PRELIM

ESM3043 Engineering Economy

The Almost -Graduating Senior Problem. Consider this situation faced by a first-
semester senior in civil engineering who is exhausted from extensive job interviewing
and poor from excessive partying. Mary’s impulse is to accept immediately a highly
attractive job offer to work in her brother’s successful manufacturing company. She
would then be able to relax for a year or two, save some money, and then return to
college to complete her senior year and graduate. She is cautious about this
impulsive desire because it may lead to no college degree at all.

a. Develop at least two formulations for Mary’s problem. b. Identify feasible solutions
for each problem formulation in part (a). Be creative.

1. Mary is tired from finishing her degree.

a. She can seek help from a counselor to help her weigh her options.
b. Continue her studies while still attending job interviews once a month, at most.
2. Mary needs money to sustain her lifestyle.
a. She can learn how to invest money once she receives money from a part-time job while finishing her degree.
b. Stop partying for a year in order to focus on her studies and resume later when she gets a job (delayed gratification).
While studying for the engineering economy final exam, you and two friends
find yourselves craving a fresh pizza. You cannot spare the time to pick up the
pizza and must have it delivered. “YellowTaxi Pizza” offers a 1-1/4-inch-thick
(including toppings), 20-inch square pizza with your choice of two toppings for
₱750 plus 5% service charge and a ₱75 delivery charge (no service charge on
delivery fee). “Pizza Kubo” offers the round, deep-dish Chicago-style, which is
20 inches in diameter. It is 1-3/4 inches thick, includes two toppings, and costs
₱862.50 plus 5% service charge and free delivery.

a. What is the problem in this situation? Please state in an explicit and precise
manner. b. Systematically apply the seven principles of engineering economy to
the problem you have defined in part (a). c. Assuming that your common unit
of measure is in pesos (i.e., cost), what is the better value for getting a pizza
based on the criterion of minimizing cost per unit of volume? d. What other
criteria might be used to select which pizza to purchase?

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a. What is the problem in this situation? Principle 5: Consider all relevant criteria
Determine which pizza restaurant would yield price, volume, additional charges,
the most economical price. distance, toppings included
b. Apply the seven principles of engineering Principle 6: Make risk and uncertainty explicit
economy to the problem. weather conditions, availability of the
Principle 1: Develop alternatives rider, availability of ingredients, busy kitchen
(long waiting time)
Choose Yellow Taxi, or Pizza Kubo, or
search for other restaurants Principle 7: Revisit your decisions
Principle 2: Focus on the Differences
Differences in price, thickness, shape,
style, additional charges
Principle 3: Use a consistent viewpoint
Consumer’s viewpoint
Principle 4: Use a common unit of measure
pesos per cubic inch

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c. What is the better value for getting a pizza based on the criterion of
minimizing cost per unit of volume?
Yellow Taxi Pizza Kubo
thickness 1.25 1.75
area 400 314.1592654
volume 500 549.7787144
item cost 750 862.5
service charge 37.5 43.125
delivery charge 75 0
total cost 862.5 905.625
cost per volume 1.725 1.647253661

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d. What other criteria might be used to select which pizza to
purchase?
Loyalty rewards, customer service, sanitation, taste, pizza
style, toppings to choose from, quality of raw materials

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Classify each of the following cost items as to ease of traceability:

Depreciation on factory building-indirect

Property tax on finished goods warehouse-indirect
Paper used in textbook production-direct
Wages paid to assembly line workers-direct
Maintenance cost for machines-indirect
Wheat flour in bread-direct
Factory rent-indirect
Pulp in paper making-direct
Batteries for a car manufacturer-direct
Auditor’s fee-indirect
Classify each of the following cost items as mostly fixed or variable:

a. Raw Materials -V
b. Direct Labor -V
c. Depreciation -F
d. Supplies -V
e. Utilities -V
f. Property Taxes -F
g. Interest on Borrowed Money -F
h. Administrative Salaries -F
i. Payroll Taxes -F
j. Insurance (Building and Equipment) -F
k. Clerical Salaries -F
l. Sales Commissions -V
m. Rent -F
The quarrying cost of marble and granite block plus delivery cost to the plant for each is
₱2,400 per cubic meter. The processing cost of marble into tiles is ₱200 per sqm and
that of the granite is ₱600 per sqm.
Marble has a net yield of 40 sqm of tile per cubic meter of block and sells at ₱400 per
sqm. On the other hand, granite gives a net yield of 50 sqm of tiles per cubic meter of
block and sells at ₱1,000 per sqm. Determine the more profitable material considering
all other costs to be the same and by how much?
Marble Cost per 1 m3 block Granite
₱400/m2 x 40 m2 Selling Price ₱1,000/m2 x 50 m2
=₱16,000 =₱50,000
₱2,400/m3 Quarrying and Delivery ₱2,400/m3
₱200/m2 x 40 m2 Processing Cost ₱600/m2 x 50 m2
=₱8,000 =₱30,000
₱5,600 Profit =₱17,600
Difference ₱12,000
(₱5,600/₱16,000)x100% Margin (₱17,600/₱50,000)x100%
=35% =35.20%
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 A manufacturer has been shipping his product (moderately heavy machines) mounted only on skids without complete crating.
To avoid crating, he must ship in freight cars which contain only his machines. To do this he must pay freight on a car capacity
load of 42 tons regardless of whether or not the car is completely full. In the past he shipped only 30 tons in each car. The
carload freight is ₱4.10 per hundred pounds.
If the machines are crated so that they can be shipped in mixed car lots, along with other merchandise, they can be shipped at
a rate of ₱4.20 per hundred pounds with the freight bill computed only on the actual weight shipped. The cost of crating would
be ₱25.00 per machine and would increase the shipping weight from 1,200 to 1,220 pounds per machine.
Note that 1 ton=2,200 lbs.
Which procedure should be followed?

Not Crated Crated

(₱4.10/100 lbs.)x42 tons x(2,200 lbs./1 ton) Shipping (₱4.20/100 lbs.) x 30tons x (2,200 lbs./ton) x (1
=₱3,788.40 machine/1,200lbs.) x (1,220lbs/machine)
=₱2,818.20
Crating (₱25.00/machine) x 30 tons x (2,200lbs./ton) x
(1 machine/1,200lbs.) = ₱1,375
₱3,788.40 Total Cost ₱4,193.20

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You borrow ₱20,000 from a family member and
agree to pay it back in 6 months. Because you
are part of the family, you are only being
charged simple interest at the rate of 0.5% per
month. How much will you owe after 6 months?
How much is the interest?
𝐹𝐹 = 20,000(1 + 6 0.005 )) 𝐼𝐼 = 𝐹𝐹 − 𝑃𝑃 = 20,600 − 20,000
𝐹𝐹 = 20,600 𝐼𝐼 = 600
• A 12-cylinder heavy-duty diesel engine will have a guaranteed
residual value of ₱50,000 in 5 years. Today (year zero) the
equivalent worth of this engine is how much if the interest
rate is 9% per year?

𝑃𝑃
𝐹𝐹 =
1 + 𝑓𝑓 𝑛𝑛
𝑃𝑃 = 𝐹𝐹 1 + 𝑓𝑓 𝑛𝑛
5
= 50,000 1 + .09
𝑃𝑃 = 76,931.20

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You just inherited ₱1,000,000. While you plan to squander
some of it away, how much should you deposit in an account
earning 5% interest per year if you would like to have
₱1,000,000 in the account in 10 years?

𝐹𝐹 = 𝑃𝑃 1 + 𝑖𝑖 𝑛𝑛
10
1,000,000 = 𝑃𝑃 1 + .05
𝑃𝑃 = 613,913.25

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 The expansion plan of a business
firm requires the purchase of a
𝐹𝐹𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 parcel of land on which to build a
= 1,000,000 1 + 0.20 5
= 2,488,320
structure, which they will need 5
𝐹𝐹𝑏𝑏𝑏𝑏𝑏𝑏𝑏𝑏 years hence. The current costs are
= 3,500,000 1 + .08 5 land, ₱1,000,000; building,
= 5,142,648.27 ₱3,500,000. Since these are not
𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 = 7,630,968.27 needed immediately, the firm
plans to defer the purchase of the
land and the construction of the
building until they are needed. If
the value of the land and the cost
of the building are expected to
appreciate at the rates of 20% and
8% per annum respectively, what
will be the total cost of the land
and structure 5 years hence?

