Engineering Economics

1. The total income equals the total operating cost.

A. Break-even
B. In-piece-value
C. Interest rate
D. Scrap value

2. What is another term for annual cost method?

A. Capital recovery method

B. Present worth recovery method
C. Cost opportunity method
D. Return of investment method

3. It refers to the amount earned by a unit principal per unit time.

A. Nominal rate of interest

B. Rate of interest
C. Effective rate of interest
D. Return of investment

4. It is the series of equal payments where the first payment does not begin until
some later date in the cash flow.

A. Annuity
B. Deferred Annuity
C. Annuity due
D. Ordinary Annuity

5. It is a series consisting of end-of-period payments, where each payment

increases or decreases by a fixed percentage.

A. Uniform geometric gradient

B. Uniform arithmetic gradient
C. Uniform geometric progression
D. Gradient cashflow

6. Find the present value of installment payments of P 1,000 now, P 2,000 at the
end of the first year, P 3,000 at the end of the second year, P 4,000 at the end
of the third year and P 5, 000 at the end of the fourth year, if money is worth
10% compounded annually.

A. P 10,782.39
B. P 10, 204.78
 C. P 11, 390.85
D. P 11, 717.85

Solution:
Present value of investment = 1,000 + P1 + P2 + P3 + P4

𝐹1 𝐹2 𝐹3 𝐹4
𝑃 = 1000 + + + +
(1 + 𝑖)1 (1 + 𝑖)2 (1 + 𝑖)3 (1 + 𝑖)4

2000 3000 4000 5000

𝑃 = 1000 + 1
+ 2
+ 3
+ = 11,717.85
(1.1) (1.1) (1.1) (1.1)4

7. On his 6th birthday a boy is left an inheritance. The inheritance will be place
paid in a lump sum of P10,000 on his 21st birthday. What is the present value
of the inheritance as of the boy’s 6th birthday, if the interest is compounded
annually? Assume: I = 4 %

A. P 5,552.64
B. P 5,340.98
C. P 5,456.90
D. P 5,640.58

Solution:
𝐹
𝑃=
(1 + 𝑖)𝑛
10,000
𝑃= = 5,552.64
(1 + .04)15

8. A machine has been purchased and installed at a total cost of P18,000.00.

The machine will retire at the end of 5 years, at which time it is expected to
have a scrap value of P2,000.00 based on current prices. The machine will
then be replaced with an exact duplicate. The company plans to establish a
reserve funds to accumulate the capital needed to replace the machine. If an
average annual rate of inflation of 3% is anticipated, how much capital much
be accumulated?

A. P18,238.90
B. P17,899.90
C. P18,548.38
D. P18,458.83

Solution:
Since the scrap value of the first machine has the amount of 2,000, then
the remaining amount needed is P16,000.00.
 Due to inflation,
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑡𝑜 𝑎𝑐𝑐𝑢𝑚𝑢𝑙𝑎𝑡𝑒 = 16,000(1 + .03)5 = 18,548.38

9. By the condition of a will, the sum of P25,000 is left to be held in trust by her
guardian until it amounts to P45,000. When will the girl receive the money if
the fund is invested at 8% compounded quarterly?

A. 7.42 years
B. 7.52 years
C. 6.42 years
D. 6.52 years

Solution:
𝐹 = 𝑃(1 + 𝑖)𝑚𝑛
𝐹
= (1 + 𝑖)𝑚𝑛
𝑃
45,000 . 08 4𝑛
= (1 + )
25,000 4
1.8 = (1.02)4𝑛

Apply algebra, multiply ln on both sides.

ln (1.8) = 4𝑛 𝑙𝑛(1.02)
29.68 = 4𝑛
𝑛 = 7.42

10. A type of bond to which are attached coupons indicating the interest due and
the date when such interest is to be paid is called ________.

A. Registered bond
B. Coupon bond
C. Mortgage bond
D. Collateral trust bond

11. In what method of computing depreciation where it assumes that a sinking

fund is established in which funds will accumulate for replacement purposes?

A. Straight line method

B. Sinking fund method
C. Sum-of-year digit method
D. Declining balance method

12. What refers to the value of an asset which a disinterested third party, different
from the buyer and seller, will determine in order to establish a price
acceptable to both parties?
 A. Book value
B. Market value
C. Fair value
D. Franchise value

13. The unrecovered depreciation which results due to poor estimates as to the
life of the equipment is called ______.

A. Sunk cost
B. Economic life
C. In-place value
D. Annuity

14. What is the factor name of the formula (1+i)-n?

A. Uniform gradient future worth

B. Capital recovery
C. Single payment present worth
D. Single payment compound amount

𝑖(1+𝑖)𝑛
15. What is the factor name of the formula (1+𝑖)𝑛−1 ?

A. Uniform series sinking fund

B. Capital recovery
C. Single payment present worth
D. Uniform gradient future worth