at ENGINEERING ECON®MY ‘THIRD EDITION HIPOLITO B. STA. MARIA NedionalPublished by Nefional PREFACE boo Sore PHILIPPINE COPYRIGHT. 1988, 1993, 2000 by Hipotto B.S Maria Baginering Economy i ono ofthe most portant and ubjecin he eogieering carve 20 much, hat tis aie Simon ta all engineering disiphines The Geldof engineting Fis Year of Publication, 1988 Sno cnn cere ray in i wes ecganae ‘Sense’ ‘The purpse af the bok fo give the student sun an sanding ofthebas concepts ofthe sujet and ome sighs ieee re wane Gbaveaches that ean be word for making sound economic {lucie than 0 te young eager. during thee ist {eyenrsafereraduation ae eequied tomake ocnomy tdi of ere ‘rapeoal projet Its the nim of this book Lo prepare and ena i ee ee Them with shill in engineering economy so as to beter face the No par of his book may be {hecenges oftheir pofessnns For chose who will pursue farther reproduced in any form or by ay afer ration they wl find Ue subject of grea importane, ma ep is review, without permission mecousillasteative problems, aerangod in the order of in wting from the author inennnngtiiuy ar presented. Tees way tty wn eae tiny tec sujet forthe student apply che principles a [hving problems, Te achive this, problems wih their answers are OPM Citapiae of Provided a he end ofeach chapter, except in Chapter ration No, SP 584 ean ‘Thin book is filled with problem sots mostly taken from examinations have iver i almet 40 yeurs] have gh hesubjct tthe Faculty of ginseng of he Us Cover Design by Rosauro Renta “Theauthor experienced inumensejo and stisieton in texching engineering aconomy nds writing the bok and hapes that the eestor woul eperince the same oy and satisfaction in reading Printed by EchaisPres Inc 760 Boni Avenue Mandaluyong City sw 97108-6078 TaeCONTENTS: Preface ‘Cuaron 8 9 “The Bonomi Environment Imerest al Money Tine Reaionship Depreciation Capita Bancig. Selsions in Present Economy. Basie Mthos for Making Beonomy Stade, Comparing Aerts Fixed, neem and Sunk Cos Replacrent Suis 10 Break ven Anas. LA BenesuCost Ratio. n m r usChapter L ‘The Economic Environment ginsering oumamy ie the analysis and evaluation ofthe faeors that wil aft the sooamie macs: of emginering projects to the Gn dha a recommendation can be made which wil sure the best toe af eapital Consumer and Producer Goods and Servieas ‘Consumer gaoisandservicm ae shosoprets or services that sno iy gat a rns — Praducer eve arn tpn cone [Necessities and Luxuries [Nees are thove pradvets or service that are required to sand cities, that ibs purchase a somewhat theaame quantity ven though the pre varie considerably. nutes re those product or serves that are desi by ‘humans and willbe purchased moneys avalable afore reauired oceans have been obtained Demand ‘Demand ithe quantity of certain commodity cha isbought at acerain pre ata gen pls and binelasticdonvand oocurs when 2 decrease i solling prise esl ia a greator than proportionate increase in sales Thelastc demand eure when a dcerease inthe sling pre proces less than proportionate increase i sles Unitary elasicty af demand oceans when dhe mathematical prot of volume snd peices constant, Demand Demand rice Figure 1-1. General price: ‘demand relationship, Figure 1-2. Prieedemand relationship for asuries and Competition, Monopoly and Oligopoly Perfect competition acurs in situation where a commodity oF service supplied ty a numberof vendors and there is nothing prevent addtional vendors entoring the market. ‘Monopoly isthe opposite of perfect competition. A perfect monopoly exists when aun produet or service is avaiable fem single vendor an thee vendarean prevent the entry o alo fina the market. ‘Olgopaly exists when there aro so few suppliers ofa product or somice that ueion by one wll almost nevitably result n simdar tion by the others, “The Law of Supply and Demand Supply is the quanti of certain commodity that i offered for aa cortain price ata given place and tine the law of supply snd damn may be sated follow Unvder conditions of perfect competion the pie at which agen ‘ac wile cupid and purchased he prices wil oul Bethe sup and the demand being equa” / _ 4 4 Prise Figure 18. Goneral price. supply relationship When theuse of nef the factors of production istimte, either in ineromsing onto by abscte quant, point wil be reached tjand which an increase in the variable factors will rel ness than proportionate merese in oat” 2 3 - LA 5 a ae Z1 é ° = Inpetingsitoiates 4 Figure 15, Performance cure of en lotr motor"Theft ofthe la of diminishing retuens on the performance ofan elec motor illustrated im Fag 1-5. Foe the eaey increase {i input, through input of 4.0 kw the tual increase in output {rear than proportional: beyond this pot the output is less chan [roportional In thiscave the fixed int factor ide eletrc mete Chapter 2 Interest and Money- Time Relationships Inert is he amount of money pid fo he wa of brow caps the ncn pradused y sony whch hes ben el ; oa Simple atest. yy mre | Sipe fntoest x cleat using the principal only, snoring oy yet at haben ara green pere In prc is inate paon shee ons nw thee fhe is mare 1 = Pai an B= Pri=P+ Pri F = Paen, en 1 = interost P= principal or present worth fh = numbar of inert pride) {= tat interest por interes period P= secumulated amount oe future worth @ simple intrest i cmpated onthe sono Bane or 0 faye ee 1 interest pei = 960 days -9y. fe Tor BY en0) xc simple intarest i based on the exact number of dy b __ima yet ap Toran ordinary yar an dys fr aap ow Ie Petpet rine se eee inert prod 3680 386 aye £ ) xe a) BleP# 0¥ y 4y termine the ordinary simple interest on PTOO fo 8 month and 15 days ithe rate of lseest 15% ambor of days = 6) + 255) 6 255.15 PIA 8 (2-2 Determine the exaet simple intorest on P500 forthe period feoms Janus 10 to Octaber 2, 1296 a¢ 10% intrest 1=Pri = P100 Solution Jan, 1-81 = 24 (exeluding Jan. 10) Februsey = 29 March = 31 aon 30 Mas an Sune = 30 day = at ‘hugust © = 31 September = 30 Octuber = 2B (including Oot 28) 202 days 292 916= ea art et aca won Exact simple interest = P5O0 Solution F=Pa tal 10.900 {1 + (HE) (o.42)= Pr. 400 i Cash-Flow Dingrams cash-flow diagram simply a graphia representation os owe driwnon ane scale Cash flow dag oe sxnor naa etblern t aalngous to that of fee body dagen for mechanic pecs. fe | iebursement (negative cash flow or cash outflow) Atoan of P100 at simple interest of 10% will bacome P50 afar Syms Piso P1009 Cash flow diagram on the viewpoint of Piso ash ow gram en te vonolat ot if Garoee)Compound Interest w Incaleulationsof compound interes, the intrest for an interst peratne 6 pera is ealoulated on the principal pls fla amount of ater ‘ecumilated in previows periods ‘Thus compund interest means “The quantity (1-+9-"icalledthe"single payment present worth interes fect nnd desigated Hy the factional yb PP, %, 0. THs, PFO. %9) GH) lo, a 8 “The sym PIF. #%, misread a8 P given F at pes cen in 0 P44 5 intocest periods” at of Tntorest (Nominal neon) inal ate intact piste rat aerest anda number of inert pends nan 86 ae en Figure 2-1, Compound Interest Borrower's Viewpoint) Tnterest | Principal at | Interest Earned | Amount at End Povo | Rorningt | Donne Perod | Ped ate of intone po intrest pial minal intrest rate ‘uml of expounding peri pr year abs Pi — Ir th nominal rate intrest is 1% compounded quate 2 jfearo | paso Petey PsN don tt 25h the eae finer per meres pt asi wey FP un: PPO 9 etna uefa, 3 Pare Pasi PCs? + PODS ae fective ent of inert the actual ena ate of 7 interaton the rina during year FP OD sinvested = “rect ompntat nen rome Favor | Paar | Pater Suet wilco Ferave @m pe (08 r 4 “The quantity (149" i commonly called the "single payment compound amount factor’ ands desaatedby the fanctionl symbol “Th actual intrest nena is PO, heros he HIPs in. Thus, rate intreat ater one your i 15 80%, ener, F=P OF. i%, 0) G4) Ethene mie= F141 BH “The symbol PP, 15, ni rad a8 "F given Pai por cont whee: the amount PF.00 willbe ater one yeae interest pers” From Equation 23).yoo 1 yar = Figure 22. Effective Rate of Interest (2) Pind the nominal rate which if converted quarterly could bbe dood instead of 12% compounded monthly. What is the ‘soerespning fective rate? Solution Lete=the gnknown nominal rate For img or more nominal rates to be equivalent, their coreeaponding elective ree must be equal Nominal rate Bective rate compounded quartely (1+ 0p? 12 camped moat ap 1+-F= (Lop? = 10908 = 1000-1 = 011212 or 12.12% compounded quarter (2-0 Find the amount atthe ond of two years and seven months ‘#1000 invested at 8k cmpounded query using simple intrest for angie lst thon a yea interest period. Por compound interest Por simple interests sino |r P00 P, =P(L+ = Plono (4 +002)"=PIITL y= F149) = PHT 98 [1+ (2-5) P2000 on wos orginally made a spe interest or yous Ath enh por the an was extended fo yan ‘ia dente being pa tthe new ners ate astm Tore cimyutad semiannual” How mac ould borne pay ate ono years? Solution : Seok p2na0PCL nb P2000 (+ 4 20H) = P2040 - (Lge P20 (1+ 0059 FHT BO weuaton SPVaisGe 4a he OO - fa Av equton ovale ishtaned ty sting te smot he vals vray Peon ger campestris ame) 0 td ee (2.0, A man bought worth P,000.00 paid in fa? On Hun BM ho artatinenchass hepa dott payment PS 00, 300 09 tho ndafone yen Pa00000 au theent of thre gear and nl Yenc)? ama a tv ar Wat ppm Tuy” pte) Solution Let = the inl payment Sis, ins hye q aonsmn | ‘Ung onty te cl dat, the aqua of ‘pa, 00 = 900,000 (A, 2.1) + P00. (PE, 206, 3 + I 0.000 = P30 00 (1.20 + P40 00 (1.2072 + QC.) Pan, c00 = Pa. a0 88) + PA. 000 87M + 4.401 = Prva san Tn dinero compounding, the intr icompounded athe end each finite Iength pein, such asa mon, 8 quarter ora Year: Ta continuous sompounding, tf assumed that eash payments ‘ccur once por year, but the oraundingscotinuouschreaghout the year z a years ayn Figure 2S. Continuous Compounding (Lender's Viewpoint), = mominal ate intrest pe year = rate af inteea per perio im. = number ofinterestperios per year sun numberof ntret pores nm years r-p(s ew olaWw r ty eet Peed AT” ‘unit of time, . (ta) -Ge IGT a ‘polite (1 +-£)¥ a Kappan atte fey F ‘us, B= Be aw) Piven ap hoo (27 Compare the culated amount after ear sev SC Beau 0m por yar compounded) analy) ‘semiannually, (c) quarterly, (d) monthly, (e) daily, and (0 contin a (242) oan : ew Settion were: d+ nao eat the pid ined Using the formula, F= PCL" > fate of interet fr the sme peed (28) Aman borrowed 75,00 from a bank and agreed to pay the a) F = Pi,o00(2 + 010F = PL,610.51 Joan athe od of9 maths, The bak discounted the lan and gave cP = Puo00(1+230)= P625.89 ‘hm P4000 in csh, (a What was the ato discos?) What was 7): {he rat of nce () What was the ate finest fr 08 yar? (oF = Phow (14210) Piennen (aie ae. Gwe = Provo (14930) rrossat 4000 nian e 1000 (14230) = Pr.sd oP = P1000 (1410) » praises (gr = Pet = Pho1eym = PLa8.72 F Discount 9 woes paid WY oka ‘cunt cn SSSR the erence bee he oe Ee ad oc ne be mc) te pes nat (the sa [eet tar te fae valve the sree te a continent paid rane eeecova Aisount, 21,00 = SSB - Bebo = onner20% Another solution, using equation 2-12), d= 1-080 = 020 oF 20% wis ‘Another sation, : interest, PLO00 5 9.280 resent wor aoon "O25" 1 fot = hee PL. 5» Ott or 23.39% Pa” (Pa.000 (2 Inflation dome 100 1 ieee he pathos PON fy Pony Tnflation the in the priser gous and services from ‘ono year ta an thus deteaving the purchasing power af mows. FO=PCO HOF ew where PC = present eos ofa commadity future cost of the same commodity umber of yeas (29) Anitom pressntly costs P1000, ination ia the oie oF vs Sor your, what wl be the xs ofthe item in ewo yeaes? Solution BO=PC C+D 000 4 0.08) = P1166 40 Jean infiainary economy. ho ayn poe RO eM pscosts increas, THs rats ea) ‘whore i th Fabuse worth, measured in way’ pens of presane nout P 10) An economy isxpeciiving nation a an annus raat ‘9%: TFthiscoinuee what wilP1000bo wrth two years fom now i toca of tay pros? Solution at ‘intrest is being ompaunse atthe same tne that ination seoccurrng the fate word wil be PCH)" e216, @-10), A man invested P10.000 at an interest rate of 10% compounds) anny. What will be the final amount of his fnvestment in terns of today's psn, after Fie years, ation Ferman the se a he rat of 3% pe year? Solution rena » CEES poo ( 1208) © pao gsACO 106A CDI 29 A OE {aero of period, equal amounts of money fhumber of interest periods interest rate per interest period A:Ordinary Annuity g guhemiud wit th 40n $H20 diazOn py PL ‘Au ordinary annuity tsone where the payments are made athe each period Pinding P when A is Given Pus Wot, iy fee (12% py 9. Yan) ar a rr.) ACP, Fin) igure 25, Cash low diggram to fad Piven A Ad Suberacing the ist uation (rm the som ev Agere + Ager aus Ae babe” + beeen es er psa “Ths quantiy in brckots calle de “uniform sree present word oso? and is designated by the funcioal rmbt Pi im sar tePelven at} percent inn intaretpridn” ene Pquation [Elim canbe expressed as P= A@AIO) eww Finding F When A is Given Figure £8. Gath low diagram to find Piven A= Ae ACPI, 0 PAUP, i, 0-1) «ACEP, by 9-8) + ABI, 1, 9-2) Poe AW ACHiva ACP + ACL ACL Mutiplyng this equation by (13) results in Pet = Alte)» LOOP AChR «AL ALP Sobtacing heist equation fom the sco given DAAT AI a AP =A Bee Aa — Age He OA Pen = Tate Salving for F gives ‘he quantity in brackets called tho “uniform series compound mst factor” and is designs by tho functional symbol F/A, 2 ‘anette Patni a F ean FA 0) Finding A When P is Given ‘making Bquation (2-10) and elviog or A, wobave A @2y [ear] “The quantity in brackets alled the “captal recovery factor sillbe denoted the functional symbol A. Fn whidh ead as {ven P at por contin nnterest periods” Hence A= PAR, i,m) ex Finding A When F is Given ‘Taking Equstion 2-19) and solving for A, we have a=? Fact] ‘the quantity inbrackts scald te bythe oneal eal AP, which od a8 ve der per canta miner pros Hess Ao FE 6) am nbuon betnoen VP, 0, man A, 0 ene arse Tae wr NIK nth = APR 25 ‘Thus, sinking fad factor +5 = capital covery factor {2:12 Whatarethepresent wrth andthe oecumalated amount ‘a JO.year annuity paying PIOD00 st the end of enck yer, with interes at 18% compounded annusly? Solution p19 net = 8 F ea 0} exon p1n'900 210,000 100 Pief00 PU eee 10.000(P/A, 15%, 10) | |_PIOMNO.RA, 15%, 10)P= AGPIA, We, 9) = P10,000 (1A, 19%, 10) fl=tuisr")— rion [=] rae AGPIA, 9, a) = PIO.000(87P, 15%, 10) so,a00 2152 = Pr0.o00 tse: = Pans.or (2:18) What isthe present worth of P500 deposited atthe nd of very three montis for 6 yearsfthejnterestrateis 12% compounded rmiannually? Solution Solving forthe interest rate per quarter, oxz deer = (488) Lek = (oor 1 = 062968 pr att P= APA,296%, 20) < 1-11 + ooag6y = race tage] 500 (17.0087) Ps.508 {@-14) Abvusinesaman eed PSO for hs operations. Ove ‘haan estitution is wil to lend him the many fe one yer ak Me it intereat per annus (decoaned). Another Inde 8 choring 7g, with the prinipl and interest payable Uhsend afer. A ANG) nancies wing to lend him P20.00 payable a 12 eaual ‘Ponty intalsent of P4600, Which ris best fo im? solution CComparethesffetiverateafeach ferandscecttheone withthe lowest fective rate First Offer: Rate ofdscaunt, d= 125% a) os Rateofinereat, § = 45 = 72 = 14.20% po yaar fective rate = 14295 Another slation: Amount received» P5000 (0875)= 48,150, PAs,150 50,000 Rate ofnteret = P2000 F48.80 = 14.29% per year terest 00 PEBIED 4.29% gry sfstve rate = 14295r Second Of: 0,000 bifeetive rata = 14% ‘Third Ofer: 50,000 Paco IA i, 12 air? ey 1: 1 -usoonr om 50.900 (1.14) asst Pann P4600 1000" om 2 x, 0285 Te * dens x = 051 i= 164 057% = 15% per manth Bective rate = (1+ 00157)" = 1= 202% ‘The sean ar isthe best (218) A chemical enginor wishes to sot up a spcil fund by making wsform samiaonual endo ered depot fr 29 years The aad sete provide PION 0009 Un onda of hoa Sv years {he2D;year period. interest 8% compounded semiannally, what {stherequied semiannual deposit tobemade? 06,000 (FA. 8.16%,5) pan Pingpn 269-00 Pu eo PH 4For the doposits,i = SE = 4% For the withdrawals, = (1+ 0.089 ~ 1= 0.0816 0 8.16% ‘Using 20 years from today’ ns the foal dat, Une equation of ale |AABIA, 4%, 40) = P100,000(R/A, 8.10%,5) |A.(95:0255) = 100,900 8895) A = Po,99.99 216) Using a compound inarest of 8%, find che equivalent unifgean nual cont fr a proposed machine tht eft eo: of Pig a eatamated enlvage value of P20.00 ard estimated ea ifeot years. Anmual maitenance wil amount 10 P2200 soe nd peeic overhl eating PS 009 each will occur a he find af the second snd fourth year. Solution oon (848 do.000 % — AIA, 8%, = P1ON.00-+ P2000 (P86 9 + POD CH. ,29 #0 Pi) — Pa 0M I. B.D 0 04+ PH (74ND + PON AGT tage 075) — P00 (A y= pian 6.7408) (2-17 A man pure a us for P425,000.In he fs ath that aad hehe jet P2,000anrepsiesand remodeling Trae after the hose was endl he was oflered PKS 0D Te tha hae. After sane snsierition, be decd to ep the bse Seb vet rent or Pp nth trting two months fr he a pen He cole ot for 13 moths ad then sol he boas fx Fgooto0 I terest rate was 15% por month, how much extra rane dems ore mtg tbe ose nunedatly erst wae remodel? Solution Pr.000 425,000 425,00 (FP, 1.5% 1)‘Thealy focal dae thet canbe used is ane non ater purchase Profit ifthe hase was told immediately after eemodelline (meth after purchase!» P48, 000 P7500 ~ PA25,000 (FP, 5, y= P3825, Prfitif te house was sold ater (16 months after purchase) 600,000 (IF, 1.5%, 151+ P4500 (AA, 1.5%, 15) F75,000 = P425.000(F/R, 15%, 1) = PN 000 (0 7090) +400 (3.43) ~ 75,000 P45 00015) Ps3.610 Losey na selling immatiatly afer remodeling =P,625-PS3.10 =P5.015 Another sli: ors by nt sling immediately ater remiling 548,000 P4,200(814, 5%, 18) P0000 PP, 1% 18) 4,00 P40 (133482) - P600,000 0.7980) s15 18) Today, you a fund that pays Antereat compound analy. To» yor ltr, obo PS, {foo a bank at 37% anual nbaret ad invest th and, Two yes later, you ithdraw enoogh sno fom Se fut repay the bok enn a al interest on Tr ons fm tis withdrawal you tart taking P20 por yo ofthe and. Ala ve withdrawal ou withdeaw th blanc nthe fund, How much was witha? Sotution @ Pu, 000 (209 1.25% 7) 000 A255) 120,00 each 50,000 (1, 2579) 50,000 (4.207 P1000 (7 258,12) Let @ =the amount withdrawn fer 12 yer Usin2 yeast aya tho fea date the equation wlan is (+ Pon p00:F/A.295,5) + PS0.0000. 204.2081) = 100,006, 2,12)» Ps 00 FPP, 25,9) (+ Panoons 2070 » Pa enncL20%f68e) = Plan one. 5519) "P50 00% 4506) Q=Pisan286Fee Tivise whore thf pagtnea sme severa ovine after the sznnisc of te ant Fiing when A i Given igure 27, Cash la diagram given Ato find P 220) em| (0-19) On the day bis grandson was bor, a man deposited to trust company a safe amount of money so that the bry coud sive Five an Pi for bi cllege titi Fees stardng with hi 18 birthday, Interest at dhe rate of 12% Se a cats on Some, Thee wart ‘Seion thatthe grandson could elect o wha annual payments ons 25th bith id receive angle lp those his option ay How much did he boy resivo asthe site payment? 1) Ho much did dhe grander deposi” ay Tho grant Solutio Lat P= theamount deposited X_ © hae withdrown | i ‘The P1000 suppose withdrawals re repreaentdy broken ine, sine they int acbly ace Thos seperate cash fw Sigroms Cab deawn, me ws X andthe P1000 suppoce wideawals are equivalent Using 28 years of age a the fl date, Ue equate of alin P10,000(FA, 125, 5) (0, 128, 9) 0,000 (6.3528 (1.4048) x sg 280of theater fc dates ae and 2 yar fom ody. pm i yb Fs r Poaanr, essen] F30.0 (8%, 12355) Wing tayo th dat he ton fais riper mp rogerme | Gt ROUND ‘ = veoao.aosssen * = reo ae $a tr P1000 sgn ach af rt ah | agit tans paren etsy ttt 84 4 SRR Raat ota = solution r “ pow 9g Mao Pend ibe P0000 supine widows areaguralnt —*. ADIASHS OTE) 4_ MBIA a i or ' Using nay a the fl at await s P= Pino A, m9, 07, 324,19 * ; Pron 2.640 014865 eat oe rb, | ‘eater nd ea dle ae 1 and 2 yar from at “reso ae ater wi 1 i Xr, 196,29 ong tiny fa daa gan as (APIA UH, UPR, 102). = FIA 1,9 acon ors) = rOAOOULSHESY A = rats | tom yy 2 Nave keAnode slo: a lM | riot," rioseo, " riovoo [re 9000 ero.008 PIO, 000FTA 4.9) Using years fom tad’ the foes! dats, the equation ovale is ACPA, 4%, 8) = PLO0ODCRIA, 14%, 9) Ac. 61886) = P1O,000(16.08535) A = PusTS Another sltion: APIA, 8) ik a, 4M oa 23 ° Tow | Pia00, ™ ooo Proeo Lee hro ws Sproo00 —FROREES | ramen ‘Using 17 years rom day asthe foes date the uation ofa AGPIA, 14%, 8) = PLQOOO (IA 4%, (87, 1486, 8) ‘A(12.22276) = PiO,000(16.08595) (2.85950) a Paste ™ 2-20) A debt P4000, nso intrest rte 1% ava ste dango a serio 1bersinn} payment ae eat tbe made Cuonthe afar onsanveatn fh ered 6 payments wl be P6OOD ec wile the remains | Bh ite wlbe en and of uch mont ts helt pail | eee the debt What the amos of sas 4 payment? * lution 9000 ‘Using today a the fel date, Ue equation ofa ‘4,000 = 6,000 (PA, 7, 6 + APA, 75% (2, 15%, 8) 40.000 = 6,00 4.608) + 13.349 (EAD) A = P54 revr Teinning of rach pero. ne | } one rewat utf tre i? P FARIA, t et) 229) RAPA mG) Finding P When Ais Given igure 2-8. Cash flow diagrom given At find F P-AgAMErD-A a0 | FoalPacsasd—i] asp | (2.20 Aman tnt an einen ting PON pala in eee arin cach nstlimet payee ate beating Tra pera. The rate of interest is 24% compounded qusrtery ‘Witt fs dhe amount of each paynent? Solution P= Poo n=12 tL P SAU + PIA gS —D po0.000 = A(Q+ PIA, 8% 1D) eig09. = A+ 7.1300) A =PLATLOL (2:29) A certain ropety is bing sl on the wa is ies biddor offre to pay P4400 sath yen fr 5 years ‘ech payoent to ba made ate begining of ach ear |The coche eed pay P2400 fra yo, 280 000 che sxe eo M40 000 och ear othe nest yee, all payments wil Feta at the ginning teach sont ney i worth 24 compounded anova, which bid should se ownar of the property ao? Solution First bi: beets at Py % present worth f dhe fist bid NUL +PIA, 20% 4) ‘de 00 (1+ FA, 20%, 4) ‘pao. 000 (1 2.588) Pas 480 »present worth af he sseond bid Pao 00 1 P3s;000 CP, 2,1) + PA0.000 GIA, 20%, 3) HF, 20%, P2400 + 0,000 (0823) 1 PA, 000 1065) 0.8829) PLanTss “The owner of property should acep the sooo bid Perpotuity ‘A perntuity isan anny in which the payment ontineinde- stay P 0 4 2 3 a A A Figuve 2-10, Cash low diagram to find P given A piste. g plete] es) — eeprom yee mre grbbtete loving slurs: F000 athe end ac yor for Sar: P4000 forte 6 yours nd 70,00 thera solution 250,000 ce, 1 ta 30.000 cee, 18% =e eee! aes asano Pogo Fea Using today athe foal dat, Un equiton of ales P= 30,000(YA, 15,6 + 4,000 CLA, 18,0078 15%, 8) + Peon 7 2,00, 5 12 0,000, 7845) + Pao 008-7845 (482 + P5000) Os = Poser Capitalized cost ‘One ofthe most portant appliatons af pepe in copia ined cost Te capitalned cst of ny propery the sum ofthe first Sind the. present worth ofall cos of placement, operation and Iaistenanee fer longtime or forever. ‘Cane 1 No replacement, nly mnintonance andor operation every period "Gupitaiad cot = Fire ot + Prasat worth of perp ope tana or snes. (2-25) Determine the eaitalizad cnet tractre thet rewies ‘an iil investment of PF,90,000 and nn annual maintenance of 160,000, Totrest 615%.oe Pisao0 —¥150,000 ped 1,000,000 oi CCaptined cost = Pistons + P = 1,500,000 + P1,000,000, = 2.500.000 (Case 2, Replacement ony, an maintenance andor operation, CCpitalicnd eet = FesLcost» Present worthofperpetal replsement amount needed to replace a property every k periods Amount of principal vested trate he interest on ‘rh wil amount to 8 every k periods = Interest X every period the periic deposit or ‘words the aecomlatin of ie er eet igure 2-11, Cash flo diagram to find X given S T | - - | SS = CHIA x 1 Spi win i) Tire Teer hts) Dilfaronce btween and in perpetety a ae rey Tai athe amount invested na at por period whose intrest a the end of evry pera fave Awhile Xiah amount vested aoe ‘enue oriderhneeinovest ot theondt eer ord eerie ee then. X=P. (2-25) A now engin was ial by testi pln to of 30,000 and projected toe ofl if of 15 years Atte nds teh iis eaimated te have salvagevalye P00, Deterine Aseapitalioed coat intrest 18% eompounded analyaqoo0 P30,000 F80,000 PTI 300,000 900,000 P300,000 0,000 Cash flow diagram for the engine Per0.000 P27E.000 PZ10.000 a G 1% 30 6 220.000. pagaot CCapitaiced east = Firs cost +X = P900,000+ P2408 24.04 Case 3. Replacement, mantsnance and or operation every pea Capitalized cost Fist ost + Present worth fest of erent operation a or maintenance + Present worth test of pepetual replacement em he capital sch ab which oan 800000 for oie onstruction, F100 0 we rary year forthe fret 6 years hem PER, 000 onc ihoveatee for operating panne, sad PSIODD avery B68 roplanement fou vet a Myer anc _ omg Pays Pe Prin a Let Q=the presen worth of ect of perpetua operation = Pron ono, 128, 6) + LMM 12, 6 P120.000 9 5965) ss Prn9.900¢4 1410)» PHS por7740Replacomer 500,000 P500,000 P500,000 5,000 : : | | Th x Aza —_ = -P5,000., 16.82 DA, 6,6 ~ ~agr7a “ oo Amweteation Scheu x ‘Outstanding | Interest’ |_| Principal Ceaetat | erred | rode paper ont = Vices 2 be = rpnoon porn + wx Seles eae eal 7 tags} | ona Sg [ae [iota mortzaton ainas | ses [tear tee | ae ee Ameri any ein et ate ee ss [ines itera of time. P0087 PIOLI2 P5,00005 (2-28) Adel of P50 wit oterest at 12% compounded somian ually tobe amortized by eos somiannul payments over the rox RRR etic doe in 6 pa Pad the somannual paynent and fontract an amortization shed. (2-20) A dabt of 10000 wih interest a he rake of 20% com- pounded semiannually isto be amortized y 5 equal pyenens at be tnd of each 6 months, dhe first paymont is tbe made ater 9 yeas Findthe remionnval payment andcinsruan amortization hdlSatation Pro. B= MBIA, 10%, 5)(PP, 105,59 ‘RAV, 10% 5) (7,108, 5) 0,000 (0.2588) (16105) = panisn Awortination Schedule Outstanding | Interest Principat ecied | primal | dusatend | Payment | ropa at Fegianing | of period nd ot pr a peri 1 _[eracoo00 | 1,000.00 2 [1100000 [1,100.00 seen 3 2ano00 | 1210.00 | | apgooe 11.00 5 [augan00 [18410 $7 [aéansi0[ suo | Papasan] P 2799 [=p Pisaer | nsus.r1_[ aanso} “290129 &_[tosesa2 [ses | 4zasso[ 31919 Bo] aaraas | sna | aanso| 351116. Samia [sea | _4zanso] 3.80228 puigiear Paz90 PI6,10619 In corain case, canons anal prebl isharsenents that erease oe dees hy wowot os end, or exarpl, maintenance ad eps ass =p Seppment oe property may eens by 2 eal na Sch pri. This is knowa a wer aot rai: ‘Guppose that the maitanance expanse on 8 1000 a the on eis your ad Inreasing scones P50 each yer forthe nest aur yor, vaso MP 2000 Paso t Prov ee — = ° 1 2 3 4 ‘ "Thea ow may be esa nto two compan wee ert) itt ee ee P ,, isknown the unifrm grafient amount P= PAP ew 2, = APA, =) 233) Gc 2G HIGH... py = Spain 2, = GIG, 0) eanPG, acto inca the paler bo radio precent worth sonertn far, Th, PoAPIA M0) + GPIG,M% 239) (2.90) Aan was to be amortiol ya group of for end yest payments forming an asorading arithmetic progression, The ial ponent wa tobe, P5000 nd dhe diference tetieon suseesie Pemrnta ms tobe PAOD, But hela was reneged to provide Fr Eaepayenct af equal rar dean uniformly varying sums the rete roof he an was 19%, what was Uhe anual payment? Solution Lat A =the annual payment LIB) = a bis IA d= AcE, 15%, 4) + GPG, 1%, 42 00028550) + P4001. 198 = 15,789.60, A(eIA, 15%, 4) = PI5E9 60 A= Pessusi (2.31) Find the equivalent anon payment th flowing obs ons at 20% inter ado Your PymentBe Lae 'A-= P8000 PIA, 20%, 4 PIG, 20%, 4 e s+ Uae equivalent anal payrent GePloo aee ina = Leu, 120» 25907 “1 fut gp te ob ER ~ Arar] 4 =P ACA, 20%, © — GLP, 2084) 5,000 25867) ~ (1,000) (9.2986) = Pima, 2 Pinan = Pest 1, What is the annual a fiat pote on na svestant of PIS. nw. 59% 2A lo of onancy Leo January 31 the following exe. plein 3fa%” Wot future amounts Oe ay con Det Ans P2A3335, 3 Ityauborrow mney fr yor fiend with sino df ta tad’ preaut worth of P2000, shih cae th mine month Ano PAAR ‘4 Determine the enc spl interest on P5,000 foe he pai froma Jan Ibo Nw. 2H 12, to rate fire 82 "Ans, F958 74 A man wishes is son esive PK, 000 (en. years fran om wAsCamount should he invest sf will cara interest of 10% MMhpounded nnnunily during be frst 5 years nd 12%. pounded quately uring the net ye Aas PORISAGT 6, By thecotians a wil de sun P25, 000 fe wach opshetlintnvthy berguselin wnt amounts PAS, 000, When, ‘Bit the gle receive the money if che fund is invested at 8% Campounded quarterly? ‘ane yas 17. Ata eran interest rate compound semiannual, P5000 vill amount P2000 after 10 Yeats, What sheen a tho kart year? ‘ane 40,0272 CE }ones Corporation borrowed P9000 frm Beoven Corporation ee yng and P1200 on Fon. 1380. domes Corpoation vaste partial payment of P7000 on Jan. 1 BI. Te was agro an vefeaance of tne a wold be smortia by tvo pryient aaa even 1 TSB andthe oon Jan 1, 15, the mu benim larger than dhe es i as rmoune of wach payment? She PN ON: PLATO 36 1. woman bored P3000 a be pi aftr 1 yours it fineness 12% smpounded seraanauly and 5,000 Go be pai ice 3 years at 12s comunded soathly. What single payment ue ae pay aoe 115 years atm incere eae 16tseompounded ‘Guasterly to ete he vo eign? “Ans. P12 121.59) Me. J. del Cewz borrows money from abank He eexived Soom the bari PLE a promise to eepay PL SOO at Une end of tronthe, Determine the simple interest rate and dhe corresponding {iscount eae o often referee 0 as tho "Bankers discount "Ane 117% 10.58% 11, Aman daposits P50 000i a bank aosuat at 6% compounded monthly for yen If the alain eat of 5% pr year eontinues Tor this peed wll hielotivelypeotes she purchasing power of the orginal pinepal? ‘Ans Nov P25, 12. What is ch future worth of P600 deposited at the end of veey motor 4 years i the iteneat eat fe 12% compownded ‘quarterly? Ans P3681 18, A young woman, 22 years ld hasjus graduated fom ole, ‘She aeoepts got land desires to establish her own retirement fu At the en ofeach year thereat she plans to depsit P20 ina fan at {3% annual intrest How ol wll se ie when the fund has a aecumte yaluo of F1000,0007 ns 38 yee ld 14, Me-Reyes borrows P00.000 a 12% compounded annually, agreeing to repy tue loan i 15. equal anni payments. How much UF e rigid principal sil unpaid after he has made the 8h payment? ‘Ans Pao 040 15 M pore sal at er an prising to pay PIS 0 hee the sells fig uc “ay What was th enh prio he {8 eM ional heist 12 pacer. mst he py ach thn the Hite ist Uo ds? fo Mies making 8 payments. MU wished to discharge emai inten yas amen ae The th regular payment was oe. hat ma aii othe tae payment then di? ( Itimised the Rt payments, what must he pay when tho th payment ideo dang hisontivntebiednes? ‘ane (PS 122, Q) PED, (6) PAOD CG) PAT. 18, A man approaches the ABKC Laan Ageney for P1000 tbe paid in 24 may nstallens, The sony adverts nent etal Le pee month, Ty proceed oaks Harun of his ‘lmthly paymet inthe flowing manner “Ament requested P00 000 rit investigation 500 Coit nk insurance 1.000 Tonal Piotsa0 Iupoeest (P101 500 (2 0.015) ‘Tal owed: P0400 POSH = PI3RONO Paymont = P1380 ~ p5751.67 2 ‘Whats the ffaive rate interest ofthe oan? Ane 38.53% consulting enginecsing firs AU that me the Gem obtained the Denk town for 10,000,000 wich 20% annual Intorest rate panpownded quarterly The terms ofthe han fled for eal FRomesty payments for» Lyon prod ithe ht of yeepayment {Many ume wtb penalty. Due to internal changes i Use firm, is now propose to refinance the loon themugh an surance ompany. The new fan Franned fora 20 year tern with an sere ate nf 24% per ann, lgnpoonded quarery” The insane company has one Eine Smet charge of 5 of che bance. Ths ew Boa alo cals fer ua quarterly paymentsoe (0) What ts thobatane ie on th asiginal mrtg esi) Lal payments ha oon uve Heh al ie years? @) Winall be the terre bettcen tho sal aactecky Fayments i the exiting arrangorient and Ue revised propa? i A a) PF 262.8; QPL BI | 18 An phat wo equiv no upesep wnt the end of year | who P60.000 wl be edad for rates Mie his POD.00 vil be | Mn I or rpeineat ahead each yent forthe next 5 years then | IaH a the end ofeach yee Ur the nest 9 years | Ti money ss worth Pe eomponnd envy, whatwas éhe equivalent uniform anal at fr the L2year period? ‘Ane P72, 19, Ajman wishes topos nun fr his retirement sue eat hom hi ith 7h yay ho wile abe co with equal Sos of PIS.000 for hi year expenses. He invests equal amount for hs Ais 58h bahay i fur earning 10% compounded favially. How much shalt cach of these aout? ‘Ans P22 120, aan Royo inherited #240,000 on is birthday. This he loc inh um pension fat @ynkecou. which nena itarest reese compere anny He sina F40,000 an vs Uh Tetay tomes inl payment on a house. crew his mul viele payment for the pension ford cm his 65th biethday and ‘lon omake 20 such withdrawals so as tous exhaust the fan. Flodiad tune ageot TI, however jst lor withrawiag th mount tdason that dats Hoe much tt nthe fund tobe pasend ov Co the Frets the time of Juans death? 21, Detormine the prsant worth and de accumulated wnount fan sanalty oonaiting of payments of 120.000 each, the pyment qeatada atthe beginning of wach year, Money i worth 15% oman ail. "Ane, P5206 0; P120,801,60 ‘22 Calculate the capitalzad cost ofa prjet that has initial coi of P:1N00-000 anda skin investment cot of P00, 000 Girne end ef avery an years, ‘The annual operating cot will be 00000 ac the end of everyone fe heirs four years F160,000 serena tek al of MLO ee | i ne PAL 28,"The will of « wealthy philonttuopst lft £5,000.000 v0 eublih s prpotualenetablo raion. the fowndation esos rein to spend PL SIG 0 re Tas nity ano sete P1GD.0) a capa replacement a hv end of wch 63 eran I¢the invested uns what seat be ere ronda avaible in yoepaty ten the endowment fbechartatie mpas? ‘ns, PHO 259 24, Thowuece ate of certain pl that rages paiting {3000 aq fh Two Kins of pin axe vale whose brands art ROR aint Aerts 1 ADper sf. but needs ene a the eof met years wile paint Bets P80 pera Caney worth {avedTectve haem shoul paint Blo secewoso halt wl be si econemieal ar Paist A? Tins 3 58008 | 25, A contract has heen signed to eae abiding at P20.000, por year with an anal increase o PLO for @ years. Payments gestae mae atthe end of wath year starting ane yea rom mo ee eg ausrct est fm. Wh bmp ed tory wom Teoguivalon i he yea ease payment phn? ‘ns PLT 6Chupleed Depreciation Depreciation isthe dsteasein th valuoot physica property wth the passage of time Definitions OF Value ‘Value ina commercial sens, the presat worth ofall future profits that are to be roceved through ownership of a partislar broperty. "rhe market value of 9 property is the amount whieh a wing ‘nayorwillpay tos willing eller forthopropety where each has equal ‘tivantage aod funder o compulsion to buy rae ‘The utility or asevaloota property is what the property is werth tw the owner os an operating uit alr value tse value which is wsually determined by diin- terested Uhind partyin order to establish price that fir to ath ok vale, sometimes elle depreciated boak values the worth sofa property ns shown on the accounting records af an enterprise Sevage or eval, yelue athe ricebatenn be obtained the fy after thas boon ‘athe mot the property would sell for if ispsed 1. ‘Roprovie or the recovery ofcapital which hos horn in physical proporty Types U¢ Depre Loria daprsiaton physical (by Bantonal 2, Depreciation dus to ehiang in pic lvls Depletion Physical depesiatinis dustathaletealagoltho physical ability ata poporty tn prodace rout ts Sommbn causes aro weer and “Tteorrin, Functiaoa! depreciation i eto thelexaing i bs ‘demand foro fnebion whieh Uh property was desir 9 rend {te ann causes are inadequney, changes fo sil, popalaton Center shit, setration of marke more ofient machine ae Dpradced ‘Depreciation duet chingesin piclevlss nat npossibeto peed and therfore i ot coniderd in eemomy aba, ‘Depltinn oflrs to Uh dorease inthe val the gradual extraction fs contents Physical Aud Roonomle Life ‘Physica ie ofa propecty i the Ing of ima durin ih ts ‘capable of performing the Function for which it was designad aad Requirements OCA Deprecis 1. Kesha be simple 2 Heshould reaver capital 15 Mhebouk vlue wile reasonably coe tothe market value at any tim, 1"The aethod shouldbe aocoptd by the Buren of Intern Revenue. Depreciation Methods We shall use the lowing symbol fr the diforant deprecation method1 = wef fifo the property in yrs 6, = the orginal ost Go = these td ed of tho io, the rap value ‘Gnchediog gino fos due to resovel) 4) = tho annua ent of depreciation y= thabwok value at the end of ye973 Dy = deprosation up tn agen years ‘The Straight Line Method ‘this method assumes that Us laos i valuo ie diectly propor tional tothe age af he property a oe wn. on = Coda os (8:1) AnsletroicalonctcostsP90,000 andes aa estimated salvagevaloc of 000 ths eadofits 10yenrs life, What would Pathe book vale afer three years, using the straight line method it faiving for the dpreciatior® Solution cy = P9000 G=PROIO | bane 1 Co=C, 790,000 P8000 9 0 aeae 0 : BD, = tanta =) R200 6, = Gy=D,=P90,000 ~P24,600 « P65 400 14,600 “thie oth pahumes tha a inking fund established ia whi, ands wil accurate for replacement. Tho total daprociton At ‘Restate lave op teeny given time is assured abe equal othe pSmalated amovst othe sinking fund at eat ime, TAT Dy = KIA, 0) G+ 6-0, on (8.2) A broadcasting coporsion pashoasd an equpuent for 59,000 and paid PL S00 for right an delivery charges to he ob site The quipmant hv a ermalifoa 1 years witha aden vale EPS O00 ganar the poechess of nay equipment athe cad othe ie (a) Determine the anual dapracntin net by dhe trait tine moth {hy Determine the anon depreciation cost by Use sinking and smothod. Assume intros 9 6-128 compounded annvaly Solution 6, = PSS,000 + P10 = P00 6, = P5000 fa) d= SoG. Pson 05.000 5.000. 4.950 94,600 P50. 0,500_ FAG, 10 13.3816(83) Airmbought an oqupment ar PE6,000. Cher expenses inch ieualation amonntal to P4000, The equipment if saat te have aio of 16 years with a salvage va of Bae Aout Detarenine te ak va a tho ed of 12 years by see te instneshndand sinking fund method a 125 inerest Solution ey = P56, 000 + PA, 000 = 60,000 fo, = PR0,00 (0.10) = F0,000 y= (animd= P8762 P4000 Gy = Cg Dy = PBN.000~ PH0,500 = PI,500 (6) Sinking fund method ea © Ws, 1% 16 260,000 P6,000_ ia PS APIA, 12%, 12) PH 268 (2.1880 = F90.480 c= Cy y= P80.000-Pa0 480 = F29.520 1g Balance Method Inthis method, sometines called the constant peentage method ‘oc Ue Matheson Formula, tis astumed that Uhe annual cost of eorcatns infeed percentage ofthe slvaxe value at the xi siete year The rato a the depresiaton in any eae ote book ‘lng of tn yer ang of thet years coostant throught te ie of Tae aperty on is dasigantod by k, the rate of deprcition ye ya Se a 4 4 x 4, = depreciation diag th Depesaton | Honk doing te sade ar Chl lok on cow -off ee ‘This method doesnot apply ifthe salvage values ero bene dei equal lane snd d,s oa Cy : (9-4) Acerainiype of machine les Iotite vals och yr ‘Themacbiae ods P2,000.00orcinaly, Makewuk schedule the yearly depeeiaton th ta deprecation apd cost ook al| Book value | Doprecintion Year | suinginning | during tie | relation tiyenr | yeni | abend of year ‘pai0.00 | 200.0 1 2 [80.00 [80.00 | 3 162,00 | 42.00 | 1as.c0 | eu7.s0 | as220 3 [33 13122 | v9.12 | 110098 Double Declining Balance (DDB) Method ‘this mothed is very similar to the delining balance mothe enoept hat the rat of deprecation ks epaced by 2%. a+ of-3)" 2 ew o.= 1-2)" com a= a (1-2) aun When the DDB method is used, the salvage valve should not be uburontel from the fest cost when calculating the deprecation hares. = (G5) Determine therateof depreciation, thetotal deprecation up athe end of he dth year and thebaok vale nthe end a 8 years ‘ey eset dat costs P15,000now and has an estimated serap value fora goo cn snl of 10 yours hy (athe declining bance nothad Eoin the double declining balance metho. iy = F150 | m (1 Dsining blasce ath Gy lU—Wr = P15, 00001 - 0.12007 = P00 1 = Cy=Cy = PIB,000 2,992» P (by Double doeining blancs iethod 1 P15 000 PapIT = P1248 (86 planta eto 2000 ad 10 sr thiamin Wore ine ater yer ot” sae so ao 20800 reat inten sot rk tong aoc ed | Rnd noon forthe ade einige mend | Solution cc, = P2000 nes | (a) Stsight ine method, = P28,000 3-6) 6, = y=, = P220,900 100,00: (P20 900 P2000) pop 990 a ~ Pion 120.00(0) Destin blancs muta C, By = vrs ao( p10 (6) Double dostiging balance metiot yp = przooon(i- -2) = rm.000 “tho Sum-of-the-Voars Digits (YD) Method etd, = depreciation charge daring ho mln your (doprcition fst) otal deprecition) 20d 7 remmedigt(c,-c) 10 or example, fora property whose lifes yrs 4 aria Depeatin Deresatin sear wake ior deter oe Lk a BE, ~G ete ee ames $$ amet) er came) (4-7) Astracture costs P12,000 new. Its extimated to havea ofS caret eaaivage valu atte end of if cfP1000.Detersine theonk vane at the end of ench year oie, Solution 12,000 PA, 000 = P11, 000 =o, of gts 18 |" 68:8) A contoctim of iterations? ts is cantata fore purchase an instal of Tinkingtwomajor tes atatota cst tpaludes eight and inalleton charges eaioalad i fen charges eabnatad at 10% of the | Rove cmtres rico the cles depeiae over purl of | Toyeara wid sr salvage vale: | °C een destained dept orf 0 ccs | snore n= 18, whats the annual dprecion charge | “By Whatisthe depreioon charge cringe sing he sou af the yeas digits oth? settion Ge emommin 68 tots . cand = pact cmensnabinne sno size (Sam of dite als Hh 20 Revers digit nreeponding othe th yer af Mb = 8Output Mothod This ced assumes that the total deprecintn thot ea taken laces iscly propertionl tose quantity oF uit o to property aie thet tne. This mcd hat Uns advantage of wai the uni wer dapreceion estat and giving low deprecation expense (Ting paris of pralucton Lett) = total units ofoutput up co te eat thi = total pamber of nie of utpat daring the nh year toa gor wait ofantgut = Depreciati gor wait efoto = 9 (252) 48) a-eevision Company paras machines or 200,00 { cnday} fa tga atthe st oof 10ymr sas org pros of, 00 ui woe hows | of 120,000 i comgany uss be achnry or M00 re 1979 nd | sn tour 190M awe pedcn 3500 ta 19 aaa ssi 190, Compe deseo for 190 [etd een below “) Suogheine 18 Wortarhoss 18 Datout meiod Solution 6, = 100,000 \oyears "P= 400,000 unite H= 120,000 hours ~e,=G, _ _P100,000--P8.000 - p9,600 = P4000 (dy = 2) dg= (Cag), = 70D EE? 0m Pron (CozSh) egy (PINDAND PAD 44,000 Cig = (SF) Qn PIERRE) cca = pias a What Bove sis worth mentioning what says slot predation spe “D) Ganoral rule “There sll Lo eduction a reasonable sl ad et Get essnnable st past the teas o sions GD. Uo of cats mots sl gles, Tne tna Srwmonable allowanes a used in the posing parse shal inl Duk Jind co) an alawanos esp in, ssnctanes with regulations Droreribed bythe Seustary of Finaas, undr any af tho flowing iathode A) ‘The aright tsa mato (GB) Declining balan nbs’, sing rts not sasoeing Aovise the rate which woul hare boss used had ts anneal Sie impart xeric mb. {) Tho eumafthoysars-dgis eth, and 0) Any athe not which aay bo presrbad by tha Ser ‘ary of Pnanen upon tenmmnsdaton of Oi Camsosones of Tnarnal Revenue ‘Notes: Taxpayer may ener iat an“agreomantia writing spoilt ‘ating with the woeful Ws and tatoo deneeiaton of any ‘property, De ae wo agred wpa sal hing (9-10) A machine outs P7000, lst 8 years and has a salrags ahin atthe en fife P50, Detarine the deprecation chars ik year teens vols nthe a yorsby thet) ‘Reale ine method () declining blanco metho, () YD method, ‘Rod snking fond method with teres 6 12,(a> Straight in mato Prat 1G = G,-D,=Pr000—Pasi(h = Pa.s76 (&) Destiningbatance mathe ASE «1 AUB oar ne ALE 1 ABS one 6, = Gy (1-10 = P7000 (1 0.3128) = P1566 fo so: i oT 26 8 Sam of digits = SED. 5 ? G4 = (/86)(P7,000.~ F380) = PORE 5 2D, = (266) (P7.000- P9SO)= P4808 Cy Cy~Dy=P7,000~ P4200 P2197 (@) Siaking fund method cy, ___ P7900 P950 = poet. : oe rine cre ee reey (8/8, 12%, 4) = BBL (4.7799) = P2886 6, -D,= P7000 2,880 = Pais r (oy(1 Wo = £7,000 (1 0.81237 (0428) = PTL ater il fee per year eprint roplas af dapreiaton lations i Saluion With inlacon: Put ot pap p00 1 nant Par O18 Pisons sors 735018 a= ARTE A E Without intaton:Valuation or appraisal isthe certain property for spec eas Utvaluation i ella en appraiser. of doteraniuing tho va ed tha tast Intangible Vatu In the determination the yslua of industrial property <¢ ‘quipment four intangible toms nee oan encountered ‘eam ia that rement of aloe which a basiness es eamal ‘rough the fayorable conserston and patrouage ofits customers eee fou its wal eww and well contacto policies and eer tion Franchise inonintangibeilamofvalsearisingeomthoexcluive gh ota company to rave 9 spec producto service in stated ego of the oaunty. ‘Going vate a a intangible value which an setvally operating cancern fas dae tats operation ‘Gryaniration cost fhe amount of money spent in organising business and arranging for is financing ond balling PROBLEMS 4. Amaching shop patehaced 10yearsagoa ailing machine fr 160,600 seaightiae depression reserva ha en provide ona Doyen feof tne machine "The owner ofthe machine shop desist foplace the ot milling soachiee with » moder sit of many advan, Tagescosting 100,00. can sll he ok uni. for P20,000, Hw moc new cpial willbe required forthe purchase? Ans. P60,000 2. Ataeand duty ee importation of 30 HP sand co paint smaniattaring) eset PO00.000, CHF Mania. Bank charges, arasce ital brokerage cost P5000, Fosndaton and installation costs wore 12,000 Other incidents! expendes amounted to P20,000, Salve vate ofthe wills estinated to be PC,000 after 20 years, Find the “npraiel vl ofthe mil ssingstraigh line depreciation atthewnd (a) 10 years and () 15 years, "A a) P88, O00 fh) P17. 500 3, Ondanuaty 1.1978, the purchasing enginoor ofa Cowieat Co. purchased new machine at acostofP140,000. Depreciation hasbeen evapo by Ue : taear tive years un ral serap alos of PLE A000. Weel, cxtczordany repair (tach wero sat van 1a goths machinery) mors entra ba ast of P20 ‘Deore ifthe Unroch gag nn Uwe ? Sethe mahinry was eatandod materially, Tho revi eat ie was ur years om Jaen 1, 18 Deveraias the anal powsone (odorata for he 7 sare ea those pvt deprecation on Dosa Br opt Assume paymontinsach forthe nace nel ostroordiacy * nos, Pas a0 ps0 4 ower tow ree transmitting satan is provide by & Dincsaletncgenerior nit The ociginal obo the ati P86 00 leosts P2000 to ahip the wnt to the job se, Au adiona st oF a, 000 as incueed for installation "O) Detecaing, Use annus depresaton esky the stright ine method, the witnas a expacted life of 10 year The clase Brahe atthe ond ats Me wos estrada 6,000. We termina Ue anal daprvitian ct iy he sinking fand ‘othe! Resume that oeannvacharaotordepresation was doped Feed drawing compound intent atthe rae of ‘Ana (91 P5500 (8) 5,168 tar setfor P90, 000.00 5. Anindutrntplantbought og expebast nding iatlotion sno to P30 000, Tho generator Jebinto hove a ito 17 years with x anbage val athe cd oie ee pg.000 Determine the depreciation charge ducing the 2928 ye sia he bok value a he ond of [a yearuty Une Jedining ance hho () double dectningbalance meta (sinking nd method ‘aoe (a) P1949, PIO0,A18 ) PRED; PIO.AD (I PLDAS; P45 590) P3106; PIL 208 6,_ Atslophooe company purchased anicrovaveradioequmest for ¥6000,000 Freight ae installation ehares amountel to 3% of Trepucehnas price Ifthe equipmentshalbe deprecotedovera peri eng h Rian with e alvage value a 6, determine the Flowing > Aout! deprecation charg using de straight line webs: (8 Sepuntaton change ducing Ue BM jor using Ue sum thoyeare digits method ‘Ans. fa) PSST (0) POSECaptor Capital Financing Equity and Borrowed Capital ‘quit capital or ownership Sands acethose sapped and ued iy the odes of enterprise in Be expectation that a praitwil ama ‘Borrowed funds or capita are those supplied byodhers.on whidh ‘afinedausotinterestustbe paid and dhe debt ust be repaid ata Speed toe. ‘Types of Business Organizations |A. Individual Ownership, Th individual ownership oslo pro A etonhip is the smplst form of business organization, wherein 8 ceases hin ar her own capital to establish business and is tie _Advanlige ofthe Individual Ovmership Y Tels easy to onganie 2. "The owner has fll eotrl ofthe eatorrise. 13 Ths owner is eniled to whatever benefits and profits that 4, 1s easy to dissolve. Disadvantages of the Individual Ownership wsitne amount of equity expat whieh can be accunmatad is Timited. 4 Wis dficul to obain borrow capita, A. "he Hay fo omnes 18 "The Partnership. Ape perweatforUne pure engaging nu Advantages of the Partnership 1 More pital ay be ebtained by te partes posi eentone gether, 2. Tein oud hy for loge roqiroments aa tits scons procedures, tx forms and oer hime aap 1, Binlation of the partaerdip may skeen 2 tims neve agroiuent of the partners. 4. Teprovides an eay mathod whereby two oF more poson ‘lferngtatets my sntarintbsces, neh carrying = Inu that he eam hest hands Disadvantages ofthe Pertaarship Tr the-amount of eapltal tt can bo aucun! i daisy ial 2, The if of th partsrahip io dsterainod! by th hi of ha Snavidual partners. When any partner dos, the partner Iutematiety ens 8. Mhore may be sri dsagrocment among the individual partners 44, Bach perineal forthe dois he partnership ©. The Corporation. A corporation isa sisting legal entity, Separate rom tne individuals ho oom #, and whieh ean eng 8 ‘most any toe of busines transaction in which ava person cult ecuny himelf or hers. ‘Advantages oft Corporation rae cure perpetual ie without rogard to any change inthe persona te owmers, the stores, 12, Thestockhalers afte corporation are nol ible far the sis of te eaeporation. Tia relatively aie to atin lrgn amounts af money fo txpansion, dvs ta its porpetal Hf 44, Shmonnarshipin the corporation ie readily transerst. ‘5 Authority ely dlogsted the hiving of anesDisadvantages of the Corporation a tivcrotavrporaion aed ta ow stad init 2 HRivraltivel eomplieatd formation and anitraion E. hese nn greater dares of governmental costal a8 ca pare other type of business onganveations pitalization of A Corporation “The capital of cnporion a seqired chrough the sla of st ‘there are ono principal type of sapital stock: common stock nd preerced stack Common Stock ‘Common stock represents ordinary ownership witht spi quncautnnof vere Common storkholdecoave ori egal ibis, mong which are th following 1 Vote at stockholders meetings 22. oct directors sod dagatas bo them power to cond the fof the busines. ‘Sell or dissolve the corporation. 4 Make aud amma the bylaws of Uh coxporation. 5. Subject to goverament approval, amond, or change the char: tor on capital strat. {6 Pericipate nthe profits 41 Tupac the sks tthe corporation. Proferred Stock Preferred stockholders are guaranteed a definite dividend on heir ets Tn cae the corporation i cslved, the apse ust be (nods satisty te claims of the peterredstockholdersbeorethose at {heholdersoftheeommen stsk Prefarred stockholders usualy have the right a vote in meetings, but not ale Financing With Bonds ‘Aboad ea cerlifcne of indebtdness of corporation usually for a pehll no ess than ten years nd guarantee by = mortgage Stisasces at the conmeaion ort subsidiaries, Bonds reissued ‘hen theres aco for moe capital such a for expansion ofthoplant ‘re gervcesreadored bythe corporation. ‘The faceor par velucoCa bond sche aroun stated on the bond ve recall ab Chassification of Bonds Registre bands, The 20 sadn the econ core atte Un oer perntzlly without at 8 2 Couponbauda Coupenbsndhaye coupe st fox enc intorest payment that wil come de fhe Twa, The owner efthebond ean collect the nes: Osby xr fering the coupon to the ices of dh aprstinn 08 speci vente Methods of Bond Retirement 1. "The tepuration may ese anther st fonds aqua to Uae mont a nds dus for rderpton ‘pte corporation nay orp adekingtendinto which period Jepositaehequal meant sve moe The acs amos in the ing fas egual othe sonst eda tortie eho ost the tie they are di A. = periodic dpose to Us sinking and P= pecumulated amnont, the ama nod to rte te ond fate of intrest the sinking ut 5 nnd rate per prod T= nearest. the bands por pesiod |= thal pened expose igure 4:1, Bond resent by sinking fone 5g FIR ma ‘ re a“ PUVE, i 0) Ge) baud issue of 200,000 io 10a bands, P10 anit paying S02 uominaditarestinseziannoal pynent abe PENSE RY tho ute of «sinking fend tha carne 12% cxmpoundat ‘Cniannually, What ithe total samiannual expense Solution F =1200,000 y= (0x2) =20 a = 220,000, P200.000 . p5 497 VA, Oe, 20 *~ 36.7056 1 = Fe= (P2000) (0.08) = 16,000, ‘Total semiannal expense = PART + P46,000 = P2487 Bond Value ‘Thevalucofabondisthe present worth fall fatereamonts that ‘ac expected tobe rorlved through cwmership of he bon. LetF = foo, par, value C= redemption or disposal price (often etal to F) f= thd rate per period ¢ fh 5 umber of periods before redemption P 2 Jnvestmeat rte oe ye per period P= lye af the bond n periods before redemption Per fre o obs 2 J = i 2 » [Pigare 4-2 Cash flow fora bond investment ys pefbetlan jc semiannually on a bond investment. How such show telling to pay now fra 126 B Yast and pays teres somiann Solution Pin | | 00 60 e | | fe 1» > P= Pom (iat 20) + PI0aGo P12) 60010 5940) + Pu,000°02534)(4.8) Me, Romo Dough. band having fies value ot F100 torbbiothsbond ate was 14min and ine payments wore rer ra semana fr a vtal oT years Ab Us cl of te a se peal te oud to afer ata pris that ros Sia on nominal enh taossnent, What was tho sting oF Solution pe poo i= Maw 1s Fr=(PL900) 0.01) = PTO ro mo PIO Pio Fe oto Po10 = PIOPIASR. IN) + CF SF.14 pore = Prora.24an) + C10.405) es) A.P1,Q00-bond which will mature i 10 years and with 2 aly ite redeamed at par at Us end onl vate of 8% payable etpignen fio sek at PA,080, determine he yl a Us os Solution Ce ee 1 =e = (P1000) (0.08) = P80 ® in ao rap Pat o = P1030 000 = PaDA 10)» POOLE. 10) ri = Om ocr, 10) + P,P, 10) P0601) » 1,000 0-488)» PLoo0L yi = Th PURPA 1,40)» P1,000 (P10) 07.0236) + P2000 56) = PI,070.19, om 1.000 sol fe Lo] an 008 le a 4. 5 af! 19 19.057 18%PROBLEMS corporation sol an issue of 20-year bor ving a aad ace Yao af P1090, 000 fr P,00,000, The bons ar iaeresk at ree vemiannually. The compat wishes to etaish @ 1 att tr rtiing Ue bond issu ad wil ake ssniananal sii a nilearn 38% compounded vial, Canon the deposi or invest and redemption of thes ba ‘Ans. PH,780,000 12 A company has eed 10,enr boul, with a face van of ‘ono, im P1000 eit, Toterect a 16% pid quarterly fan ear ecnres to earn 20% nominal intatest 0 (200,00 orth of diva ge what would the sling pica bro to bs? ‘Ane, P2886 4 AP1,500 bond which will maturon 10 yearo.and with abond ateot Low payable annusllyiatobe redeemed atpar at theca of is Tera trict sad now for P1890, determine the yk at this pie ‘Ans, 1656% i) Selections in Present Eeonomy “than re many ess in sowiacering ssanomy stiss whore inert i na aor, thos ais ace requ called present interest ables Such sbi usually mvolve the selection etme stsrnatve designs materia oe methods (6-0 An elect contractor has hi shouldbe complied in 196 dope, Apert haa BD mean tha jb ard its astiatod ‘ha hey el es te work 13D day al the BD nn, 50 ata pea Psa dy, ac PN yn at 730 day and if foreach atop ht plzna! HN day, the ntact hast pay P2000, Tuned daze ae mays more men shoul Gh vata a oe can ample the work on ine Be wesantinen of Sarat PIBDA daw an her pigiia day, woul the contractor save maney by employing mere ne tain the Solution (Lax = nwnberofmentabeaddedt completa tein time ting nan-day, wo bare "EPa tio (20028) z= Mm4) am 0 the ob Wags) (PB (lao) = PLZ CON 25) (20) (130) = 715.00 Gy e300) (9) = 95.000 Damages" (P2600) (= __ Goon taal expense PRO04000 {4 mes an te joe Wages (50-19) PI) CIO) = PLILL OOD fess) (10) = 6eO UND @ sm 10 = \.000 “Taal expense P2126.000 Saving by eopoying ore mn = P2206,000--P2, 12,000 = a4.000 (62) Themanthly demandforicecansboing manufscturedby Me Crusis 3,200 pisces. With a manally operated suiting, the wit fathng cost is 25.00. An electrically operated hydraulic aillotioe Iwas offered to Me, rac at a price of P275,000 and which wil cat by 300% the unit etting cost. Disragarding the ena of money, how many ‘months will Me, Cri he abl a reoner the exe of the machine ihe ‘cides to buy now? Solution Ninoy Operated Citing Monthly eating ent» (,200)0225) = P80000 lstialy Opratad HydraslieGuloino ‘Monthly cutting cost (9.200) (P25) (1 030)» P56,000 Savings = P30,000 -P56,000« P24,000 per month 276,000 PAW As No, of mont to recover cost of chi postin of the Wes Po0,000. The machi hole per howe “The seen mood was canting P27 500 "The sch posure paid ‘nctouttholesevey imate This eto scones TEPLTS pore toe: the machine ay Ill other ants ar asmuned oqal what ithe taal tor cach achinefor 6,000 hols, seaming tho tatalestofeach machine tobe chargnd to those hoes? . "For how many bles iho cont be ua? Bok {) Dell Pres: ‘rime dil 6,000 sn = 8000 0 hours wage of machinist » (P35) (200) = P 7.000 et of dl prs = snow Totatenst © PEI Mattpte Punch Machine 7 = 800 5 hours ‘rime to pc 000 Holes = BON = 25wage of machinist emen "9 F150 het ofsetting the machine = (LTB) (G00) = (0500 Sesto machine 21500 | "Total cove sa750 4) Lot x= number of bol cost of drill ross 3-35) + F90.900 = TS. + P9000 coat for nip punch machine =a (P9O + PLA 6) vex sa0 2 Ge kc Par 500 equal cost, 7% + For equal cost, + 30,000 Ro hte 2800 x = 9500 hols (4) ‘The volume ofthe raw material roqurod fora certan machine parti 20teu,cm."The fished yoke e105. em. The {le for machining each piece is 48 seconds for steel and 30 seconds for raga. ‘Th costs of steel io P3260 por kg and the valu of ata ‘evap ia negligible The cost ofthe brass is PO0.00 por Ex and the ‘alte of brass serap ia P2500 pee bg. ‘The wage of tho peraioes ‘PallOd per hove and the overhead eat of the machine is P0.00 par Inout, The weight of steel and brass a 0.0081 ad 0.0088 kg pet ca em, respectively. Which mate | Slaton seat Vit er pine = 2.02 (0099 = 00169 be 7 . ‘material = (0.01696) (P32.50) = PDssIT wage operator =(-y45-) P4n0m = 05000 cnt = (#85) 5000 = 0020 Tenet vier matetiak = (0477 (POO) Poe ange ofapoaoe= (205°) (00H) = UH 8) sno overt = (335) 25000) ascot of orp = (2021.08 (01085 (2500) “Total nt sa Stel (6-5) High carbon ststralo snl can bowed forthe ets ‘onalathe Thetolemustbe sharpened periadialy. Dataforeachare sr foows: igh carbon stot Ally stl vipat per hour ps pes ‘Tie between tool grinds 4h oh ‘Time required change tls Th th “The waysot the lathe erator P69 perused on anal working hoes. The tal ehanger cuts POQOO par howe Ovesad late forth lathe nea 45.0 pe hou, including toa change ime ‘Roetof unsharpeaa highearbon ssl casts PSOG and canbe ground ten timep ast of unsharpened allo sac ents P8EO at can be irond five times. Which type of ete shoud be used? Solution High carbon sta: ‘jlo time =4 +1 = Shows numberof pices per ele (Coat per ese ‘perme = PSD ‘ool ehnger = PD (0) Overhead = P45) = 25 naar = =expe pie» P55 F228 0 Alo set yeltine=6 1+ 7 hows mam fis pe sl oc=4 cot pr ere Spent = FOO = FO alchrngerdt( = BD Overhead = 45} = 8B Gosharpeed tol = P82 = 170 ea Paes ast perpnce= FES = aon 2D ‘Use alloy ste, PROBLEMS: 1. An industrial engineor has designed to altarnative methods for aecomplishing 4 prodivtion job. Both methods involve the respisition ofthe same working es andl oer capital ensinment {oe sed for this only. ‘Mathes Aen ora ew consiting of theee men each ating ‘Pao.n0 per hour, This suthod will rsult inthe production of 10 ‘ints por hour of which to wl be rejects, ‘Mathod B. cals fora craw of to raen each exsting P35.00 pee hhout and shoul result inthe proucion of eight unis per howe 2 “rh cot ofthe diact material lst in onc ret in P2000 Ut cortin oral uber of uss eto be peoducad, nl which method i hot eennomial "Ane, PIG 25; PLO; Mothod B 2. An executivo receives an annual salary of P000,000 and is Secentary a alnry of P180}000,Acsetain task canbe performed by the executive working alone ia 4 hours. Ue delegates the task secretary iil rite him 30 minutos to explain the work and eonher 45 minutes to ehack the finished work Due to the ‘Untamiiariyof the secretary todo he sk, takes eran adiiona thing longed steel ging bal easing P1200 ge ton, whi thy aoa ate 10 grame orton cement till Bf the some epaeity ses big eames etn 80.000 pr to with oar eae 20 tailed, Deteenine the mare exmomialgrining nt nso ‘thor factors tb he same int PAD pr he; PSO per he, Mill ismore won 4 Acarent kiln with padustion eapacity of 190 cons poe day 4 hoor) lier ho a fs benim sane bos 4 tone fags {heome bricks being replaced peiadially depending on wane Sheeaional fats and th feof he bree, Ttlocrilyprshce bres nets P25,000 pec ton and have lie of <¢runth whe certain imported rik costing F000 gee ton and have’ fe of Bons, determina the mare sanomizal bricks snd ty ow mich, [Ana Imported brieks ate more economical by P56.250 per oath 5. Amauufvenror hasbeen shipping his prs oda ty ‘machina, mounteony on sts witout compacrating, To ayend ‘rating he mua hi infeghtcars which basin oni bis machines. ‘Todo this he mest pay fight ona car capacity fala 42 tons gardens of whether oF aoe he eae completely Full nthe post Fractal has shipped only 30 tonsin eoch at. The carload eight Tues 4 pee hundred pounds Hse macs are crated hot {ey canbe iy in mee fot, along with ther mershandie, thay can be shipped ata ate of P20 por ded pounds with the Teeght bil emu aly on the aetual weigh shipped. The tot ‘rating woul bo P20 perrarhive and wiuldincrese the shiping ‘eight row 1200 fo 1220 pounds per machine ‘Which proure soul be followed? (Lan = 2:20 tbs) Jno Shipping withoo eating i cheaper by PAD BD G Amaching we oreitig mera fxn haste lowing fuiputs per hour ae vari apoods and required periodic rerinding a he intervals citedSpoot Ogu per houe al rogeng & 200 pes very Bho 8 20 pec very Shouse Aso of wns costs P1200 andcan be ground twonty ties, Bach rogrting ete P54 00 nd the ine needed to rogeind nd change TOSL'A Thou, The machine qperaoe i paid 85.00 por howe tietading eta the tol hanged The tol gender who ase sets ute mache yd P4000 pee Hour. The hous “tnchvngeable azn the machine Ss P00, rages of machine nse Which speed i the most economical? ‘hs. Spa 8 cheaper by PODBTIpe Basic Methods for Making Feonomy Studies BASIC MBTHODS OR PATTERNS FOR MAKING SCOHOMY STUDIES “THE RATE OF RETURN (ROR METHOD ‘therateot eturon te capital invested given by the formal, et aman prof . ate orate Mel en ‘Rats of return isa measure of he ffativeous of an avestont of capita Iisa fnancn eliceny, When this method is wed, 5 enue decide whether the campated al of returais iit {ejay the investment. The advantage of is webu is dab ti tually understnd hy management and investors Tho applications “gle investment of eaital at Ue begining of te ist year of ie ‘ret life and ential revenue and cst data or esc you. The EDs invested nthe otal amount octal investment required io nance ne proc, whether eviyo«barowel _ THE ANNUAL WORTH (AW) METHOD {mn this method, interes on the origina invest (sosoiues calle minima esuied proB ie inlded a cst, the ifeaalntowroverenmiessh ning ates thow ete ‘praponed stnent i jtind 15 valid This eto is cover‘ho samo Viniations as rab of return investment a eapial and uniform reve Io of the tvestanent. "IME PRESENT WORTH (PW) METHOD "Thi pattem for ecomomy studies in Bago cr the eomenpt of rth If the proont worth of he net eas ws ol, “rgreatar than zero, the projertsjusified economically. Thepreseat “ovth method ie flexible and ean be used for any type of eso ‘Tiny leis used oxtonsively in emaking economy stains inthe pnbli ‘orks field, whore long lived races ave invole ‘THe FUTURE WORTH (FW) METHOD “The future worth method for economy sbi is exactly x abte to the present worth metnod except tht all eas inflows nd Taitlowsarecompounded forward to reference poi in tine called the fatare,trahefature worth ofthe net eash lows i equal t, oF treater than, zero, the projets justified reanamicaly. "THE PAYBACK (PAYOUT) FBI ‘The paybnck perad is etxmonly defioed as the length of time required tn roover the firs eat an investment from Usenet ch Tow produced Uy that investment fran intrest rate er 62) (6:1) Aniovestnent of P270,000ean made ina projec tat will praduce a unorm annual revenve of F455,4W or 9 years anu cen, Roveasalvage valu of 10% ofthe investment, Out-f pocket coats for fperation and maintenance will be P8%,000 per year. Taxes and houranee wil be 4% ofthe first.cost por year. The company expects pital to eur not ls than 25% Ifore income taxes Ts this ‘Gesiraleiavestnent? Whats Uh payback pesado the nvestnent? olntian Anowatrevense 1%, Anil enn r se Deprciation 29500 Operation and maiatansine si, "Tenesand insurance = 270,000 (0) 2) otal anual it exagoe Nat anal poi cr Rate of retar «8 Sines the rat of rete elt Ua 25%, the nvetzont bs ot inti. By the annual worth mothod Annval revenue 95,400 ‘Anna eat Depreciation = 22 a9. Operation and maintenance ‘Paxes and ingurance = P270,000 (208) Interest on capital = P270,000 (0.25, ‘ota ana cost Sineethe excossf anual ath inflows ver annual eash tows fess than seo PBN) the jvestnent i uo justifed aon t g,400 PARK, 400 Pia5.400 F185 400 PLES. Teer By the present worth mothod ‘cash lop dram es elas[PW of co flows = PURE AOD (PA,259.5)» PRODI 25%.0) as 400 2.6839 $ P27, 000 (03277) = 506,370 ‘nm ost eschading daprodiatin) 181,000 5 ¥270,000 (0.4) = P9180 3 4 ial 91,800 PO1,800 PO1,800 P91,800FO1,800 26 aot ota = FUR. oom zasre > 20% ‘The mm short eet ny he amnol worth ead ‘owl even 2 29 (3 0 69 Fran ‘wal ete . reciauon = 261000 Depreciation» tc (49 60 025 Mucllneets =P25000(13)"— = 998,000 Int apa = 5000020 1.09 = Pyanga Homa” "PIBOH Since th’ excess of annual revenue over annus costs erator thon soo the invent is justified. The an show vest. (64 Afi iscmsiterng purchasing equipment chat wireetsy P40 900 Thooqupmant cas FOOD 0 vada naslvgerains Sa dof oars. Te an nines costs P60. Hee macy the Arm, the eqipinent cn bo ented La tet Meat incnne of P1000 por yea. fancy cuba nw oF ‘Fee Ra roara io the ire utd i nin the eam? Sotetion noua aioe: odin st Rant i ‘eal anol sain room Anon ts: sion 7200000 5,00, 28000 ae eer agian 8 Maictnance “= 000 ‘tl agua at "34018 ‘Amana at brings Piss utr of rou Anse vin, PUBEEE « 10) apie” 40,000 398 < 9% “the equipment shoud not be pushed (65) The MGC omnpany has contrat with amulet to transport ‘ta hap equitement of 3,600,000 liter per yar fom nrfinery aera ta ante in Pac a acostof PL OSper er. Ie isproposed aaeeraeeapany buys a tanker with 9 cxpaeity of 18,000 ees to roa egret ata fis cost F.0D G00 ie i 6 years ‘aa neat on “iy bach fst ac PT 95 por Str aod he tankes consumers 120 tos pe round ip from Paco to Batangas nnd back (dy Labricting oi wl rising P,200per month oO akeratng overtime nnd Cnge benefits For one diver sande spe P21 000 per bath {iD Amal aves nd insuranes, Sof frst eos {0 General mantanaace pee year P40.000 ener PZONO per se a wil be now every 150 round “What should dhe MGC company do if» 19% interost rato 8 nventmct is noha inthe nays? ntion Buying Tanker Put = 28000 29 (9.98) 199.90 ow=eraam 02 33,40 Lehr = (P2000 (1) = 52000 Tnecsfeinsurance=(P8,000000) (0.06) =~ 40,0 Maintenance ey) 00.00 Tires Rae ra. aver Tata anu ast Parag 42 Anawal savings =P780000 -PI.Ta64s2 = PI,990.650 ne of ceurn =PLS8B.58 199 = 24 9056-1 of rtuen = aang 100 = AS “the company hou bay the taker (6-0) A machine dat is oot eqns with bake st” 92 seconds alter th pores iture fap completion ach pic, ns Drovelingremovol of Ue work rau the machin. Te tne pe ise, Titunve of te dppig tine it wiouee. The machin ow to Pein 0 pe ot yar, Te pr ec FO iow auc onl th cmp edo pyr ra a wed seduce te stopping tie to Spends it woud have ae ofp? ‘anume tow elvag vale, capital worth 18% ‘maintenance wand (tal not over P3000 par Solution Anna savings gE (26+ Pam (4,000= P18 500 AC th amon a sa besa ar ie beakeDepreciation 55 Sere = Cat : Repoire and wsintenonee = (2300) 12) Interest on capital ota aaa east POI Beating annual sarge to taal ennual ent, poset: Pane = e500 Do bara In any problem where the kan gusty i the syestment cr capital thetest method to ae che enna wardh eho. 167) A ely til business property containing space fr a tne ‘and two offen, canbe purchased for PL 00,000. A prospestive buyer ‘toute at Jaro the next 10 years bo can bls annual rental ‘lems 458.400 fom the property nd Hat the aawal ou orkt. ‘ishursements wil ot exoud P80 000. Ho boleve Ut he should ke {tle to dopose of the reporty atthe eo of 10 years a ot leas haa PH00 00. emul tesa itcsn lata 2.0% ofthe fiat ot, “e) Assumchehorsofeentoruity capital opurchaethepropery, and tat the average return he bain from his capital i 20% ‘ould yoo recommend Ue iavartne™ {() What racsmendaton would you malo thon to borrow 256 ofthe cequied capital, on the basi of « 10year amortization with Incoretf 13? {© Ihe entire eaptaleanbeabtane hy loatingbnnds a that srl matare in 10 ears, what woold you recommend? Shing fu interest 15% | Solution (9) Ava revenue = Pasion ‘Annual cuts py a9, 1,200,000 -7'700,000 Peveeition SAITO Dishuronments ‘Pozar nairanon» P,200,000(0:025) “Total anual st [Net annaal post (0) Anvl rovenns Amon ote 1 m0 a6 1%, 10 Disbursements 0,000 Manes acusaace =P, 200000 (0025) = 3.080 “ota nna at wietaen et nnval profit P24 PELL 1002 24 50H Rader = RT 10 24 "thoinvestment jie, (©) Anal reve = us8.40 ‘Anal ot ‘Sisking fin deposit Dinoerements ‘Tana & insurance =P1,200000 (005 1.08) alum vast Neemal pt Pisa. rateatrsame BSEE 1p = acre ