[1]Set A 1.

a) Engineering Economy 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.

b) Inelastic demand occurs when a decrease in the selling price produces a less than proportionate increase in sales. c) An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. Specifically, the interest rate (I/m) is a percent of principal (I) paid at some rate (m). For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for deferring the use of funds and instead lending it to the borrower. Interest rates are normally expressed as a percentage of the principal for a period of one year d) Compound interest is the sum of the capital plus the total amount of interest accumulated in previous periods. Thus compound interest means interest on top of interest. A bank account, for example, may have its interest compounded every year: in this case, an account with P1000 initial principal and 20% interest per year would have a balance of P1200 at the end of the first year, P1440 at the end of the second year, and so on. e) Discount on a negotiable paper is the difference between the present worth( the amount received for the paper in cash) and the worth of the paper at some time in the future (the face value of the paper or principal). Discount is interest paid in advance. Example is that when you borrowed P5000 from a bank and agreed to pay the loan at the end of 9 months and the bank discounted the loan and gave you P4000 in cash. Present worth - the worth of money or commodity at present time. Money may worth higher or lower depending on the economic stability of nation. The amount of commodities or services changes due to the supply and demand.

Set B 1. a) Perfect competition occurs in a situation where a commodity or service is supplied by a number of vendors and there is nothing to prevent additional vendors entering the market.

Monopoly is the opposite of perfect competition. A perfect monopoly exists when a unique product or service is available from a single vendor and that vendor can prevent the entry of all others into the market. Oligopoly exists when there are so few suppliers of a product or service that action by one will almost inevitably result in similar action by others. b) The law of supply and demand may be stated as follows: Under conditions of perfect competition the price at which a given product will be supplied and purchased is the price that will result in the supply and demand being equal. c) Ordinary annuity is one where the payments are made at the end of each period. d) the capitalized cost of any property is the sum of the first cost and the present worth of all costs of replacement, operation and maintenance for a long time or forever. e) Amortization is any method of repaying a debt, the principal and interest included, usually by a series of equal payments at equal interval of time. Example : Pensioner

[2] SET A: Problem

3. Your company bought a machine for P140,000(including other costs). Expected life is 7 years. Scrap value Is th th P12,000. What is the depreciation change during the 4 year and the book value at the end of the 4 year. a. By Sinking Fund Method, at 8%. L = 7 years Cl=P12,000 Co=P140,000

n=4 . Find D4 and C4

d= (Co=Cl)/(F/A,i%,L) = P14,345.5 th D4=s(F/A,i%,n)=P64,641 (Depreciation charge during the 4 year) th C4 = Co-D4 =P75,359 (book value at the end of the 4 year) b. By declining balance method k=1-(Cl/Co)^(1/L) =1-(12,000/140,000)^1/7=0.2960 D4=(Co(1-k)^(n-1))k=(0.2960)(140000)(1-0.2960)^4-1 = P14459 C4=Co(1-k)^n=140,000(1-0.2960)^4=34389 4. Mr Romualdo bought a bond having a face value of P1000 for P970. The bond rate was 14% nominal and interest payments were made to him semiannually for a total of 7 years. At the end of the seventh year, he sold the bond to a friend at a price that resulted a yield of 16% nominal on his investment. What was the selling price?

PRACTICAL THINKING TOOLS: 1. PMI (Plus, Minus, Interesting) A crystallization of the open-minded attitude used deliberately. The treatment of ideas , suggestions, and proposals. Instead of just deciding whether or not you like an idea, this thinking operation leads you to find the good points (P=Plus), the bad points(M=Minus) and the interesting points (I =Interesting) about an idea. The natural reaction to an idea is to like or dislike it, to approve or disapprove; and then stop further evaluation. Using PMI leads to a deliberate operation of going beyond natural emotional reaction to an idea, to enlarge the view of a situation. Principles: A. PMI is important because without it you may reject a valuable idea that seems bad at first sight. B. Without a PMI you are very unlikely to see the disadvantages of an idea that you like very much. C. PMI can show that ideas are not just good or bad but can also be interesting if they lead to other ideas. D. Without PMI major judgements are based not on the value of the ideas itself but on your emotions at that time. E. With a PMI , you decide whether or not you like the idea after you have explored it instead of before. Practice examples: 1. All the seats should be taken out of buses 2. Windows should be made of transparent plastic instead of glass. 2. C & S : Consequence and Sequel C&S is a crystallization of the process of looking ahead to see the consequences of some action, plan, decision, rule, invention etc. C&S goes beyond CAF, what may happen after the decision has been made. Immediate consequences as well as short-term ( 1-5 years), medium-term (5-25 years) and long term consequences (over 25 years). The intention is to enlarge the view beyond immediate effect of that action. An action may seem worthwhile if the immediate effect is good. But if one makes a deliberate effort to look at longer term consequences, the action may not be worthwhile at all and vice versa. Principles: A. Other people may be able to see the consequences of your action more easily than you can yourself. B. It is important to know whether the consequences are reversible or not. C. The immediate consequences may be good and long-term consequences bad or the other way around.

