Group 3

Engineering Economics
Topic 3 – Economic study methods, Basic
economic study methods, and other
methods

S TA R T T O P R E S E N TAT I O N
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Entendez Dela Cruz Javier
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Your Library Grana Gesta

Playlist Dechosa Elimanco

Economic Study Methods

Basic Economic Study Topics Overview

Methods

Other methods

Minimum Rate Present Worth Future Worth Annual Worth

of Return Method Method Method
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Entendez Dela Cruz Javier
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Your Library Grana Gesta

Playlist Dechosa Elimanco

Economic Study Methods

Basic Economic Study Topics Overview

Methods

Other methods

Internal Rate External Rate Discounted Payback Benefit/Cost

of Return of Return Period Ratio
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Cash flow - refers to the money entering or leaving a project or
Playlist
business during a specific period of time.
Economic Study Methods

Basic Economic Study Cash flow Diagram (CFD) – diagrams constructed with
Methods
horizontal line (period) and vertical line (cash flow) used for
Other methods
analyzing cash flows that occur over several time periods.
Rate of Return – interest rate earned on uncovered project
balance such that an investment’s cash receipts make the terminal
project balance equal to zero.
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Economic Study Methods

Basic Economic Study

Methods

Other methods Know the

Apply this lesson
in solving real-life importance of this
problems topic
Define the
Economics Study
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3.1 Minimum Attractive Rate
Search Of Return (MARR)
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 The MARR or Hurdle rate is a minimum return
Playlist the company will accept on the money it invests.
Economic Study Methods
 T h e M A R R i s u s u a l l y c a l c u l a t e d b y fi n a n c i a l
Basic Economic Study
Methods a n a l y s t i n t h e c o m p a ny a n d p r o v i d e d t o t h o s e
Other methods w h o e v a l u a t e p ro j e c t s .
A B C D

ROR = 2% ROR = 5% ROR = 7% ROR = 10%

If MARR is ≥ 10
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Present Worth Method
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Playlist  It is a method based on the concept of equivalent

Economic Study Methods
worth of cash flows relative to some base or
Basic Economic Study
Methods beginning point in time called present.
Other methods
 If PW (i=MARR) ≥ 0, the project is economically
justified.
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Present Worth Method
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Your Library Example 1:

Yo u r b o s s w a n t s t o b u y a n e q u i p m e n t f o r ₱3 0 , 0 0 0 . I t i s b e l i e v e d
Playlist
t h a t e q u i p m e n t w i l l b r i n g a n a d d i ti o n a l ₱8 , 5 0 0 i n c o m e p e r y e a r.
Economic Study Methods T h e e q u i p m e n t ’s v a l u e a ft e r 5 y e a r s w i l l b e ₱4 , 5 0 0 . Yo u r b o s s
Basic Economic Study
asks you if his idea is economically viable. What would be on
Methods y o u r a n s w e r ? Yo u r c o m p a n y ’s M A R R i s 1 5 % .
Other methods
₱4.5k

₱8,5K ₱8.5k ₱8.5k ₱8.5k

₱8.5k
MARR= i = 0.15

₱30k
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Your Library Solution: PW= PW of Cash Inflows – PW of Cash Outflows

₱4.5k Step 1: Identify the Cash inflows and outflows
Playlist ₱8,5K ₱8.5k ₱8.5k ₱8.5k
₱8.5k
PW= ₱8,500 (P/A,15%,5) + ₱4,500 (P/F,15%,5) - ₱30,000
Economic Study Methods
Step 2: Use Uniform Series and Single Payment PW factor
Basic Economic Study
₱30k
Methods P= A and F= P

Other methods
=

= ₱28,493.31833 + ₱2,237.295309 - ₱30,000

PW= ₱730.61
Because Present Worth at the interest of 15% is greater than or equal 0, it is economically
justified.
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Present Worth Method
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Your Library Example 2:

A piece of new equipment has been proposed by DPWH engineers
Playlist t o i n c r e a s e p r o d u c ti v i t y f o r m a n u a l w i e l d i n g o p e r a ti o n . ₱2 5 , 0 0 0 i s
Economic Study Methods
i n v e s t e d a n d t h e e q u i p m e n t w i l l h a v e ₱5 , 0 0 0 a t t h e e n d o f 5 y e a r
s t u d y p e r i o d . I n c r e a s e d p r o d u c ti v i t y a tt r i b u t a b l e t o e q u i p m e n t
Basic Economic Study
Methods
w i l l a m o u n t t o ₱8 , 0 0 0 p e r y e a r a ft e r e x t r a o p e r a ti n g c o s t
s u b t r a c t e d f r o m t h e r e v e n u e b y a d d i ti o n a l p r o d u c ti o n . I f t h e
Other methods fi r m ’ s M A R R i s 2 0 % p e r y e a r, i s t h i s p r o p o s a l s o u n d o n e ? U s e P W
method.
₱5k

₱8k ₱8k ₱8k ₱8k ₱8k

MARR= i = 0.20

₱25k
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Your Library Solution: PW= PW of Cash Inflows – PW of Cash Outflows

$5k
Step 1: Identify the cash inflows and outflows
Playlist $8k $8k $8k $8k $8k
PW= ₱8,000 (P/A,20%,5) + ₱5,000 (P/F,20%,5) - ₱25,000
Economic Study Methods
Step 2: Use Uniform Series and Single Payment PW factor
Basic Economic Study $25k
Methods P= A and F= P
Other methods
=

= ₱23,924.89712 + ₱2,009.38786 - ₱25,000

PW = ₱ 934.28
Because Present Worth at the interest of 20% is greater than or equal 0, it is economically
justified.
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Future Worth Method
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Playlist  T h e f u t u r e m e t h o d fo r e c o n o m y s t u d i e s i s
Economic Study Methods e xa c t l y c o m p a r a b l e t o t h e p r e s e n t w o r t h m e t h o d
Basic Economic Study e xc e p t t h a t a l l c a s h i n fl o w s a n d o u tf l o w s a r e
Methods
c o m p o u n d e d fo r w a r d t o a r e fe r e n c e p o i n t i n
Other methods
ti m e c a l l t h e f u t u r e .
 I f F W ( i = M A R R ) ≥ 0, the project is economically
justified.
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Future Worth Method
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Your Library Example 1:

A piece of new equipment has been proposed by DPWH engineers
Playlist t o i n c r e a s e p r o d u c ti v i t y f o r m a n u a l w i e l d i n g o p e r a ti o n . ₱2 5 , 0 0 0 i s
Economic Study Methods i n v e s t e d a n d t h e e q u i p m e n t w i l l h a v e ₱5 , 0 0 0 a t t h e e n d o f 5 y e a r
s t u d y p e r i o d . I n c r e a s e d p r o d u c ti v i t y a tt r i b u t a b l e t o e q u i p m e n t
Basic Economic Study
Methods
w i l l a m o u n t t o ₱8 , 0 0 0 p e r y e a r a ft e r e x t r a o p e r a ti n g c o s t
s u b t r a c t e d f r o m t h e r e v e n u e b y a d d i ti o n a l p r o d u c ti o n . I f t h e
Other methods fi r m ’ s M A R R i s 2 0 % p e r y e a r, i s t h i s p r o p o s a l s o u n d o n e ? U s e F W
method.
₱5k

₱8k ₱8k ₱8k ₱8k ₱8k

MARR= i = 0.20

₱ 25k
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Future Worth Method
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Your Library Solution: FW= FW of Cash Inflows – FW of Cash Outflows

$5k
Step 1: Identify the Cash inflows and outflows
Playlist $8k $8k $8k $8k $8k
FW= $8,000 (F/A,20%,5) + $5,000 - $25,000(F/P,20%,5)
Economic Study Methods
Step 2: Use Uniform Series Compound Factor and Single Payment FW factor
Basic Economic Study $25k
Methods F= A and F= P
Other methods
=

= ₱59,532.8 + ₱5,000 - ₱62,208

FW= ₱ 2,324.8
Because Future Worth at the interest of 20% is greater than or equal 0, it is economically
justified.
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Future Worth Method
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Your Library Example 2:

Yo u r a i r - c o n d i ti o n e r i s o l d , s o y o u p l a n t o b u y n e w o n e t o y o u r
Playlist o ffi c e . T h e n e w a i r c o n d i ti o n e r c o s t s ₱5 0 , 0 0 0 ( d e l i v e r y a n d
Economic Study Methods i n s t a l l a ti o n i n c l u d e d ) . I t i s e s ti m a t e d t h a t t h e a i r c o n d i ti o n e r
c a n s a v e u p t o ₱1 1 , 0 0 0 w o r t h o f e l e c t r i c c o s t . I f t h e a i r
Basic Economic Study
Methods c o n d i ti o n e r ’s m a r k e t v a l u e w o u l d b e ₱7 , 5 0 0 a ft e r 6 y e a r s , i s
i n s t a l l i n g t h e n e w a i r c o n d i ti o n e r a g r e a t i d e a ( e c o n o m i c w i s e ) ? ?
Other methods
MARR is 20%.
₱ 7.5k

₱11k ₱11k ₱11k ₱11k ₱11k ₱ 11k

MARR= i = 0.20

₱50k
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Future Worth Method
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Your Library Solution: FW= FW of Cash Inflows – FW of Cash Outflows

₱ 7.5k Step 1: Identify the Cash inflows and outflows
Playlist
₱11k ₱11k ₱11k ₱11k ₱11k ₱ 11k FW= ₱7,500 + ₱11,000(F/A,20%,6) - ₱ 50,000(F/P,20%,6)
Economic Study Methods Step 2: Use Uniform Series Compound Factor and Single Payment FW factor
Basic Economic Study ₱50k
F= A and F= P
Methods

Other methods =

= ₱7,500 + ₱109,229.12 - ₱149,299.2

FW= ₱-32,570.08

Because Future Worth at the interest of 20% is less than 0, it is not economically justified.
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Annual Worth Method
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Playlist  AW i s a n e q u a l a n n u a l s e r i e s o f d o l l a r
Economic Study Methods a m o u nt s , o ve r a state d p e r i o d ( N ) , e q u i va l e nt
Basic Economic Study
Methods
to t h e c a s h i nfl o ws a n d o u tf l o ws at i nte re st
Other methods
rate c a l l e d M A R R .
 I f F W ( i = M A R R ) ≥ 0, the project is economically
justified.
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Annual Worth Method
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Your Library Example 1:

Yo u r b o s s w a n t s t o b u y a n e q u i p m e n t f o r ₱3 0 , 0 0 0 . I t i s b e l i e v e d
Playlist
t h a t e q u i p m e n t w i l l b r i n g a n a d d i ti o n a l ₱8 , 5 0 0 i n c o m e p e r y e a r.
Economic Study Methods T h e e q u i p m e n t ’s v a l u e a ft e r 5 y e a r s w i l l b e ₱4 , 5 0 0 . Yo u r b o s s
Basic Economic Study
asks you if his idea is economically viable. What would be on
Methods y o u r a n s w e r ? Yo u r c o m p a n y ’s M A R R i s 1 5 % . U s e A n n u a l W o r t h
method.
Other methods
₱4.5k

₱8,5K ₱8.5k ₱8.5k ₱8.5k

₱8.5k
MARR= i = 0.15

₱30k
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Annual Worth Method
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Your Library Solution: AW= Revenue – Expenses – Capital Recovery Rate

₱4.5k Step 1: Identify the Revenue and Expenses
Playlist ₱8,5K ₱8.5k ₱8.5k ₱8.5k
₱8.5k Revenue – Expenses = Income
Economic Study Methods Revenue – Expenses = ₱8,500
Step 2: Identify the Capital Recovery Rate
Basic Economic Study
Methods ₱30k Capital Recovery Rate = Annual Worth of Investment – Annual
Worth of Market (Salvage Value)
Other methods
Step 2.1: Solve for Annual Worth Investment

A= 8,949.47
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Your Library Solution: AW= Revenue – Expenses – Capital Recovery Rate

₱4.5k A= 8,949.47
Playlist ₱8,5K ₱8.5k ₱8.5k ₱8.5k
₱8.5k Step 2.2: Solve for Annual Worth of Market
Economic Study Methods

Basic Economic Study

Methods ₱30k
A= 667.42
Other methods
Step 2.3: Solve for Capital Recovery Rate
Capital Recovery Rate = Annual Worth of Investment – Annual Worth of
Market (Salvage Value)

Capital Recovery Rate = 8,949.47 – 667.42

= ₱8282.05
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Annual Worth Method
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Your Library Solution: Annual Worth= Revenue – Expenses – Capital Recovery

