Merged 1-4

ENGINEERING ECONOMY
ES 312b
Jean M. Martin/ Ryan James s. Olivo/ Alvin John R. Villanueva
2021
UNIVERSITY OF SOUTHERN MINDANAO

Kabacan, Cotabato
ENGINEERING ECONOMY
ES 312b
Jean M. Martin/ Ryan James s. Olivo/ Alvin John R. Villanueva
2021
UNIVERSITY OF SOUTHERN MINDANAO

Kabacan, Cotabato
Authors’ Declaration
Ideas, concepts, diagrams and/or illustrations depicted in this learning material

are excerpts from established references and properly noted in the list of literatures cited
herein. The author in this learning material does not claim full and authentic ownership of
all the contents of this material, nor in any manner willfully infringe the copyright law and
other existing provisions appertaining thereto.
This learning material is printed for the sole use of classroom or distance/remote
learning of USM and is not intended for commercial purposes. Any use or reproduction
in part or in full, whether electronic or mechanical, photocopying or recording in any
information storage and retrieval system, other than what it is intended for requires the
consent of authorized and competent authority of the University of Southern Mindanao.
ES 312b: Engineering Economy

iv
USM VISION
Quality and relevant education for its clientele to be globally competitive, culture
sensitive and morally responsive human resources for sustainable development
USM MISSION
Help accelerate socio-economic development, promote harmony among diverse

communities and improve quality of life through instruction, research, extension and
resource generation in Southern Philippines.
UNIVERSITY QUALITY POLICY STATEMENT
The University of Southern Mindanao, as a premier university, is committed to

provide quality instruction, research development and extension services and resource
generation that exceed stakeholders’ expectations through the management of continual
improvement efforts on the following initiatives.
1. Establish Key Result Areas and performance indicators across all mandated
functions;
2. Implement quality educational programs;
3. Guarantee competent educational service providers;
4. Spearhead need-based research outputs for commercialization, publication,
patenting, and develop technologies for food security, climate change mitigation
and improvement in the quality of life;
5. Facilitate transfer of technologies generated from research to the community for
sustainable development;
6. Strengthen relationship with stakeholders;
7. Sustain good governance and culture sensitivity; and
8. Comply to customer, regulatory and statutory requirements.

v
PREFACE
This module was developed for Engineering Economy. This module aimed to
provide a better understanding on the methods of economic analysis for decision making
among alternative courses of action in engineering business and government applications.
Itcover time value of money; effect of inflation; Cash Flow, future and present value;
investments, depreciation, Capital Financing, Benefit-Cost Ratio (BCR), Return on
Investment (ROI) and Payback Period; financial and economic feasibility analyses with
risk/sensitivity analysis.
Self –assessment questions were included at the end of every chapter to assess
the students’ understanding of each chapter.
A course guide was also included in this module, in order to guide the
users on the content, grading system and class policies on this subject.

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TABLE OF CONTENTS
Page
Chapter 1: Introduction to Engineering Economy 1
1
Chapter 2: Cost Concepts and Economic Environment
Fixed Cost, Variable Cost, Incremental Cost
Direct, Indirect and
Overhead Cost
Standard, Sunk and
Opportunity Cost
Consumer and Producer of Goods and Services
Necessities, Luxuries and Price Demand
Competition
Chapter 3: Principles of Money-Time Relationship

Simple Interest
Notation and Cash Flow
Diagram
Compound Interest
Continuous Compounding Discrete Payments
The Concept of Equivalence
Ordinary Annuity
Differed Annuity
Discount
Inflation and Price Changes
Perspective and terminology of Public Projects
Benefit/Cost Ratio Method
Chapter 4: Depreciation and Depletion
Nature of Depreciation
Classical Depreciation Methods
Chapter 5: Capital Financing
Types of Business Organization
Bonds and Its Classification
Chapter 6: Basic Methods of Making Economic Studies
Rate of Return Method
Annual Worth Method
Present Worth Method
Future Worth Method
Payback Period
Chapter 7: Comparing Alternatives
The rate of Return on Additional Investment
Annual Cost Method
Present Cost Method
Equivalent Uniform Annual Cost
Chapter 8: Nature of Risk, Uncertainty and Sensitivity Break-even Analysis
Algebraic Method
Graphical Method

vii
viii
COURSE GUIDE
Course Information
Course Title Engineering Economy
Course Code ES 312 b
Pre-requisite/Co- Math 101E, Math 121E, ES
requisite 111, Phys 112
Course Description
This course explores methods of economic analysis for decision making among
alternative courses of action in engineering business and government applications. It
covers time value of money; effect of inflation; Cash Flow, future and present value;
investments, depreciation, Capital Financing, Benefit-Cost Ratio (BCR), Return on
Investment (ROI) and Payback Period; financial and economic feasibility analyses with
risk/sensitivity analysis.
Course Objectives/Outcomes
Upon passing the course, you must be able to:
1. Explain the time value of money and money discounting at normal and inflationary
conditions
2. Describe the concept of equivalence and calculate present and future worth of
cash flows using nominal and effective interest rates and continuous
compounding.
3. Demonstrate an understanding of the key concepts used to determine costs and
benefits of an engineering project, depreciation, and depletion
4. Make analysis in decision making using breakeven and sensitivity analysis under
uncertainty conditions.
Course Learning/Study Plan/Schedule

Week/Date Topic Teaching and Learning Assessment
(Deadlines) Learning Materials
Activities
1 Online Video VLE/Zoom/ Online Exam,
Presentation Online Laboratory
conferences exercises
Lecture
2 Online Video VLE/Zoom/ Online Exam,

Lecture
3-8 Online Video VLE/Zoom/ Online Exam,


9
Lecture

Lecture

Lecture
Course Requirements/Assessment and Evaluation Scheme/Grading System
Weight
Course Outcomes (CO) Satisfactory Rating Target Standard
(%)
CO1. Explain the time value of At least 60% of the
money and money discounting at class has a
normal and inflationary conditions 30% 75% satisfactory Rating
CO2. Describe the concept of At least 60% of the
equivalence and calculate present class has a
and future worth of cash flows 20% 75% satisfactory Rating
using nominal and effective interest
rates and continuous compounding.
CO3 Demonstrate an At least 60% of the
understanding of the key concepts class has a
used to determine costs and 20% 75% satisfactory Rating
benefits of an engineering project,
depreciation, and depletion
CO4. Make analysis in decision At least 60% of the
making using breakeven and class has a
sensitivity analysis under uncertainty 30% 75% satisfactory Rating
conditions

10
Grading System
Grade Grade Equivalent:
CO 1 Score Range Score Range

30% 1 98 100 3.25 65.625 74.9999
1.25 95 97.999 3.5 56.250 65.6249
CO2 1.5 92 94.999 3.75 46.875 56.2499
20% 1.75 89 91.999 4 37.500 46.8749
2 86 88.999 4.25 28.125 37.4999
CO3
2.25 83 85.999 4.5 18.750 28.1249
20% 2.5 80 82.999 4.75 9.3750 18.7499
CO4 2.75 77 79.999 5 0 9.3749
30% 3 75 76.999
House Rules/Class Policies

1. Attendance will be checked every class meeting. Provisions of the USM Code
regarding attendance of student will be strictly implemented.
2. Wearing of complete uniform will be strictly observed.
3. Cheating is strictly prohibited. Anyone who is caught cheating will be referred to the
guidance office.
4. Recordkeeping of quiz and exam results is recommended for monitoring of
academic standing.
5. Consultation during prescribed schedule is highly encouraged.
6. Make-up exam will be applicable for missed term exam only provided that an excuse
slip or medical certificate is presented.
The instructor reserves the right to change any part of this syllabus with prior disclosure
to the students.

