Sol’n:
Extra Cost = P1,200
Savings = 4 mi/gal
For 8 cylinders = 20 mi/gal gasoline
Approx. driving = 1,200 mi/month
i = 0.5%/month
Cost of Gasoline = P2/gal
Cost for 8-cylinders
1,200 mi/month
= -------------- x P2/gal = P120/month
20 mi/gal
Cost for 4-cylinders
1,200 mi/month
= -------------- x P2/gal = P100/month
20 + 4 mi/gal
Savings on cost = P120 – P100 = P20/month
Equating the present worth:
P20(P/A,i%n) = Extra Cost
1-(1.005)-n
P20(------------) = P1200
0.005
1.005-n = 1200(0.005)/20 – 1
-n(ln1.005) = ln(0.7)
-n = -0.357/0.005
n = 71.4 months
5-4.
Present Worth
Outflow Inflow
Investment P13,000
N = 15 years
Market (Salvage Value)
= 3,000((P/F,i%,n) = 3,000(1.12)-15 = P548.09
1 –(1.12)-15
Annual Op Expenses = P100(P/A,i%,n) = P100(--------------------) = P681.09
0.12
Overhaul Exp. (end of 5 yrs) = P200(1.12)-5 = P113.49
-10
Overhaul Exp. (end of 10 yrs) = P550(1.12) = P117.09
Net Present Worth = P548.09 – P13,000 – P681.09 – P113.49 – P117.09 = -P13,363.50
5-5.
Present Worth
Inflow Outflow
Investment P10,000
N = 5 years
Market value = -P1000(P/F,i%,N) = -P1000(1.15-5) = -P497.18
1 – 1.15-5
Annual receipts = P8000(P/A,i%,N) = P8000(----------------) = P26,817.24
0.15
1 – 1.15-5
Annual Expenses = P4000(P/A,i%,N) = P4000(----------------) = P13,408.62
0.15
Net PW = -P497.18 +P26,817.24 – P10,000 – P13,408.62 = P2,911.44
1.155 - 1
Investment = P10,000(A/P,15%%,5) = P10,000(--------------) =
P2,983.16
0.15
N = 5 years
0.15
Market value = -P1000(A/F,15%,5) = -P1,000(--------------) = -P148.32
1.155 - 1
Annual receipts = P8000
Annual Expenses = P4000
5-8.
Present Worth
Inflow Outflow
Land, Building, Equipment & Additional Working Capital
= P300,000 + P600,000 + P250,000 +P100,000 = P1,250,000
Annual Sales = P750,000(P/A,15%10) = P750,000(5.01877) = P3,764,076.47
Market Value = (400,00+350,000+50,000)(1.15)-10 = P197,747.76
Annual Expenses = P475,000(P/A,15%,10) = P475,000(1-1.15-10)/0.15 = P2,383,915.10
Net PW = P3,764,076.47 + P197,747.76 – P1,250,000 – P2,383,915.10 = P327,909.13
5-12.
a). N = 10 x 4 = 40 periods
r = 8%/4 = 2%
Z = P10,000
C = P10,000
r = 8%/4 = 2% = 0.02
N = 10 x 4 = 40
i = 12%/4 = 3%/period = 0.03
Market value
5-27. Referring to the accompanying cash-flow diagram, complete the following statements
P2,000 P2,000
P1,000 P1,000 P1,000
0 1 2 3 4 5 6
P1,000 EOY
P3,000
a. As i oo, the PW equals ______
b. the discounted payback period (θ‘) is ___ years Let MARR = 12% per year.
c. If the cash flow at the end of year six had been –P2,000 instead of +P2000, AW (0%) = _____
5-30. To purchase a used automobile, you borrow P8,000 from JohnAgs Enterprises. They tell you the
interest rate being charged is 1% per month for 35 months. They also charge you P200 for a credit
investigation, so you leave with P7,800 in your pocket. The monthly payment they calculated for you is
P8,000(0.01)(35) + P8,000
------------------------- = P308.57/month
35
If you agree to these terms and sign their contract, what is the actual APR (annual percentage
rate) that you are paying?
