rate of interest of the following nominal
There is also a provision that the grandson could select to withdraw rates.
no annual payments and receive single lump amount on his 25th 12. 12% compounded annually.
birthday. 13. 12% compounded bi-monthly.
How much did the boy receive as the single payment? 14. 12% compounded continuously.
How much did the grandfather deposit?
15. What interest rate compounded quarterly is equal to 12%
Annuity Due compounded continuously?
9. How much should an Engineer invest every year for 10 years
starting from now to be able to accumulate $1,000,000 for an
upcoming project.
 Review Module – Engineering Economy

CONTINUOUS COMPOUND INTEREST DEPRECIATION

16. Money is deposited in a certain account for which the interest is SITUATION. The first cost of a machine is P1,800,000 with a salvage
compounded continuously. If the amount triples in 10 years, what value of P300,000 at the end of its life of 10 years. Determine the
is the annual percentage rate? depreciation charge during the 5th year, the total depreciation after 5
years, and the book value after 5 years,
17. A textile mill has just purchased a lift truck that has a useful life 22. Using the Straight-Line Method of Depreciation (SLM).
of 5 years. The engineer estimates that the maintenance costs for 23. Using the Depreciation by Sum of Years Digit Method (SOYD)
the truck during the first year will be $1000. Maintenance costs are 23. Using the Depreciation by Declining Balance Method (DBM),
expected to increase as the truck ages at a rate of $250 per year Constant Percentage Method (CPM) or Matheson’s Method.
over the remaining life. Assume that the maintenance costs occur 24. Using the Depreciation by Double Declining Balance Method
at the end of each year. The firm wants to set up a maintenance (DDBM).
account that earns 12% annual interest. All future maintenance 25. Using the Depreciation by Sinking Fund Method (SFM). Assume
expenses will be paid out from this account. How much does the interest rate= 8%
firm have to deposit in the account now?
USE: (P/G, i, n) = 6.3970 (P/A, i, n) = 3.6048 INFLATION
26. An economy is experiencing inflation at the rate of 5% per year. An
item presently costs P200. If the 5% inflation rate continues, what will be
the price of this item in 3 years.

27. Suppose that your salary is P45,000 in year one, and will increase at
4% per year through year four. What will be your final salary after 4
years, in terms of today’s pesos? Assume that the inflation is at 5% per
year.
PERPETUITY

18. Isko want to live as a “LODI”. He wants to receive a perpetuity

BREAK-EVEN ANALYSIS
of P250,000 annually starting 5 years from now. How much should 28. A shoe manufacturer produces a pair of shoes at a labor cost of P9.00
he invest in an investment giving an average interest rate of 10% a pair and a material cost of P8.00 a pair. The fixed charges on the
compounded annually. business is P90,000 a month and the variable cost is P4.00 a pair. If the
shoes sells at P30 a pair, how many pairs must be produced each month
CAPITALIZED COST AND ANNUAL COST for the manufacturer to break even?

19. A construction firm is considering establishing an engineering

computing center. This center will be equipped with three engineering
workstations that would cost $50,000 each, and each has a service life of
5 years. The expected salvage value of each workstation is $5000. The
annual operating and maintenance cost would be $12,000 for each
workstation. At a MARR of 20%, determine the capitalized cost and the
equivalent annual cost for operating the engineering center.

20. A contractor can buy dump trucks for P800,000 each (surplus) or rent
them for P1189 per truck per day. The truck has a salvage value of
P100,000 at the end of its useful life of 5 yrs. Annual cost of maintenance
is P20,000.00. If money is worth 14% per annum. Determine the number
of days per year that a truck must be used to warrant the purchase of the
truck.

21. Alice is a recent chemical engineering graduate. One of her first jobs
is to calculate a large pump’s cost using the following data. The first cost
will be $54,000, the annual operating costs for energy and maintenance
will be $18,000, the expected life is 10 years, the expected salvage value
is 0, and the firm’s interest rate is 9%. What is the equivalent annual cost
(EAC)?