Engineering Economy

ENGINEERING ECONOMY Set B (With Answers/Solutions)

Instruction: Select the Correct Answer from each of the following questions.

1. Determine, which of the following is incorrect between lease and outright purchase of equipment?
a) Leasing fees needed working capital
b) Leasing reduces maintenance and administrative expenses
c) Leasing offers certain tax advantage
d) Leasing offers less flexibility with respect to technical obsolescence.

2. What do you call the replacement of the original cost of an investment?

a) Pay off b) Return on investment c) Breakeven d) Capital recovery

3. What is the least number of years needed triple a certain amount of money at 5 % per annum compounded
interest to the nearest year?
a) 20.5 years b) 18.5 years c) 22.5 years d) 16.5 years

F  P1  i   3P  P1  i   3  1  0.05

n n n
Solution:
ln 3
n  22.5 years
ln 1.05

4. The management of a certain company deposits P1,500.00 for each of its employees in a retirement fund at
the end of each year for the next 12 years. How much is each employee’s fund at the end of 12 years if it
accumulates 8 % for the first 8 years and at 6 % for the last 4 years?
a) P27,705 b) P26,705 c) P24,705 d) P23,705

Solution: F8 
A
i
 0.08
 
1  i n  1  1500 1.088  1  P15,954.94 
F812  F8 1  i   15,954.941.06  P20,142.74
n 4

A
i

F12  1  i   1 
n

1500
0.06

1.064  1  P6,561.92 
F012  20,142.74  6,561.92  P26,705.00

5. Fr. Bautista Expects to receive P50,000.00 in 6 years. How much is that money worth now considering
interest at 6 % compounded quarterly?
a) P39,477.20 b) P34,977.20 c) P37,497.20 d) P32,977.40

F 50,000.00
Solution: P mn
 4 6 
 P34,977.20
 in   0.06 
1   1  
 m  4 

6. Jovencio wants to make 14 % nominal interest compounded semi-annually on a bond investment. How much
should Jovencio be willing to pay now for a 12 % - P15,000 bond that will mature in 8 years and pays interest
semi-annually?
a) P13,583.00 b) P14,583.00 c) P13,583.00 d) P12,585.00

12
Solution: Let r  6 %  bond paying rate per semi - annual or per 6 months
2
d  r redemption Pr ice  0.0615,000.00  P900.00  semi - annual dividend

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Engineering Economy

  i  mn 
 1  n   1 
 m  
Future Worth, F  d   Bond Face Value
in
 
 m 
 

  0.14  28  
 1    1
 2 
F  900   15,000.00  40,099.25

0.14
 
 2 

F 40,099.25
Amount to be paid now, P  mn
 28 
 P13,583.00
 in   0.14 
1   1  
 m  2 

Note: It is understood that redemption price is equal to the face value because redemption
price is not mentioned.

7. Determine the effective rate corresponding to 18 % compounded daily? Take 1 year = 365 days.
a) 17.72 % b) 18.72 % c) 19.72 % d) 20.72 %

 i  m   0.18  365 
Solution: i e  1  n  100 %  1   100 %  19.72 %
 m    365  

8. Determine the value of P20,000.00 in 5 years at 5 % compounded quarterly.

a) P26,540.75 b) P27,540.25 c) P25,640.75 d) P24,250.75

mn 4 5 
 i   0.05 
Solution: F  P1  n   20,0001    P25,640.75
 m  4 

9. If a Mechanical engineer borrowed money from his girl friend with simple interest of 12 %, determine the
present worth of P75,000.00, which is due at the end of 7 months.
a) P72,200.20 b) P70,200.20 c) P73,900.50 d) P70,093.5

F 75,000.00
P   P70,093.5
Solution:
1  i n 1  0.12 7
12
 
10. An Electrical Engineer obtained a loan of P50,000.00 at the rate of 8% compounded annually in order to
repair his mistress’ house. Mow much must the Electrical Engineer pay monthly to amortize the loan within a
period of ten years?
a) P605.20 b) P550.90 c) P505.90 d) P508.90

Solution: Converting the interest into effective monthly interest, one peso-one year analysis,

11  0.61 year  11  i 12 months

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Engineering Economy

1
i  1.0612  1  0.00486 or 0.486 %

N = mn = 12(10) = 120

i 1  i N P 0.004861.00486120 50,000.00
A   P550.90
1  i N  1 1.00486120  1

11. This is a form of business organization owned by one individual who is responsible for the firm’s policies,
owned all its assets, and is personally liable for its debts. How do you call this business organization?
a) Partnership b) Sole Proprietorship c) Corporation d) Cooperative

12. This cost item is common for both the fixed and operating cost of an enterprise. What is this cost item?
a) Interest b) Taxes c) Depreciation d) Supplies

13. What do you think is the length of time, usually in years, for cumulative net annual profit to equal the
investment?
a) Receivable turnover b) Return of investment c) Payback period d) Price earning ratio

14. What do you call the reduction in value and marketability due to competition from newest products/model?
a) Depreciated cost b) Fixed cost c) Indirect cost d) Obsolescence

15. What do you think is the form of summary of assets, liabilities and net worth?
a) Production b) Balance sheet c) Break even point d) Balance method

16. How do you call the worth of property that is equal to the original cost less depreciation?
a) Earning value b) Scrap value c) Book value d) Face value

17. This type of interest is periodically added to the amount of loan so that subsequent interest is based on the
cumulative amount. How do you call this type of interest?
a) Compound interest b) Interest rate c) Simple interest d) Sinking fund

18. What do you think is the output or sales at which income is insufficient to equal operating cost?
a) Break even point b) Depreciation c) Investment d) Cash flow

19. What is an estimate of assets’ net market value at the end of its estimated life?
a) Book value b) Depreciation c) Salvage value d) Cash flow

20. What do you think is the lessening of the value of an asset due to a decrease in the quantity available as a
coal, oil and timber in forests?
a) Depletion b) Amortization c) Depreciation d) Investment

21. This is a certificate of indebtedness of a corporation usually for a period of net loss that, ten years and
guaranteed by a mortgage on certain assets of the corporation or its subsidiaries. What do you think it is?
a) Appraisal b) Bond c) Equity capital d) Written contract

22. This is a fund supplied and used by owners of an enterprise in the expectation that profit will be earned. What
is this?
a) Equity Capital b) Working capital c) Investment d) Present fund

23. This is a fund supplied by others on which a fixed rate of interest must be paid and the debt be repaid at a
specific place and time. How do you call this fund?

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Engineering Economy

a) Discount b) Cash flow c) Working Capital d) Borrowed capital

24. How do you call the quantity of a certain commodity that is offered for sale at a certain price at a given place
and time?
a) Supply b) Discount c) Demand d) Investment

25. What do you think is the quantity of a certain commodity that is bought at a certain price at a given place and
time?
a) Supply b) Discount c) Demand d) Investment

26. This is a market condition where only few individuals produce a certain product that action of one will lead to
almost the same action by the other. Guess what is this?
a) Monopoly b) Oligopoly c) Semi monopoly d) Perfect competition

27. Guess, what is this? This is the simplest form of a business organization.
a) Sole proprietorship b) Enterprise c) Partnership d) Corporation

28. Guess this! Those funds which are required to make the enterprise or project of a going concern.
a) Banking Funds b) Working Capital
c) Accumulated amounts d) Principal or present worth

29. What do you think is the length of time during which the property may be operated at a profit?
a) Length of time b) Economic life c) Physical life d) Love life

30. What is the worth of a property as shown in the accounting records of an enterprise?
a) Fair value b) Market value c) Use value d) Book value

31. What do you think is a kind of obligation that has no condition attached?
a) Analytic b) Private c) Gratuitous d) Pure

32. Guess this! Gross profit sales less cost of goods sold, as a percentage of sales.
a) Profit margin b) Gross margin c) Return of investment d) Price earnings

33. How do you call a series of payments at equal intervals of time?

a) Depreciation b) Annuity c) Interest d) Amortization

34. What can you say about the present worth of all depreciation over the economic life of the item?
a) Maintenance b) Capital recovery c) Depreciation recovery d) Annuity

35. What do you think is the provision in the contract that indicates the possible adjustment of material cost and
labor cost?
a) Secondary clause b) Specification c) Escalatory clause d) General provision

36. What is the association of two or more individuals for the purpose of operating a business as co-owners of a
profit?
a) Organization b) Company c) Partnership d) Corporation

37. What do you call the decrease of value of a physical property due to the passage of time?
a) Inflation b) Depletion c) Recession d) Depreciation

38. This is the type of ownership in business where individuals exercise and enjoy the right in their own interest.
What do you call this type of ownership?
a) Equitable ownership b) Public ownership c) Private ownership d) Pure ownership

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Engineering Economy

39. What do you think is the money paid for the use of borrowed capital?
a) Depletion b) Discount c) Interest d) Overhead cost

40. What can you say about an index of short term paying ability?
a) Current ratio b) Receivable ratio turn-over c) Acid-test ratio d) Profit margin