Sol’n: Computing the annual worth:
for i = 0.01 Net AW = P8,000(A/P, 1%,35) – 308.57
P272.029 – P308.57 = -P36.54
for i = 0.02 Net AW = P8,000(A/P,2%,35) – 308.57
P320.00 – P308.57 = P11.45
i – 0.01 0 – (-36.54)
----------- = ----------------- ; i = 0.0176
0.02 – 0.01 11.45 – (-36.54)
i’ = (1.017612 – 1)100% = 23.28%
5-33.
5-34.A small business owner estimates that the heat loss through the exterior walls of her warehouse
will cost approximately P4,000 next year. A local company is offering insulation that can reduce the heat
loss by 80%, with an insulation cost of P17,000 now. She intends to keep the warehouse for 10 years. If
the cost of the heat loss increases by P300 per year, after next year, what is the IRR?
5-38. Determine the single (and unique) IRR in each of these situations:
a. EOY Cash Flow b. EOY Cash Flow
0 -3 0 0 -P1,800
4 -P1,000 1 -700
5 300 2 1,830
6 300 3 1,830
7 300
8 300 c. EOY Cash Flow
9 300 0 0
1 -P3,000
2 1,000
3 1,900
4 -800
5 2,720
5-41. A P20,000 ordinary life insurance policy for a 22-year old female can be obtained for annual
premiums of approximately P250. This thype ofpolicy (ordinary life) would pay a death benefit of
P20,000 in exchange for annual premiums of P250 that are paid during the lifetime of the insured
person. If the average life expectancy of a 22-year old female is 77 years, what interest rate establishes
equivalence between cash outflows and inflows for this type of insurance policy? Assume that all
premiums are paid on a beginning of a year basis and that the last premium is paid on the female’s 76th
birthday.
0 1 2 3 4 5 6
P200 EOY
P500
a.. What is the breakeven life (θ’) of this project
--- by the use of Payback
b. What is the breakeven interest rate?
--- IRR
5-49. The prospective exploration for oil in the outer Cebu sea by a small, independent drilling company
has produced a rather curious pattern of cash flows, as follows:
End of Year Net Cash Flow
0 -P520,000
1-10 +200,000
10 -1,500,00
The P1,500,000 expense at the end of year 10 will be incurred by the company in dismantling
the drilling rig.
a. Over the 10-year period, plot PW versus the interest rate (i) in an attempt to discover whether
multiple rate of return exist.
-- IRR
b. Based on the projected net cash flows and results in (a), what would you recommend regarding the
pursuit of this project? Customarily the company expects to earn at least 20% per year on invested
capital before taxes. Use the ERR method (є = 20%)
-- ERR
5-63. Willie purchased a used car for P100,000. She wrote a check for P20,000 as downpayment for the
car and financed the P80,000 balance. The annual percentage rate (APR) is 9% compounded monthly,
and the loan is to be repaid in equal monthly installments over the next four years. Willie’s monthly car
payment is?
---AW
Comparison of Alternatives
6-5. Which mutually exclusive design should be chosen from the lists? A 10-year study period is to be
used, and MARR is 10% per year. All market values are negligible.
Design A Design B Design C
Capital Investment 170,000 330,000 300,000
Annual receipts 114,000 147,000 130,000
Annual expenses 70,000 79,000 64,000
Use the FW method. Confirm your recommendation, using the PW and AW methods.
6-9. Consider the following mutually exclusive alternatives:
Alternative A Alternative B
Capital Investment 780,000 1,840,000
Net Annual receipts 138,060 311,000
Both alternatives have a useful life of 1o years and no market value at that time. The MARR is
10% per year. Use the FW method to identify the most appropriate course of action. Confirm your
recommendation using AW and PW methods.