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CHAPTER 1
Introduction to Engineering Economy
Intended Learning Outcomes

By the end of this topic/chapter, you must be able to:
1. Be introduced to the Principles of Engineering Economy
2. Be introduced to the Engineering Economy Design Process
Principles of Engineering Economy

1. Develop the Alternatives
2. Focus on the Differences
3. Use a Consistent Viewpoint
4. Use a Common Unit of Measure
5. Consider All Relevant Criteria
6. Make Risk and Uncertainty Explicit
7. Revisit Your Decision
Apply to an example problem
Rodrigo needs 57 liters of gasoline to top off (full tank) his automobile’s gas tank.
If he drives an extra 14 km (round trip) to a gas station on the outskirts of town, Stan can
save Php 3.00 per liter on the price of gasoline (Php 3.00/liter off). Suppose gasoline
costs Php 50.00 per liter and Stan’s car gets 10.6 km per liter for in-town driving. Should
Rodrigo make the trip to get less expensive gasoline? Every 3 kilometer that Stan drives
creates one kilo of carbon dioxide (CO2). Each kilo of CO2 has a cost impact of Php
2.23 on the environment. What other factors (cost and otherwise) should Stan consider
in his decision making?
1. Develop the Alternatives
Problem: Rodrigo needs to top off his automobile by 57 liters.

The Alternative: Drive an extra 14 km to save Php 3.00 per liter.
Define: If he pursues to drive an extra 14 km, an additional cost for travel (10.6
km per liter) and cost of creating (CO2) (Php 2.23/kilo) would be incurred.
2. Focus on the Differences
Difference: Cost of topping off Rodrigo’s automobile’s gas tank.

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Net Savings (NOT Availing the Php 3.00/liter off) = None
Savings: (57 L x Php 3.00/L) – (14 km x 1kg/3km x Php 2.23/kg) = Php 160.59
Cost - Driving Extra 14km: (14 km ÷ 10.6 km/liter) x (Php 50.00/liter) = Php
66.04
Net Savings = 160.59-66.04 = Php 94.55
3. Use a Consistent Viewpoint
Viewpoint: It is the perspective of Rodrigo (the automobile owner) on whether he

will drive an extra 14 km to save Php 3.00 per liter of gasoline.
4. Use a Common Unit of Measure

What are to be Measured? - In this case the things that are to be measured are the
gasoline and the carbon dioxide produced from the automobile.
What Unit of Measure to be Used? - Since gasoline (liters) and CO2 (kg) are of
different measure, it is better to find a common measurement for them and that is
the cost (Php).
5. Consider All Relevant Criteria

Criteria: In this problem, the criteria of Rodrigo for choosing an alternative is to have
the best financial outcome for both choices.
Choice 1: Rodrigo does not drive and extra 14km to avail a lesser gasoline price
(Php 3.00/liter Off), The result is NO savings
Choice 2 (Alternative): The savings he incurred from driving an extra 14 km to avail a
gasoline price with Php 3.00/liter off is about Php 160.59 (with deduction for
environment impact – 2.23 kg of CO2 per 3 km of driving).The cost of driving an
extra 14 km is Php 66.04. Therefore, the alternative has the best financial outcome
since the savings from the alternative is higher than its cost. Net = (160.59-66.04 =
+94.55)
The only criteria considered in the problem is to maximize his savings. Other criteria
that could be considered is to minimize financial loss he will incur from the time he spent
in driving
6. Make Risk and Uncertainty Explicit

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Rodrigo’s decision may also be influenced by cost for accidents. Thus, questions
will arise if he would make the trip of driving an extra 14 km because risk and uncertainty
in accidents is present. Assuming that it is best for Rodrigo’s financial interest to drive an
extra 14 km to avail a lesser gasoline price, then question about its frequency would arise
(i.e. How often would I drive an extra 14 km to avail the lesser price?)
7. Revisit Your Decision
The example problem yielded a result on how Rodrigo should decide and that is
to travel an extra 14 km for the gasoline with Php 3.00/liter off. His decision should
always be reviewed since there are circumstances that will change.
Consider this example.
Suppose that after sometime, Rodrigo realizes that he will spend some money
for maintenance (i.e. Tires, engine oils, etc.) for every km he travels. He estimated that the
maintenance cost for every km he travels is about Php 8.00
Savings: (57 L x Php 3.00/L) – (14 km x 1kg/3km x Php 2.23/kg) – (14 km x
Php 8.00/km) = Php 48.59
Cost: (14 km ÷ 10.6 km/liter) x (Php 50.00/liter) = Php 66.04
Therefore, the alternative is not good for Rodrigo’s financial interest. (Net = -17.45) and
he should now revise his decision.
What if? The environmental cost increases by Php 3.00/kg; The gasoline price
change into Php 43.00/liter. This what ifs would influence Rodrigo on his decision making.
The Seven Principles are the basis for the Engineering Economy Design Process
STEPS - Engineering Economic Analysis Procedure

1. Problem recognition, definition, and evaluation.
2. Development of the feasible alternatives
3. Development of the outcomes and cash flows for each alternative.
4. Selection of a criterion (or criteria).
5. Analysis and comparison of alternatives
6. Selection of the preferred alternative
7. Performance monitoring and post-evaluation of results
Apply to an example problem

IMAGINE: You are a financial advisor and a client came to ask for advice. You will now try
to help him using the steps presented here. Your client’s name is Noynoy and this are
the facts: Noynoy bought an apartment complex near USM for Php 2M. He applied for a
housing loan in BDO kabacan for about Php 1.5M since he gave the previous owner a
Php 500k downpayment, the loan was approved. The annual (yearly) payment to the
bank is fixed at Php 150k. Noynoy also estimated that the annual maintenance for the
apartment complex is Php 72k. There are six (6) apartments with three (3) bedrooms
each in the apartment complex that can each be rented for Php 2.5k. We can now apply

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the seven-step procedure to answer the questions.
From the example, the following questions are:
a) Does your client have a problem? If so, what is it?

b) What are his alternatives? (Identify at least three)
c) Estimate the economic consequences and other required data for the alternatives
in Part (b).
d) Select a criterion for discriminating among alternatives, and use it to advise your
client on which course of action to pursue.
e) Attempt to analyze and compare the alternatives in view of at least one criterion in
addition to cost.
f) What should your client do base on the information you and him have generated?
a) Does your client have a problem? If so, what is it?

Let’s see:
Annual Expenses: Php 150k + Php 72k = Php 222k

Annual Income: (6 x Php 2.5k x 12) = Php 180k
Net Income: Php 180k - Php 222k = Php -42k (loss!)
Therefore, your client has a problem
b) What are his alternatives? (Identify at least three)

Option 1: Raise the rent. (Will the market bear the increase?)
Option 2: Lower maintenance expenses (but not so far as to cause safety
problems)
Option 3: Sell the apartment building. (What about a loss?)
Option 4: Abandon the building (bad for your client’s reputation)
c) Estimate the economic consequences and other required data for the
alternatives in Part (b).
Option 1: Raise the monthly rent.
Monthly cost: (Php 222k/12) = Php 18.5k
Monthly Income from Rent: (6 x Php 2.5k) = Php 15k
Additional Payment for Rent: Php 18.5k – Php 15k = Php 3.5 k
Increase in Rent for the 6 Apartment: Php 3.5 k/6 = Php 583 ~ Php 600
Therefore, for this option, change the rent from Php 2.5k to Php 3.1k, a fair
increase of about 24%. For practical purposes you can advise your client to set it
at 3.5k per month per apartment which has also a fair increase of about 40%.
Option 2: Lower maintenance expenses (but not so far as to cause safety
problems) – Lower the monthly expenses so that it will be covered by monthly
revenue (rent).

15
Monthly cost: (Php 222k/12) = Php 18.5k
Monthly Maintenance Expense (MME): (Php 72k/12) = Php 6k
Monthly Expense w/out MME: Php 18.5k – Php 6k = Php 12.5k
Monthly Income from Rent: (6 x Php 2.5k) = Php 15k
Reduction of MME: Php 15k – Php 12.5k = Php 2.5k
Based on the calculation done, the original MME of Php 6k needs to be lowered
to Php 2.5k. This reduction is almost 60% which could possibly cause safety
problems. Therefore, this option is not in the best financial interest of your client.
There’s not much to be done about the annual loan payment cost unless a
favorable refinancing opportunity presents itself.
Option 3: Sell the apartment building. (What about a loss?)
Assumption: Suppose the apartment complex is in operation for twelve

(12) months (1 year), and on the 13th month when he realizes that there
were losses in his revenue.
Downpayment: Php 500k
Annual Losses: Php 42k (for the first year)
Price (Apartment Complex): Php 500k + Php 42k = Php 542k
The successive payments for the loan in BDO will be shouldered by the
new owner.
Option 4: Abandon the building (bad for your client’s reputation)

Walk away from the venture and cry in pain as you kiss good-bye to your
investment. The
bank would likely assume possession (repo) through foreclosure and may try to
collect fees
from your client. This option would also be very bad for your friend’s credit rating.
d) Select a criterion for discriminating among alternatives, and use it to advise

your client on which course of action to pursue.
One criterion could be to minimize the expected loss of money. In this case, you
might advise your client to pursue Option (1) or Option (3).
e) Attempt to analyze and compare the alternatives in view of at least one

criterion in addition to cost.
For example, let’s use “credit worthiness” as an additional criterion. Option (4) is
immediately ruled out. Exercising Option (3) could also harm your client’s credit
rating. Thus, Options (1) and (2) may be his only realistic and acceptable
alternatives.