D. You should look at the consequences not only as they affect you but as they affect others as well. E. You should do a full C&S before deciding which consequences you should consider. Practice Examples: 1. The world runs out of gas and oil 2. All school examinations are abolished. 3. Planning Bring together AGO, C&S, CAF, and PMI Planning is thinking ahead, how you are going to do something, the manner of going some place or getting something done. The more complicated the thing you are going to do, the more necessary it is to have a clear plan. Principles: A. In planning it is important to know exactly what you want to achieve (AGO). B. Always have an alternative plan ready in case something goes wrong with the first plan. C. The value of the plan depends on the consequences (C&S). D. Keep the plan as simple and direct as possible. E. Consider all factors (CAF) very carefully and get as much information as possible before your plan. Practice examples: 1. Your plan to prevent people from hijacking aircraft. 2. Your plan to make it easier for people to find the jobs they like. AGO- Aims, Goals, Objectives Focus on Purpose : Aim is the general direction. Goal is an ultimate destination. Objective is a recognizable point of achievement along the way. Without a sense of purpose, all actions are either reactions to a situation or matters of habit or imitation. Principles: A. If you know exactly what your objectives are, it is easier to achieve them. B. In the same situation different people may have different objectives. C. On the way to a final objective, there may be a chain of smaller objectives, each one following from the previous one. D. Objectives should be near enough, real enough and possible enough for a person to really try to reach them E. There may be many objectives, but some are more important than others. Practice examples: 1. AGO of politician vs. business executive 2. AGO of school principal 3. In respect to food, AGO of homemaker, cook in restaurant, food manufacturer, farmer, government.

[2] SET A : Definition 1.DEPRECIATION -is the decrease in the value of physical property with the passage of time. a) Purpose of Depreciation 1. To provide for the recovery of capital which has been invested in physical property. 2. To enable the cost of depreciation to be charged to the cost of producing products or services that result from the use of the property. b) Types of Depreciation 1. Normal Depreciation a. physical is due to the lessening of the physical ability of a property to produce results. Its common causes are wear and deterioration. b. functional is due to the lessening in the demand for the function which the property was designed to render. Its common causes are inadequacy, changes in styles, population center shift, saturation of markets, or more efficient machines are produced. 2. Depreciation due to changes in price levels is almost impossible to predict and therefore is not considered in economy studies 3. Depletion refers to the decrease in the value of a property due to the gradual extraction of its contents. c) Requirements of a depreciation method 1. It should be simple. 2. It should recover capital 3. The book value will be reasonably close to the market value at any time 4. The method should be accepted by the Bureau of Internal Revenue. d) The Straight line method -This method assumes that the loss in value is directly proportional to the age of the property. d = (Co Cl)/L Dn = n(Co-Cl)/L Cn = Co-Dn e. Sinking fund -This method assumes that a sinking fund is established in which funds will accumulate for replacement. The total depreciation that has taken place up to any given time is assumed to be equal to the accumulated amount in the sinking fund at that time. d = (Co Cl)/(F/A, i%,L) Dn = d(F/A, i%, n) Cn = Co-Dn f. Declining balance In this method, sometimes called the constant percentage method or the Matheson Formula, it is assumed that the annual cost of depreciation is a fixed percentage of the salvage value at the beginning of the year. The ratio of the depreciation in any year to the book value at the beginning of that year is constant throughout the life of the property and is designated by k the rate of depreciation. This method does not apply, if the salvage value is zero, because k will be equal to one and d1 will be equal to Co. dn=depreciation during the nth year dn=(Co(1-k)^n-1)k Cn= Co(1-k)^n = Co (Cl/Co)^n/L Cl = Co(1-k)^L

k = 1-(Cn/Co)^1/n = 1-(Cl/Co)^L 2. CAPITAL a) Equity Capital or ownership funds are those supplied and used by the owners of an enterprise in the expectation that a profit will be earned. b) Borrowed funds or capital are those supplied by others on which a fixed rate of interest must be paid and the debt must be repaid at a specified time. c. Bond Financing A bond is a certificate of indebtedness of a corporation usually for a period not less than ten years and guaranteed by a mortgage on a certain assets of the corporation or its subsidiaries. Bonds are issued when there is need for more capital such as for expansion of the plant or the services rendered by the corporation. The face or par value of a bond is the amount stated on the bond. When the face value has been repaid, the bond is said to have been retired or redeemed. The bond rate is the interest rate quoted on the bond. d. The Corporation is a distinct legal entity, separate from the individuals who own it, and which can engage in almost any type of business transaction in which a real person could occupy himself or herself. Advantages: 1. It enjoys perpetual life without regard to any change in the person of its owners, the stockholders. 2. The stockholders of the corporation are not liable for the debts of the corporation. 3. It is relatively easier to obtain large amounts of money for expansion, due to its perpetual life. 4. The ownership in the corporation is readily transferred. 5. Authority is easily delegated by the hiring of managers. Disadvantages 1. The activities of a corporation is limited to those stated in its charter. 2. It is relatively complicated in formation and administration. 3. There is a greater degree of governmental control as compared to other types of business organizations. [2] SET B : Definition 1. a) Market Value of a property- is the amount which a willing buyer will pay to a willing seller for the property where each has equal advantage and is under no compulsion to buy or sell. b) Fair value is the value which is usually determined by a disinterested third party in order to establish a price that is fair to both seller and buyer. c) book value sometimes called depreciated book value is the worth of a property as shown in the accounting records of an enterprise. d)Salvage value or resale value is the price that can be obtained from the sale of the property after it has been used. e. Scrap Value is the amount the property would sell for if disposed off as junk. 2. a) Individual ownership or sole proprietorship is the simplest form of business organization, wherein person uses his or her own capital to establish a business and is the sole owner. Advantages of the individual ownership: 1. It is easy to organize 2. The owner has full control of the enterprise.

3. The owner is entitled to whatever benefits and profits that accrue from the business. 4. It is easy to dissolve. Disadvantages of the Individual Ownership 1. The amount of equity capital which can be accumulated is limited. 2. The organization ceases upon the death of the owner 3. It is difficult to obtain borrowed capital, owing to the uncertainty of the life of the organization. 4. The liability of the owner for his debts is unlimited. Partnership is an association of two or more persons for the purpose of engaging in a business for profit. Advantages: 1. More capital may be obtained by the partners pooling their resources together. 2. It is bound by few legal requirements as to its accounts, procedures, tax forms and other items of operation. 3. Dissolution of the partnership may take place at any time by mere agreement of the partners. 4. It provides an easy method whereby two or more persons of differing talents may enter into business, each carrying those burdens that he can best handle. Disadvantages: 1. The amount of capital that can be accumulated is definitely limited. 2. The life of the partnership is determined by the life of the individual partners. When any partner dies, the partnership automatically ends. 3. There are many serious disagreement among the individual partners. 4. Each partner is liable for the debts of the partnership. b) Stock ownership is the practice of companies in giving their staff members shares In their company as part of the salary. It also means owning a stock in a company investment. c) Common stock represents ordinary ownership without special guarantees of return. Common stockholders have certain legal rights, among which are the following: 1. Vote at stockholders meeting. 2. Elect directors and delegates to them power to conduct the affairs of the business. 3. Sell or dissolve the corporation 4. Make and amend the by laws of the corporation 5. Subject to government approval, amend or change the character or capital structure. 6. Participate in the profits. 7. Inspect the books of the corporation. d) Preferred Stock Preferred stockholders are guaranteed a definite dividend on their stocks. In case the corporation is dissolved, the assets must be used to satisfy the claims of the preferred stockholders before those of the holders of the common stock. Preferred stockholders usually have the right to vote in meetings but not always. e. Bond Financing A bond is a certificate of indebtedness of a corporation usually for a period not less than ten years and guaranteed by a mortgage on a certain assets of the corporation or its subsidiaries. Bonds are issued when there is need for more capital such as for expansion of the plant or the services rendered by the corporation.

The face or par value of a bond is the amount stated on the bond. When the face value has been repaid, the bond is said to have been retired or redeemed. The bond rate is the interest rate quoted on the bond. f) Declining balance In this method, sometimes called the constant percentage method or the Matheson Formula, it is assumed that the annual cost of depreciation is a fixed percentage of the salvage value at the beginning of the year. The ratio of the depreciation in any year to the book value at the beginning of that year is constant throughout the life of the property and is designated by k the rate of depreciation. This method does not apply, if the salvage value is zero, because k will be equal to one and d1 will be equal to Co. dn=depreciation during the nth year dn=(Co(1-k)^n-1)k Cn= Co(1-k)^n = Co (Cl/Co)^n/L Cl = Co(1-k)^L k = 1-(Cn/Co)^1/n = 1-(Cl/Co)^L g) sum of the years digits (SYD) Let dn= depreciation charge during the nth year dn= (depreciation factor)(total depreciation) dn = (reverse digit(Co-Cl)/(Sum of digits) For example, for a property whose life is 5 years. Year 1 2 3 4 5 Year in reverse order 5 4 3 2 1 Depreciation factor 5/15 4/15 3/15 2/15 1/15 Depreciation during the year (5/15)(Co-Cl) (4/15)(Co-Cl) (3/15)(Co-Cl)

[2]SET B: Problem 3. Co = P100,000 L = 5 years Cl = P10,000 n=3 a) By double declining method dn = (2/L)(Co)(1-2/L) ^n-1 = (2/5)(100,000)(1-2/5)^2 = P14,400 Cn = Co(1-2/L)^n = 100,000(1-2/5)^3 = P21,600 b) By Sum of the years digits (SYD) Co Cl = 90,000 Year 1 2 3 Year in reversed order 5 4 3 Depreciation during the year Book value at end of year (5/15)(90,000)=30,000 100,000-30,000 = 70,000 (4/15)(90,000)=24,000 70,000-24,000 = 46,000 (3/15)(90,000)=18,000 46,000-18,000 = 28,000

4 2

5 1

4. A bond issue of P200,000 in 10 year bonds, in P1,000 units, paying 16% nominal interest in semiannual payments, must be retired by the use of a sinking fund that earns 12% compounded semiannually. What is the total semiannual expense? Solution: F = 200,000 r= 16%/2 = 8% i=12%/2 = 6 n=10(2)=20 A= (P200,000)/(F/A,6%,20)=P200,000/36.7856=P5,437 I=Fr=(P200,000)(0.08)=P16,000 Total Semiannual expense = P5,437 + P16,000 = P21,437 PRACTICAL THINKING TOOLS 1. CAF(Consider All Factors) Related to action, decisions, planning, judgment, and conclusions. Deliberate operation directing attention from the obvious factors to looking around for all the factors. Also factors affecting oneself, others and society in general. CAF differs from PMI in that PMI is a reaction to an idea whereas CAF is an exploration of a situation before coming up with an idea. Principles: A. CAF is useful before choosing, deciding or planning. B. It is better to consider all the factors first and then pick out the ones that matter most. C. You may have to ask someone else to tell you whether you have left out some important factors. D. If you have left out an important factor your answer may seem right but will later turn out to be wrong. E. If you do a CAF on someone elses thinking you may be able to tell the person what has been left out. Practice examples: 1. A young couple is undecided whether to get married at once or wait. What factors should they be considering? 2. The sugar industry is demanding protection from foreign imports which are coming into the country at a lower price and taking over the market, what factors should the government consider in this matter. 2. AGO- Aims, Goals, Objectives Focus on Purpose : Aim is the general direction. Goal is an ultimate destination. Objective is a recognizable point of achievement along the way. Without a sense of purpose, all actions are either reactions to a situation or matters of habit or imitation. Principles: A. If you know exactly what your objectives are, it is easier to achieve them. B. In the same situation different people may have different objectives. C. On the way to a final objective, there may be a chain of smaller objectives, each one following from the previous one. D. Objectives should be near enough, real enough and possible enough for a person to really try to reach them E. There may be many objectives, but some are more important than others.

Practice examples: 1. AGO of politician vs. business executive 2. AGO of school principal 3. In respect to food, AGO of homemaker, cook in restaurant, food manufacturer, farmer, government.

3. DECISIONS Bring together in particular FIP and APC and also the other tools in a more general way. CAF, AGO, FIP, C&S, APC and also the PMI. This helps to increase knowledge of the situation so that the decision either makes itself, or is at least easier to make because the alternatives are more numerous and the consequences better defined. The final considerations are the personal values of the decision maker. Principles: A. You should always be able to tell yourself the real reason behind any decision you make. B. It is important to know whether the decision can be reversed or not after it has been made. C. Not making a decision is really a decision to do nothing. D. Decision are very difficult to make if you are not prepared to give up something in order to gain something. E. In making a decision, you should consider all factors(CAF), look at the consequences (C&S), be very clear about objectives (AG0), and assess the priorities(FIP). And fill all the possible alternatives(APC). When you have done this, a decision may be much easier. Practice Examples: 1. How do people decide to spend their money? 2. A young woman has two boys, one of them is quite and hardworking. The other is the better looking and more fun but rather unreliable. Both want to marry her. She has to decide. [3] Set A-B:
SET A a.) SCIENCE, a term derived from Latin word scientia, is a systematized body of knowledge based on fac ts and events of life arranged according to order. It is a system of gaining knowledge based on a scientific method which has the following steps: unbiased observations, formulation of hypothesis, gathering of data, systematic experimentation, analysis of data and conclusion. It aims to give better understanding of current phenomena and a better ability to infer future events. It expresses general truths and principles to explain how things work. b.) ENGINEERING is an applied science. It aims to solve problems to improve the status quo. It can also be defined as the optimal conversion of the natural resources to products that will make for optimum and safe utilizations of humans. It solves problems not just by explaining but by actually designing and manufacturing products, engines and devices which will last for a long time and under a specification of safety. c.) PRESENT ECONOMY PROBLEMS There are many cases in engineering economy studies where interest is not a factor, these

studies are frequently called present economy problems. Such studies usually involve the selection between alternative designs, materials, or methods. d.) RATE OF RETURN (ROR) METHOD The rate of return on the capital invested is given by the formula,