6-50. Complete the following analysis of investment alternatives and select the preferred alternative.
The study period is three years and the MARR=15% per year.
A B C
Capital investment 11,000 16,000 13,000
Annual revenues 4,000 6,000 5,540
Annual Costs 250 300 400
Market value at EOY3 5,000 6,150 2,800
PW(15%) 850 ??? 577
6-51. Complete the following analysis of cost alternatives and select the preferred alternative. The study
period is 10 years and the MARR=12%. Which alternative is most economical?
A B C D
Capital Investment 11,000 16,000 13,000 18,000
Annual Costs 250 300 400 100
Market Value at EOY 10 1,000 1,300 1,750 2,000
Use ROR method.
6-53. For the following table, assume a MARR of 15% per year, and a useful life for each alternative of
eight years. The rank order of alternatives from least capital investment to greatest capital investment is
Z-Y-W-X. Complete the incremental analysis by selecting the preferred alternative.
Z-Y Y-W W –X
Δ Capital investment -250 -400 -550
Δ Annual cost savings 70 90 15
Δ Market value 100 50 200
Δ PW (15%) 97 20 ???
Depreciation
7-10.A Company purchased a machine for P15,000. It is paid sales taxes and shipping costs of P1,000 and
nonrecurring installation costs amounting to P1,200. At the end of three years, the company had no
further use for the machine, so it spent P500 to have the machine dismantled and was able to sell the
machine for P1,500.
a.. What is the cost basis for this machine?
b.. The Company had depreciated the machine on an SL basis, using an estimated useful life of five years
and P1,000 SV. By what amount did the depreciation deductions fail to cover the actual depreciation?
7-14. During the current year, a pharmaceutical company purchased a mixing tank that had a fair market
price of P120,000. It replaced an older, smaller mixing tank that had a BV of P15,000. Because a special
promotion was underway, the old tank was used as a trade-in for the new one, and the cash price
(including delivery and installation) was set at P99,500. The new mixing tank will have a useful life of 9
years. If 200% DB depreciation had been applied to this problem, what would be the cumulative
depreciation through the end of year four?
7-15. A special-purpose machine is to be depreciated as a linear function of use (units-of-production
method). It costs P25,000 and is expected to produce 100,000 units and then be sold for P5,000. Up to
the end of the third year, it had produced 10,000 units and during the fourth year it produced 10,000
units. What is the depreciation deduction for the fourth year and the BV at the end of the fourth year.
Replacement Studies
9-7. A city water and waste-water department has a four year old sludge pump that was initially
purchased for P65,000. This pump can be kept in service for an additional four years, or in can be sold
for P35,000 and replaced by a new pump. The purchase price of the replacement pump is P50,000. The
projected market values and O&M costs over the four –year planning horizon as shown in the table.
Assuming that the MARR is 10%, determine (a) the economic life of the challenger, (b) when the
defender should be replaced.
Defender Challenger
Year MV at EOY O&M Cost MV at EOY O&M Cost
1 25,000 18,500 40,000 13,000
2 21,000 21,000 32,000 15,500
3 17,000 23,500 24,000 18,000
4 13,000 26,000 16,000 20,500
Prob. A. An asset for drilling was purchased and replaced in service b a petroleum production company.
Its cost basis is P60,000 and it has an estimated MV of P12,000 at the end of an estimated useful life of
14 years. Compute the depreciation amount in the third year and the BV at the end of fifth year of life
by each of these methods. a). SL method; b). Sinking Fund method with compound interest of 6%
Prob. B. JGA Corp. purchased a machine with a basic cost of P180,000. With additional options costing
P15,000, the cost basis for depreciation purposes is P195,000. Its market value at the end of eight years
is estimated as P40,000. Compute the depreciation charge and book value at the end of a). 5 years by
the Declining Balance Method. b). 6 years by the Double Declining Method c). 7 years by the SYD
Method
Prob. 1. Loader loans Maria P5,000 with interest compounded at a rate of 6% per year. How money will
Maria owe Loader if she repays the entire loan at the end of five years?
