PATTS REVIEW CENTER

PATTS COLLEGE OF AERONAUTICS

Lombos Ave., San Isidro, Paraa!e
ENGINEERING ECONO"ICS
Reviewer: Engr. R. R. Renigen
Basic Economic Environment and Concept
Economics - is the study or science of the production, distribution and consumption of goods and
services
Economy - the cost or profit situation regarding a practical enterprise or project, as in economy
studies, engineering economy, project economy.
Engineering economy:
a. he discipline concerned with economic aspects of engineering! it involves the systematic
evaluation of the costs and benefits of proposed technical projects!
b. he application of engineering or mathematical analysis and synthesis to economic decisions!
c. " body of #nowledge and concerned with the evaluation of the worth of commodities and
services!
d. he economic analysis of engineering alternatives.
Cos# Termino$o%&
Fixed costs - are those unaffected by changes in activity level over a feasible range of operations
for the capacity or capability available. ypical fi$ed costs include insurance and ta$es on
facilities, general management and administrative salaries, license fees, and interest costs on
borrowed capital.
Variable costs - are those associated with an operation that varies in total with the %uantity of
output or other measures of activity level. &or e$ample, the costs of material and labor used in a
product or service are variable costs ' because they vary in total with the number of output units
' even though the costs per unit stay the same.
Incremental cost, or incremental revenue - is the additional cost, or revenue, that results from
increasing the output of a system by one (or more) units. *ncremental cost is often associated
with +go,no go- decisions that involve a limited change in output or activity level.
Recurring costs - are those that are repetitive and occur when an organi.ation produces similar
goods or services on a continuing basis. /ariable costs are also recurring costs, because they
repeat with each unit of output. 0owever, recurring costs are not limited to variable costs. "
fi$ed cost that is paid on a repeatable basis is a recurring cost. &or e$ample, in an organi.ation
providing architectural and engineering services, office space for rental ' which is a fi$ed cost '
is also a recurring cost.
Nonrecurring costs ' are those that are not repetitive, even though the total e$penditure may be
cumulative over a relatively short period of time. ypically, nonrecurring costs involve
developing or establishing a capability or capacity to operate. &or e$ample, the purchase cost for
real estate upon which a plant will be built is a nonrecurring cost, as is the cost of constructing
the plant itself.
Direct Costs ' are those that can be reasonably measured and allocated to a specific output or
wor# activity. he labor and material costs directly associated with a product, service, or
construction activity are direct costs. &or e$ample, the materials needed to ma#e a pair of
scissors would be a direct cost.
1
Indirect costs ' are those that are difficult to attribute or allocate to a specific output or wor#
activity. he term normally refers to type of costs that would involve too much effort to allocate
directly to a specific output. *n this usage, they are costs allocated through a selected formula
(such as, proportional to direct labor hours, direct labor dollars, or direct material dollars to the
outputs or wor# activities. &or e$ample, the costs of common tools, general supplies, and
e%uipment maintenance in a plant are treated as indirect costs.
Overhead consists of plant operating costs that are not direct labor or direct material costs.
E$amples of overhead include electricity, general repairs, property ta$es, and supervision.
tandard costs ' are representative costs per unit of unit of output that are established in advance
of actual production or service delivery. hey are developed from the direct labor hours,
materials, and support functions (with their established costs per unit) planned for the production
or delivery process.
Cash cost ' a cost that involves payment of cash (and results in a cash flow) to distinguish it
from one that does not involve a cash transaction and is reflected in the accounting system as a
noncash cost. his noncash cost is often referred to as a boo! cost.
un! cost ' is one that has occurred in the past and has no relevance to estimates of future costs
and revenues related to an alternative course of action.
O""ortunity cost ' is the cost of the best rejected (i.e., foregone) opportunity and is often hidden
or implied. *t is incurred because of the use of limited resources, such that the opportunity to use
those resources to monetary advantage in an alternative use is foregone. &or e$ample, suppose
that a project involves the use of vacant warehouse space presently owned by a company. he
cost for that space to the project should be the income or savings that possible alternative uses of
the space may bring to the firm. *n other words, the opportunity cost for the warehouse space
should be the income derived from the best alternative use of the space.
#i$e%Cycle cost 'this term refers to a summation of all costs, recurring and nonrecurring, related
to a product, structure, system, or service during its life span.
T'e Genera$ E(onomi( Environmen#
here are numerous general economic concepts that must be ta#en into account in engineering
studies. *n broad terms, economics deals with the interactions between people and wealth, and
engineering is concerned with the cost-effective use of scientific #nowledge to benefit man#ind.
Cons!mer and Prod!(er Goods and Servi(es
Consumer goods and services are those products or services that are directly used by people to
satisfy their wants. &ood, clothing, homes, cars, television sets, haircuts, and medial services are
e$amples.
2roducer goods and services are used to produce consumer goods and services or other producer
goods. 3achine tools, factory building, buses, and farm machinery are e$ample.
"eas!re o) E(onomi( Wor#'
4oods and services are produced and desired because directly or indirectly they have utility ' the
power to satisfy human wants and needs. hus, they may be used or consumed directly, or they
may be used to produce other goods or services that may, in turn, be use directly. 5tility is most
commonly measured in terms of value, e$pressed in some medium of e$change as the price that
must be paid to obtain the particular item.
Ne(essi#ies, L!*!ries, and Pri(e +emand
4oods and services may be divided into two types 'necessities and luxuries. Necessities are
those products or services that are re%uired to support human life and activities that will be
6
purchased in somewhat the same %uantity even though the price varies considerably. Luxuries
are those products or services that are desired by humans and will be purchase if money is
available after the re%uired necessities have been obtained. 7bviously, these terms are relative,
because, for most goods and services, what one person considers a necessity may be considered a
lu$ury by another. &or e$ample, a person living in one community may find that an automobile is
a necessity to get to and from wor#. *f the same person lived and wor#ed in a different city,
ade%uate public transportation might be available, and an automobile would be a lu$ury. &or all
goods and services, there is a relationship between the price that must be paid and the %uantity
that will be demanded or purchased.
"s the selling price per unit (p) is increased, there will be less demand (D) for the product, and as
the selling price is decreased, the demand will increase. he relationship between price and
demand can be e$pressed as linear function:

p 8 a ' bD for 9 : D : a/b, a ; 9, b ; 9 E%n. 1

where a is the intercept on the price a$is and ' b is the slope. hus, b is the amount by which
demand increases for each unit decrease in p. Both a and b are constants. *t follows that,
a - p
D 8 (b < 9) E%n. 6
b
Demand is the need, want or desire for a product bac#ed by the money to purchase it. *n
economic analysis, demand is always based on +willingness and ability to pay- for a product, not
merely want or need for the product.
he demand for a product is inversely proportional to its selling price, i.e., as the selling price is
increased, there will be less demand for the product! and as the selling price is decreased, the
demand will increase.
u""ly is the amount of a product made available for sale.
*f the selling price for a product is high, more producers will be willing to wor# harder and ris#
more capital in order to reap more profit. 0owever, if the selling price for a product declines,
capitalists will not produce as much because of the smaller profit they can obtain for their labor
and ris#.
herefore, the relationship between price and supply is that they are directly proportional, i.e.,
the bigger the selling price, the more supply! and the smaller the selling price, the less is the
supply.
T,E LAW OF SUPPL- AN+ +E"AN+
he law of supply and demand may be stated as follows:
+Under conditions of perfect competition, the price at which any given product will be supplied
and purchased is the price that will result in the supply and the demand being equal.
=
Com.e#i#ion
&er$ect com"etition occurs in a situation in which any given product supplied by a large number
of vendors and there is no restriction on additional vendors entering the mar#et. 5nder such
conditions, there is assurance of complete freedom on the part of both buyer and seller. 2erfect
competition may never occur in actual practice, because of a multitude of factors that impose
some degree of limitation upon the actions of buyers or sellers, or both.
'ono"oly is at the opposite pole of perfect competition. " "er$ect mono"oly e$ists when a
uni%ue product or service is only available from a single vendor and that vendor can prevent the
entry of all others into the mar#et. 5nder such conditions, the buyer is at the complete mercy of
the vendor in terms of the availability and price of the product. 2erfect monopolies rarely occur
in practice, because (1) few products are so uni%ue that substitutes cannot be used satisfactorily,
and (6) governmental regulations prohibit monopolies if they are unduly restrictive.
T'e To#a$ Reven!e F!n(#ion
he total revenue, R that will result from a business venture during a given period is the
product of the selling price per unit, p, and the number of units sold, D. hus
R 8 price > demand 8 p (D) E%n. =
*f the relationship between price and demand as given in E%n. 1 is used,

R 8 (a ! bD)D 8 aD ! bD
6
for : D : a/b, a ; 9, b ; 9 E%n. ?

&rom calculus the demand, " that will produce ma$imum total revenue can be obtained by
solving
dR
8 a - 6bD 8 9 E%n. @
dD
hus
a
" 8 E%n. A
6b
o guarantee that B ma$imi.es the total revenue, chec# the second derivative to be sure it is
negative.
d
6
R
8 - 6b
dD
6
Cos#, Vo$!me, and /rea0even Poin# Re$a#ions'i.s
&i$ed costs remain constant over a wide range of activities as long as the business does not
permanently discontinue operations, but variable costs vary in total with the volume of output.
hus, at any demand C, total cost is
#
$
8 #
%
D #
&

E%n. E
Fhere:
#
% 8 fi$ed costs
#
&
8 variable costs
?
&or the linear relationship assumed here,
#
&
8 (#') (D) E%n. G
Fhere:
#' 8 variable cost per unit
Fe consider two scenarios for finding brea#even points. *n the first scenario, demand is a
function of price. he second scenario assumes that price and demand are independent of each
other.
Hcenario 1. Fhen total revenue and total cost, as given in E%ns. E and G are combined, the
typical results as a function of demand are depicted. "t brea#even point D(
1
, total revenue is
e%ual to total cost, and an increase in demand will result in a profit for the operation. hen at
optimal demand, D), profit is ma$imi.ed (E%n. 19). "t brea#even point D(
6
, total revenue and
total cost are again e%ual, but additional volume will result in an operating loss instead of a
profit. 7bviously, the conditions for which brea#even and ma$imum profit occurs are our
primary interest. &irst, at any volume (demand), D,
2rofit (loss) 8 total revenue - total costs
8 (aD - bD
6
) - (#
%
D CIC)

8 - #% D (a - #') D - bD
6

for 9 : D : a,b E%n. J

*n order for a profit to occur, and to achieve the typical results, two conditions must be
met:
1. (a ' #') ; 9! that is, the price per unit that will result in no demand has to be greater than
the variable cost per unit (this avoids negative demand).
6. otal revenue (R) must e$ceed total cost (#
$
) for the period involved.
*f these conditions are met, we can find the optimal de?mand at which ma$imum profit will
occur by ta#ing the first derivative of profit 8 -#
%
D (a ' #') D * bD
6
with respect to D and it
e%ual to .ero:
d (profit)
8 9
dD
a - CI
D) 8 E%n. 19
6b
Fhere:
D) 8 optimal value of D that ma$imi.es profit
o ensure that we have ma$imi.ed profit (rather than minimi.ed it)! the sign of the second
derivative must be negative. Chec#ing this, we find that
d
6
(profit)
8 - 6b
dD
6
@
which will be negative for b ; 9 (as earlier specified). ("lso, recall that in cost minimi.ation
problems a positive signed second derivative is necessary to guarantee a minimum ' valued
optimal cost solution).
"n economic brea#even point for an operation occurs when total revenue e%uals total
cost. hen for total revenue and total cost, as used in the development of E%ns. J and 19 and at
any demand D,
otal revenue 8 total cost (brea#even point)
aD * bD
6
8 #
%
D #'D
-bD
6
D (a ' #') D ' #
%
8 9 E%n. 11
Because E%n. 11 is a %uadratic e%uation with one un#nown (D), we can solve for the brea#even
points DK
1
and D(
6
(the roots of the e%uation).
- (a ' #') L M(a ' #')
6
' ?(-b) (-#
%
)N
O
D( 8 E%n. 16
6(-b)
Fith the conditions for the profit satisfied (E%n. J), the %uantity in the brac#ets of the numerator
(the discriminant) in E%n. 16 will be greater than .ero. his will ensure that D(
1
and D(
6
have
real positive and une%ual values.
- (a ' #') D M(a ' #')
6
' ?(-b) (-#
%
)N
O
D(
1
8
6(-b)
and
- (a ' #') - M(a ' #')
6
' ?(-b) (-#
%
)N
O
DK
6
8
6(-b)
Hcenario 6. Fhen the price per unit (p) for a product or service can be represented more simply
as being independent of demand (versus being a linear function of demand, as assumed in E%n.
1) and is greater than the variable cost per unit (#'), a single brea#even points results. hen
under the assumption that demand is immediately met, total revenue R 8 p (D).
Prob$ems1
1. &ind the demand, " that ma$imi.es total revenue if the e%uation for price is given by
@9,999- 699DP

"ns. " 8 16@ units
6. " company produces an electronic time switch that is used in consumer and commercial
products made by several other manufacturing firms. he fi$ed cost (#
%
) is QE=,999 per
month, and the variable cost (#') is QG= per unit. he selling price per unit is p 8 Q1G9 '
9.96D, based on E%n 1. &or this situation (a) determine the optimal volume for this
A
product and confirm that a profit occurs (instead of loss) at this demand! and (b) find the
volumes at which brea#even occurs! that is what is the range of profitable rangeP

"ns. (a+ D) 8 6,?6@ units per month (b) D(
1
8 J=6 units per month, D(
6
8 =,J1G units
per month.

=. Huppose we #now that p 8 1,999 ' D,@, where p 8 price in dollars and D 8 annual
demand. he total cost per year can be appro$imated by Q1,999 D 6D
6
(a) Cetermine the value of C that ma$imi.es profit
(b) Hhow in part (a) that profit has been ma$imi.ed rather than minimi.ed.
"ns. (a) D) 8 66E units per year
d
6
(profit)
(b) 8 - ?.?
dD
6
?. " company produces circuit boards used to update outdated computer e%uipment. he
fi$ed cost is Q?6,999 per month and the variable cost is Q@= per circuit board. he selling
price per unit is p 8 Q1@9 ' 9.96D. 3a$imum output of the plant is ?,999 units per
month.
(a) Cetermine optimum demand for this product
(b) Fhat is the ma$imum profit per monthP
(c) Fhat is the companyKs range of profitable demandP
"ns. (a) D) 8 6?6@ circuit boards per month
(b) 3a$ profit 8 QE@,A16.@ per month
(c) ?G9 to ?,=AJ circuit boards per month
@. " company has established that the relationship between the sales price for one of its
products and the %uantity sold per month is appro$imately D 8 EG9 ' 19 p units (D is the
demand or %uantity sold per month, and p is the price in dollars). he fi$ed cost is QG99
per month, and the variable cost is Q=99 per unit produced. Fhat number of units, D),
should be produced per month and sold to ma$imi.e net profitP Fhat is the ma$imum
profit per month related to the productP
"ns. D) 8 6?9 units per month
3a$imum profit 8 Q?,JA9 per month
A. " company estimates that as it increases its sales volume by decreasing the selling price
of its product, revenue 8 aD ' bD
6
(where D represents the units of demand per month,
with 9 : D : a/b). he fi$ed cost is Q1,999 per month, and the variable cost is Q? per unit.
*f a 8 QA and b 8 Q9.991, determine the sales volume for ma$imum profit, and the
ma$imum profit per month.

"ns. D) 8 1,999 units per month
3a$imum profit 8 Q9 per month
Prin(i.$es o) "one& 2 Time Re$a#ions'i.
Ca"ital 2 refers to wealth in the form of money or property that can be used to produce more
wealth.
T3o basi( (a#e%ories o) (a.i#a$1
1. E(uity ca"ital 2 is that owned by individuals who have invested their money or property
in a business project or venture in the hope of receiving a profit.
E
6. Debt ca"ital 2 often called borrowed capital, is obtained from lenders e.g., through the
sale of bonds) for investment.
SI"PLE INTEREST
Huppose a debtor loans money from a creditor. he debtor must pay the creditor the original
amount loaned plus an additional sum called interest. &or the debtor, interest is the payment for
the use of the borrowed capital while for the creditor! it is the income from the invested capital.
im"le Interest (denoted as *) is defined as the interest on a loan or principal that is based only
on the original amount of the loan or principal. his means that the interest charges grow in
linear function over a period of time. his is usually used for short-term loans where the period
of the loan is measured in days rather than years. *t can be calculated using the following
formula:
* 8 2in E%n. 1=
where: 2 8 principal,loan
* 8 interest
i 8 interest rate
n 8 period
he future amount of the principal may be calculated by adding the interest (*) to the principal
(2).
& 8 2 D *
or:

& 8 2 D 2in
hus,
& 8 2(1Din) E%n. 1?
here are two types of simple interest namely, ordinary interest and e$act simple interest.
Ordinary sim"le interest is based on one ban#erKs year. " ban#er year is composed of 16 months
of =9 days each which is e%uivalent to a total of =A9 days in a year. he value of n that is used in
the preceding formulas may be calculated as

d
n 8 E%n. 1@
=A9
where: d 8 number of days the principal was invested
Exact sim"le interest is based on the e$act number of days in a given year. " normal year has
=A@ days while a leap year (which occurs once every ? years) has =AA days. 5nli#e the ordinary
simple interest, the number of days in a month is based on the actual number of days each month
contains in our 4regorian calendar.
o determine the year whether leap year or not, one has to divide the year by ?. *f it is e$actly
divisible by ?, the year to be leap year otherwise it will be considered just a normal year with =A@
days. 0owever, if the year is a century year (ending with two .eros, e.g. 1E99, 1G99R), the year
must be divided by ?99 instead of ? to determine the year whether or not a leap year. 0ence, year
1A99 and year 6999 are leap years.
G
5nder this method of computation of interest, it must be noted that under normal year, the month
of &ebruary has 6G days while during leap years it has 6J days. "gain, the values of n to be used
in the preceding formulas are as follows:
d
n 8 for normal year E%n 1A
=A@

d
n 8 for leap year E%n. 1E
=AA
+ISCOUNT
Consider the following cases where discount is involved:
C"HE 1:
" person has a bond or financial security that is not due yet but payable in some future
date, desires to e$change it into an immediate cash. *n the process, he will accept an amount in
cash smaller than the face value of the bond. he difference between the amount he receives in
cash (present worth) and the face value of the bond or financial security (future worth) is #nown
as discount. he process of converting a claim on a future amount of money in the present is
called discounting.
C"HE 6:
*n a ban# loan, a person borrows 2199 for 1 year with an interest of 19S. he interest as
computed is 219. he ban# deducts the interest, which is 219 from the end of the year. he 219
that was deducted represent the interest paid in advance in this case, discount also represent the
difference between the present worth (i.e. 2J9) and the future worth (i.e. 2199).
Ciscount 8 &uture worth ' present worth
he rate of discount is the discount on one unit of principal per unit time.

1
d 8 1 - E%n. 1G
1 D i

d
i 8 E%n. 1J
1 ' d
where: d 8 rate of discount
Prob$ems1
1. *f you borrow money from your friend with simple interest of 16S, find the present worth of
269,999, which is due at the end of nine months.
"ns. 2 8 21G,=?G.A6
6. 3r. 3. Cela Cru. borrowed money from a ban#. 0e receives from the ban# 21,=?9.99 and
promised to pay 21,@99 at the end of J months. Cetermine the following:
". Himple interest rate
B. he corresponding discount rate or often referred to as the +ban#erKs discount-
"ns. ". i 8 1@.J6S
B. d 8 1=.E=S
J
=. Husie buys a television set from a merchant who as# 21,6@9 at the end of A9 days.
Husie wishes to pay immediately and the merchant offers to compute the cash price on the
assumption that money is worth GS simple interest. Fhat is the cash priceP
"ns. 2 8 21,6==.@@
?. " man borrowed money from a loan shar#. 0e receives from the loan shar# an amount of
21,=?6.99 and promised to repay 21,@99.99 at the end of = %uarters. Fhat is the simple
interest rateP
"ns. i 8 1@.AJS
@. Cetermine the e$act simple interest on 2@,999.99 invested for the period from Tanuary 1@,
1JJA to 7ctober 16, 1JJA, if the rate of interest is 1GS.
"ns. * 8 2AAA.=J
A. he e$act simple interest of 2@,999.99 invested from Tune 61, 1JJ@ to Cecember 6@, 1JJ@ is
2199.99. Fhat is the rate of interestP
"ns. i 8 =.J9S
CO"POUN+ INTEREST
Com"ound interest is defined as the interest of loan or principal which is based not only on the
original amount of the loan or principal but the amount of loan or principal plus the previous
accumulated interest. his means that aside from the principal, the interest now earns interest as
well. hus, the interest charges grow e$ponentially over a period of time.
Compound interest is fre%uently used in commercial practice than simple interest, more
especially if it is a longer period which spans for more than a year.
he future amount of the principal may be derived by the following tabulation:
Period Prin(i.a$ In#eres# To#a$ Amo!n#
1 2 2i 2 D 2i 8 2(1 D i)
6 2(1 D i) 2(1 D i)i 2(1 D i)(1 D i) 8 2(1 D i)
6
= 2(1 D i)
6
2(1 D i)
6
i 2(1 D i)
6
(1 D i) 8 2(1 D i)
=
n 2(1 D i)
n
he tabulation above shows that the future amount (total amount) is just the value 2(1 Di) with
an e$ponent which is numerically e%ual to the period.
*t is also observed that compound interest is based on the principles of geometric progression and
using such method, the total amount after each period are as follows:
&irst term, a1 8 2(1 Di) E%n. 69
Hecond term, a6 8 2(1 Di)
6
E%n. 61
hird term, a= 8 2(1 D i)
=
and so on. E%n. 66
Holving for the common ratio,
a6
r 8
a1

19
2(1 D i)
6
r 8
2(1 D i)
r 8 1 D i E%n. 6=
5sing the formula for nth term of a 4eometric 2rogression (4.2.)
an 8 a1r
n-1
an 8 2(1 D i)(1 D i)
n-1
an 8 2(1 D i)
n
E%n. 6?
a. FUTURE A"OUNT, F1
& 8 2(1 D i)
n
E%n. 6@
where: 2 8 2rincipal
i 8 interest per period (in decimal)
n 8 number of interest periods
(1 D i)
n
8 single payment compound amount factor
b. PRESENT WORT,, P1
&
2 8 E%n. 6A
(1 D i)
n
1
where: 8 single payment present worth factor
(1 D i)
n

CONTINUOUS CO"POUN+ING
he concept of continuous compounding is based on the assumption that cash payments occur
once per year but compounding is continuous throughout the year.
he basic e%uation for future worth of compound interest is
& 8 2(1 D i)
n
but for m periods per year
UR
mU
& 8 2 1 D
m

m
let $ 8
UR
11
1
$(UR)U
& 8 2 1 D
$

(UR)U
1
$
& 8 2 1 D
$
1
$
but Vim 4 5 6 e

$

$

herefore,
& 8 2e
(UR)U
E%n. 6E

where:
2 8 principal
e 8 6.E1G6GR
UR 8 nominal rate

e
(UR)U
8 continuous compounding compound amount factor
he present worth of continuous compounding is
&
2 8 E%n. 6G
e
UR(U)
NO"INAL AN+ EFFECTIVE RATES OF INTEREST
Rate o$ interest is the cost of borrowing money. *t also refers to the amount earned by a unit
principal per unit time.
here are two types of rates of interest, namely the nominal rate of interest and the effective rate
of interest.
Nominal rate o$ interest is defined as the basic annual rate of interest while e$$ective rate o$
interest is defined as the actual or the e$act rate of interest earned on the principal during a one-
year period.
&or e$ample: " principal is invested at @S compounded %uarterly.
*n this statement, the nominal rate is @S while the effective is greater than @S because of the
compounding which occurs four times a year. he following formula is used to determine the
effective rate of interest:
ER 8 (1 D i)
m
' 1 E%n. 6J
or

UR
m


ER 8 1 D - 1

m
where:
16
m 8 number of interest period per year
UR
i 8 interest per period 8
m

UR 8 nominal rate of interest
note: i 8 UR if the mode of compounding is annually
Hubstituting the values of m and i:
9.9@

?
ER 8 1 D - 1

?
ER 8 9.9@9J
ER 8 @.9JS
Ho, the actual interest rate is not just @S but @.9JS. 0owever, the effective rate and nominal rate
are e%ual if the mode of compounding is per annum or annually.
Prob$ems1
1. " credit plan charges interest rate of =AS compounded monthly. &ind its effective rate.

"ns. ER 8 ?6.@ES
6. " master card compounds monthly and charges an interest of 1.@S per month. Fhat is the
effective interest rate per yearP
"ns. ER 8 1J.@AS
=. " man e$pects to receive 269,999.99 in 19 years. *f interest is computed at AS compounded
%uarterly, how much is it worth todayP
"ns. 2 8 211,96@.6@
?. Huppose you borrow 2G,999 now, promising to repay the loan principal plus accumulated
interest in four years at i 8 19S per year. 0ow much would you repay at the end of four yearsP
"ns. & 8 211,E1=
@. "n investor (owner) has an option to purchase a tract of land that will be worth 219,999 in si$
years. *f the value of the land increases at GS per year, how much should the investor be
willing to pay now for his propertyP
"ns. 2 8 2A,=96
A. 0ow long will it ta#e money to triple itself if invested at GS compounded annuallyP
"ns. n 8 1?.6E years
ANNUIT-
)nnuity is defined as a series of e%ual payments occurring at e%ual interval of time. Fhen an
annuity has a fi$ed time span, it is #nown as annuity certain. he following are annuity certain.
1=
1. ,rdinary annuity is a type of annuity where the payments are made at the end of each
period beginning from the first period.
Cerivation of formula for the sum of ordinary annuity:
Vet " be the periodic or uniform payment and assuming only four payments:
a1 8 "
a6 8 "(1 D i)
a= 8 "(1 D i)
6
a? 8 "(1 D i)
=

"nnuity is based on the principles of compound interest. 0ence, computation of the sum
of annuity may be done using the formulas for geometric progression.
Holving for common ratio:
a6
r 8
a1
"(1 D i)
r 8 8 1 D i
"

Holving for the sum:
a1(r
n
' 1)
H 8
r ' 1
"M(1 D i)
?
- 1N
H 8
1 D i ' 1
"M(1 D i)
?
- 1
H 8
i
a. SU" OF OR+INAR- ANNUIT-1
"M(1 D i)
n
-1N
& 8 E%n. =9
i
where: i 8 interest per period
n 8 number of periods
" 8 uniform payment

M(1 D i)
n
-1N
8 uniform series compound amount factor
i
b. PRESENT WORT, OF OR+INAR- ANNUIT-1

5sing compound sentence formula:
1?
&
2 8
(1 D i)
n
"M(1 D i)
n
-1N
But: & 8
i
"M(1 D i)
n
- 1N
2 8 E%n. =1
i(1 Di)
n
where:
"M(1 D i)
n
- 1N
8 uniform series present worth factor
i(1 Di)
n
6. -nnuity due is a type of annuity where the payments are made at the beginning of each
period starting from the first period.
=. Ceferred annuity is a type of annuity where the first payment dose not begin until some
later date in the cash flow.
Fhen an annuity does not have a fi$ed time span but continues indefinitely, then it is referred to
as a perpetuity. he sum of a perpetuity is an infinite value.
PRESENT WORT, OF PERPETUIT-1
A
2 8
i
where:
i 8 interest per period
" 8 uniform payment
Prob$ems1

1. "n enterprising student is planning to have personal savings totaling 21,999,999 when she
retires at age A@. Hhe is now 69 years old. *f the annual interest rate will average ES over the
ne$t ?@ years on her savings account, what e%ual end-of-year amount must she save to
accomplish her goalP
"ns. - 8 2=,@99
6. Huppose that you have 219,999 cash today and can invest it at G S compound interest each
year. 0ow many years will it ta#e you to become a millionaireP
"ns. n 8 A9 years
=. *f 2@99.99 is invested at the end of each year for A years, at an annual interest rate of ES, what
is the total peso amount available upon the deposit of the si$th paymentP
"ns. & 8 2=,@EA.A?
?. 0ow much money must you invest today in order to withdraw 21,999.99 per year for 19 years
1@
if the interest rate is 16SP
"ns. 2 8 2@,A@9.66
@. T. Cela Cru. borrowed 2@9,999.99 from Hocial Hecurity system, in the form of calamity loan,
with interest at GS compounded %uarterly payable in e%ual %uarterly installments for 19 years.
&ind the %uarterly payments.
"ns. " 8 21,G6E.EJ
+e.re(ia#ion Con(e.#s and Termino$o%&
De"reciation is the decrease in value of physical properties with the passage of time and use.
3ore specifically, depreciation is an accounting concept that establishes an annual deduction
against before-ta$ income such that the effect of time and use on an assetKs value can be reflected
in a firmKs financial statements. "nnual depreciation deductions are intended to +match- the
yearly fraction of value used by an asset in the production of income over the assetKs actual
economic life. he actual amount of depreciation can never be established until the asset is
retired from service. Because depreciation is a noncash cost that affects income ta$es, we must
consider it properly when ma#ing after-ta$ engineering economy studies.
De"reciable "ro"erty is property for which depreciation is allowed under federal, state,
or municipal income ta$ laws and regulations. o determine if depreciation deductions can be
ta#en, the classification of various types of property must be understood. *n general, property is
depreciable if it meets the following basic re%uirements:
1. *t must be used in business or held to produce income.
6. *t must have a determinable useful life, and the life must be longer than one year.
=. *t must be something that wears out, decays, gets used up, becomes obsolete, or loses
value from natural causes.
?. *t is not inventory, stoc# in trade, or investment property.
De"reciable "ro"erty is classified as either tangible or intangible. angible property can be seen
or touched, and it includes two main types called personal property and real property. 2ersonal
property includes assets such as machinery, vehicles, e%uipment, furniture, and similar items. *n
contrast, real property is land and generally anything that is erected on, or attached to land. Vand
itself, however, is not depreciable because it does not have a determinable life.
Intangible "ro"erty is personal property as a copyright, patent, or franchise. Engineering
projects rarely include this class of property.
" company can begin to depreciate it owns when the property is placed in service for use
in the business or for the production of income. 2roperty is considered to be placed in service
when it is ready and available for a specific use, even if it is not actually used yet. Cepreciation
stops either when the cost of placing it in service has been recovered or it is retired from service.
+e.re(ia#ion "e#'ods and Re$a#ed Time Periods
he depreciation methods permitted under the *nternal Revenue Code have changed with time.
*n general, the following summary indicates the primary methods used for property placed in
service during three distinct time periods.
he primary methods used were straight-line (HV), declining balance (CB), and sum-of-
the-digits (HWC). Fe will refer to these methods, collectively, as the classical or historical
methods of depreciation.
)d*usted +cost, basis ' the original cost basis of the asset, adjusted by allowable increases or
decreases, is used to compute depreciation and depletion deductions. &or e$ample, the cost of
any improvement to a capital asset with a useful life greater than one year increases the original
1A
cost basis, and a casualty or theft loss decreases it. *f the basis is altered, the depreciation
deduction may need to be adjusted.
-asis, or cost basis ' the initial cost of ac%uiring an asset (purchase price plus any sales ta$es),
including transportation e$penses and other normal costs of ma#ing the asset serviceable for its
intended use. his amount is also called the unad.usted cost basis.
-oo! value +-V, ' the worth of a depreciable property as shown on the accounting records of a
company. *t is the original cost basis of the property, including any adjustments, less all
allowable depreciation or depletion deductions. *t thus represents the amount of capital that
remains invested in the property and must be recovered in the future through the accounting
process. he B/ of a property may not be a useful measure of its mar#et value.
'ar!et value +'V, ' the amount that will be paid by a willing seller for a property where each
has e%ual advantage and is under no compulsion to buy or sell. he 3/ appro$imates the present
value of what will be received through ownership of the property, including the time value of
money (or profit).
Recovery "eriod ' the number of years over which the basis of a property is recovered through
the accounting process. &or the classical methods of depreciation, this period is normally the
useful life. 5nder the 3odified "ccelerated Cost Recovery Hystem (3"CRH), this period is the
property class for the 4eneral Cepreciation Hystem (4CH), and it is the class life for the
"lternative Cepreciation Hystem ("CH).
Recovery rate ' a percentage (e$pressed in decimal form) for each year of the 3"CRH recovery
period that is utili.ed to compute an annual depreciation deduction.
alvage value ' the estimated value of a property at the end of its useful life. *t is the e$pected
selling price of a property when the asset can no longer be used productively by its owner. he
term net salvage value is used when the owner will incur e$penses in disposing of the property,
and these cash outflows must be deducted from the cash inflows to obtain a final net H/. Fhen
the classical methods of depreciation are applied, an estimated salvage value is initially
established and used in the depreciation calculations. 5nder 3"CRH, the H/ of depreciable
property is defined to be .ero.
.se$ul li$e ' the e$pected (estimated) period of time that a property will be used in a trade or
business or to produce income. *t is not how long the property will last but how long the owner
e$pects to productively use it. 5seful life is sometimes referred to as depreciable life. "ctual
useful life of an asset, however, may be different than its depreciable life.
T'e C$assi(a$ 7,is#ori(a$8 +e.re(ia#ion "e#'od
his section describes and illustrates the straight-line, declining balance, and sum-of-the-years
digits methods of calculating depreciation deductions. hese historical methods continue to
apply, directly and indirectly, to the depreciation of property.
S#rai%'#9Line 7SL8 "e#'od
Htraight-line depreciation is the simplest depreciation method. *t asumes that a constant amount
is appreciated each year over the depreciable (useful) life of the asset. he following definitions
are used in the e%uations below. *f we define
n 8 depreciable life of the asset in years
B 8 cost basis, including allowable adjustments
dX 8 annual depreciation deduction in year # (1 : # : n)
B/# 8 boo# value at end of year #
H/n 8 estimated salvage value at end of year n
d#Y 8 cumulative depreciation through year #
then
1E
d# 8 (B ' H/n),n E%n. =6
d#Y 8 #d# for 1 : # : n
8 #(B ' H/n),n E%n. ==
B/# 8 B - d#Y
8 B ! # (B ' H/n),n E%n. =?
Uote for this method you must have an estimate of the final H/, which will also be the final boo#
value at the end of year n. *n some cases, the estimated H/n may not e%ual an assetKs actual
terminal 3/.
E*am.$e no.41 " new electric saw for cutting small pieces of lumber in a furniture
manufacturing plant has a cost basis of 2?,999 and a 19-year depreciable life. he estimated H/
of the saw is .ero at the end of 19 years. Cetermine the annual depreciation amounts using the
straight-line method. abulate the annual depreciation amounts and the boo# value of the saw at
the end of each year.
SOLUTION1
he depreciation amount, cumulative depreciation, and boo# value for each year are obtained by
applying E%uations =6, == and =?. Hample calculations for year five are shown below.
2 ?,999 ' 9
d@ 8 8 2 ?99
19
@ (2?,999 ' 9)
d@ 8 8 2 6,999
19
@ (2?,999 ' 9)
B/@ 82 ?,999 - 8 26,999
19
he depreciation and boo# value amounts for each year are shown below.
EOY, k dk BVk
0 ------- P4,000
1 P400 3,600
2 400 3,200
3 400 2,800
4 400 2,400
5 400 2,000
6 400 1,600
7 400 1,200
8 400 800
9 400 400
10 400 0
+e($inin% /a$an(e 7+/8 "e#'od
*n the declining balance method, sometimes called the constant percentage method or the
/atheson formula, it is assumed that the annual cost of depreciation is a fi$ed percentage of the
B/ at the beginning of the year. he ratio of the depreciation in any one year to the B/ at the
beginning of the year is constant throughout the life of the asset and is designated by R (9R1).
*n this method, R8 6, n when a 699S declining balance is being used (i.e., twice the straight
1G
line rate of 1,n), and n e%uals the depreciable (useful) life of an asset. *f the 1@9S declining
balance method is specified, then R8 1.@,n. he following relationships hold true for the
declining balance method:
d1 8 B (R) E%n. =@
d# 8 B (1 ' R)
#-1
(R) E%n. =A
d#
Y
8 B M1- (1- R)
#
N E%n. =E
B/# 8 B (1-R)
#
E%n. =G
B/n 8 B (1-R)
n
E%n. =J
E*am.$e no. :1 Rewor# E$ample 1 with the declining balance method when (a)R 8 6,n (699S
declining balance method) and (b) R 8 1.@,n (1@9S declining balance method). "gain, tabulate
the annual depreciation amount and boo# value for each year.
So$!#ion1
"nnual depreciation, cumulative depreciation, and boo# value are determined by using
E%uations =A, =E, and =G, respectively. Hample calculations for year si$ are shown below.

(a) R 8 6,n 8 6,19 8 9.6
dA 8 2?,999 (1- 9.6)
@
(9.6) 8 26A6.1?
dA
Y
8 2?,999 M1 ' (1 ' 9.6)
A
N 8 26,J@1.?6
B/A 8 2?,999 (1 ' 9.6)
A
8 21,9?G.@G
(b) R 8 1.@,n 8 1.@,19 8 9.1@
dA 8 2?,999 (1- 9.1@)
@
(9.1@) 8 26AA.66
dA
Y
8 2?,999 M1 ' (1 ' 9.1@)
A
N 8 26,?J1.?9
B/A 8 2?,999 (1 ' 9.1@)
A
8 21,@9G.A9
he depreciation and boo# value amounts for each year, when R 8 6,n 8 9.6, are shown below:
:;;< +e($inn% /a$an(e "e#'od On$&
EOY, k dk BVk
0 ------- P4,000
1 P800 3,200
2 640 2,560
3 512 2,048
4 409.60 1,638.40
5 327.68 1,310.72
6 262.14 1,048.58
7 209.72 838.86
8 167.77 671.09
9 134.22 536.87
10 107.37 429.50
S!m9o)9#'e9-ears9+i%i#s 7S-+8 "e#'od
o compute the depreciation deduction by the HWC method, the digits corresponding to the
number for each permissible year of life are first listed in reverse order. he sum of these digits
is then determined. he depreciation factor for any year is the number from the reverse-ordered
listing for that year divided by the sum of the digits. &or e$ample, for a property having a
depreciable (useful) life of five years, HWC depreciation factors are as follows:
1J
Year
Number of the
Year in
Reverse Order
(digits)
SYD
Depreiation
!ator
1 5 5/15
2 4 4/15
3 3 3/15
4 2 2/15
5 1 1/15
Sum of the digits 15
he depreciation for any year is the product of the HWC depreciation factor for that year and the
difference between the cost basis (B) and the estimated final H/. he general e$pression for the
annual cost of depreciation for any year #, when U e%uals the depreciable life of an asset, is
6(n- 0 D 1)
d# 8 (B ' H/n) E%n. ?9

n (n D 1)
he boo# value at the end of the year # is
6 (B ' H/n) (B 'H/n)
B/0 8 B - 0 D 0 (0D1) E%n. ?1
n n(n D 1)
and the cumulative depreciation through the 0th year is simply
d0Y 8 B ' B/0 E%n. ?6
E*am.$e no. =1 Rewor# e$ample 1 using the sum-of-the-years-digits method. abulate the
annual depreciation mount and boo# value for each year.
So$!#ion1
Fith E%uations ?9, ?1, and ?6, respectively, the annual depreciation, boo# value, and cumulative
depreciation amounts are obtained. Hample calculations for year four are given below
6(19- ? D 1)
d? 8 2?,999 8 2@9J.9J
19(19 D 1)
6 (2?,999) (2?,999)
B/? 8 2?,999 - ? D ?(@) 8 21,@6E.6E
19 19(19 D1)
d?
Y
8 2?,999 - 21,@6E.6E 8 2,?E6.E=
Cepreciation and boo# value amounts for each year are shown below.
EOY, k dk BVk
0 ------- P4,000
1 P727.27 3,272.73
2 654.55 2,618.18
3 581.82 2,036.36
4 509.09 1,527.27
5 436.36 1,090.91
6 363.64 727.27
69
7 290.91 436.36
8 219.18 218.18
9 145.45 72.73
10 72.73 0
"ULTIPLE C,OICE >UESTIONS
1. he paper currency issued by the central Ban#, which forms part of the countryKs money
supply.
". Ban# note Y
B. Chec#
C. Coupon
C. -bills
6. Reduction in the level of national income and output usually accompanied by the fall in the
general price level.
". Ceflation Y
B. Cepreciation
C. Cevaluation
C. *nflation
=. *t is a series of e%ual payments occurring at e%ual interval of time.
" "morti.ation
B. "nnuity Y
C. Cept
C. Ceposit
?. he place where buyers and sellers come together.
". Business
B. Buy and sell section
C. 3ar#et Y
C. Recreation center
@. " mar#et whereby there is only one buyer of an item for which there are no goods substitute.
". 3onopoly
B. 3onopsony Y
C. 7ligopoly
C. 7ligopsony
A. *t is a series of e%ual payments occurring at e%ual interval of time where the first payment is
made after several periods, after the beginning of the payment.
". "nnuity due
B. Ceferred annuity Y
C. 7rdinary annuity
C. 2erpetuity
E. he total income e%uals the total operating cost.
61
". Balanced sheet
B. Brea# even ' no gain no loss Y
C. Chec# and balance
C. *n-place value
G. Xind of obligation which has no condition attached.
". "nalytic
B. 4ratuitous Y
C. 2rivate
C. 2ure
J. Cirect labor costs incurred in the factory and direct material costs are the costs of all
materials that go into production. he sum of these two direct costs is #nown as
". 4H and " e$penses
B. 7perating and maintenance costs
C. 7 and 3 costs
C. 2rime cost Y
19. "n inde$ of short term paying ability is called
". acid-test ratio Y
B. current ratio
C. profit margin ratio
C. receivable turn-over
11. "n artificial e$penses that spreads the purchase price of an asset or another property over a
number of years.
". "mnesty
B. Bond
C. Cepreciation Y
C. Hin#ing fund
16. Estimated value at the end of the useful life.
". Boo# value
B. &air value
C. 3ar#et value
C. Halvage value Y
1=. Consists of the actual counting or determination of the actual %uantity of the materials on
hand as of a given date.
". 3aterial count
B. 3aterial update
C. 2hysical inventory Y
C. echnological assessment
1?. "dditional information of prospective bidders on contact documents issued prior to bidding
date.
". Bid bulletin Y
66
B. Celict
C. Escalatory
C. echnological assessment
1@. " series of uniform accounts over an infinite period of time.
". "nnuity
B. Cepreciation
C. *nflation
C. 2erpetuity Y
1A. he %uantity of a certain commodity that is offered for sale at a certain price at a given place
and time.
". Cemand
B. 4oods
C. Htoc#s
C. Hupply Y
1E. For#-in process is classified as
". an asset Y
B. an e$penses
C. "n ownerKs e%uity
C. a liability
1G. Fhat is the highest position in the corporationP
". Board of Cirectors
B. Chairman of the Board Y
C. 2resident
C. Htoc#holders
1J. ype of ownership in business where individuals e$ercise and enjoy the right in their own
interest.
". E%uitable
B. 2ublic
C. 2rivate Y
C. 2ure
69. Cecrease in the value of a physical property due to the passage of time.
". Cepletion
B. Cepreciation Y
C. *nflation
C. Recession

61. "n association of two or more individuals for the purpose of operating a business as
co-owners for profit.
". Company
B. Corporation
6=
C. 2artnership Y
C. Hole proprietorship
66. Fe may classify an interest rate, which specifies the actual rate of interest on the principal
for one year as

". effective rate Y
B. e$act interest rate
C. nominal rate
C. rate of return
6=. *t is defined to be the capacity of a commodity to satisfy human want.
". Ciscount
B. Vu$ury Y
C. Uecessity
C. 5tility

6?. *t is the amount which a willing buyer will pay to a willing seller for a property where each
has e%ual advantage and is under no compulsion to buy or sell.
". Boo# value
B. &air value
C. 3ar#et value Y
C. Halvage value
6@. his occurs in a situation where a commodity or service is supplied by a number of vendors
and there is nothing to prevent additional vendors entering the mar#et.
". Elastic demand
B. 3onopoly
C. 7ligopoly
C. 2erfect competition Y
6A. hese are products or services that are desired by human and will be purchased if money is
available after the re%uired necessities have been obtained.
". Vu$uries Y
B. Uecessities
C. 2roduct goods and services
C. 5tilities
6E. hese are products or services that are re%uired to support human life and activities that will
be purchased in somewhat the same %uantity even though the price varies considerably.
". Vu$uries
B. Uecessities Y
C. 2roduct goods and services
C. 5tilities
6G. " condition where only few individuals produce a certain product and that any action of one
will lead to almost the same action of the others.
6?
". 3onopoly
B. 7ligopoly Y
C. 2erfect competition
C. Hemi-monopoly
6J. 4rand total of the assets and operational capability of a corporation.
". "uthori.ed capital Y
B. *nvestment
C. 3oney mar#et
C. Hubscribed capital
=9. he worth of the property e%uals to the original cost less depreciation.
". Boo# value Y
B. &ace value
C. 3ar#et value
C. Hcrap value
=1. 3oney paid for the use of borrowed capital.
". Credit
B. *nterest Y
C. Ciscount
C. 2rofit
=6. Vi%uid assets such as cash and other assets that can be converted %uic#ly into cash, such as
accounts receivable and merchandise are called
". current assets Y
B. &i$ed assets
C. total assets
C. Uone of the above

==. he length of time which the property may be operated at a point.
". Economic life Y
B. 7perating life
C. 2hysical life
C. "ll of the above
=?. he provision in the contract that indicates the possible adjustment of material cost and
labor cost.
". Contingency clause
B. Escalatory clause Y
C. 3ain clause
C. Hecondary clause
=@. he present worth of all depreciation over the economic life of the item is called
". boo# value
B. capital recovery
C. depreciation recovery Y
6@
C. sin#ing fund
=A. 4ross profit, sales less cost of goods sold, as percentage of sale is called
". gross margin Y
B. net income
C. profit margin
C. rate of return
=E. Forth of the property as shown in the accounting records of an enterprise.
". Boo# value Y
B. &air value
C. 3ar#et value
C. Halvage value
=G. hose funds that are re%uired to ma#e the enterprise or project a going concern.
". Current accounts
B. *nitial investment
C. Hubstantial capital
C. For#ing capital Y
=J. " mar#et situation where there is only one seller with many buyer.
". 3onopoly Y
B. 3onopsony
C. 7ligopoly
C. 7ligopsony
?9. " mar#et situation where there are few sellers and few buyers.
". Bilateral oligopoly Y
B. Bilateral oligopsony
C. 7ligopoly
C. 7ligopsony
?1. " mar#et situation where there is one seller and one buyer.
". Bilateral monopoly Y
B. Bilateral monopsony
C. 3onopoly
C. 3onopsony
?6. " mar#et situation where there are only two buyers with many sellers.
". Cuopoly
B. Cuopsony Y
C. 7ligopoly
C. 7Vigopsony
?=. he cumulative effect of elapsed time on the money value of an event, based on the earning
power of e%uivalent invested funds capital should or will earn.
". *nterest rate
B. 2resent worth factor
C. ime value of money Y
C. Wield
6A
??. Cefined as the future value minus the present value.
". Capital
B. Ciscount Y
C. *nterest
C. Rate of return
?@. he flow bac# of profit plus depreciation from a given project is called
". cash flow Y
B. capital recovery
C. earning value
C. economic return
?A. he profit derived from a project or business enterprise without consideration of obligations
to financial contributors or claims of other based on profit.
". Earning value
B. Economic return Y
C. E$pected yield
C. Wield
?E. he payment for the use of borrowed money is called
". interest Y
B. loan
C. maturity value
C. principal
?G. he interest rate at which the present wor# of the cash flow on a project is .ero of the
interest earned by an investment.
". Effective rate
B. Uominal rate
C. Rate of return Y
C. Wield
?J. he ratio of the interest payment to the principal for a given unit of time and usually
e$pressed as a percentage of the principal.
". *nterest
B. *nterest rate Y
C. *nvestment
C. "ll of the above
@9. he true value of interest rate computed by e%uations for compound interest for a 1 year
period is #nown as
". effective interest Y
B. e$pected return
C. interest
C. nominal interest
@1. he intangible item of value from the e$clusive right of a company to provide a specific
product or service in a stated region of the country.
". Boo# value
6E
B. &ranchise value Y
C. 4oodwill value
C. 3ar#et value
@6. he recorded current value of an asset is #nown as
". boo# value Y
B. present value
C. salvage value
C. scrap value
@=. Hcrap value of an asset is sometimes #nown as

". boo# value
B. future value
C. replacement value
C. salvage value Y
@?. Hometimes called second hand value.

". Boo# value
B. 4oing value
C. Halvage value Y
C. Hcrap value
@@. "n intangible value which is actually operating concern has due to its operation.

". Boo# value
B. &air value
C. 4oing value Y
C. 4oodwill value
@A. he value which a disinterested third party, different from the buyer and seller, will
determine in order to establish a price acceptable to both parties.

". &air value Y
B. &ranchise value
C. 4oodwill value
C. 3ar#et value
@E. " type of annuity where the payments are made at the end of each payment period starting
from the first period.

". "nnuity due
B. Ceferred annuity
C. 7rdinary annuity Y
C. 2erpetuity
@G. *t is a series of e%ual payments occurring at e%ual intervals of time where the first payment
is made after several periods, after the beginning of the payment.

". Ceferred annuity Y
B. Celayed annuity
6G
C. 2rogressive annuity
C. Himple annuity
@J. " type of annuity where the payments are made at the start of each period, beginning from
the first period.

". "nnuity due Y
B. Ceferred annuity
C. 7rdinary annuity
C. 2erpetuity
A9. Fhich is U7 an essential element of an ordinary annuityP

". the amounts of all payments are e%ual.
B. he payments are made at e%ual interval of time.
C. he first payment is made at the beginning of each period. Y
C. Compound interest is paid on all amounts in the annuity.
A1. " is a periodic payment and * is the interest rate, then present worth of a perpetuity 8

". "i
B. "i
n
C. "
n
,i
C. ",i Y
A6. " mathematical e$pression also #nown as the present value of an annuity of one called

". demand factor
B. load factor
C. present worth factorY
C. sin#ing fund factor
A=. "s applied to a capitali.ed asset, the distribution of the initial cost by a periodic changes to
operation as in depreciation or the reduction of a dept by either periodic or irregular
prearranged program is called

". amorti.ationY
B. annuity
C. annuity factor
C. capital recovery
A?. he reduction of the value of an asset due to constant use and passage of time.
". Boo# value
B. Cepletion
C. Cepreciation Y
C. Hcrap value
A@. " method of computing depreciation in which the annual charge is a fi$ed percentage of the
depreciated boo# value at the beginning of the year to which the depreciation applies.
". Ceclining balance method Y
6J
B. Hin#ing fund method
C. Htraight line method
C. HWC method
AA. " method of depreciation whereby the amount to recover is spread uniformly over the
estimated life of the asset in terms of the periods or units of output.
". Ceclining balance method
B. Hin#ing fund method
C. Htraight line method Y
C HWC method
AE. Fhich of the following depreciation methods cannot have a salvage value of .eroP
". Ceclining balance method Y
B. Hin#ing fund method
C. Htraight line method
C. HWC method
AG. " method of depreciation where a fi$ed sum of money is regularly deposited at compound
interest in a real or imaginary fund in order to accumulate an amount e%ual to the total
depreciation of an asset at the end of the assetKs estimated life.
". Ceclining balance method
B. Hin#ing fund method Y
C. Htraight line method
C. HWC method
AJ. he function of interest rate and time that determines the cumulative amount of a sin#ing
fund resulting from specific periodic deposits.
". Capacity factor
B. Cemand factor
C. 2resent worth factor
C. Hin#ing fund factor Y
E9. he first cost of any property includes

". the original purchase price and freight and transportation charges
B. installation e$penses
C. initial ta$es and permits fee
C. all of the above Y
E1. *n HWC method, the sum of years digit is calculated using which formula with n 8 number
of useful years of the e%uipment.
". n(n-1)
6
B. n(nD1) Y
6
C. n(nD1)
C. n(n-1)
=9
E6. Capitali.ed cost of any property is e%ual to the
". annual cost
B. first cost D cost of perpetual maintenance Y
C. first cost D interest of the first cost
C. first cost D salvage value
E=. he lessening of the value of an asset due to the decrease in the %uantity available
(referring to the natural resources, coal, oil, etc).
". Cepletion Y
B. depreciation
C. *ncremental cost
C. Cepreciation
E?. *s the simplest form of business organi.ation.
". Corporation
B. Enterprise
C. 2artnership
C. Hole proprietorship Y
E@. "n association of two or more persons for a purpose of engaging in a profitable business.
". Corporation
B. Enterprise
C. 2artnership Y
C. Hole proprietorship
EA. " distinct legal entity which can practically transact any business transaction which a real
person could do.
". Corporation Y
B. Enterprise
C. 2artnership
C. Hole proprietorship
EE. Couble ta$ation is a disadvantage of which business organi.ationP
". Corporation Y
B. Enterprise
C. 2artnership
C. Hole proprietorship
EG. Fhich is U7 a type of business organi.ationP
". Corporation
B. Enterprise Y
C. 2artnership
C. Hole proprietorship
EJ. Fhat is the minimum number of incorporators in order that be organi.edP
". =
B. @ Y
C. 19
=1
C. E
G9. *n case of ban#ruptcy of a partnership,
". the partners are not liable for the liabilities of the partnership.
B. the partnership assets (e$cluding the partnersK personal assets) only will be used to pay
the liabilities.
C. the partners personal assets are attached to the debt of the partnership. Y
C. the partners may sell stoc# to generate additional capital.
G1. Fhich is R5E about partnershipP
". *t has a perpetual life.
B. *t will be dissolved if one of the partners ceases to be connected with the partnership. Y
C. *t can be handed down from one generation of partners to another.
C. *ts capitali.ation must be e%ual for each partner.
G6. Fhich is R5E about corporationP
". *t is not the best form of business organi.ation.
B. he minimum number of incorporators to start a corporation is three.
C. *ts life is dependent on the lives of the incorporators.
C. he stoc#holders of the corporation are only liable to the e$tent of their investments. Y
G=. Represent ownership, and enjoys certain preferences than ordinary stoc#.
". "uthori.ed capital stoc#
B. Common stoc#
C. *ncorporatorKs stoc#
C. 2referred stoc# Y
G?. Represent the ownership of stoc#holders who have a residual claim on the assets of the
corporation after all other claims have been settled.
". "uthori.ed capital stoc#
B. Common stoc# Y
C. *ncorporatorKs stoc#
C. 2referred stoc#
G@. he amount of companyKs profits that the board of directors of the corporation decides to
distribute to ordinary shareholders.
". Cividend Y
B. 2ar value
C. Return
C. Hhare stoc#
GA. " certificate of indebtness of a corporation usually for a period not less than 19 years and
guaranteed by a mortgage on certain assets of the corporation.
". Bond Y
B. Common stoc#
C. 2referred stoc#
C. -bill
GE. " form of fi$ed-interest security issued by central or local government, companies, ban#s or
other institutions. hey are usually a form of long-term security, buy may be irredeemable,
secured or unsecured.
=6
". Bonds Y
B. Certificate of deposit
C. -bills
C. "ll of these
GG. " type of bond where the corporation pledges securities which it owns (i.e., stoc#s, bonds of
its subsidiaries).

". Collateral trust bond Y
B. Coupon bond
C. 3ortgage bond
C. Registered bond
GJ. " type of bond which does not have security e$cept a promise to pay by the issuing
corporation.
". Collateral trust bond
B. Cebenture bond Y
C. 3ortgage bond
C. Registered bond
J9. " type of bond issued jointly by two or more corporations.
". Collateral trust bond
B. Cebenture bond
C. Toint bond Y
C. Registered bond
J1. " type of bond whose guaranty is in lien on railroad e%uipments.

". Cebenture bond
B. E%uipment obligations bond Y
C. *nfrastructure bond
C. Registered bond
J6. *f the security of the bond is a mortgage on certain specified asset of a corporation, this bond
is classified as
". coupon bond
B. joint bond
C. mortgage bond Y
C. registered bond
J=. " type of bond where the corporationKs owners name are recorded and the interest is paid
periodically to the owners with their as#ing for it.
". *ncorporated bond
B. 2referred bond
C. Registered bond Y
C. "ll of these
J?. Bond to which are attached coupons indicating the interest due and the date when such
interest is to be paid.
". Collateral trust bond
B. Coupon bond Y
==
C. 3ortgage bond
C. Registered bond
J@. "n amount of money invested at 16S interest per annum will double in appro$imately
". ? years
B. @ years
C. A years Y
C. E years
JA. he E6 rule of thumb is use to determine
". how many years money will triple
B. how many years of money will double Y
C. how many years to amass 1 million
C. how many years to %uadruple the money
JE. o triple the principal, one must use
". derivatives
B. implicit functions
C. logarithms Y
C. integration
JG. " currency traded in a foreign e$change mar#et for which the demand is consistently high in
relation to its supply
". Certificate of deposit
B. 0ard currency Y
C. 3oney mar#et
C. reasury bill
JJ. Everything a company owns and which has a money value is classified as an asset. Fhich of
the following is classified as an assetP
". &i$ed assets
B. *ntangible assets
C. rade investments
C. "ll of these Y
199. Fhich an e$ample of an intangible assetP
". Cash
B. &urnitures
C. *nvestment in subsidiary companies
C. 2atents Y
191. Vands, buildings, plant and machinery are e$amples of
". current assets
B. fi$ed assets Y
C. intangible assets
C. trade investments
196. "n increase in the value of a capital asset is called
". capital e$penditure
B. capital gainY
C. capital stoc#
=?
C. profit
19=. he reduction in the money value of a capital asset is called
". capital e$penditure
B. capital loss Y
C. deficit
C. loss
19?. *t is a negotiable claim issued by a ban# in lieu of a term deposit.
". Bond
B. Capital gain
C. Certificate of deposit Y
C. ime deposit
19@. "ny particular raw material or primary product (e.g. cloth, wood, flour, coffeeR) is called
". commodity Y
B. necessity
C. stoc#
C. utility
19A. *t denotes the fall in the e$change rate of one currency in terms of others. he term usually
applies to floating e$change rates.
". Currency appreciation
B. Currency devaluation
C. Currency depreciation Y
C. Currency float
19E. he deliberate lowering of the price of a nationKs currency in terms of the accepted standard
(4old, "merican dollar or the British pound).
". Currency appreciation
B. Currency devaluation Y
C. Currency depreciation
C. Currency float
19G. he residual value of a companyKs assets after all outside liabilities (shareholders e$cluded)
have been allowed for.
". Cividend
B. E%uity Y
C. 2ar value
C. Return
19J. " saving which ta#es place because goods are not available for consumption rather than the
consumer really want to save.
". Compulsory saving
B. Consumer saving
C. &orced saving Y
C. "ll of these
119. " document that shows proof of legal ownership of a financial security.
". Ban# note
B. Bond
=@
C. Chec#
C. Coupon Y
111. Cefined as the capacity of commodity to satisfy human want.
". Ciscount
B. Vu$uries
C. Uecessity
C. 5tility Y
116. *t is the profit obtained by selling stoc#s at a higher price than its original purchase price.
". Capital gain Y
B. Cebenture
C. 4oodwill
C. *nternal rate of return
11=. he %uantity of a certain commodity that is offered for sale at a certain price at a given time
and place.
". Cemand
B. 3ar#et
C. Hupply Y
C. 5tility
11?. he %uantity of a certain commodity that is bought at a certaiGn price at a given time and
place.
". Cemand Y
B. 3ar#et
C. Hupply
C. 5tility

