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Problem Set 5 With Solution - Capitalized Cost & Amortization

The document contains 4 engineering economy problems involving capitalized cost, amortization, and time value of money calculations. Problem 1 calculates the capitalized cost of a project. Problem 2 calculates the annual amount available from an endowment. Problem 3 determines the renewal period that makes two types of paint economically equivalent. Problem 4 constructs an amortization schedule for a loan with payments starting after 3 years.

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5K views7 pages

Problem Set 5 With Solution - Capitalized Cost & Amortization

The document contains 4 engineering economy problems involving capitalized cost, amortization, and time value of money calculations. Problem 1 calculates the capitalized cost of a project. Problem 2 calculates the annual amount available from an endowment. Problem 3 determines the renewal period that makes two types of paint economically equivalent. Problem 4 constructs an amortization schedule for a loan with payments starting after 3 years.

Uploaded by

Noel So jr
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ENEECO30 -Engineering Economy

PROBLEM SET # 5

CAPITALIZED COST & AMORTIZATION

PROBLEM #1:

With an interest rate of 15 %, calculate the capitalized cost of a project with a Php

3,000,000.00 original cost and an extra Php 100,000.00 cost per 10 years. For the first four years,

the yearly running cost will be Php 100,000.00, then Php 160,000.00. A substantial rework cost of

Php 300,000.00 is also projected every 13 years.

Given:
𝑖 = 15%
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐶𝑜𝑠𝑡 (𝐼𝐶) = 𝑃ℎ𝑝 3,000,000.00
𝐴𝑑𝑑𝑖𝑡𝑖𝑜𝑛𝑎𝑙 𝐶𝑜𝑠𝑡 (𝐴𝐶) = 𝑃ℎ𝑝 1,000,000.00 at 𝑛 = 10
𝐴 = 𝑃ℎ𝑝 100,000.00 at 𝑛 = 4
𝐴 = 𝑃ℎ𝑝 160,000.00 at 𝑛 = ∞
𝑅𝐶 = 𝑃ℎ𝑝 300,000.00 at 𝐿 = 13

Solution:
Consider Capitalize Cost General Formula
 𝑪𝑪 = 𝑭𝑪 + 𝑷𝑪 + 𝑿𝑻

Get the value of 𝑷𝑪


 𝑃 = 𝑃 + 𝑃

Instructor: Engr. Michael Benjamin M. Diaz


ENEECO30 -Engineering Economy

For 𝑃
( )
 𝑃 = 𝐴
( . )
 𝑃 = 100,000.00
.

 𝑃 = 𝑃ℎ𝑝 285,497.84

For 𝑃

 𝑃 = (1 + 𝑖)
,
 𝑃 = (1 + 0.15)
.

 𝑃 = 𝑃ℎ𝑝 609,870.13

Substitute values to get 𝑷𝑪


 𝑃 = 285,497.84 + 609,870.13
 𝑃 = 𝑃ℎ𝑝 895,367.97

Get the value of 𝑿𝑻


 𝑋 = 𝑋 + 𝑋

For 𝑋

 𝑋 =( )
, .
 𝑋 =( )
.

 𝑋 = 𝑃ℎ𝑝 32,834.71

For 𝑋

 𝑋 =( )
, .
 𝑋 =( )
.

Instructor: Engr. Michael Benjamin M. Diaz


ENEECO30 -Engineering Economy

 𝑋 = 𝑃ℎ𝑝 42,034.11

Substitute values to get 𝑿𝑻


 𝑋 = 32,834.71 + 42,034.11
 𝑋 = 𝑃ℎ𝑝 74,868.82

Substitute values to get 𝑪𝑪


 𝐶𝐶 = 3,000,000.00 + 895,367.97 + 74,868.82
 𝐶𝐶 = 𝑃ℎ𝑝 3,970,235.82

Answer:
𝑪𝑪 = 𝑷𝒉𝒑 𝟑, 𝟗𝟕𝟎, 𝟑𝟑𝟔. 𝟕𝟗

PROBLEM #2:

The will of a wealth philanthropist left Php 5,000,000.00 to establish a perpetual charitable

foundation. The foundation trustees decided to spend Php 1,200,000.00 to provide facilities

immediately and to provide Php 100,000.00 of capital replacement at the end of each 5-year period.

If the invested funds earned 12% per annum, what would be the year end amount available in

perpetuity from the endowment for charitable purposes?

Given:
𝑖 = 12%
FC = Php 1,200,000.00
𝐶𝐶 = 𝑃ℎ𝑝 5,000,000.00
𝑅𝐶 = 𝑃ℎ𝑝 100,000.00
𝐿 = 5 𝑦𝑒𝑎𝑟𝑠

Instructor: Engr. Michael Benjamin M. Diaz


ENEECO30 -Engineering Economy

Solution:
 𝑪𝑪 = 𝑭𝑪 + 𝑷 + 𝑿

Get P
 𝑃= = eqn.1
.