Prob. 2. If P25,000 is deposited now into a savings account that earns 6% per year, what uniform annual
amount could be withdrawn at the end of each year for 10 years so that nothing would be left in the
account after the 10th withdrawal?
Prob. 3. Maintenance costs for a small bridge with an expected 50-year life are estimated to be P1,000
each year for the first 5 years, followed by a P10,000 expenditure in the year 15 and P10,000
expenditure in year 30. If i = 10% per year, what is the equivalent uniform annual cost over the entire
50-year period?
CE Board 1999
The corporation purchased a machine for P1 million. Freight and installation charges amounted to 3% of
the purchased price. If the machine shall be depreciated over a period of 8 years with a salvage value of
12% of the first cost. Determine the depreciation charged during the 5th year using the SYD
method.100711
1. It is a depreciation method based on the assumption that the value of a property is directly
proportional to its age.
a. Straight Line Method
b. Sinking Fund Method
c. Declining Balance Method
d. Service Output Method
6. Amount of money spent on a business operation which cannot be recovered due to certain reason.
a. Fixed cost
b. Sunk cost
c. First cost
d. Increment cost
10. An economic situation when there is only one vendor of a product or service.
a. Oligopoly
b. Monopoly
c. Communism
d. Socialism
xxxxx
Below are the answer to the questions posted on the subject Engineering Economy.
1. It is a depreciation method based on the assumption that the value of a property is directly
proportional to its age.
A. Straight Line Method
2. Which of the following is NOT a requirement of a depreciation method?
D. The book value should be higher than the market value
6. Amount of money spent on a business operation which cannot be recovered due to certain reason.
B. Sunk cost
10. An economic situation when there is only one vendor of a product or service.
B. Monopoly
Xxxxxxx
Here are some questions for the board exam on the topic Engineering Economy.
5. A type of bond where the name of the owner is recorded in the books of the corporation. Interests
are periodically sent to him without claim action.
a. Coupon bond
b. Registered bond
c. Bond paper
d. Corporate bond
6. A type of business organization where two or more persons associate to engage for a business.
a. Single proprietorship
b. partnership
c. Cooperative
d. Corporation
7. A type of business organization which is a distinct legal entity capable of business transactions like a
real person.
a. Cooperative
b. Single proprietorship
c. Corporation
d. Partnership
8. In a partnership type of business, what will happen if one of the owners dies?
a. The partnership will continue
b. The partnership will continue as long as the dead member has been replaced.
c. The partnership automatically dies
d. The partnership will become corporation.
10. It is the length of time during which a property may be used for profit.
a. Useful life
b. Physical life
c. Fiscal life
d. Economic life
5.1Your uncle has almost convinced you to invest in his peach farm. It would require a $10,000 initial
investment on your part. He promises you revenue (before expenses) of $1,800 per year the first year,
and increasing by $100/year thereafter. Your share of the estimated annual expenses is $500. You
figure you would invest for 6 years. Your uncle has promised to buy out your share of the business at
that time for $12,000 (at which point you would use it to buy a new car). You have decided to set a
personal MARR of 15% per year.
Evaluate the investment using the AW method (show entire AW calculation). Use the AW to calculate
the PW.
AW (15%) = -$10,000(A/P, 15%, 6) + 12,000(A/F, 15%, 6) +
(1800- 500)(P/F, 15%, 1) + [1300 + 100(A/G, 15, 5)
= -$2642 + 1370.4 + 1130.48 + [1300 + 172.28]
= 1331.16
Calculate the IRR for this investment using linear interpolation. State what your final decision should be.
Be sure to set up correctly and to bracket the IRR within 5%.
Line BA = Line dA
Line BC Line de