₱4.5k
Rate
Playlist ₱8.5k ₱8.5k ₱8.5k
₱8,5K ₱8.5k Step 3: Substitute the value and solve for Annual Worth
Economic Study Methods
Annual Worth = ₱8,500 – ₱8,282.05
Basic Economic Study
Methods ₱30k Annual Worth = ₱217.95
Other methods
Because Annual Worth at the interest of 15% is
greater than 0, it is economically justified.
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Your Library Example 2:

Yo u r a i r - c o n d i ti o n e r i s o l d , s o y o u p l a n t o b u y n e w o n e t o y o u r
Playlist o ffi c e . T h e n e w a i r c o n d i ti o n e r c o s t s ₱5 0 , 0 0 0 ( d e l i v e r y a n d
Economic Study Methods i n s t a l l a ti o n i n c l u d e d ) . I t i s e s ti m a t e d t h a t t h e a i r c o n d i ti o n e r
Basic Economic Study
c a n s a v e u p t o ₱1 1 , 0 0 0 w o r t h o f e l e c t r i c c o s t . I f t h e a i r
Methods c o n d i ti o n e r ’s m a r k e t v a l u e w o u l d b e ₱7 , 5 0 0 a ft e r 6 y e a r s , i s
i n s t a l l i n g t h e n e w a i r c o n d i ti o n e r a g r e a t i d e a ( e c o n o m i c w i s e ) ? ?
Other methods
MARR is 20%.
₱ 7.5k

₱11k ₱11k ₱11k ₱11k ₱11k ₱ 11k

MARR= i = 0.20

₱50k
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Your Library Solution: AW= Revenue – Expenses – Capital Recovery Rate

₱ 7.5k
Step 1: Identify the Revenues and Expenses
Playlist
₱11k ₱11k ₱11k ₱11k ₱11k ₱ 11k
Revenue – Expenses = Income
Economic Study Methods Revenue – Expenses = ₱11,000
Basic Economic Study ₱50k Step 2: Identify the Capital Recovery Rate
Methods
Capital Recovery Rate = Annual Worth of Investment – Annual
Other methods Worth of Market (Salvage Value)

Step 2.1: Solve for Annual Worth Investment

A= 15,035.29
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Your Library Solution: AW= Revenue – Expenses – Capital Recovery Rate

₱ 7.5k A= 15,035.29
Playlist Step 2.2: Solve for Annual Worth of Market
₱11k ₱11k ₱11k ₱11k ₱11k ₱ 11k

Economic Study Methods

Basic Economic Study ₱50k

Methods A= 755.29
Other methods Step 2.3: Solve for Capital Recovery Rate
Capital Recovery Rate = Annual Worth of Investment – Annual Worth of
Market (Salvage Value)

Capital Recovery Rate = 15,035.29 – 755.29

= ₱14,280
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Your Library Solution: Annual Worth= Revenue – Expenses – Capital Recovery

₱ 7.5k Rate
Playlist
₱11k ₱11k ₱11k ₱11k ₱11k ₱ 11k Step 3: Substitute the value and solve for Annual Worth
Economic Study Methods
Annual Worth = ₱11,000 – ₱14,280
Basic Economic Study ₱50k
Methods Annual Worth = -₱3,280
Other methods
Because Annual Worth at the interest of 20% is
less than 0, it is not economically justified.
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Internal Rate of Return
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Your Library

Playlist  Is the discount rate that results the net present value
Economic Study Methods equal to zero. Sometimes referred as breakeven
Basic Economic Study interest rate.
Methods

Other methods PW = PW of Cash Inflows – PW of Cash Outflows

0 = PW of Cash Inflows – PW of Cash Outflows
PW of Cash Outflows = PW of Cash Inflows
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Your Library Sample Cashflow PW or NPV = PW of Cash Inflows – PW of Cash Outflows

₱3,000 ₱3,000
Playlist Formula:

Economic Study Methods

Basic Economic Study ₱5,000

Methods RATE (i) NPV
Other methods 0% ₱1000
5% ₱578
10% ₱207
15% - ₱123
20% - ₱416
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Your Library RATE (i) NPV

1200

0% ₱1000 1100
1000
Playlist 5% ₱578 900
800

Economic Study Methods 10% ₱207 700

NPV (₱)
600
500
Basic Economic Study 15% - ₱123 400
Methods 300
20% - ₱416 200
Other methods 100
-100
-200
-300
-400
-500
-600
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Internal Rate of Return
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Your Library Sample Cashflow PW or NPV = PW of Cash Inflows – PW of Cash Outflows

