Republic of the Philippines

Laguna State Polytechnic University

Province of Laguna
College of Engineering

COMPILATION OF LECTURE
IN
ENGINEERING ECONOMY

SUBMITTED BY:
ME-IV B
SUBMITTED TO:
Mrs. Cheerobie Aranas
Course Outline
1. Introduction of Engineering Economy
2. Simple Interest
3. Compound Interest
4. Annuity
5. Bonds
6. Depreciation
7. Basic Accounting Concepts
8. Present Economy
9. Break-Even Analysis

10% - Attendance
20% - Class Participation
30% - Quizzes
40% - Major Exam
100%
NO REMOVAL
𝐹 = 𝑃(1 + 𝑖𝑛)
𝐹 = 𝑃(1 + 𝑖)𝑛

I. Simple Interest
𝐼 = 𝑃𝑖𝑛 Where: I = Interest
P = Principal
I = Interest Rate
n = Period of Payment
𝐹 = 𝑃(1 + 𝑖𝑛) Where: F = Future Worth
P = Present Worth/ Principal
2 Types of Simple Interest
1. Ordinary – bankers year ( 12 months of 30 days )
𝑑
𝑛=
360
2. Exact – actual number of days in a given year
365 – Normal years
366 – Leaf years
𝑑 𝑑
𝑛= /𝑛 =
365 366

Discount / future worth – present worth

1
𝑑 =1−
1+𝑖
𝑑
𝑖=
1−𝑑
Sample Problems:

1. If P1000 accumulates to P1500 when invested at a simple interest for three, what is
the rate of interest?
GIVEN: P=1000
F=1500
n= 3 yrs
𝑖=?
SOLUTION:
𝐹 = 𝑃(1 + 𝑖𝑛)
1500 = 1000(1 + 3𝑖)
1.5 = 1 + 3𝑖
1.5 − 1 = 3𝑖
. 5 3𝑖
=
3 3
𝑖 = .1667 × 100 = 16.67%

2. You loan from loan firm an amount of P100,000 with a rate of simple interest of 20%
but the interest was deducted from the loan at the time the money was borrowed. If
at the end of one year, you have to pay the full amount of P100,000. What is the
actual rate of interest?
GIVEN: P=100000(.80) = 80 000
𝑖=20%
n= 1
𝑖=?
SOLUTION:
20000 80000𝑖(!)
100% × 80000 = 80000
𝑖 = 25%

3. A loan of P5,000 is made for a period of 15 months at simple interest rate of 15%
what future amount is due at the end of the loan period?
GIVEN: P=5000
N=15 MONTHS
𝑖=15%
F?
SOLUTION:
𝐹 = 𝑃(1 + 𝑖𝑛)
15
𝐹 = 5000((1 + .15 ( )))
12
𝐹 = 𝑃5937.50
4. If you borrowed money from the bank. He received from the bank P1,842 and
promise to repay P2,000 at the end of 10 months. Determine the simple interest.
GIVEN: P=1842
F=2000
N=10 MONTHS
𝐼 =?
SOLUTION:
𝐹 = 𝑃(1 + 𝑖𝑛)
10
2000 = 1842((1 + 𝑖 ( )))
12
𝑖 = .1029 × 100 = 10.29%
𝐼 = 𝑃𝑖𝑛
10
𝐼 = (1842)(.1029)( )
12
𝐼 = 𝑃158
5. Determine the exact sample interest of P5,000 invested for the period from January
15,1996 to October 12, 1996, if the rate of interest is 18%
GIVEN: P=5000
𝑖=18%
Jan15,1996 – OCT.12,1996
I=?
SOLUTION:
jan 15 - 16
feb - 29
march - 31
april - 30
may - 31
june - 30
july - 31
august - 31
sep - 30
oct - 12
-------
271DAYS

𝐼 = 𝑃𝑖𝑛
271
𝐼 = 5000(.18)( )
366
𝐼 = 666.40
 II. COMPOUND INTEREST
- Interest of loan or principal which is based not only to the original amount of the
loan, but the amount of loan plus the previous accumulated interest.
𝐹 = 𝑃(1 + 𝑖)𝑛
(1 + 𝑖)𝑛 = SINGLE PAYMENT

RATE OF INTEREST
1. NOMINAL RATE – Basic annual rate
- State interest rate, the interest works according to the simple interest and does
not take into account to compounding period.
2. EFFECTIVE RATE - Actual or exact rate of interest on the principal during years
- The one which caters the compounding periods during payments plan.
- It is used to compare the annual interest between loans with different
compounding period like week, months, years and etc.
𝐸𝑅 = (1 + 𝑖)𝑚 − 1
𝑁𝑅 𝑚
𝐸𝑅 = (1 + ) −1
𝑚
Sample Problems:
1. The amount of P20,000 wa deposited in a bank earning an interest of 65% per annum.
Determine the total amount at the end of 7 years if the principal and interest were not
withdraw during the period.
GIVEN: P=20000
i=65%
n=7
F=?
SOLUTION:
𝐹 = 𝑃(1 + 𝑖)𝑁
𝐹 = 20000(1 + .65)7
𝐹 = 665913.17
2. a load for 50000 is to be paid in 3 years at the amount of 65000. what is the effective
rate of the interest.
GIVEN: P=50000
F=65000
N=3years
i=?
SOLUTION:
65000 = 50000(1 + 𝑖)3
3 65000 3
√ = √(1 + 𝑖)3
50000
 3 65000
√ =1+𝑖
50000

3 65000
√ −1=𝑖
50000
𝑖 = .0914 × 100 = 9.14%

3. Find the present worth of a future payments of 80000 to be made in 6 years with an
interest of 12% compounded annually.
GIVEN: F=80000
n=6years
i=12years
P=?
SOLUTION:
80000 = 𝑃(1 + .12)6
𝑃 = 40530.49
4. What is the effective rate corresponding to18% compounded daily? take 1 year is equal
to 360 days.
GIVEN: nr=18%
m=360days =1year
ER=?
SOLUTION:
𝑁𝑅
𝐸𝑅 = (1 + 𝑚 )𝑚 − 1
. 18 360
𝐸𝑅 = (1 + ) −1
360
𝐸𝑅 = .1972 × 100 = 19.72%
5. What nominal rate, compounded semi0annually, yields the same amount as 16%
compounded quarterly?
GIVEN: 𝑁𝑅1 = 𝑁𝑅16% QUARTERLY
2
SOLUTION:
𝑁𝑅 2 . 16 4
(1 + ) − 1 = (1 + ) −1
2 4
𝑁𝑅 2
√(1 + ) = √1.17
2
𝑁𝑅
1+ = √1.17
2
𝑁𝑅
[ = √1.17 − 1] 2
2
𝑁𝑅 = (√1.17 − 1)2
𝑁𝑅 = .1633 × 100 = 16.33%

6. If P5,000 shall accumulate for 10 years at 8% compounded quarterly, then what is the
compound interest at the end of 10 years?
GIVEN: P=5000
N=10 YEAR
𝑖1 = 8%
4
F=?
 SOLUTION:
𝐼 = 5000(.08)(10)
𝐼 = 𝑃6040.20

7. In how many years is required for P20,000 to increase by P3,000 if the interest at 125
compounded semi-annually?
GIVEN: P=3000
F=5000
𝑖1 = 12%
2
n=?
SOLUTION:
.12
5000 = 2000(1 + 2 )2𝑛
2.5 = (1.06)2𝑛
log(2.5) = (2𝑛)log(1.06)
log(2.5)
=𝑛
(2)log(1.06)
𝑛 = 7.86 𝑌𝐸𝐴𝑅𝑆
8. How long will it take money to double itself if invested at 5% compounded annually?
GIVEN: i=5%
F=2P
N=?
SOLUTION:
𝐹 = 𝑃(1 + 𝑖)𝑛
2𝑃 = 𝑃(1 + .05)𝑛
2 = (1.05)𝑛
log(2) = (𝑛)log(1.05)
log(2)
=𝑛
log(1.05)
𝑛 = 15.21𝑦𝑒𝑎𝑟𝑠
 III. Annuity
defined as a series of equal payments occurring at equal interval of time. when
-
an annuity has a fixed time span, it is known as annuity certain the are annuity
certain
1. Ordinary Annuity – is a type of annuity where the payments are made at the end of each
period beginning from the first period.
𝐴[(1 + 𝑖)𝑛 − 1]
𝑃=
(1 + 𝑖)𝑛 (𝑖)
𝐴[(1 + 𝑖)𝑛 − 1]
𝐹=
𝑖
2. Annuity Due
𝐴[(1 + 𝑖)𝑛−1 − 1]
𝑃+𝐴 =
(1 + 𝑖)𝑛−1 (𝑖)
3. deferred Annuity
𝐴[(1 + 𝑖)𝑛 − 1]
𝑃1 =
(1 + 𝑖)𝑛 (𝑖)

4. Perpetuity
𝑃1
𝑃=
(1 + 𝑖)𝑛
𝐴
𝑃=
𝑖
Sample Problems:
1. Today, a businessman borrowed money to be paid in 10 equal payments for 10 quarters.
if the interest rate is 10% compounded quarterly and the quarterly payment is P2000,
how much did he borrow ?
GIVEN: i=10% quarterly
n=10
A= P2000
SOLUTION:
𝐴[(1+𝑖)𝑛 −1]
𝑃= (1+𝑖)𝑛 (𝑖)

. 10
2000 [(1 + 4 )10 − 1]
𝑃=
. 10 10 . 10
(1 + 4 ) ( 4 )

𝑃 = 17504.13
2. A manufacturer desires to set aside a certain sum of money to provide funds to cover the
yearly operating expenses and the cost of replacing every year the dyes of a stamping
machine used in making radio chassis as model changes for a period of 10 years.
Operating cost per year - P500
Cost of dye - P1200
Salvage value of dye - P600
The money will be deposited in a saving account which earns 6% interest. Determine
the sum of money that must be provided, including the cost of the initial dye.
 GIVEN: Operating value= 500
Cost of Dye= 1200
Salvage Value= 60
SOLUTION:
P = sum of money to be provided

𝑃 = 𝑃1 − (𝑃2 + 𝑃3 )

600[(1 + .06)10 − 1]
𝑃1 =
(1 + .06)10 (.06)
𝑃1 = 4,416.05
500[(1 + .06)10 − 1]
𝑃2 =
(1 + .06)10 (.06)
𝑃2 = 3,680.04
1200[(1 + .06)9 − 1]
𝑃3 + 1200 =
(1 + .06)9 (.06)

𝑃3 = 6,962.03
𝑃 = 4,416.05 − [3,680.04 − 6962.03]
𝑃 = −6,226.02/6,226.02
3. Maintenance cost of an equipment is P20000 for 2 years, P40000 at the end of 4 years
and P80000 at the end of 8 years. Compute the semi-annual amount that will be set
aside for this equipment. money worth 10% compounded annually.
GIVEN: P= semi-annual amount that will be set aside
i= 10% compounded annually
SOLUTION:
𝐸𝑅1 = 𝐸𝑅1
2

(1 + 𝑖)1 − 1 = (1 + 𝑖)2 − 1
(1 + .10)1 − 1 = (1 + 𝑖)2 − 1

𝑖 = .0488

20000[(1 + .0488)2 − 1]
𝑃1 =
(1 + .0488)2 (.0488)

𝑃1 = 37251.07
40000
𝑃2 =
(1 + .0488)4
 𝑃2 = 33,057.85
80000
𝑃3 =
(1 + 0.0488)8
𝑃3 = 54,644.76
𝐴[(1 + 𝑖)𝑛 − 1]
𝑃1 + 𝑃2 + 𝑃3 =
(1 + 𝑖)𝑛 (𝑖)

𝐴[(1 + .0488)16 − 1]
37251.07 + 33057.85 + 54644.76 =
(1 + 𝑖)16 (.0488)

𝐴 = 11,431.58

4. Mr. Ayala borrows P100000 at 10% effective annual interest. He must pay back the loan
over 30 years with uniform monthly payments due on the first day of each month. What
does Mr. Ayala pay each month?
GIVEN: P1= P100000
i= 10%
n=30 years
SOLUTION:
(1 + .10) − 1 = (1 + 𝑖)12 − 1
𝑖 = .00797
𝐴[(1 + .00797)30(12) − 1]
100000 + 𝐴 =
(1 + .00797)359 (.00797)
𝐴 = 853.155
IV. BREAK-EVEN
Income = Expenses
Expenses
1. Fixed cost - miscellaneous
2. Variable cost - tuition
Selling Prize(X) = Fixed cost + Variable cost(X)
X = No. of units
Sample Problems:
1. SOLUTION:
𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 = 𝐼𝑛𝑐𝑜𝑚𝑒
315(𝑥) + 100(𝑥) + 3(𝑥) + 461,600 = 995(𝑥)
𝑥 = 800 𝑢𝑛𝑖𝑡𝑠
2. SOLUTION:
69994 + 56(𝑥) = 135(𝑥)
𝑥 = 886 𝑢𝑛𝑖𝑡𝑠
 3. SOLUTION:
20(x)
2(x)
3500 = 55(x)
2500
12000

𝑥 = 1227.27 𝑢𝑛𝑖𝑡𝑠
4. SOLUTION:
𝐸𝑛𝑎𝑚𝑒𝑙𝑙𝑒𝑑 𝑇𝑖𝑚𝑒𝑑
1.65(400) 1.15(400)
. 55(𝑥) . 75(𝑥)
1.65(400) + .55(𝑥) = 1.15(400) + .75(𝑥)
𝑥 = 1000 𝑓𝑒𝑒𝑡

5. SOLUTION
1st Method 2nd Method

Machinist Wage 𝑃20.25⁄ 𝑃20⁄

ℎ𝑟 ℎ𝑟
# of Holes 27ℎ𝑜𝑙𝑒𝑠⁄ 8ℎ𝑜𝑙𝑒𝑠⁄
ℎ𝑟 𝑚𝑖𝑛
Machine Wage / hole 𝑃20.25⁄ 1ℎ𝑟⁄ 𝑃0.50⁄
1ℎ𝑟 𝑥 27ℎ𝑜𝑙𝑒𝑠 ℎ𝑜𝑙𝑒 −
𝑠𝑒𝑡 𝑢𝑝

= 𝑃0.75⁄ℎ𝑜𝑙𝑒 𝑃2000 – 𝐼𝑛𝑠𝑡𝑎𝑙𝑙𝑎𝑡𝑖𝑜𝑛

𝑃20⁄ 1ℎ𝑟⁄
1ℎ𝑟 𝑥 8(60)ℎ𝑜𝑙𝑒𝑠

= 𝑃0.04⁄ℎ𝑜𝑙𝑒

0.75𝑥 = 0.04𝑥 + 0.5𝑥 + 2000

𝑥 = 9524 ℎ𝑜𝑙𝑒𝑠
6. Worker A Worker B

Wage 𝑃25⁄ 𝑥
ℎ𝑟
# of Output 100 𝑢𝑛𝑖𝑡𝑠⁄ 120 𝑢𝑛𝑖𝑡𝑠⁄
ℎ𝑟 ℎ𝑟
Cost of Operation 𝑃100⁄ 𝑃100⁄
ℎ𝑟 ℎ𝑟

𝑐𝑜𝑠𝑡
𝑥= 𝑓𝑜𝑟 𝑊𝑜𝑟𝑘𝑒𝑟 𝐵
𝑝𝑖𝑒𝑐𝑒
𝑃25 𝑃100
+ 𝑃1.25
ℎ𝑟 ℎ𝑟
A. 100 𝑢𝑛𝑖𝑡𝑠 =
𝑢𝑛𝑖𝑡
ℎ𝑟

𝑃100
𝑥+ 𝑃1.25 𝑃50
ℎ𝑟
B. 120 𝑢𝑛𝑖𝑡𝑠 = =𝐵 =
𝑢𝑛𝑖𝑡 ℎ𝑟
ℎ𝑟

V. PRESENT ECONOMY
A B C
Cost of Production 200(8) 250(7) 280(5)
= 1600𝑝𝑐𝑠 = 1750 pcs = 1400 𝑝𝑐𝑠
1800 1800 1800
Tool Cost = 𝑃90 = 𝑃90 = 𝑃90
20 20 20
𝑃18 𝑃18 𝑃18
Regrinding Cost ℎ𝑟 ℎ𝑟 ℎ𝑟
𝑃28 𝑃28 𝑃28
Wage of Machine Operator (8 + 1) (7 + 1) (5 + 1)
ℎ𝑟 ℎ𝑟 ℎ𝑟
𝑃250 𝑃224 𝑃168
= = =
ℎ𝑟 ℎ𝑟 ℎ𝑟
𝑃25 𝑃25 𝑃25
Wage of Tool Grinder ℎ𝑟 ℎ𝑟 ℎ𝑟
𝑃54 𝑃54 𝑃54
Machine Cost (8ℎ𝑟𝑠) (7ℎ𝑟𝑠) (5ℎ𝑟𝑠)
ℎ𝑟 ℎ𝑟 ℎ𝑟

= 𝑃432 = 𝑃375 = 𝑃270

Total Cost = 𝑃817 = 𝑃735 = 𝑃571
𝐶𝑜𝑠𝑡 𝑃817 𝑃735 𝑃571
𝑃𝑖𝑒𝑐𝑒 1600 𝑢𝑛𝑖𝑡𝑠 1750 𝑢𝑛𝑖𝑡𝑠 1400 𝑢𝑛𝑖𝑡𝑠
𝑃0.51 𝑃0.42 𝑃0.41
= = =
𝑢𝑛𝑖𝑡 𝑢𝑛𝑖𝑡 𝑢𝑛𝑖𝑡