Rate of return is a measure of effectiveness of an investment of capital. It is a financial efficiency. When this method is used, it is necessary to decide whether the computed rate of return is sufficient to justify the investment. The advantage of this method is that it is easily understood by management and investors. The applications of the rate of return method is controlled by the following conditions. A single investment of capital at the beginning of the first year of the project life and identical revenue and cost data for each year. The capital invested is the total amount of capital investment required to finance the project, whether equity or borrowed. e.) PRESENT WORTH (PW) METHOD This pattern for economy studies is based on the concept of present worth. If the present worth. If the present worth of the net cash flows is equal to, or greater than, zero, the project is justified economically. The present worth method is flexible and can be used for any type of economy study. It is used extensively in making economy studies in the public works field, where long-lived structures are involved. SET B f.) SCIENCE, a term derived from Latin word scientia, is a systematized body of knowledge based on facts and events of life arranged according to order. It is a system of gaining knowledge based on a scientific method which has the following steps: unbiased observations, formulation of hypothesis, gathering of data, systematic experimentation, analysis of data and conclusion. It aims to give better understanding of current phenomena and a better ability to infer future events. It expresses general truths and principles to explain how things work. g.) ENGINEERING is an applied science. It aims to solve problems to improve the status quo. It can also be defined as the optimal conversion of the natural resources to products that will make for optimum and safe utilizations of humans. It solves problems not just by explaining but by actually designing and manufacturing products, engines and devices which will last for a long time and under a specification of safety. h.) ANNUAL WORTH. In this method, interest on the original investment (sometimes called minimum required profit) is included as the cost. If the excess of annual cash inflows over annual cash out flows is not less than zero the proposed investment is justified is valid. This method is covered by the same limitations as the rate of return pattern a single initial investment of capital and uniform revenue and cost throughout the life of investment. i.) FUTURE WORTH. The future worth method for economy studies is exactly comparable to the present worth method except that all cash inflows and outflows are compounded forward to a reference point in

time called the future. If the future worth of the net cash flows is equal to, or greater than, zero, the project is justified economically. j.) PAYBACK PERIOD. The payback period is commonly defined as the length of time required to recover the first cost of an investment from the net cash flow produced by that investment for an interest rate of zero Investment salvage value Payout period (years) = Net annual cash flow h.) ECONOMICS is the social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems. It is also the theories, principles, and models that deal with how the market process works. It attempts to explain how wealth is created and distributed in communities, how people allocate resources that are scarce and have many alternative uses, and other such matters that arise in dealing with human wants and their satisfaction.

[4] SET A-Definition 1. a)Capitalized Method The capitalized cost method is a variation of the present worth cost pattern. This method is used for alternatives having long lives. To use the method, determine the capitalized cost of all the alternatives and choose that one with the least capitalized cost. b) Annual cost method To apply this method, the annual cost of the alternatives including interest on investment is determined. The alternative with the least annual cost is chosen. This pattern, like the rate of return on additional investment pattern, applies only to alternatives which has a uniform cost data for each year and a single investment of capital at the beginning of the first year of the project life. c) Equivalent Uniform Annual Cost Method In this method, all cash flows(irregular or uniform) must be converted to an equivalent uniform annual cost, that is, a year-end amount which is the same each year. The alternative with the least equivalent uniform annual cost is preferred. When the EUAC method is used, the equivalent uniform annual cost of the alternatives must be calculated for one life cycle only. This method is flexible and can be used for any type of alternative selection problems. The method is a modification of the annual cost pattern. d. Variable cost Variable costs are those costs which vary with output or any change in the activities of an enterprise. Unlike fixed costs, which remain constant regardless of output, variable costs are a direct function of production volume, rising whenever production expands and falling whenever it contracts. Examples of common variable costs include raw materials, packaging, and labor directly involved in a company's manufacturing process. For example, a firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention. These costs are variable costs.