₱3,000 ₱3,000
Playlist Formula: Formula:

Economic Study Methods

Basic Economic Study

₱5,000
Methods

Other methods GIVEN:

n= 2
CF0= - ₱5,000
CF1= ₱3,000
CF2= ₱3,000
The internal rate of return is approximately 13.07%
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Your Library Example 1:

The management of VGA Textile Company is considering to replace an old
Playlist
machine with a new one. The new machine will be capable of performing some
Economic Study Methods tasks much faster than the old one. The installation of machine will cost
Basic Economic Study ₱423,750 and will reduce the annual labor cost by ₱75,000. The useful life of the
Methods machine will be 10 years with no salvage value. The minimum required rate of
Other methods return is 15%.
₱423,750

₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000
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Internal Rate of Return
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₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000
Your Library GIVEN:
n= 10
Playlist CF0= - ₱423,750 ₱423,750

CF1= ₱75,000
Economic Study Methods Formula:
CF2= ₱75,000
Basic Economic Study
Methods CF3= ₱75,000 Solution 1:
CF4= ₱75,000 PW or NPV = PW of Cash Inflows – PW of Cash Outflows
Other methods
CF5= ₱75,000
CF6= ₱75,000
CF7= ₱75,000
CF8= ₱75,000
CF9= ₱75,000
CF10= ₱ ₱75,000
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Internal Rate of Return
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₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000 ₱75,000
Your Library GIVEN:
n= 10
Playlist ₱423,750
CF0= - ₱423,750
Economic Study Methods CF1= ₱75,000 Formula:
Basic Economic Study CF2= ₱75,000
Methods CF3= ₱75,000 Solution 2:
PW or NPV = PW of Cash Inflows – PW of Cash Outflows
Other methods CF4= ₱75,000
CF5= ₱75,000
CF6= ₱75,000
CF7= ₱75,000
CF8= ₱75,000
CF9= ₱75,000 Since, the Internal Rate of Return (i = 12%) is less than the
CF10= ₱ ₱75,000 Minimum Required Rate of Return (MARR = 15%), the
project is not economically justified.
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Your Library Example 2:

Mrs. Amy is considering investing ₱12,500,000 in a business. The cost of capital
Playlist for the investment is 13%. Following cash flows are expected from the investment:
Economic Study Methods Year Cashflow
Basic Economic Study 0 -₱12,500,000
Methods 1 ₱2,500,000
2 ₱5,000,000
Other methods
3 ₱10,000,000
₱2,500,000 ₱5,000,000 ₱10,000,000
Calculate the IRR for the
proposed investment and
interpret your answer.
₱12,500,000
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₱2,500,000 ₱5,000,000 ₱10,000,000
Your Library
GIVEN:
Playlist n= 3
₱12,500,000
CF0= ₱12,500,000
Economic Study Methods Formula:
CF1= ₱2,500,000
Basic Economic Study
Methods
PW or NPV = PW of Cash Inflows – PW of Cash Outflows
CF2= ₱5,000,000
Other methods CF3= ₱10,000,000

Since, the Internal Rate of Return (i = 15.12%) is more than the Minimum Required Rate of Return
(MARR = 13%), the proposed project is economically justified.
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Your Library

Playlist  The rate of return on a project where any “excess” cash

Economic Study Methods from a project is assumed to earn interest at a pre-
Basic Economic Study
Methods
determined explicit rate usually the MARR.
Other methods
 Future Worth of Disbursement = Future Worth of Receipt
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Your Library Example 1:

Yo u r a i r - c o n d i ti o n e r i s o l d , s o y o u p l a n t o b u y n e w o n e t o y o u r
Playlist o ffi c e . T h e n e w a i r c o n d i ti o n e r c o s t s ₱5 0 , 0 0 0 ( d e l i v e r y a n d
Economic Study Methods
i n s t a l l a ti o n i n c l u d e d ) . I t i s e s ti m a t e d t h a t t h e a i r c o n d i ti o n e r
c a n s a v e u p t o ₱1 1 , 0 0 0 w o r t h o f e l e c t r i c c o s t . I f t h e a i r
Basic Economic Study
Methods
c o n d i ti o n e r ’s m a r k e t v a l u e w o u l d b e ₱7 , 5 0 0 a ft e r 6 y e a r s , i s
i n s t a l l i n g t h e n e w a i r c o n d i ti o n e r a g r e a t i d e a ( e c o n o m i c w i s e ) ?
Other methods MARR is 20%.
₱50k