Get X
 𝑋=( )
,
 𝑋=( )
.

 𝑋 = 𝑃ℎ𝑝 131,174.78

Substitute the value to get the capitalize cost


 5,000,000 = 1,200,000 + + 131,174.78
.

 𝐴 = 𝑃ℎ𝑝 440,259.03

Answer:
𝑨 = 𝑷𝒉𝒑 𝟒𝟒𝟎, 𝟐𝟓𝟗. 𝟎𝟑

PROBLEM #3:

SLP manufacturing requires painting 8,000 sq. ft. surface area. Two kinds of paint are

available whose Davis and Boysen. Davis cost Php 1.40 per sq. ft. but needs renewal at the end of

Instructor: Engr. Michael Benjamin M. Diaz


ENEECO30 -Engineering Economy

4 years while Boysen cost Php 1.80 sq. ft. If the money is worth 12% effective, how often should

paint B be renewed so that it will be economical as point A?

Given:
Surface Area (𝐴 ) = 8,000 𝑠𝑞. 𝑓𝑡.
𝑖 = 12%
For Davis
𝑅𝑎𝑡𝑒 = Php 1.40 per sq ft.
𝐿 = 4 𝑦𝑒𝑎𝑟𝑠
For Boysen
𝑅𝑎𝑡𝑒 = Php 1.80 per sq ft.
Solution:
First, get the Present worth of replacement cost of Davis (𝑋 )

 𝑋 =( )
( . )( )
 𝑋 = ( )
.

 𝑋 = 𝑃ℎ𝑝 19,528.58

Then, get the difference paint replacement cost


 𝑅𝐶 = 𝑅𝐶 − 𝑅𝐶
 𝑅𝐶 = (𝑃ℎ𝑝 1.80)(8000) − (𝑃ℎ𝑝 1.40)(8000)
 𝑅𝐶 = 𝑃ℎ𝑝 3,200.00

Then, get the renewed years by considering difference in replacement cost


 𝑋 =𝑋 − 𝑅𝐶

Note: 𝑋 =
( )

 =𝑋 − 𝑅𝐶
( )
( . )( , )
 = 𝑃ℎ𝑝 19,528.58 − 𝑃ℎ𝑝 3,200.00
( . )

 𝐿 = 5.58 𝑦𝑒𝑎𝑟𝑠

Instructor: Engr. Michael Benjamin M. Diaz


ENEECO30 -Engineering Economy

Answer:
𝑳𝑩𝒐𝒚𝒔𝒆𝒏 = 𝟓. 𝟓𝟖 𝒚𝒆𝒂𝒓𝒔

PROBLEM #4:

A debt of Php 10,000.00 with interest at the rate of 20% compounded semi-annually is to

be amortized by 5 equal payments at the end of each 6 months, first the payment is to be made

after 3 years. Find the semiannual payment and construct an amortization schedule.

Given:
𝑃 = 𝑃ℎ𝑝 10,000.00
𝑖 = 20%
𝑛 = 5 𝑝𝑎𝑦𝑚𝑒𝑛𝑡𝑠
𝑥 = 3 𝑦𝑒𝑎𝑟𝑠 or 12 months

Solution:

 𝐴=𝑃 ( )
(1 − 𝑖)

 𝐴=𝑃 ( )
(1 − 𝑖)

.
.
 𝐴 = 10,000 .
1−

 𝐴 = Php 4,248.48

Answer:
𝑨 = Php 4,248.48

Instructor: Engr. Michael Benjamin M. Diaz


ENEECO30 -Engineering Economy

Period Outstanding Interest (𝐼 ) Payment (𝐴 ) Principal repaid


(n) Principal (𝑃 ) (𝐴 − 𝐼 )
1 Php 10,000.00 Php 1,000.00 - -
2 Php 11,000.00 Php 1,100.00 - -
3 Php 12,100.00 Php 1,210.00 - -
4 Php 13,310.00 Php 1,3310.00 - -
5 Php 14,641.00 Php 1,464.10 - -
6 Php 16,105.10 Php 1,610.51 Php 4,248.50 Php 2,637.99
7 Php 13,467.11 Php 1,346.71 Php 4,248.50 Php 2,901.79
8 Php 10,565.32 Php 1,056.53 Php 4,248.50 Php 3,191.97
9 Php 7,373.35 Php 737.34 Php 4,248.50 Php 3,511.16
10 Php 3,862.19 Php 386.22 Php 4,248.50 Php 3,862.28

Instructor: Engr. Michael Benjamin M. Diaz

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