e) Marginal cost Marginal cost is the additional cost of producing one more unit of a product. That is, it is the cost of producing one more unit of a good. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory. f) Increment cost Increment costs are those that arise as the result of a change in operations or policy. A very simple example would be a factory making widgets where it takes one employee an hour to make a widget. As a simple figure, the incremental cost of a widget would be the wages for the employee for an hour plus the cost of the materials needed to produce a widget. g) Sunk Cost Sunk Cost represents money which has been spent or capital which has been invested and which cannot be recovered due to certain reasons. For example, if a firm sinks $1 million on an enterprise software installation, that cost is "sunk" because it was a one-time thing and cannot be recovered once expended. SET A-Problem A company is considering two types of equipment for its manufacturing plant. Pertinent data are as follows: Type A Type B First cost P200,000 P300,000 Annual Operating cost P32,000 24,000 Annual labor cost P50,000 32,000 Insurance and property taxes 3% 3% 0.03(First cost) 0.03(First Cost) = P6,000 =P9,000 Payroll taxes 4% 4% 0.04(Annual labor cost) =P2,000 =P1,280 Estimated life 10 yrs 10 yrs If the minimum required rate of return is 15%, which equipment should be selected? 1 a.) By ROR on additional investment method Type A Annual Costs: Depreciation = First Cost/(F/A,15%,10) = 200,000/20.3037 = P9,850 Operation = P32,000 Labor = P50,000 Payroll taxes = 0.04(Annual labor cost) = 50000(0.04) = 2,000 Taxes & Insurance = 0.03(First cost) = (P200,000)(0.03) = P6,000 Total Annual Cost = P99,850 Type B

Annual Costs: Depreciation = First Cost/(F/A,15%,10) = 300,000/20.3037 = P14,776 Operation = P24,000 Labor = P32,000 Payroll taxes = 0.04(Annual labor cost) = 32000(0.04) = P1,280 Taxes & Insurance = 0.03(First cost) = (P300,000)(0.03) = P9,000 Total Annual Cost = P81, 056 Annual Savings = P99,850 P81,056 = P18,794 Additional Investment = P300,000 P200,000 = P100,000 Rate of Return on Additional Investment = P18,794(100)/P100,000= 18.79 > 15% Type B should be selected.

b.) Present Worth Cost Method Type A Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll taxes+ Insurance and property taxes Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + 0.04(Annual labor cost) + 0.03(First cost) = P90,000 PWCa = First cost + Annual cost(P/A, 15%,10) = P200,000 + (90,000)(5.0188) = P651,692

Type B Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll taxes+ Insurance and property taxes Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + 0.04(Annual labor cost) + 0.03(First cost) = P66,280 PWCb = First Cost + Annual cost (P/A, 15%, 10) = 300,000 + (66,280)(5.0188) = P632,646 Since PWCb < PWCa for the same period of time, type B should be selected. 2. Given: 11,000 units/year P13/unit Equipment cost:P 120,000 Other equipment: P2,000 Labor cost: P5/unit Material cost: P4/unit

Taxes and insurance : 3% Overhead cost: 20% Operating and maintenance: P9,000 Capital cost: 16% Solution: Annual revenue = 11,000 units/yr (P13/unit) Annual revenue = P143,000 Annual cost: Other equipment: P2,000 Labor cost: P5/unit(11,000units/yr) = P55,000 Material cost: P4/unit(11,000units/yr)= P44,000 Taxes and insurance : 0.03(equipment cost)= 0.03(120,000)=P3,600 Overhead cost: 0.2(labor cost) =0.2(55,000)= P11,000 Operating and maintenance: P9,000 Capital cost: 0.16(equipment cost)=0.16(120,000)=P19200 Depreciation = equipment cost/ (F/A, 16%,5) = P17,500 Annual cost = P161,300 Annual Revenue Annual Cost = -P18,300 Therefore, this opportunity should not be accepted! [4] SET B: Definition a. Rate of Return on additional investment method The formula for the rate of return on additional investment is, Rate of return on additional investment = annual net savings/additional investment If the rate of return on additional investment is satisfactory, then, the alternative requiring a bigger investment is more economical and should be chosen. b. Annual Cost Method To apply this method, determine the annual cost of each alternative including the interest on capital/investment. Choose the alternative which has a least annual cost. This pattern, like the rate of return on additional investment pattern is applicable only to alternatives which has a uniform cost data for each year and a single investment of capital at the beginning of the first year of the project life. c. Capitalized Method The capitalized cost method is a variation of the present worth cost pattern. This method is used for alternatives having long lives. To use the method, determine the capitalized cost of all the alternatives and choose that one with the least capitalized cost. d. Payback(Payout) Period Method

To use this method, the payback period of each alternative is computed. The alternative with the shortest payback period is adopted. This method is seldom used. e. Fixed costs Fixed costs are those costs which remain constant, whether or not a given change in operations or policy is adopted. Unlike variable costs, fixed costs are not zero when production is zero. Good examples of fixed costs would be insurance, rent, periodic load payments, interest paid, fixed permanent employee salaries. Total fixed costs remain unchanged as volume increases, while fixed costs per unit decline. For example, if a bicycle business had total fixed costs of $1,000 and only produced one bike, then the full $1,000 in fixed costs must be applied to that bike. On the other hand, if the same business produced 10 bikes, then the fixed costs per unit decline to $100. f. Variable Costs Variable costs are those costs which vary with output or any change in the activities of an enterprise. Unlike fixed costs, which remain constant regardless of output, variable costs are a direct function of production volume, rising whenever production expands and falling whenever it contracts. Examples of common variable costs include raw materials, packaging, and labor directly involved in a company's manufacturing process. For example, a firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention. These costs are variable costs. g. Marginal costs Marginal cost is the additional cost of producing one more unit of a product. That is, it is the cost of producing one more unit of a good. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those extra vehicles includes the cost of the new factory.