Most Economical
 VI. DEPRECIATION
is the reduction of fail in the value of an asset or physical property during
course of its workin life dueto the passage of time.
Types of Deppreciation
A. Physical Depreciation
- is due to the reduction of the physical ability of an equipment of an
equipment or asset to produce results.
B. Functional Depreciation
- is due to the reduction in the demand for the function that the equipment
or asset was designed to render. This type of depreciation is often called
obsolescence.
Methods of Computing Depreciation:
A. Straight Line Method
- in this method of computing depreciation, it is assumed that the loss in
value is directly proportional to the age of the equipment or asset.
Annual depreciation charge, d
𝐶𝑜 −𝐶𝑛
𝑑= where, 𝐶𝑜 = first cost
𝑛

𝐶𝑛 =cost after “n” years (salvage/scrap value)

n= life of property
Book value at the end of “m” years of using 𝐶𝑚
𝐶𝑚 = 𝐶𝑜 − 𝐷𝑚
B. Sinking Fund Method
- in this method of computing depreciation, it is assumed that the sinking
fund is established in which funds will accumulate for replacement
purposes.
(𝐶 −𝐶 )𝑖
𝑜 𝑛
𝑑 = (1+𝑖)𝑛 −1 where, 𝐶𝑜 = first cost

𝐶𝑛 =cost after “n” years (salvage/scrap value)

n= life of property
Book value at the end of “m” years of using 𝐶𝑚
𝐶𝑚 = 𝐶𝑜 − 𝐷𝑚 where, Dm = total depreciation after “m” years
𝑑[(1 + 𝑖)𝑚 − 1]
𝐷𝑚 =
𝑖
C. Declining Method
 - in this method of computing depreciation, it is assumed that the cost of
depreciation is a fixed percentage of the book value at the beginning of
the year. This method is sometime called as constant method or Matheson
Formula.
Matheson Formula:
𝑛 𝐶 𝑚 𝐶
𝑘 = 1 − √𝐶𝑛 or 𝑘 = 1 − √ 𝐶𝑚
𝑜 𝑜

The value of k is the constant percentage. Hence, k must be decimal and value is less
than 1. In this method, salvage or scrap value must not be zero.
D. Sum-of-Year’s Digit (SYD) Method
Respective depreciation charge:
𝑛
First Year 𝑑1 = (𝐶𝑜 − 𝐶𝑛 ) ∑ 𝑦𝑒𝑎𝑟𝑠
𝑛−1
Second Year 𝑑1 = (𝐶𝑜 − 𝐶𝑛 ) ∑ 𝑦𝑒𝑎𝑟𝑠
𝑛−2
Third Year 𝑑1 = (𝐶𝑜 − 𝐶𝑛 ) ∑ 𝑦𝑒𝑎𝑟𝑠
and so on……
Book value at the end of “m” years of using 𝐶𝑚
𝐶𝑚 = 𝐶𝑜 − (𝑑1 + 𝑑2 +. . . +𝑑𝑚 )
Sum of Years Digit, ∑ 𝑦𝑒𝑎𝑟𝑠
𝑛(𝑛 + 1)
∑ 𝑦𝑒𝑎𝑟𝑠 =
2
SAMPLE PROBLEM:
1. GIVEN:
First cost, 𝐶𝑜 =P10,000
Salvage Value, 𝐶𝑛 =P500
Life of Property =5 years
i =10%
SOLUTION
a.Straight Line Method
𝐶𝑜 − 𝐶𝑛⁄
𝑑= 𝑛
(10000 − 500)⁄
𝑑= 5 = 1900
𝐶𝑚 = 𝐶𝑜 − 𝑑𝑚
𝐶2 = 10000 − 1900(2)
b. Sinking Fund Method
1. 𝐶𝑜 = 400
𝑘 = 10%
𝑚 = 5𝑦𝑟𝑠
𝐶5 = ?
5 𝐶
0.10 = 1 − √ 5⁄400

𝐶5 = 236.196

2. 𝐶𝑜 = 8000
𝑛 = 10𝑦𝑟𝑠
𝐶𝑛 = 500
𝑚 = 8𝑦𝑟𝑠
𝐶𝑜 − 𝐶𝑛⁄
𝑑= 𝑛
(8000 − 500)⁄
𝑑= 10 = 750
𝐶8 = 8000 − 750(8)

3.𝐶𝑜 = 6𝑀 + 0.04 (6𝑀)

𝐶𝑜 = 6,240,000
𝑛 = 10𝑦𝑟𝑠
𝐶𝑛 = 0.08(6240000) = 499,200
𝑑5 = 6240000 − 499200 − (𝑛⁄55)

𝑛=6
4.𝐶𝑜 = 10000
𝐶𝑛 = 500
𝑛 = 10𝑦𝑟𝑠
𝑖 = 4%
10000 − 500(0.04)
𝑑= ⁄(1 + 0.04)10−1

𝑑 = 𝑃791.26