11@. +Fhen one of the factors of production is fi$ed in %uantity or is difficult to increase,
increasing the other factors of production will result in a less than proportionate increase in
output-.
". Vaw of demand
B. Vaw of diminishing return Y
C. Vaw of supply
C. Vaw of supply and demand
11A. +Fhen free competition e$ists, the price of a product will be that value where supply is
e%ual to the demand-.
". Vaw of demand
B. Vaw of diminishing return
C. Vaw of supply
C. Vaw of supply and demand Y
11E. "n accounting term that represents an inventory account adjustment.
". Cost of good sold Y
B. 7verhead
C. 2aybac#
C. /ariance
11G. he simplest economic order %uantity (E7Z) model is based on which of the following
assumptionsP
=A

". Hhortages are not allowed.
B. Cemand is constant with respect to time.
C. Reordering is instantaneous. he time between order placement and receipt is .ero.
C. "ll of the choices Y
11J. *n economics, a +short-term- transaction usually has a lifetime of
". = months or less
B. 1 year or less
C. @ years or less Y
C. 19 years or less
169. *n the cash flow, e$penses incurred before time 8 9 is called
". disbursements
B. first costs
C. receipts
C. sun# costs Y
161. "n imaginary cost representing what will not be received if a particular strategy is rejected.
". *nitial cost
B. 7pportunity cost Y
C. Replacement cost
C. Hun# cost
166. *n replacement studies, the e$isting process or piece of e%uipment is #nown as
". asset
B. challenger
C. defender Y
C. liability
16=. *n replacement studies, the new process or piece of e%uipment being considered for
purchase is #nown as
". asset
B. challenger Y
C. defender
C. liability
16?. [[[[[[ means that the cost of the asset is divided into e%ual or une%ual parts, and only one
of these parts is ta#en as an e$pense each year.
". "rtificial e$pense
B. Capitali.ing the asset Y
C. Cepreciating the asset
C. E$pensing the asset
16@. *ndicate the C7RREC statement about depreciation.
". he depreciation is not the same each year in straight line method.
B. he declining balance method can be used even if the salvage value is .ero.
C. he sum-of-yearsK digit method (HWC), the digits 1 to (n D 1) is summed.
=E
C. Couble declining balance depreciation is independent of the salvage value. Y
16A. "n artificial deductible operating e$pense designed to compensate mining organi.ations for
decreasing mineral reserves.
". Ceflation
B. Cepletion Y
C. *nflation
C. Reflation
16E. he change in cost per unit variable change is #nown as
". fi$ed cost
B. incremental cost Y
C. semi-variable cost
C. sun# cost
16G. Fhat type of cost increases step-wiseP
". Cirect labor cost
B. 7perating and maintenance cost
C. Hemi-variable cost Y
C. Hupervision cost
16J. Fhich of the following is U7 a variable costP
". Cost of miscellaneous supplies
B. *ncome ta$es
C. *nsurance cost Y
C. 2ayroll benefit costs
1=9. Fhich of the following is U7 a fi$ed costP
". Cepreciation e$penses
B. Tanitorial service e$penses
C. Rent
C. Hupervision costs Y
1=1. he annual costs that are incurred due to the functioning of a piece of e%uipment is #nown
as
". 4eneral, selling and administrative e$penses
B. 7perating and maintenance costs Y
C. 2rime cost
C. otal cost
1=6. he sum of the direct labor cost and the direct material cost is #nown as
". indirect manufacturing e$penses
B. mar#eting cost
C. prime cost Y
C. total cost
1==. Research and development costs and administrative e$penses are added to the factory cost
to give the [[[[[[[[[[[ of the product.
". manufacturing cost Y
B. mar#eting cost
C. prime cost
=G
C. total cost
1=?. he sum of the prime cost and the indirect manufacturing cost is #nown as
". factory cost Y
B. manufacturing cost
C. research and development cost
C. total cost
1=@. he manufacturing cost plus selling e$penses or mar#eting e$panses e%uals
". administrative cost
B. indirect production cost
C. miscellaneous cost
C. total cost Y
1=A. Fhich of the following is U7 a direct labor e$penseP
". "ssembly
B. *nspection
C. Hupervision Y
C. esting
1=E. "ll are administrative e$pense E>CE2:

". "ccounting
B. Cata processing
C. 3ar#eting Y
C. 7ffice supplies
1=G. 7n of the following is U7 a selling or mar#eting e$pense. Fhich oneP
". "dvertising
B. Commission
C. *nsurance Y
C. ransportation
1=J. Research and development e$penses includes all E>CE2 one. Fhich oneP
". Crafting
B. Vaboratory Y
C. 2rototype
C. esting
1?9. Fhich is not a factory overhead e$penseP
". E$pediting
B. 2ension, medical, vacation benefits
C. Zuality control and inspection
C. esting Y
1?1. Boo##eeping consists of two steps, namely recording the transactions and categori.ation of
transactions. Fhere are the transactions (receipts and disbursements) recordedP
". Columnar
B. Tournal Y
C. Vedger
=J
C. Htatement of account
1?6. he following are ledger accounts E>CE2:
". "sset accounts
B. Ban# accounts Y
C. Viability accounts
C. 7wnerKs e%uity accounts
1?=. he journal and the ledger together are #nown simply as [[[[[[[[[[[[[ of the company.
". accounting system
B. balance sheet
C. boo##eeping system
C. the boo#s Y
1??. he basic accounting e%uation is
". "ssets 8 Viability D 7wnerKs e%uity Y
B. Viability 8 "ssets D 7wnerKs e%uity
C. 7wnerKs e%uity 8 "ssets D Viability
C. 7wnerKs e%uity 8 Viability ' "ssets
1?@. he ability to convert assets to cash %uic#ly is #nown as
". insolvency
B. leverage
C. li%uidity Y
C. solvency
1?A. he ability to meet debts as they become due is #nown as
". insolvency
B. leverage
C. li%uidity
C. solvency Y
1?E. Fhat is considered as an inde$ of short-term paying abilityP
". "cid test ratio
B. Current ratio Y
C. 4ross margin
C. Return of investment
1?G. "n acid test ratio is a ratio of
". gross profit to net ratio
B. net income before ta$es to net sales
C. net income to ownerKs e%uity
C. %uic# assets to current liabilities Y
1?J. he ratio of the net income to the ownerKs e%uity is #nown as
". gross margin
B. price-earning ratio
C. 2rofit margin ratio
C. return of investment Y
?9
1@9. 2aybac# period is the ratio of
". cost of goods sold to average cost of inventory on hand
B. gross profit to net sales
C. initial investment to net annual profit Y
C. net income before ta$es to net sale
1@1. " secondary boo# of accounts, the information of which is obtained from the journal.
". Balance sheet
B. Vedger Y
C. rial balance
C. For#sheet
1@6. he present worth of cost associated with an asset for an infinite period of time is referred
to as
". annual cost
B. capitali.ed cost Y
C. increment cost
C. operating cost
1@=. " stoc# of a product which is held by a trade or government as a means of regulating the
price of that product.
". Buffer stoc# Y
B. 0oard stoc#
C. Htoc# pile
C. Fithheld stoc#
1@?. " negotiable claim issued by a ban# in lieu of a term deposit is called
". Certificate of deposit Y
B. Che%ue
C. Currency
C. -bills
1@@. " form of business firm which is owned and run by a group of individuals for their mutual
benefit.
". Cooperative Y
B. Corporation
C. Enterprise
C. 2artnership
1@A. " document which shows the legal ownership of financial security and entitled to payments
thereon.
". Bond
B. Consol
C. Contract
C. Coupon Y
1@E. " government bond which have an indefinite life rather than a specific maturity.
?1
". Cebenture
B. Consol Y
C. Coupon
C. -bill
1@G. Refers to the order %uantity that minimi.es the inventory cost per unit time.
". Economic order %uantity Y
B. 2rivate order %uantity
C. 2ublic order %uantity
C. Hocial order %uantity
1@J. Fhat is referred to as an individual who organi.es factors of production to underta#e a
venture with a view to profitP
". "gent
B. Commissioner
C. Entrepreneur Y
C. Halesman
1A9. he money that is inactive and does not contribute to productive effort in an economy is
#nown as
". fro.en asset
B. hard money
C. idle money Y
C. soft money




?6