MANILA: Room 206, JPD Building, CM Recto Avenue, Manila

CEBU: 4/F J. Martinez Bldg., Osmeña Blvd., Cebu City

Telephone Number: (02) 516-7559 (Manila) E-Mail: buksmarquez1 @yahoo.com
(032) 254-9967 (Cebu)

Review MODULE 10 – ENGINEERING ECONOMY – Part 1

10.01 SIMPLE INTEREST ANNUITY-Annuity due

SITUATION. 12. A contractor bought a welding machine that is worth P850,000 after
How much is the interest that will be paid on a Php25,000 loan that was 5 years and is payable in 10 semi-annual payments, each
made on May 1, 2002 and repaid on August 1,2005 installment payable at the beginning of each period. If the rate of
1. With ordinary simple interest at 8% per year. interest is 26% compounded semi-annually, determine the amount
of each installment.
2. With exact simple interest at 8% per year.
13. A contractor wishes to buy a machine worth 1 million after one year.
3. The tag price of a certain commodity is for 100 days. If paid in 31 The bank gives an interest of 1.5% compounded monthly. If he
days, there is a 3% discount. What is the rate of interest paid? deposits P100,000 at the beginning of each month for 6 months
starting 6 months from now, how much more will the contractor has
4. A deposit of Php 110,000 was made for 31 days. The net interest to have to buy the machine?
after deducting the 20% withhold tax is P 890.36 Find the rate of
return annually.
10.04 GRADIENTS

10.02 COMPOUND INTEREST AND ARITHMETIC GRADIENT

THE CASH FLOW DIAGRAM
14. Dr. Anderson plans to make a series of gradient-type withdrawals
5. Suppose that you have P10,000 cash today and can invest it at an from his savings account over a 10-year period, beginning at the
interest rate of 10% compounded each year. How many years will it end of the second year. What equal annual withdrawals would be
take you to become a millionaire? equivalent to a withdrawal of P1000 at the end of the second year,
P2000 at the end of the 3rd year . . . P9000 at the end of the 10th
6. A man opened an account P200,000 in the bank today at the rate year, if the bank pays 9% per year compounded annually?
of 3% per annum. After two years, he deposits another P400,000.
After another five years, he will withdraw P500,000. How much
money does he have on his account after the 10th year?

7. Fifteen years ago, P1,000.00 was deposited in a bank account, and

today it is worth P2,370.00. The bank pays interest semi-annually.
What was the interest rate paid on this account?

8. John borrowed a certain amount on June 1990 from Bogart. Two

years later, John borrowed again from Bogart an amount of P 5,000.
John paid P 1,000 on June 1993 and discharged his balance by A[(1 + i)n − 1] G (1 + i)n − 1 n
P= n
+ [ n
− ]
paying P 7,500 on June 1995. What was the amount borrowed by (1 + i) i i (1 + i) i (1 + i)n
John on June 1990 if the interest rate is 8% compounded annually?

GEOMETRIC GRADIENT
10.03 ANNUITIES

ANNUITY-Ordinary Annuity

9. A service car whose cash price was P540,000 was bought with a
down-payment of P162,000 and monthly installments of P10,874.29
for 5 years. What was the rate of interest if compounded monthly?

ANNUITY-Deferred Annuity

10. A lathe for machine shop costs X pesos if paid in cash. On the
installment plan, a purchaser should pay 20,000 pesos down
payment and ten 5,500 php quarterly installments, the first due at
the end of the first year after purchase. If money is worth 15%
compounded quarterly, determine X.
15. A mechanical contractor is trying to calculate the present worth of
11. Juncel is thinking of establishing a fund for his daughter’s college
personnel salaries over the next five years. He has four employees
education. He wants his daughter to be able to withdraw P60,000
whose combined salaries thru the end of this year are 900,000php.
from the fund on her 18th birthday, again on her 19th birthday, again
If he expects to give each employee a raise of 5% each year,
on her 20th birthday, up to her 23rd birthday. If the fund earns
compute the present worth of his employees' salaries at an interest
interest at 12% per year, compounded annually, how much should
rate of 12% per year.
Juncel deposit at the end of each year, from the time his daughter
reaches 5 years old up to her 17th birthday?
 MANILA: Room 206, JPD Building, CM Recto Avenue, Manila
CEBU: 4/F J. Martinez Bldg., Osmeña Blvd., Cebu City
Telephone Number: (02) 516-7559 (Manila) E-Mail: buksmarquez1 @yahoo.com
(032) 254-9967 (Cebu)

Review MODULE 10 – ENGINEERING ECONOMY – Part 1

10.05 EFFECTIVE RATE OF INTEREST AND CONTINUOUS 10.06 PERPETUITY

COMPOUND INTEREST
23. Determine the present value of a perpetuity of P100,000 payable
EFFECTIVE RATE OF INTEREST annually, with the first payment due at the end of 10 years. Money
is worth 10%.
SITUATION.
Determine the effective rate of interest of the following nominal rates. 24. Find the present value, in pesos, of a perpetuity of P15,000 payable
semi-annually if money is worth 8% compounded quarterly.
16. 12% compounded annually.

17. 12% compounded quarterly. 10.07 CAPITALIZED COST AND ANNUAL COST

18. 12% compounded bi-monthly. 25. A new boiler was installed by a textile plant at a total cost of
P300,000 and projected to have a useful life of 15 years. At the end
19. 12% compounded continuously. of its useful life, it is estimated to have a salvage value of P30,000.
If operation and maintenance amount to P10,000 per year,
determine its capitalized cost if interest is 18% compounded
20. What is the smallest nominal rate to yield an effective rate of annually.
10.15%?
26. A construction firm is considering establishing an engineering
computing center. This center will be equipped with three
CONTINUOUS COMPOUND INTEREST engineering workstations that would cost $50,000 each, and each
has a service life of 5 years. The expected salvage value of each
21. Money is deposited in a certain account for which the interest is workstation is $5000. The annual operating and maintenance cost
compounded continuously. If the amount triples in 10 years, what is would be $12,000 for each workstation. At a MARR of 20%,
the annual percentage rate? determine the equivalent annual cost for operating the engineering
center.
22. A textile mill has just purchased a lift truck that has a useful life of
5 years. The engineer estimates that the maintenance costs for 27. A contractor can buy dump trucks for P800,000 each (surplus) or
the truck during the first year will be $1000. Maintenance costs are rent them for P1189 per truck per day. The truck has a salvage
expected to increase as the truck ages at a rate of $250 per year value of P100,000 at the end of its useful life of 5 yrs. Annual cost
over the remaining life. Assume that the maintenance costs occur of maintenance is P20,000.00. If money is worth 14% per annum.
at the end of each year. The firm wants to set up a maintenance Determine the number of days per year that a truck must be used
account that earns 12% annual interest. All future maintenance to warrant the purchase of the truck.
expenses will be paid out from this account. How much does the
firm have to deposit in the account now? 28. To decrease costs of operating a lock in a large river, a new system
USE: (P/G, i, n) = 6.3970 of operation is proposed. It will cost $450,000 to design and build. It
(P/A, i, n) = 3.6048 is estimated that it will have to be reworked every 10 years at a cost
of $50,000. In addition, there will be an expenditure of $40,000 at
INTEREST RATE FACTORS (12%) the end of the fifth year for a new type of gear that will not be
Single Payment Equal Payment Series Gradient Series available until then. The annual operating costs are expected to be
Compound Present Compound Sinking Present Capital Gradient Gradient
Amount Worth Amount Fund Worth Recovery Uniform Present $30,000 for the first 15 years and $25,000 a year thereafter.
Factor Factor Factor Factor Factor Factor Series Worth Compute the capitalized cost of perpetual service at i = 10%.
N (F/P,i,N) (P/F,i,N) (F/A,i,N) (A/F,i,N) (P/A,i,N) (A/P,i,N) (A/G,i,N) (P/G,i,N)
5 1.7623 0.5674 6.3528 0.1574 3.6048 0.2774 1.7746 6.3970