[4 ]SET B-Problem A company is considering two types of equipment for its manufacturing plant. Pertinent data are as follows: Type A Type B First cost P200,000 P300,000 Annual Operating cost P32,000 24,000 Annual labor cost P50,000 32,000 Insurance and property taxes 3% 3% 0.03(First cost) 0.03(First Cost) = P6,000 =P9,000 Payroll taxes 4% 4% 0.04(Annual labor cost) =P2,000 =P1,280 Estimated life 10 yrs 10 yrs If the minimum required rate of return is 15%, which equipment should be selected? 1. a. ) By equivalent Uniform Annual Cost Method Type A Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll taxes+ Insurance and property taxes

Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + 0.04(Annual labor cost) + 0.03(First cost) = P90,000 EUACa = First cost (A/P,15%,10) + Annual cost = (200,000)(0.1993) + 90,000 = P129,860 Type B Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll taxes+ Insurance and property taxes Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + 0.04(Annual labor cost) + 0.03(First cost) = P66,280 EUACb = First cost (A/P,15%,10) + Annual cost = P300,000(0.1993) + 66,280 = P126,070 Since EUACb < EUACa, type B is more economical. 1.b.) Present Worth Cost Method Type A Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll taxes+ Insurance and property taxes Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + 0.04(Annual labor cost) + 0.03(First cost) = P90,000 PWCa = First cost + Annual cost(P/A, 15%,10) = P200,000 + (90,000)(5.0188) = P651,692

Type B Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + Payroll taxes+ Insurance and property taxes Annual Costs(excluding depreciation) = Annual operating cost + Annual labor cost + 0.04(Annual labor cost) + 0.03(First cost) = P66,280 PWCb = First Cost + Annual cost (P/A, 15%, 10) = 300,000 + (66,280)(5.0188) = P632,646 Since PWCb < PWCa for the same period of time, type B should be selected. 2. Given: 11,000 units/year P13/unit Equipment cost:P 120,000 Other equipment: P2,000 Labor cost: P5/unit Material cost: P4/unit Taxes and insurance : 3% Overhead cost: 20% Operating and maintenance: P9,000

Capital cost: 16% Solution: Annual revenue = 11,000 units/yr (P13/unit) Annual revenue = P143,000 Annual cost: Other equipment: P2,000 Labor cost: P5/unit(11,000units/yr) = P55,000 Material cost: P4/unit(11,000units/yr)= P44,000 Taxes and insurance : 0.03(equipment cost)= 0.03(120,000)=P3,600 Overhead cost: 0.2(labor cost) =0.2(55,000)= P11,000 Operating and maintenance: P9,000 Capital cost: 0.16(equipment cost)=0.16(120,000)=P19200 Depreciation = equipment cost/ (F/A, 16%,5) = P17,500 Annual cost = P161,300 Annual Revenue Annual Cost = -P18,300 Therefore, this opportunity should not be accepted! [5] SET A

2. Two electric motors are being considered to power an industrial hoist. Each is capable of providing 100 hp. Pertinent data for each motor are as follows: Motor A Investment = P25,000 Electrical efficiency = 84% Maintenance per year = 400 Life, years = 10 Motor B Investment = P32,000 Electrical efficiency = 88% Maintenance per year = 600 Life, years = 10 Money is worth 20%. If the expected usage of the hoist is 700 hours per year, what would be the cost of electrical power have to be before Motor A is favored over motor B? Solution: Let x = cost of electrical power for both motors to be equally economical Motor A

Annual Costs: Depreciation = (Investment)/(F/A, 20%, 10) = P963 Power = (100)(0.746)(700)(x)/0.84 = 62,167x maintenance = 400 Interest on capital = Investment(0.20) = 5,000 Total annual cost = P6,363 + 62,167x Motor B Annual Costs: Depreciation = (Investment)/(F/A, 20%, 10) = PP1,232 Power = (100)(0.746)(700)(x)/0.88 = 56,341x maintenance = 600 Interest on capital = Investment(0.20) = 6,400 Total annual cost = P8232 + 59341x P6363 + P62167x = 8232 + 592341x X= P0.6614 per kwh Motor A will be more economical for electrical power cost less than P0.6614 per kwh. 3. Motor rebuild: Investment = 50,000 Maintenance = 15,000 Life = 5 years New motor Investment = 150,000 Maintenance = 12,000 Life = 10 Rebuild Depreciation = (50,000)/(F/A, 16%,5) = P7,270 Maintenance = P15,000 Interest on investment (50,000)(0.16) = P8,000 Total : 30,270 New motor: Depreciation = (150,000)/(F/A, 16%,10) = P7,035 Maintenance = P12,000 Interest on Investment (150,000)(0.16) = P24,000 Total: P43,035