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 𝑟𝑟 𝑚𝑚
Calculate the effective rate 𝑖𝑖𝑒𝑒𝑒𝑒𝑒𝑒 = 1 + −1
corresponding to each of the following 𝑚𝑚
rates:
2
• 9% compounded semi-annually a. 𝑖𝑖𝑒𝑒𝑒𝑒𝑒𝑒 = 1 +
.09
− 1 = .092025
2
• 9% compounded quarterly .09 4
b. 𝑖𝑖𝑒𝑒𝑒𝑒𝑒𝑒 = 1 + 4 − 1 = .093083
• 9% compounded monthly .09 12
c. 𝑖𝑖𝑒𝑒𝑒𝑒𝑒𝑒 = 1 + − 1 = .093807
• 9% compounded continuously 𝑟𝑟
12
.09
d.𝑖𝑖𝑒𝑒𝑒𝑒𝑒𝑒 = 𝑒𝑒 − 1 = 𝑒𝑒 − 1 = .094174

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Today you invested ₱100,000 into a fund that pays 25% interest
compounded annually. Three years later, you borrow ₱50,000 from a
bank at 20% annual interest and invest the fund. Two years later you
withdraw enough money from the bank to repay the bank loan and
all interest due on it. Three years after the withdrawal, you start
taking ₱20,000 per year out of the fund. After 5 withdrawals, you
withdraw the balance in the fund. How much was withdrawn?
Today you invested ₱100,000 into a fund that pays 25% interest
compounded annually. Three years later, you borrow ₱50,000 from a
bank at 20% annual interest and invest the fund. Two years later you
withdraw enough money from the bank to repay the bank loan and
all interest due on it. Three years after the withdrawal, you start
taking ₱20,000 per year out of the fund. After 5 withdrawals, you
withdraw the balance in the fund. How much was withdrawn?
2
𝐹𝐹 = 50,000 1.20 = 72,000
1.25 5−1
𝐵𝐵𝐵𝐵𝐵𝐵 = 100,000 1.25 13 + 50,000 1.25 10 − 72,000 1.25 8 − 20,000 (1.25)
0.25

𝐵𝐵𝐵𝐵𝐵𝐵 = ₱1,650,321.47
A man wishes to provide a fund for his retirement such that from
his 60th to 70th birthdays he will be able to withdraw equal sums
of ₱18,000 for his yearly expenses. He invests equal amounts for
his 41st to 59th birthdays in a fund earning 10% compounded
annually. How much should each of these amounts be?

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A man wishes to provide a fund for his retirement such that from
his 60th to 70th birthdays he will be able to withdraw equal sums
of ₱18,000 for his yearly expenses. He invests equal amounts for
his 41st to 59th birthdays in a fund earning 10% compounded
annually. How much should each of these amounts be?
𝐹𝐹𝐴𝐴1 = 𝑃𝑃𝐴𝐴2

1.1019 − 1 1 − 1.10−11
𝐴𝐴1 = 18,000
0.10 0.10

𝐴𝐴1 = ₱2,285.25

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A company will borrow a loan to finance a 10-year project that
will require an initial installation cost of ₱2,500,000. After 2
years another P500,000 and a regular annual upkeep cost of
₱75,000 paid every end of the year. If the interest rate of the
loan is 2% per annum, what amount should be loaned?

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A company will borrow a loan to finance a 10-year project that
will require an initial installation cost of ₱2,500,000. After 2
years another P500,000 and a regular annual upkeep cost of
₱75,000 paid every end of the year. If the interest rate of the
loan is 2% per annum, what amount should be loaned?

500,000 1 − 1.02−9 −1
𝑃𝑃 = 2,500,000 + 2 + 75,000 1.02
1.02 .02
𝑃𝑃 = ₱3,580,748.85

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A businessman has to settle a debt of 4 equal semi-annual
payments of ₱50,000 at 9% rate of interest compounded
semi-annually. However, he was not able to do so. Instead,
he negotiated with the bank to settle it into 8 quarterly
payments at the same 9% interest rate but compounded
quarterly. How much should the new payments be?

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A businessman has to settle a debt of 4 equal semi-annual
payments of ₱50,000 at 9% rate of interest compounded
semi-annually. However, he was not able to do so. Instead,
he negotiated with the bank to settle it into 8 quarterly
payments at the same 9% interest rate but compounded
quarterly. How much should the new payments be?
𝐹𝐹𝐴𝐴1 = 𝑃𝑃𝐴𝐴2
.09 4 .09 −8
1+ 2 −1 1− 1+ 4
50,000 = 𝐴𝐴2
.09 .09
2 4

𝐴𝐴2 = ₱29,516.23

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Pearl Pacific Airlines has implemented a
program to recycle plastic drink cups
used on their aircraft. Their goal is to
generate ₱15,000,000 by the end of the
recycle program’s 5-year life. Each
recycled cup can be sold for ₱0.25.
a. How many cups must be recycled
annually to meet this goal? Assume
uniform annual plastic cup usage and a
0% interest rate.
b. Repeat part (a) when the annual
interest rate is 15%.
c. Why is the answer to part (b) less than
the answer to part (a)?
A) 15,000,000 = 5(0.25𝑥𝑥)
𝑥𝑥 = 12,000,000 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

B) 1 + .15 5 − 1
15,000,000 = 0.25𝑥𝑥
.15

𝑥𝑥 = 8,898,933.148 ≈ 8,898,934 𝑐𝑐𝑐𝑐𝑐𝑐𝑐𝑐

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What lump sum of money must
be deposited into a bank
account at the present time so
that ₱20,000 per month can be
withdrawn for five years, with
the first withdrawal scheduled
for six years from today? The
interest rate is 0.75% per
month.
 −60
A) 1 − 1.0075 −71
𝑃𝑃 = 20,000 1.0075
.0075

𝑃𝑃 = ₱566,810.86

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Lisa plans to retire on her 61st birthday. On her 22nd birthday,
she will start saving ₱A per year for 40 years. Starting on her
62nd birthday, she plans on withdrawing ₱100,000 and will
continue these annual withdrawals until the account is
exhausted on her 85th birthday. If Lisa’s bank account pays 3%
per year, what annual amount of ₱A will she need to invest in
her bank account to achieve her retirement goal?

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 𝐹𝐹𝐴𝐴1 = 𝑃𝑃𝐴𝐴2
1.0340 − 1 1 − 1.03−24
𝐴𝐴1 = 100,000
.03 .03
𝐴𝐴1 = ₱22,460.56

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The Atlas Machinery Corporation sells its equipment to contractors on either of the
following arrangements: a) cash basis: payments of marked price less 10%; b) installment
basis: down payment of 20% of the marked price and the balance payable in equal annual
installments for the next 4 years.
If you are the engineer buying a 7S Concrete Mixer which is marked at ₱250,000 and if
money is worth 5% compounded annually, which of the following arrangements will you
consider better from your standpoint? A) Pay ₱225,000 cash, or b) pay a down payment
of ₱50,000 and pay the balance on equal installments of ₱50,000 annually for the next 4
years?

A) P = 0.90 250,000 = ₱225,000

B)
1 − 1.05−4
P = 50,000 + 50,000
.05
P = ₱227,297.53
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A man owes ₱100,000 with interest at 6% payable semi-annually.
What equal payments at the beginning of each 6 months for 8 years
will discharge his debt?

1 − 1.06−15
100,000 = 𝐴𝐴 1 +
.06
𝐴𝐴 = ₱9,335.11

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