41. These are Liquid assets such as cash and other assets that can be converted quickly into cash, such as accounts
receivable, and merchandise. How do you call this?
a) Total assets b) Fixed assets c) Current assets d) Land and buildings

42. Direct costs incurred in the factory and direct material costs are the costs of all materials that go into
production. What do you call the sum of these two direct costs?
a) Gross sales and account expenses b) Operation and maintenance cost
c) Prime cost c) Overhead and maintenance costs

43. What can you say about the total income equals the total operating cost?
a) Balance sheet b) In-place value c) Check and balance d) Break-even-no-gain-no-loss

44. What is the estimated value at the end of the useful life of a machine?
a) Salvage value b) Compounded annually c) Economic life d) Balance sheet

45. What do you think is an artificial expense that spreads the purchase price of an asset or another property over
a number of years?
a) Depreciation b) Sinking fund c) Amnesty d) Bond

46. This Consists of the actual counting or determination of the actual quantity of the materials on hands as of a
given date. What is this?
a) Physical inventory b) Material update c) Technological assessment d) Material count

47. It is a series of equal payments accounting at equal interval of time where the first payment is made several
periods, after the beginning of the payment. How do you call this?
a) Deferred annuity b) Delayed annuity c) Progressive annuity d) Simple annuity

48. What can you say a market condition whereby there is only one buyer of an item for which there are no good
substitute?
a) Monopsony b) Oligopoly c) Monopoly d) Oligopsony

49. Vicente made a loan from a bank. The bank charges him 12 % simple interest on a P300.00 loan. How much
will be repaid if the loan is paid in one lump sum after three years?
a) P408.00 b) P425.00 c) P551.00 d) 450.00

Solution: F  P1  i n   3001  .0.123  P408.00

50. My P5,000.00 shall accumulate for 10 years at 8 % compounded quarterly. What is the compounded interest
of my money at the end of 10 years?
a) P6,005.30 b) P6,000.00 c) P6,040.20 d) P6,010.20

mn 4 10
 i   0.08 
Solution: F  P1  n   5,000.001    P11,040.20
 m  4 

Interest  11,040.02  5,000.00  P6.040.20

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Engineering Economy

51. The JRF Corporation manufactures bookcases that it sells for P65.00 each. It costs JRF corporation
P35,000.00 per year to operate its plant. The sum includes rentals, depreciation charges on equipment, and
salary payments. If the cost to produce one bookcase is P50.00, how many bookcases must be sold each year
for the corporation to avoid taking a loss?
a) 2 334 Bookcases b) 539 Bookcases c) 750 Bookcases d) 2 333 Bookcases

Solution: Let, Nc = number of cases

65N c  50N c  35,000.00

35,000.00
Nc   2 234 cases
65  50

52. A machine is purchased for P500,000.00. The salvage value in 25 years is P100,000.00. What is the
depreciation in the first three years using straight line method?
a) P48,000.00 b) P24,000.00 c) P32,000.00 d) P16,000.00

C o  C L 500,000.00  100,000.00
Solution: d   P16,000.00
L 25

C n  d n  16,000.003  P48,000.00

53. How much must be deposited at 6 % each year beginning on January 1, yar 1, in order to accumulate
P5,000.00 on the date of the last deposit, January 1, year 6?
a) P766.24 b) P676.24 c) P667.2 d) P626.24

F 5,000.00
A   P676.24
   
Solution:
 1  1  i 1n   1  1.065 
1  1  i  1  1.06
n 6

 i   0.06 

54. This is a distinct legal entity that can practically transact any business transaction that a real person could do.
What do you think is this entity?
a) Sole proprietorship b) Partnership c) Enterprise d) Corporation

55. This is an increase in the value of capital asset. What is this?

a) Profit b) Capital gain c) Capital expenditure d) Capital stock

56. What is the reduction in the money value of a capital asset?

a) Capital expenditure b) Capital loss c) Capital gain d) Deficit

57. What do you think is the difference between sales revenue and the cost of goods?
a) Net income b) Rate of return c) Gross profit d) Gross national product

58. This is a currency traded in a foreign exchange market for which the demand is consistently high in relation to
its supply. How do you call this?
a) Money market b) Hard currency c) Treasury bill d) Certificate of deposit

59. It is defined as the certificate of indebtedness of a corporation usually for a period of not less than 10 years
and guaranteed by a mortgage on certain assets of a corporation. Guess, what is this?
a) Bond b) Stock c) T-bill d) Treasury bill