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f) What should your client do base on the information you and him have
generated.
Your friend should probably do a market analysis of comparable housing
(survey) in the area to see if the rent could be raised (Option 1). Maybe a fresh
coat of paint would make the apartments more appealing to prospective renters.
If so, the rent can probably be
raised while keeping 100% occupancy of the six apartments.
SUMMARY:
The problems discussed here showed the importance of doing engineering

economic analysis which was based on the seven principles described on the first part.
The simple illustration of how the seven principles helped Rodrigo in a seemingly simple
problem of whether he would avail the Php 3.00/liter off by doing a 14km trip (round trip)
or not. The second problem shows you how to use the steps of engineering economic
procedures. You were told to imagine that you are a “financial advisor” and give advice to
a client, Noynoy, by giving him options and advising him what he should after the best
choice is made. Based on the two different criteria presented in the problem, the best
choice is option 1 since it became a good candidate for the two criteria.
Although the problems here do not reflect the real-life situation, it gives you an
understanding on how to use engineering economy to your advantage. Real-life situation
always involved the concept of time to money which will be discussed in later topics.
EXERCISES:
SHOW YOUR SOLUTIONS.

Problem 1: Stan Moneymaker needs 15 gallons of gasoline to top off his automobile’s
gas tank. If he drives an extra eight miles (round trip) to a gas station on the outskirts of
town, Stan can save $0.10 per gallon on the price of gasoline. Suppose gasoline costs
$3.90 per gallon and Stan’s car gets 25 mpg for in-town driving.
1. Compute the savings he would have if he chose to avail the $0.10 per gallon off of
gasoline price. Will it be good for his financial interest? Why?
2. How much is the cost of gasoline for the trip?
3. Suppose that he realizes that he needs to incorporate the maintenance cost of $0.2
per miles. Will it still be good for his financial interest? Why?
Problem 2: Tyler just wrecked his new Nissan, and the accident was his fault. The owner
of the other vehicle got two estimates for the repairs: one was for $803 and the other
was for $852. Tyler is thinking of keeping the insurance companies out of the incident to
keep his driving record “clean.” Tyler’s deductible on his comprehensive coverage

17
insurance is $500, and he does not want his premium to increase because of the
accident. In this regard, Tyler estimates that his annual premium will rise by $60 if he files
a claim against his insurance company. In view of the above information, Tyler’s initial
decision is to write a personal check for $803 payable to the owner of the other vehicle.
1. Assuming that he will keep the Nissan car for 5 more years, how much would be the
cost of submitting a claim for the insurance company? Is it a good move? Why?
2. Assuming that he will keep the Nissan car for 10 more years, how much would be the
cost of submitting a claim for the insurance company? Is it a good move? Why?
3. Assuming that his semi-annual premium will rise by $60 and keep the Nissan car for 5
more years, how much would be the cost of submitting a claim for the insurance
company? Is it a good move? Why?
Problem 3: Atypical discounted price of a AAA battery is $0.75. It is designed to provide
1.5 volts and 1.0 amps for about an hour. Now we multiply volts and amps to obtain
power of 1.5 watts from the battery. Thus, it costs $0.75 for 1.5 Watt-hours of energy.
1. How much would it cost to deliver one kilo Watt-hour?
2. How many times will it be costly compared to the cost of energy from your local
electric utility at $0.10 per kilo Watt-hour?
Problem 4: Studies have concluded that a college degree is a very good investment.
Suppose that a college graduate earns about 75% more money per hour than a high
school graduate. If the lifetime earnings of a high-school graduate average $1,200,000,
1. How much is the increased?
2. How much is the expected earnings of a college degree holder?
Problem 5: The manufacturer of Brand A automobile tires claims that its tire can save
110 gallons of fuel over 55,000 miles of driving, as compared to a popular competitor
(Brand B).
1. If gasoline costs $4.00 per gallon, how much per mile driven does this tire save the
customer (Brand A versus Brand B)?
2. If gasoline costs $4.00 per gallon, how much would the customer save if he uses
Brand A?
3. What fraction of a penny would he save for each mile the customer uses Brand A tire?

18
ES 312b - Engineering Economy 1st Sem, S.Y. 2020-2021
MODULE 2
Cost Concepts and Economic Environment
After completing this module, you are expected to:

1. Understand the basic cost terminologies
2. Understand economic concepts
A. Fixed, Variable and Incremental Cost
ex: rent Fixed costs are those unaffected by changes in activity level over a feasible
range of operations for the capacity or capability available.
oppposite if fixed cost Variable costs are those associated with an operation that varies in total with
the quantity of output or other measures of activity level.
example everyday ga sell ka ng 50 lumpia
may nag order ng 20 lumpia
if 5 ang capital each lumpia
20*5 is incremental cost
An incremental cost (or incremental revenue) is the additional cost (or revenue)
that results from increasing the output of a system by one (or more) units.
READ (IMPORTANT!)
• Page 21 to 22
Textbook: Engineering Economy,
16th Edition
Example:
In connection with surfacing a new highway, a contractor has a choice of two sites on
which to set up the asphalt-mixing plant equipment. The contractor estimates that it will
cost $2.75 per cubic yard mile (yd 3-mile) to haul the asphalt-paving material from the
mixing plant to the job location. Factors relating to the two mixing sites are as follows
(production costs at each site are the same):
Cost Factor Site A Site B
Average hauling distance 4 miles 3 miles
Monthly rental of site $2,000 $7,000
Cost to set up and remove equipment $15,000 $50,000
Hauling expense $2.75/ yd3-mile $2.75/ yd3-mile
Flagperson Not Required $150/day
The job requires 50,000 cubic yards of mixed-asphalt-paving material. It is estimated

that four months (17 weeks of five working days per week) will be required for the job.
Page 1 of 8
Engr. Ryan James S. Olivo
Compare the two sites in terms of their fixed, variable, and total costs. Assume that the
cost of the return trip is negligible. Which is the better site? For the selected site, how
many cubic yards of paving material does the contractor have to deliver before starting
to make a profit if paid $12 per cubic yard delivered to the job location?
Identify the Fixed Cost and the Variable Cost
Rent – This type of cost is a fixed cost. The job (hauling) is fixed for four (4) months, any
changes in activity level will never result in change of the monthly cost.
Site A: (4 months) x ($2,000/month) = $8,000
Site B: (4 months) x ($7,000/month) = $28,000
Set-up/Removal – This type of cost is a fixed cost. For the entirety of the job, the cost of
setting and removal of equipment (Mobilization and Demobilization) is fix at $15,000 for
site A and $50,000 for site B. No amount of change in activity during the duration of the
project will cause this cost to change.
Flagperson – This type of cost is a fixed cost. It is stated in the problem that the duration
of the job is 17 weeks with 5 working days per week. Site A does not require any
flagperson while Site B needs flagperson which is fixed at $150/day. This cost (salary of
flagperson) is unaffected by any changes in activity level over the course of 17 weeks.
Site A: Flagperson not needed = $0
Site B: (17 weeks) x (5 days/week) x ($150/day) = $12,750
Hauling – This type of cost is a variable cost. This cost varies with the total number of
cubic yards. It is stated in the problem that the required mixed-asphalt-paving material is
about 50,000 yd3. Although this was stated, this is actually just an estimate. The real
amount of hauled material will always be determined at the end of the job, it can be more
than or less than 50,000 yd3. Since, there is this problem of which site to choose, we will
use the estimated 50,000 yd3 as basis for our decision.
Site A: (4 miles) x ($2.75/ yd3-mile) x (50,000 yd3) = $ 550,000
Site B: (3 miles) x ($2.75/ yd3-mile) x (50,000 yd3) = $ 412,500
Cost Fixed Cost Variable Cost Site A Site B

Rent ✓ $8,000 $28,000
Set-up/Removal ✓ $15,000 $50,000
Flagperson ✓ $0 $12,750
Hauling ✓ $ 550,000 $ 412,500
Total $573,000 $503,250
The result shows that site B is cheaper than site A. Although the fixed cost is more
expensive in site B the variable cost of hauling was affected by the distance of site B (1
mile lesser than site A) to the project.
Page 2 of 8
B. Direct, Indirect, Overhead and Standard Costs
READ (IMPORTANT!)
• Page 23
16th Edition
raw materials Direct costs are costs that can be reasonably measured and allocated to a
products diretso specific output or work activity.
materials sa Example:
paggawa ng Type text here
building Material cost of a building construction
Labor cost of a building construction
Cost of ingredients for a Dish
Cost of raw materials of a factory
Indirect costs are costs that are difficult to allocate to a specific output or work
activity. ex: seminar
for safety before
SYSTEM OF COSTS Example: starting building
COMPLICATED
Cost of a safety and health program – it can be a percentage of
di madiretso sa product
labor cost of a construction project.
Overhead cost consists of plant operating costs that are not direct labor or direct
material costs.
Example:
Contractor’s Profit
IS BASED ON SOMETHING Real Estate/Property Tax
EX: TAX- BASED ON SOCIOECONOMIC
Cost of Mobilization/Demobilization for Equipment
Cost of Temporary Housing for Labors
Cost of Temporary Utilities
Standard costs are planned costs per unit of output that are established in
advance of actual production or service delivery. This is the total cost divided by
the planned unit of output
FROM THE NAME ITSELF Example: Cost of constructing a low – end residential building in the
"STANDARD" OR FIXED PRICE
Philippines is about Php 25,000 to Php 30,000 per sq. meter.
gagawa ka ng bahay, sa ph
ang standard cost ay Cost of manufacturing a 1-liter beer is about Php 65.28 per bottle
25,000- 30,000
included na ang direct, indirect, and overhead cost
Page 3 of 8
C. Sunk and Opportunity Costs
READ (IMPORTANT!)
• Page 24-25
16th Edition
no relevance
A sunk cost is one that has occurred in the past and has no relevance to estimates of
mga cost future costs and revenues related to an alternative course of action.
na hindi na
marecover
Example:
Ricky wants to buy the old model Yamaha Mio scooter with a price tag of Php 75,900
and down payment of Php 3,800. He then decides to pay the down payment of Php
3,800 and will pay periodically the remaining balance of Php 72,100. The release of
the scooter is one week after paying of the down payment. Next day, he saw the
latest Honda Beat scooter with a price tag of only Php 70,400. For the purpose of
deciding which scooter to purchase, the Php 3,800 is a sunk cost and thus would
not enter into the decision, except that it lowers the remaining cost of the first scooter
(Yamaha Mio). The decision then is between paying an additional Php 72,100 (Php
75,900 − Php 3,800) for the first scooter versus Php 70,400 for the second scooter.
If Ricky chooses to go with the second scooter (Honda Beat), the Php 3,800 he paid
as a downpayment will be irretrievable.
An opportunity cost is incurred because of the use of limited resources, such that the
opportunity to use those resources to monetary advantage in an alternative use is
foregone. Thus, it is the cost of the best rejected (i.e., foregone) opportunity and is often
hidden or implied.
Example:
Sarah, a student, could earn a decent salary working as a full-time minute burger
crew. Her salary for the whole year is about Php 97,032 (Php 311/day). Although
the salary is good, she still chooses to go to a private school whose yearly tuition is
Php 30,000. Based on this:
Opportunity Cost of Going to School: Php 97,032 + Php 30,000 = Php 127,032
Cash Outlay (Outgoing): Php 30,000
Income Foregone: Php 97,032 yung nawala sa kanya dahil nag aral siya
Thus, Sarah should do her best in her school because the opportunity cost is
expensive.
Page 4 of 8
Consumer and Producer Goods and Services

The goods and services that are produced and utilized maybe divided conveniently into
two classes.
1. Consumer goods and services are those products or services that are directly
used by people to satisfy their wants.
Examples: Food
Clothing
Homes
Cars
Internets
Haircuts
Cellular Loads
Medical Services
The providers of consumer goods and services must be aware of, and are subject
to, the changing wants of the people to whom their products are sold.
2. Producer goods and services are used to produce consumer goods and services
or other producer goods.
Examples: Machine tools
factory buildings
buses
farm machinery
The amount of producer goods needed is determined indirectly by the amount of
consumer goods or services that are demanded by people. However, because the
relationship is much less direct than for consumer goods and services, the demand
for and production of producer goods may greatly precede or lag behind the
demand for the consumer goods that they will produce.
Necessities, Luxuries, and Price Demand
READ (IMPORTANT!)
• Page 28-29
16th Edition
Goods and services may be divided into two types: necessities and luxuries. Obviously,
these terms are relative, because, for most goods and services, what one person
considers a necessity may be considered a luxury by another. For example, a person
living in one community may find that an automobile is a necessity to get to and from
Page 5 of 8
work. If the same person lived and worked in a different city, adequate public
transportation might be available, and an automobile would be a luxury.
ex:
smartphone
Competition
pagandahan
ng camera Perfect competition occurs in a situation in which any given product is supplied by a large
ang companies
number of vendors and there is no restriction on additional suppliers entering the market.
Monopoly is at the opposite pole from perfect competition. A perfect monopoly exists
ex: cotelco when a unique product or service is only available from a single supplier and that vendor
sila lang ang can prevent the entry of all others into the market.
electric
provider sa cot.
yan ang
monopoly SUMMARY:
It is important to understand the different terminologies used in engineering economy.

The first example illustrates the difference of fixed and variable cost. The varying amount of
materials to be hauled will be the basis of the contractor on decisions. This is important in
engineering economy to determine what cost is the variable. An incremental cost (or incremental
revenue) is the additional cost (or revenue) that results from increasing the output of a system by
one (or more) units.
The direct, indirect, overhead and standard cost have been explained thru series of
examples. The standard cost is an estimate and is the total of the three cost (direct, indirect,
overhead) divided into the planned unit of output.
The sunk cost are irretrievable consequences of past decisions and therefore are irrelevant
in the analysis and comparison of alternatives that affect the future.
The opportunity cost is the best rejected opportunity cost which is often hidden or implied
Consumer goods and services are those products or services that are directly used by
people to satisfy their wants.
Producer goods and services are used to produce consumer goods and services or other
producer goods.
Necessities and Luxuries are defined by who will used it, some people consider luxury as
necessity and vice versa.
Price and Demand for every increase of selling price the demand will decrease.
Perfect Competition occurs in a situation in which any given product is supplied by a large
number of vendors and there is no restriction on additional suppliers entering the market.
Perfect Monopoly exists when a unique product or service is only available from a single
supplier and that vendor can prevent the entry of all others into the market.
Page 6 of 8
EXERCISES:
NOTE: For VLE Students – No need to answer the problems here. What you need to do
is to solve the exercises in the VLE.
The exercises here are to be DONE ONLY by students who choose the “Printed
Module” mode of delivery. The solutions to this problem are to be handwritten and to
be passed to your instructor a week after you received this printed module.
Problem 1: Refer to the example from the topic about fixed and variable cost
1. How many cubic yards of material (X) will the contractor haul in order to begin
making a profit for site A?
2. How many cubic yards of material (X) will the contractor haul in order to begin
making a profit for site B?
Problem 2: Classify each of the following cost items as mostly fixed or variable:
Raw materials Administrative salaries
Direct labor Payroll taxes
Depreciation Insurance (building and equipment)
Supplies Clerical salaries
Property taxes Sales commissions
Interest in borrowed money Rent
Problem 3: A group of enterprising engineering students has developed a process for

extracting combustible methane gas from cow manure (don’t worry, the exhaust is
odorless). With a specially adapted internal combustion engine, the students claim that
an automobile can be propelled 15 miles per day from the “cow gas” produced by a single
cow. experimental car can travel 60 miles per day for an estimated cost of $5 (this is the
allocated cost of the methane process equipment—the cow manure is essentially free)
1. How many cows would it take to fuel 1,000,000 miles of annual driving by a
fleet of cars?
2. What is the annual cost of using the “cow gas”?
3. Compare the annual cost of “cow gas” to that of a gasoline-fueled car averaging
30 miles per gallon when the cost of gasoline is $3.00 per gallon ?
Problem 4: John Bros, owner of a spark manufacturing facility, is looking to expand his
production capacity. He is considering three location s A, B, and C for the construction of
a new plant. The company wishes to find the most economical location for an expected
volume of 2,500 units per year. Bros calculates that the fixed costs per year at each of
the sites amount to $25,000, $50,000 and $100,000 respectively. The variable cost is $70
Page 7 of 8
per unit, $40 per unit and $20 per unit respectively. The expected selling price for each
spark plug is $120.
1. Find the most economical location .
2. How many units of spark plug (X) will the company manufacture in order to begin
Page 8 of 8
MODULE 3
Principles of Money-Time Relationship (Part 1)

1. Solve for Simple Interest problems
2. Solve for Compound Interest problems
3. Draw Cash Flow Diagram
4. Evaluate Continuous Compounding (single amounts)
A. Simple Interest
𝐈 = 𝐏𝐍𝐢
𝐅=𝐏+𝐈
𝐅 = 𝐏 (𝟏 + 𝐍𝐢)
Where:
READ (IMPORTANT!)
I = interest
P = principal amount lent or borrowed, or present worth • Page 5 to 6
N = number of interest periods
Textbook: Engineering
i = rate of interest per interest period Economy, 3rd
F = accumulated amount of future worth Ed. (Sta. Maria)
READ (IMPORTANT!)
1. Ordinary simple interest – computed based on a
fixed number of days in a month = 30 days. It • Page 109 to 110
disregards the other months with 31 days or 28-29
days. Thus, the number of days in a year is 360 = (30 Economy, 16th
days/months) x (12 months). Ed.
Example: Determine the ordinary simple interest on Php 500 for 9 months and T
21 days if the rate of interest is 16%?
Number of days = 9(30) + 21 = 291

291
I = PNi = (Php 500) ( ) (0.16)
360
𝐈 = 𝐏𝐡𝐩 𝟔𝟒. 𝟔𝟕
2. Exact simple interest – computed based on the exact number of days in a

month. It considers the other months with 31 days or 28-29 days. Thus, the
number of days in a year will be 365 or 366 (for leap year).
Page 1 of 7
Example: Determine the exact simple interest on Php 500 for the period from
January 10 to October 28, 1996 at 16% interest?
292
I = PNi = (Php 500) ( ) (0.16)
366
𝐈 = 𝐏𝐡𝐩 𝟔𝟑. 𝟖𝟑
B. Cash Flow Diagrams
Example: Before evaluating the economic merits of READ (IMPORTANT!)

a proposed investment, the XYZ Corporation insists • Page 7
that its engineers develop a cash-flow diagram of
the proposal. An investment of $10,000 can be made
Economy, 3rd
that will produce uniform annual revenue of $5,310
Ed. (Sta. Maria)
for five years and then have a market (recovery)
value of $2,000 at the end of year (EOY) five. Annual READ (IMPORTANT!)
expenses will be $3,000 at the end of each year for • Page 113 to 115
operating and maintaining the project. Draw a cash-
flow diagram for the five-year life of the project. Use Textbook: Engineering
Economy, 16th
the corporation’s viewpoint.
Ed.
Solution:
As shown in the figure below, the initial investment of $10,000 and annual
expenses of $3,000 are cash outflows, while annual revenues and the market value
are cash inflows.
Notice that the beginning of a given year is the end of the preceding year. For
example, the beginning of year two is the end of year one.
Page 2 of 7
C. Compound Interest
READ (IMPORTANT!)
F= maturity value
P= principal
i= rate 𝐅 = 𝐏 (𝟏 + 𝐢 )𝐍 • Page 8 to 12
N= term
m= number of interesr
periods in a year 𝐅 = 𝐏 (𝐅/𝐏, 𝐢%, 𝐍) Textbook: Engineering
Economy, 3rd
𝐏 = 𝐅 (𝟏 + 𝐢)−𝐍 Ed. (Sta. Maria)
𝐏 = 𝐅 (𝐏/𝐅, 𝐢%, 𝐍) READ (IMPORTANT!)
• Page 110,117-119,
The term (𝟏 + 𝐢)𝐍 or 𝐅/𝐏, 𝐢%, 𝐍 is called the single
122-123
payment compound factor.
The term (𝟏 + 𝐢)−𝐍 or 𝐏/𝐅, 𝐢%, 𝐍 is called the single Economy, 16th
payment present worth factor Ed.
The i, m, and r
The symbol i, called the rate of interest per interest period, is important in
engineering economy, thus, we need to understand it. Let’s relate it to r and m.
The symbol r – represents the rate of interest per year. As we see, the
difference of the symbol r and the symbol i is that the former is fixed while the latter
depends on how many interest periods (or payment) would occur in a year.
The symbol m – represents the number of interest periods in a year. This the
number of times your interest compounds in a year or the number of times you pay
or being paid back in a year. (see table 3.1)
Therefore, the relationship of these three symbols is:

𝐫
𝐢=
𝐦
Also, the r in this relationship is called the Nominal Interest Rate.
Table 3.1. Common terms used for m
Terms m Definition
Weekly 52 There are 52 weeks in a year.
Fortnightly 26 There are 26 fortnights in a year (also bi-weekly).
Semi-monthly 24 Semi-monthly means you have to pay twice a month.
Monthly 12 You have to pay every month. 12 months in a year.
Bi-monthly 6 You pay every two months.
Quarterly 4 A quarter of a year is three months. (Quarter!)
Semi-annually 2 You pay only for twice a year.
Annually 1 You pay only each year. (Yearly)
Page 3 of 7
The Effective Rate of Interest (i)
READ (IMPORTANT!)
• Page 155-157
Economy, 16th Ed.
F= maturity value
P= principal
i= rate
N= term
m= number of interesr 𝐫 𝐦
periods in a year 𝐢 = (𝟏 + ) −𝟏
𝐦
Example: A credit card company charges an interest rate of 1.375% per month on the
unpaid balance of all accounts. The annual interest rate, they claim, is 12(1.375%) =
16.5%. What is the effective rate of interest per year being charged by the company?
The 1.375% per month would lead to a simple calculation of r = 16.5% which is called
the nominal interest rate. Creditors often advertised their interest on monthly basis
(or other periodical terms like quarterly and so on). This would seemingly result on
a lower annual interest rate. But, because you are an engineering student and you
know economy, you can really know the real interest rate the creditor is offering you.
You can then apply what you have learn on module 1, to decide on a choice.
Solution:
r m
i = (1 + ) − 1
m
0.165 12
i = (1 + ) −1
12
𝐢 = 𝟎. 𝟏𝟕𝟖 𝐨𝐫 𝟏𝟕. 𝟖%
This is higher than what the creditor is showing to you, higher by 1.3%. You
are paying an extra 1.3% interest annually if you think that the annual interest
rate you are paying is only 16.5%.
Page 4 of 7
D. Continuous Compounding (single amounts)
F= maturity value 𝐅 = 𝐏 𝒆𝐫𝐍 READ (IMPORTANT!)

P= principal
𝐅 = 𝐏 (𝐅/𝐏, 𝐫%, 𝐍)
i= rate
N= term • Page 160-163
m= number of interesr
periods in a year
𝐏 = 𝐅 𝒆−𝐫𝐍 Textbook: Engineering
Economy, 16th Ed.
𝐏 = 𝐅 (𝐏/𝐅, 𝐫%, 𝐍)
The term 𝒆𝐫𝐍 or 𝐅/𝐏, 𝐫%, 𝐍 is called the continuously compounding compound
amount factor (single cash flow) at r% nominal interest for N years.
The term 𝒆−𝐫𝐍 or 𝐏/𝐅, 𝐫%, 𝐍 is called the continuously compounding present
equivalent (single cash flow) at r% nominal interest for N years.
Example:
You have Php 150,000 to invest for two years. Your bank offers 5% interest,
compounded continuously for funds in a money market account. Assuming no
additional deposits or withdrawals, how much money will be in that account at the
end of two years? What if the interest rate was 5% compounded weekly?
Compounded monthly? Compounded quarterly? Compounded semi-annually,
Compounded annually?
F = Php 150,000 (F/P, 5%, 2)
F = (Php 150,000) 𝑒 (0.05)(2)
𝐅 = 𝐏𝐡𝐩 𝟏𝟔𝟓, 𝟕𝟕𝟓. 𝟔𝟒
For the interest rate of 5% not compounded continuously.
𝟎. 𝟎𝟓 𝐍
𝐅 = 𝐏𝐡𝐩 𝟏𝟓𝟎, 𝟎𝟎𝟎 (𝟏 + ) ; 𝑵 = 𝟐𝒎 (𝟐 𝒚𝒆𝒂𝒓𝒔 𝒙 𝒎)
𝐦
F Compounded m N = 2m Diff. w/ continuously
Php 165,767.67 Weekly 52 104 Php 7.97
Php 165,741.20 Monthly 12 24 Php 34.44
Php 165,672.92 Quarterly 4 8 Php 102.72
Php 165,571.93 Semi-annually 2 4 Php 203.706
Php 165,375.00 Annually 1 2 Php 400.64
Page 5 of 7
SUMMARY:
It was shown here that money increases with time using the system of interests.
Simple interest is when the principal amount (capital, borrowed or lend) increases
linearly with time along with its interest rate.
Compound interest is when the interest increases based on the original
principal amount plus any accumulated interest from the beginning of the period. To
say, the new principal of the new period is the addition of the new interest and the
previous principal. This will continue until the finished period
To draw cash flow diagrams, the horizontal bar is the time divided by periods
(year, month, etc.). The up arrow symbolizes cash is coming in (cash in-flow) while the
down arrow symbolizes cash is going out (cash out-flow). The start of a period is the
end of the previous period.
Continuous compounding is a type of compound interest in which the number
of periods in a year tends to go infinite (m → ∞). As shown by the example, continuous
compounding has much higher future amount than any compound interest.
EXERCISES:
The exercises here are to be DONE ONLY by students who chose the “Printed
Module” mode of delivery. The solutions to this problem are to be handwritten and
to be passed to your instructor a week after you received this printed module.
Problem 1: The principal amount is Php 173,248 and the rate of interest is 6.8%
1. Determine the ordinary simple interest for 8 months and 13 days 8279.33
2. Determine the exact simple interest the period from February 11 to October
24, 2007. If 2008? 8240.17
Problem 2: A Php 270,500 loan was originally made at 12% simple interest for 5
years. At the end of this period the loan was extended for 4 years without the interest
being paid, but the new interest rate was made 10% compounded quarterly.
1. How much should the borrower pay at the end of 9 years? 642494.03
2. How much should the borrower pay if it was compounded semi-annually? 639442.72
Page 6 of 7
Problem 3: The company Schizo inc., is planning to buy a labor-saving device which
could potentially save Php 640,000 annually. CEO Harlem de Juan insist that they
should develop a cash-flow diagram for the proposal. The device cost Php 2 million
and its annual operating and maintenance cost (O & M) is Php 240,000. The salvage
value of the machine after 5 years is Php 1.2 million. Develop a cash-flow diagram for
the proposal.
Problem 4: You have Php 750,000 to invest for two years. Your bank offers 6.5%
interest, compounded continuously for funds in a money market account. Assuming
no additional deposits or withdrawals, how much money will be in that account at the
end of two years? What if the interest rate was 6.5% compounded weekly?
Compounded fortnightly? Compounded semi-monthly? Compounded bi-monthly,
Compounded annually?
at the end of 2 years= 854121.29

weekly= 854051.95
forthnightly= 853982.73
semi-monthly= 853971.21
bi monthly= 853524.36
annually= 850668.75
Page 7 of 7
MODULE 4
Principles of Money-Time Relationship (Part 2)

1. Perform Interest Formulas Relating Uniform Series Present and Future
Equivalent Values.
2. Solve for Annuity
Relating a Uniform Series (Annuity) to Its Present

and Future Equivalent Values
READ (IMPORTANT!)
Annuity - a series of uniform (equal) receipts (or
payments), each of amount A, occurring at the end of • Page 18 to 29
each period for N periods with interest at i% per Textbook: Engineering
period. The notations involved here are: Economy, 3rd
Ed. (Sta. Maria)
1. P (present equivalent value) occurs one interest
READ (IMPORTANT!)
period before the first A (uniform amount).
2. F (future equivalent value) occurs at the same • Page 123 to 133
time as the last A, and N periods after P.
3. A (annual equivalent value) occurs at the end of Economy, 16th
periods 1 through N, inclusive. Ed.
Ordinary Annuity
The first cash flow being made is at the end of the first period,
1. Finding F when given A

(𝟏 + 𝒊)𝑵 − 𝟏
𝐅 = 𝐀[ ]
𝒊
𝐅 = 𝐀(𝑭/𝑨, 𝒊%, 𝑵)
Where:
(𝟏+𝒊)𝑵 −𝟏
[ ] = (𝑭/𝑨, 𝒊%, 𝑵) - Uniform Series Compound Amount Factor
𝒊
Page 1 of 10
Example: If eight (8) annual deposits of $187.45 each are placed in an account.
How much money has accumulated immediately after the last deposit? Interest
rate is 10%.
(1 + 0.10)8 − 1
F = A(𝐹/𝐴, 10%, 8) = $187.45 [ ]
0.10
𝐅 = $𝟐, 𝟏𝟒𝟑. 𝟔𝟎
If the principle of money-time relationship is not considered (i.e. disregarding

interest rate), the accumulated amount at the end of eight (8) annual deposits is
just F = 8*$187.45 = $1,499.6. This is not how money should work with time.
Therefore, do not just store money in your piggy bank, invest it or put it in a bank.
Example: Who wants to be a millionaire by saving Php 1.00 a day? “If you are 20
years of age and save Php 1.00 each day for the rest of your life, you can become a
millionaire.” Let’s assume that you live to age 80 and that the annual interest rate
is 10% (i = 10%). Under these specific conditions, we compute the future
compound amount (F) to be:
(1 + 0.10)60 − 1
F = Php 365(𝐹/𝐴, 10%, (80 − 20 = 60)𝑦𝑒𝑎𝑟𝑠) = 𝑃ℎ𝑝 365 [ ]
0.10
𝐅 = 𝐏𝐡𝐩 𝟏, 𝟏𝟎𝟕, 𝟕𝟎𝟕. 𝟗𝟖 (𝐘𝐨𝐮′ 𝐫𝐞 𝐚 𝐦𝐢𝐥𝐥𝐢𝐨𝐧𝐚𝐢𝐫𝐞 𝐛𝐲 𝐚𝐠𝐞 𝟖𝟎)
2. Finding P when given A
(𝟏 + 𝒊)𝑵 − 𝟏
𝐏 = 𝐀[ ]
𝒊(𝟏 + 𝒊)𝑵
𝐏 = 𝐀(𝑷/𝑨, 𝒊%, 𝑵)
Where:
(𝟏+𝒊)𝑵 −𝟏
[ ] = (𝑷/𝑨, 𝒊%, 𝑵) - Uniform Series Present Worth Factor
𝒊(𝟏+𝒊)𝑵
Page 2 of 10
Example: Suppose you want to have an eight (8) annual withdrawal of $187.45 in
an account. How much money should you deposit at the beginning? Interest rate
is 10%.
(1 + 0.10)8 − 1
P = A(𝑃/𝐴, 10%, 8) = $187.45 [ ]
0.10(1 + 0.10)8
𝐏 = $𝟏, 𝟎𝟎𝟎. 𝟎𝟑
Example: “Make your best deal with us on a new automobile and we’ll change
your oil for free for as long as you own the car!” If you purchase a car from this
dealership, you expect to have four free oil changes per year during the five years
you keep the car. Each oil change would normally cost you $30. If you save your
money in a mutual fund earning 2% per quarter, how much are the oil changes
worth to you at the time you buy the car? (How much is the discount (discounted
through oil change) when you buy the car at the beginning)
𝑖 = 2% 𝑝𝑒𝑟 𝑞𝑢𝑎𝑟𝑡𝑒𝑟 – This means that the r = 2% (4) = 8% per year.

𝑁 = (5 𝑦𝑒𝑎𝑟𝑠)(4) = 20 𝑝𝑒𝑟𝑖𝑜𝑑𝑠; 𝑚 = 4 (𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦)
(1 + 0.02)20 − 1
( )
P = $30 𝑃/𝐴, 2%, 20 = $30 [ ]
0.02 (1 + 0.02)20
𝐏 = $𝟒𝟗𝟎. 𝟓𝟒
This is what you save when you buy at that dealer (your savings is in a form of
four free oil changes per year at $30 per oil change, assuming that the interest
rate is 2% per quarter). This would help you decide in choosing what dealer has
better offer.
Page 3 of 10
3. Finding A when given F

𝒊
𝐀 = 𝐅[ ]
(𝟏 + 𝒊)𝑵 − 𝟏
𝐀 = 𝐅(𝑨/𝑭, 𝒊%, 𝑵)
Where:
𝒊
[(𝟏+𝒊)𝑵 ] = (𝑨/𝑭, 𝒊%, 𝑵) – Sinking Fund Factor
−𝟏
Example: A 45-year-old person wants to accumulate $500,000 by age 70. How

much will she need to save each month, starting one month from now, if the
interest rate is 0.5% per month?
𝑖 = 0.5% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ – This means that the r = 0.5% (12) = 6% per year.
t = 70-45 = 25 years; 𝑁 = (25 𝑦𝑒𝑎𝑟𝑠)(12) = 300 𝑝𝑒𝑟𝑖𝑜𝑑𝑠; 𝑚 = 12 (𝑚𝑜𝑛𝑡ℎ𝑙𝑦)
0.005
A = $500,000(𝐴/𝐹, 0.5%, 300) = $500,000 [ ]
(1 + 0.005)300 − 1
𝐀 = $𝟕𝟐𝟏. 𝟓𝟏 𝐩𝐞𝐫 𝐦𝐨𝐧𝐭𝐡
4. Finding A when given P

𝒊(𝟏 + 𝒊)𝑵
𝐀 = 𝐏[ ]
(𝟏 + 𝒊)𝑵 − 𝟏
𝐀 = 𝐏(𝑨/𝑷, 𝒊%, 𝑵)
Where:
𝒊(𝟏+𝒊)𝑵
[(𝟏+𝒊)𝑵 ] = (𝑨/𝑷, 𝒊%, 𝑵) – Capital Recovery Factor
−𝟏
Example: You borrow Php 350,000 from your credit union to purchase a used car.
The annual interest rate on your loan is 3% payable for 3 years. What is your
monthly payment?
𝑟 3%
𝑖= = = 0.25% 𝑝𝑒𝑟 𝑚𝑜𝑛𝑡ℎ.
𝑚 12 𝑚𝑜𝑛𝑡ℎ𝑠
t = 3 years; 𝑁 = (3 𝑦𝑒𝑎𝑟𝑠)(12) = 36 𝑝𝑒𝑟𝑖𝑜𝑑𝑠; 𝑚 = 12 (𝑚𝑜𝑛𝑡ℎ𝑙𝑦)
0.0025(1 + 0.0025)36
A = Php 350,000(𝐴/𝑃, 0.25%, 36) = Php 350,000 [ ]
(1 + 0.0025)36 − 1
𝐀 = 𝐏𝐡𝐩 𝟏𝟎, 𝟏𝟕𝟖. 𝟒𝟐 𝐩𝐞𝐫 𝐦𝐨𝐧𝐭𝐡
Page 4 of 10
Deferred Annuity
READ (IMPORTANT!)
The cash flow does not begin until some later
date. • Page 30 to 35
If the annuity is deferred for J periods (J < N),
the situation is as portrayed in the Figure, in Economy, 3rd Ed.
which the entire framed ordinary annuity has (Sta. Maria)
been moved away from “time present,” or “time
READ (IMPORTANT!)
zero,” by J periods. Remember that, in an annuity
deferred for J periods, the first payment is made • Page 135 to 137
at the end of period (J + 1) (upward arrow – start
of payment), assuming that all periods involved Economy, 16th Ed.
are equal in length.
1. Present Equivalent of a Deferred Annuity
𝐏𝟎 = 𝑷𝑱 (𝑷/𝑭, 𝒊%, 𝑱) = 𝑷𝑱 (𝟏 + 𝒊)−𝑱

(𝟏 + 𝒊)𝑵−𝑱 − 𝟏
𝐏𝐉 = 𝑭𝑱 = 𝑨(𝑷/𝑨, 𝒊%, 𝑵 − 𝑱) = 𝐀 [ ]
𝒊(𝟏 + 𝒊)𝑵−𝑱
(𝟏 + 𝒊)𝑵−𝑱 − 𝟏
𝐏𝟎 = 𝐀 [ ] (𝟏 + 𝒊)−𝑱
𝒊(𝟏 + 𝒊)𝑵−𝑱
Where:
𝑷𝟎 – The present amount at “time present” or “time zero”
𝑷𝑱 – The present amount when the receipts (or payment) is deferred for J periods
𝑭𝑱 – Equal to 𝑷𝑱 , this is the future amount for 𝑷𝟎 after J periods (time when the
annuity deferred by J periods starts)
Page 5 of 10
Example: To illustrate the preceding discussion, suppose that a father, on the day his
son is born, wishes to determine what lump amount would have to be paid into an
account bearing interest of 12% per year to provide withdrawals of $2,000 on each
of the son’s 18th, 19th, 20th, and 21st birthdays.
The father wants the withdrawal to start on his son’s 18th birthday (this is J+1) up
to his son’s 21st birthday. Therefore, J = 17 and N = 21. He wants to know P0.
P0 = 𝑃𝐽 (𝑃/𝐹, 12%, 17) = 𝑃𝐽 (1 + 0.12)−17
(1 + 0.12)21−17 − 1
PJ = 𝐹𝐽 = $2,000(𝑃/𝐴, 12%, 21 − 17) = $2,000 [ ]
0.12(1 + 0.12)21−17
PJ = 𝐹𝐽 = $6,074.70
P0 = $6,074.70(𝑃/𝐹, 12%, 17) = $6,074.70(1 + 0.12)−17

𝐏𝟎 = $𝟖𝟖𝟒. 𝟕𝟓
His father needs to set-up an account and deposit $𝟖𝟖𝟒. 𝟕𝟓 at the start of age of his
son in order for his son to withdraw $2,000 on his son’s 18th, 19th, 20th and 21st
birthday.
2. Deferred Future Value of Annuity
Example: When you take your first job, you decide to start saving right away for
your retirement. You put Php 500 per month into an insurance policy which
averages 6% interest per year. The payment will stop after you completed the
payment for 10 years and the policy will mature. You can then only get the
accumulated future amount of your savings at the end of year (EOY) 40. How much
is the accumulated future amount?
Page 6 of 10
Soln.
Periods of payment = (12 months) (10 years) = 120 periods
Total periods = (12 months) (40 years) = 480 periods
i = 6%/12 = 0.5%
(1 + 0.5%)120 − 1
F10 ( )
= Php 500 𝐹/𝐴, 0.5%, 120 = 𝑃ℎ𝑝 500 [ ]
0.5%
F10 = 𝑃ℎ𝑝 81,939.67
F40 = 𝑃ℎ𝑝 81,939.67(𝐹/𝑃, 0.5%, (480 − 120)) = 𝑃ℎ𝑝 81,939.67(1 + 0.5%)360
𝐅𝟒𝟎 = 𝑷𝒉𝒑 𝟒𝟗𝟑, 𝟒𝟖𝟕. 𝟖𝟑
Saving Php 500 per month for 10 years without considering the principle of money-
time relationship will only give you a saving of (12)(10)(Php 500) = Php 60,000.
Annuity Due and Perpetuity
READ (IMPORTANT!)
• Page 36 to 39
Economy, 3rd Ed.
(Sta. Maria)
Annuity due is one where the payments are made at the beginning of each period
1. Finding P when A is given
(𝟏 + 𝒊)𝑵−𝟏 − 𝟏
𝐏 = 𝐀+ 𝐀[ ]
𝒊(𝟏 + 𝒊)𝑵−𝟏
(𝟏 + 𝒊)𝑵−𝟏 − 𝟏
𝐏 = 𝐀 {𝟏 + [ ]}
𝒊(𝟏 + 𝒊)𝑵−𝟏
𝐏 = 𝐀 + 𝐀(𝑷/𝑨, 𝒊%, 𝑵 − 𝟏)
𝐏 = 𝐀[𝟏 + (𝑷/𝑨, 𝒊%, 𝑵 − 𝟏)]
Example: A man bought an equipment costing Php 60,000 payable in 12 quarterly
payments, each installment is payable at the beginning of each period. The rate of
interest is 24% compounded quarterly. What is the amount of each payment?
Page 7 of 10
Soln.
P = Php 60,000; N = 12; i = 24%/4 = 6%
(1 + 6%)12−1 − 1
Php 60,000 = A(1 + 𝑃/𝐴, 6%, 12 − 1) = A {1 + [ ]}
6%(1 + 6%)12−1
𝐀 = 𝐏𝐡𝐩 𝟔, 𝟕𝟓𝟏. 𝟓𝟑
2. Finding F when A is given
(𝟏 + 𝒊)𝑵+𝟏 − 𝟏
𝐅 = 𝐀[ ]−𝑨
𝒊
(𝟏 + 𝒊)𝑵+𝟏 − 𝟏
𝐅 = 𝐀 {[ ] − 𝟏}
𝒊
𝐅 = 𝐀(𝑭/𝑨, 𝒊%, 𝑵 + 𝟏) − 𝑨
𝐅 = 𝐀[(𝐅/𝑨, 𝒊%, 𝑵 + 𝟏) − 𝟏]
3. Perpetuity
A perpetuity is an annuity in which the payments continue indefinitely
𝐀
𝐏=
𝐢
Continuous Compounding for Uniform Series (Annuity)
READ (IMPORTANT!)
a. Finding F given A
• Page 160 to 163
𝐅 = 𝐀(𝑭/𝑨, 𝒓%, 𝑵)
𝒆𝒓𝑵 − 𝟏 Economy, 16th Ed.
𝐅 = 𝐀( 𝒓 )
𝒆 −𝟏
Factor Name:
Continuous Compounding Amount Factor (Uniform Series)
Page 8 of 10
b. Finding P given A
𝐏 = 𝐀(𝑷/𝑨, 𝒓%, 𝑵)
𝒆𝒓𝑵 − 𝟏
𝐏 = 𝐀[ ]
𝒆𝒓𝑵 (𝒆𝒓 − 𝟏)
Factor Name: Continuous Compounding Present Equivalent Factor (Uniform
Series)
c. Finding A given F
𝐀 = 𝐅(𝑨/𝑭, 𝒓%, 𝑵)
𝒆𝒓 − 𝟏
𝐀 = 𝐅[ ]
𝒆𝒓𝑵 − 𝟏
Factor Name: Continuous Compounding Sinking Fund Factor
d. Finding A given P
𝐀 = 𝐏(𝑨/𝑷, 𝒓%, 𝑵)
𝒆𝒓𝑵 (𝒆𝒓 − 𝟏)
𝐀 = 𝐏 [ 𝒓𝑵 ]
𝒆 −𝟏
Factor Name: Continuous Compounding Capital Recovery Factor
The Concept of Equivalence
Alternatives should be compared when they produce similar results, serve the
same purpose, or accomplish the same function. As one of the principles of
engineering economy, it should answer the question: How can alternatives for
providing the same service or accomplishing the same function be compared
when interest is involved over extended periods of time? Thus, we should
consider the comparison of alternative options, or proposals, by reducing them
to an equivalent basis that is dependent on:
(1) the interest rate,
(2) the amounts of money involved, and
(3) the timing of the monetary receipts or expenses.
Example: Read the case study on page 163 to 166 on Engineering Economy
16th Edition PDF.
Page 9 of 10
SUMMARY:
The second part of Principle of Money-Time relationship introduced the concept
of uniform series which involved a series of uniform receipts (or payments) occurring
at every period (end or beginning). This series is what we call Annuity.
When a payment is made at the end of a period it is called Ordinary Annuity.
When a payment is made several periods after the “time zero” or which the payment
started at future periods less than the end period it is called Deferred Annuity.
When a payment is made at the beginning of a period it is called Annuity Due.
When a payment is made to continue indefinitely it is called Perpetuity.
EXERCISES:
The exercises here are to be DONE ONLY by students who chose the “Printed
Module” mode of delivery. The solutions to this problem are to be handwritten and
to be passed to your instructor a week after you received this printed module.
Problem 1: Your parents make 20 equal annual deposits of $2,000 each into a bank
account earning 3% interest per year. The first deposit will be made one year from
today. How much money can be withdrawn from this account immediately after the
20th deposit?
Problem 2: How much money should be deposited each year for 12 years if you wish
to withdraw $309 each year for five years, beginning at the end of the 14th year? Let
i = 8% per year. Draw a cash-flow diagram.
Problem 3: A certain property is being sold and the owner received two bids. The
first bidder offered to pay Php 400,000 each year for 5 years, each payment is to be
made at the beginning of each year. The second bidder offered to pay Php 240,000
first year, Php 360,000 the second year and Php 540,000 each year for the next 3
years, all payments will be made at the beginning of each year. If money is worth 20%
compounded annually, which bid should the owner of the property accept?
Problem 4: What amount of money invested today at 15% interest can provide the
following scholarships; Php 30,000 at the end of each year for 6 years; Php 40,000 for
the next 6 years and Php 50,000 thereafter?
Page 10 of 10

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ENGINEERING ECONOMY

Jean M. Martin/ Ryan James s. Olivo/ Alvin John R. Villanueva

UNIVERSITY OF SOUTHERN MINDANAO

Jean M. Martin/ Ryan James s. Olivo/ Alvin John R. Villanueva

UNIVERSITY OF SOUTHERN MINDANAO

Ideas, concepts, diagrams and/or illustrations depicted in this learning material

ES 312b: Engineering Economy

Help accelerate socio-economic development, promote harmony among diverse

UNIVERSITY QUALITY POLICY STATEMENT

The University of Southern Mindanao, as a premier university, is committed to

ES 312b: Engineering Economy

ES 312b: Engineering Economy

Chapter 3: Principles of Money-Time Relationship

ES 312b: Engineering Economy

Course Learning/Study Plan/Schedule

2 Online Video VLE/Zoom/ Online Exam,

3-8 Online Video VLE/Zoom/ Online Exam,

ES 312b: Engineering Economy

10-11 Online Video VLE/Zoom/ Online Exam,

12-17 Online Video VLE/Zoom/ Online Exam,

Course Requirements/Assessment and Evaluation Scheme/Grading System

ES 312b: Engineering Economy

CO 1 Score Range Score Range

House Rules/Class Policies

ES 312b: Engineering Economy

Intended Learning Outcomes

Principles of Engineering Economy

Apply to an example problem

1. Develop the Alternatives

Problem: Rodrigo needs to top off his automobile by 57 liters.

2. Focus on the Differences

Difference: Cost of topping off Rodrigo’s automobile’s gas tank.

ES 312b: Engineering Economy

3. Use a Consistent Viewpoint

Viewpoint: It is the perspective of Rodrigo (the automobile owner) on whether he

4. Use a Common Unit of Measure

5. Consider All Relevant Criteria

6. Make Risk and Uncertainty Explicit

ES 312b: Engineering Economy

7. Revisit Your Decision

Consider this example.

STEPS - Engineering Economic Analysis Procedure

Apply to an example problem

ES 312b: Engineering Economy

From the example, the following questions are:

a) Does your client have a problem? If so, what is it?

a) Does your client have a problem? If so, what is it?

Annual Expenses: Php 150k + Php 72k = Php 222k

b) What are his alternatives? (Identify at least three)

ES 312b: Engineering Economy

Option 3: Sell the apartment building. (What about a loss?)

Assumption: Suppose the apartment complex is in operation for twelve

Option 4: Abandon the building (bad for your client’s reputation)

d) Select a criterion for discriminating among alternatives, and use it to advise

e) Attempt to analyze and compare the alternatives in view of at least one

ES 312b: Engineering Economy

The problems discussed here showed the importance of doing engineering

SHOW YOUR SOLUTIONS.

ES 312b: Engineering Economy