Thus, rebuild the old motor. 4. First cost = 220,000,000 Interest =6 % Annual operation and maintenance cost = P11,000,000 Annual income/benefit = 26,000,000 Life = 60 years a) By EUAC Method Annual benefit = 26,000,000 EUAC = 220,000,000(A/P,6%,60) + 11,000,000 EUAC = 24,618,000 B/C = (benefit)/(EUAC) = 1.06 > 1 Therefore, this is ok! b.) By Present Worth Method PWbenefit = 26,000,000 (P/A, 6%, 60) PWbenefit = 4202 x10^5 PWcost = 220,000,000 + 11,000,000(P/A, 6%,60) PWcost = 3,978x10^5 B/C = (PWbenefit)/(PWcost) = 1.06 > 1.0 therefore , this is ok!

[5] SET B

1. a) Rental or lease possibilities -It is possible to rent identical or comparable asset or property, thus freeing capital for other and more profitable use. B) Physical impairment The existing asset is completely or partially worn out and will no longer function satisfactorily without extensive repairs. c. Inadequacy

The existing asset does not have sufficient capacity to meet the present demands that is placed on it. d. Break-even analysis In engineering economy, many situations are encountered where the cost of two or more alternatives may be affected by a common variable. Break-even point is the value of the variable for which the costs for the alternatives will be equal. C1= f1(x) and C2=f2(x) Where: C1 = certain specified total cost applicable to alternative 1 . C2 = certain specified total cost applicable to alternative 2. X= a common independent variable affecting alternative 1 and 2. The break even point is where C1 and C2 are equal , f1(x)=f2(x) which may be solved for x, the break even point. Break-even chart is a graphical representation of break-even analysis. The break even point is the quantity of production at which the income is equal to total cost. It is the intersection of the income line and the total cost line on the break even chart. When two alternatives are to be compared, the breakeven point is the intersection of the total cost line for each alternative on the break even chart.
[5] Set B:

2. Old Motor (Rebuild) First cost = 60,000 Life = 6 years Annual operation and maintenance = 14,000 New Motor First cost = 170,000 Life = 11 years Annual operation and maintenance = 11,000 Money worth = 15% Solution: By ROR on additional investment Old Motor Depreciation = (First cost)/(F/A,15%, 6) = P6,854 Annual operation and maintenance = 14,000 Total : P20,854 New Motor Depreciation = (First cost)/(F/A,15%,11) = 6,982 Annual operation and maintenance = 11,000

Total: P17,982 Annual Savings = Old New = 20,854 17982 = 2,872 Additional annual investment = 170,000 60,000 = 110,000 ROR on additional investment = (2,872/110,000) x 100 = 2.61% < 15% Therefore, the old motor should be rebuilt.

3. A local factory assembling calculators produces 400 units per month and sells them at P1,800 each. Dividends are 8% on the 8,000 shares with a par value of P250 each. The fixed operating cost per month is P25,000. Other costs are P1,000 per unit. Determine the break-even point. If only 200 units were produced per month, determine the profit or loss. Solution : Income : 1.800 per unit Fixed costs = P25,000 per month Variable costs = P1,000 per unit Dividend = 8% per year Par value = 250 each shares = 8000 Let x = number of calculators per month to break even Income = 1,800x Total cost = P25,000 + P1,000x To break even, Income = Total cost 1,800x = 25,000 + 1,000x X = 31.25 or 32 units Dividend = (par value)(dividend percent)(share)/12months = (250)(0.08)(8000)/12 = P13,333 per month

For 200 units: Income = Total cost + Dividend +Profit /loss P1,800(200) = P25,000 + (1,000)(200) + 13,333 + Profit/loss Profit = P121,667 per month 4. First cost = 220,000,000 Interest =6 % Annual operation and maintenance cost = P11,000,000 Annual income/benefit = 26,000,000 Life = 60 years a) By EUAC Method Annual benefit = 26,000,000 EUAC = 220,000,000(A/P,6%,60) + 11,000,000 EUAC = 24,618,000 B/C = (benefit)/(EUAC) = 1.06 > 1 Therefore, this is ok! b.) By Present Worth Method PWbenefit = 26,000,000 (P/A, 6%, 60) PWbenefit = 4202 x10^5 PWcost = 220,000,000 + 11,000,000(P/A, 6%,60) PWcost = 3,978x10^5 B/C = (PWbenefit)/(PWcost) = 1.06 > 1.0 therefore , this is ok!