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Engineering Economy

60. What is a negotiable claim issued by a bank in lieu of a term deposit?

a) Time deposit b) Capital gain c) Bond d) Certificate of deposit

61. This is the amount of the company’s profit that the board of directors of the corporation decides to distribute
to ordinary shareholders. How do you call this?
a) Dividend b) Share stock c) Return d) Par value

62. What do you think is a document that shows proof of legal ownership of a financial security?
a) Bond b) Coupon c) Bank note d) Check

63. This is the process of determining the value of certain properties for definite reasons. How do you call this
process?
a) Valuation b) Estimate c) Appraisal d) Valuation and appraisal

64. What can you say about the difference between present worth and the worth of the paper at some time in the
future?
a) Discount b) Amortization c) Depletion d) Investment

65. What can you say about the value that is usually determined by the disinterested third party in order to
establish a price that is fair to both seller and buyer?
a) Fair value b) Salvage value c) Market value d) Book value

66. What is the price that can be obtained from the sale of property or second hand?
a) Book value b) Salvage value c) Fair value d) Market value

67. This is the process of determining the value of certain property for specific reasons. Guess, what is this?
a) Amortization b) Investment c) Appraisal d) Depreciation

68. What do you call a bond whereby the security behind it is the equipment of the issuing corporation?
a) Debenture Bond b) Collateral bond c) Coupon bond d) Mortgage bond

69. What do you think is an annuity where the payment period extends forever or in which the periodic payment
continue indefinitely?
a) Ordinary annuity b) Annuity due c) Deferred annuity d) Perpetuity

70. It is the span of life of equipment during which it produces the product; it is designed to produce at a profit.
How do you call this span of life?
a) Write off period b) Economic life c) Physical life d) Perpetual life

71. It is a depreciation method whereby the decrease in value of the unit is constant each year. What is this
depreciation method?
a) Matheson Formula b) SYD method c) Straight line method d) Sinking fund method

72. It is a distinct legal entity separate from the individual who own it and which can engage in practically any
business transaction, which a real person can do. How do you call this legal entity?
a) Sole Proprietorship b) Corporation c) Partnership d) Enterprise

73. These are costs that remain relatively constant regardless of any change in operation or policy, which is made.
What are these costs?
a) Fixed costs b) Variable costs c) Increment costs d) Differential costs

74. It is the analysis and evaluation of the factors that will affect the economic success of engineering projects to
the end that a recommendation can be made which will insure the best use of capital. What is this?
a) Engineering Economy b) Accounting analysis

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Engineering Economy

c) Project Study d) Demand analysis

75. How do you call those products or services that are directly used by people to satisfy their wants?
a) Consumer goods and services b) Producer goods and services
c) Necessity products and services d) Luxury products and services

76. These are used to produce consumer goods and services. Guess, what are these?
a) Consumer goods and services b) Producer goods and services
c) Necessity products and services d) Luxury products and services

77. What do you think are those products or services that are required to support human life and activities that
will be purchased in somewhat the same quantity even though the price varies considerably?
a) Consumer goods and services b) Producer goods and services
c) Necessity products and services d) Luxury products and services

78. These are those products or services that are desired by humans and will be purchased if money is available
after the required necessities have been obtained. What are these?
a) Consumer goods and services b) Producer goods and services
c) Necessity products and services d) Luxury products and services

79. This is demand that occurs when a decrease in selling price result in a greater than proportionate increase in
sales. How do you call this demand?
a) Elastic demand b) Inelastic demand c) Unitary Elastic demand d) No demand

80. This is a demand that occurs when a decrease in the selling price produces a less than proportionate increase
in sales. What is this demand?
a) Elastic demand b) Inelastic demand c) Unitary Elastic demand d) No demand

81. This is a demand that occurs when the mathematical product of volume and price is constant. What is this?
a) Elastic demand b) Inelastic demand c) Unitary Elastic demand d) No demand

82. This is a market condition that exists when a unique product or service is available from only a single vendor
and that vendor can prevent the entry of all others into the market. How do you call this market condition?
a) Perfect monopoly b) Perfect competition c) Oligopoly d) Monopoly

83. How do you call a market condition that exists when there are so few suppliers of a product or service that
action by one will almost inevitably result in similar action by the other?
a) Perfect monopoly b) Perfect competition c) Oligopoly d) Monopoly

84. This is a type of interest which is computed on the basis of 12 months of 30 days each or 360 days a year.
One interest period is equal to 360 days. How do you call this type of interest?
a) Compound interest b) Ordinary simple interest
c) Exact simple interest d) Nominal interest

85. This is the actual rate of interest on the principal for one year. How do you call this?
a) Effective rate of interest b) Nominal rate of interest
c) Ordinary simple rate of interest d) Exact simple rate of interest