MARR= i = 0.20
₱11k
₱11k ₱11k ₱11k ₱11k ₱11k
₱7.5k
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3.2 Basic Economic Study Methods

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External Rate of Return
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Your Library Solution: Step 1: Use the formula

Playlist ₱50k

Economic Study Methods where; P= 50,000

n= 6
Basic Economic Study ₱11k
A= 11,000
Methods ₱11k ₱11k ₱11k ₱11k ₱11k i=?
₱7.5k
Other methods
Step 2: Solve for i

i = 0.11353413559% or 11.35%
Since the interest rate is 11.35% which less than 20% (MARR). Therefore, the project is not
economically justified.
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3.2 Basic Economic Study Methods

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External Rate of Return
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Your Library Example 2:

Yo u r b o s s w a n t s t o b u y a n e q u i p m e n t f o r ₱3 0 , 0 0 0 . I t i s b e l i e v e d
Playlist
t h a t e q u i p m e n t w i l l b r i n g a n a d d i ti o n a l ₱8 , 5 0 0 i n c o m e p e r y e a r.
Economic Study Methods T h e e q u i p m e n t ’s v a l u e a ft e r 5 y e a r s w i l l b e ₱4 , 5 0 0 . Yo u r b o s s
Basic Economic Study
asks you if his idea is economically viable. What would be on
Methods y o u r a n s w e r ? Yo u r c o m p a n y ’s M A R R i s 1 5 % .
Other methods
₱4.5k

₱8,5K ₱8.5k ₱8.5k ₱8.5k

₱8.5k
MARR= i = 0.15

₱30k
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External Rate of Return
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Your Library Solution: Step 1: Use the formula

₱4.5k
Playlist ₱8,5K ₱8.5k ₱8.5k ₱8.5k
₱8.5k

Economic Study Methods where; P= 30,000

n= 5
Basic Economic Study
₱30k A= 8,500
Methods
i=?
Other methods
Step 2: Solve for i

i = 0.15964970451 or 15.96%
Since the interest rate is 15.96% which is greater than 15% (MARR). Therefore, the project is
economically justified.
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Playlist  Discounted Payback Period is the time required, after

Economic Study Methods
start-up, to recover the fixed capital costs required for
Basic Economic Study
Methods a project with all cash flows discount back to time zero.
Other methods The project with the shortest discounted payback
period is the most desirable.
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Your Library Example:

Calculate DPP of the following project and give recommendation. (Max DPP 3 years)
Playlist Year 0 1 2 3 4 5

Economic Study Methods Cashflow ₱100,000 ₱30,000 ₱50,000 ₱40,000 ₱30,000 ₱20,000

Basic Economic Study

Methods Use 10% for Discounting.
Year Cashflow DF @ 10% Present Value Cumulative NPV
Other methods
0 ₱100,000 1 -100,000 -100,000
1 ₱30,000 0.909 27,270 -72,730
2 ₱50,000 0.826 41,300 -31,430
3 ₱40,000 0.751 30,040 -1390
4 ₱30,000 0.683 20,490 19,100
5 ₱20,000 0.621 12,420 31,520
  NPV: 31,520  
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Your Library Solution: Year Cashflow DF @ 10% Present Value Cumulative

NPV

Playlist
Calculate DPP of the 0 ₱100,000 1 -100,000 -100,000
following project and 1 ₱30,000 0.909 27,270 -72,730
Economic Study Methods 2 ₱50,000 0.826 41,300 -31,430
give recommendation.
Basic Economic Study Max DPP is 3 years 3 ₱40,000 0.751 30,040 -1390
Methods 4 ₱30,000 0.683 20,490 19,100
5 ₱20,000 0.621 12,420 31,520
Other methods
  NPV: 31,520  
DPP= 3+ Project should be rejected
because the DPP exceeds target
= 3 + 0.067 = 3 + (0.067*12) DPP of 3 years.
= 3.067 years or 3 years and 0.8 Month
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3.3 Other Methods

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Playlist • The method of selecting alternatives that is commonly

Economic Study Methods used by government agencies for analyzing the
Basic Economic Study
Methods
desirability of public projects is the benefit-cost ratio (B/C
Other methods
ratio). The B/C method of analysis is based on the ratio of
the benefits to costs associated with a particular project.

Materi 02
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Economic Study Methods C o s t - e s ti m a t e d e x p e n d i t u r e s t o t h e g o v e r n m e n t e q u i t y f o r
Basic Economic Study c o n s t r u c ti o n , o p e r a ti o n , a n d m a i n t e n a n c e o f t h e p r o j e c t l e s s
Methods any expected salvage value.
Other methods B e n e fi t s - a d v a n t a g e s t o b e e x p e r i e n c e d b y t h e o w n e r s , t h e
public.
D i s b e n e fi t s - e x p e c t e d u n d e s i r a b l e o r n e g a ti v e c o n s e q u e n c e s t o
t h e o w n e r s i f t h e a l t e r n a ti v e i s i m p l e m e n t e d . I t m a y b e
i n d i r e c t e c o n o m i c d i s a d v a n t a g e s o f t h e a l t e r n a ti v e .

Materi 02
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Decision Guideline:
Economic Study Methods
If B/C ≥ 1.0 accept the project as economically justified
Basic Economic Study
Methods and the discount rate applied
Other methods
If B/C < 1.0 the project is not economically acceptable

Materi 02
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3.3 Other Methods

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Your Library Example 1:

A n o n p r o fi t e d u c a ti o n a l r e s e a r c h o r g a n i z a ti o n i s
Playlist
c o n t e m p l a ti n g a n i n v e s t m e n t o f ₱1 , 5 0 0 , 0 0 0 i n g r a n t s t o
Economic Study Methods develop new ways to teach people the rudiments of
Basic Economic Study profession. The grants would extend over a ten-year
Methods
p e r i o d a n d w o u l d a c h i e v e a n e s ti m a t e d s a v i n g s o f
Other methods ₱500,000 per year in professor’s salaries, student tuition, and other
expenses. The program would be an addition to ongoing and planned
activities, thus an estimated ₱100,000 a year would have to be released
from other program to support the educational research, a rate of return
of 15% is expected. Is this a good program?
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Your Library Solution:

Step 2: Use B/C Ratio Formula and Solve
B e n e fi t s = ₱500,000 per year
Playlist D i s b e n e fi t s = ₱100,000 per year
Economic Study Methods Step 1: Solve B/C ratio using Uniform Series Capital Recovery Factor

Basic Economic Study

Methods

Other methods

B/C = 1.338
Cost = ₱298,878.0938

Since B/C = 1.338 is greater than 1.0. Therefore, it is economically justified.

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Your Library Example 2:

Playlist T h e D P W H i s c o n s i d e r i n g t h e c o n st r u c ti o n o f a
Economic Study Methods
n e w h i g h way t h ro u g h s c e n i c a r u ra l a re a . T h e
Basic Economic Study ro a d i s ex p e c te d to c o st ₱50,000 with annual upkeep
Methods
estimated at ₱400,000. The improved accessibility is expected
Other methods
to result in additional income from tourist of ₱7,000,000 per
year. The road is expected to have a useful life of 25 years. If
the rate of interest is 15%, should the road be constructed?
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3.3 Other Methods

Home Benefit-Cost Ratio (B-C ratio)
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Your Library Solution:

Step 1.1: Use B/C Ratio formula
B e n e fi t s = ₱7,000,000 per year
Playlist D i s b e n e fi t s = ₱400,000 per year
Economic Study Methods Step 1: Solve B/C ratio using Uniform Series Capital Recovery Factor

Basic Economic Study

Methods

Other methods

B/C = 0.8532
Cost = ₱7,734,970.116

Since B/C = 0.8532 is less than 1.0. Therefore, it is not economically justified.
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Your Library Solution: Step 2.2: Solve for yearly Disbenefit

Step 2: Solve B/C ratio using Present Worth Method

Playlist
Step 2.1: Solve for yearly Benefit
Economic Study Methods

Basic Economic Study PW of yearly Disbenefit = ₱2,585,659.634

Methods
Step 2.3: Use B/C Ratio formula
Other methods

PW of yearly Benefit = ₱7,734,970.116

B/C = 0.8532
Since B/C = 0.8532 is less than 1.0. Therefore, it is not economically justified.
 Group 3

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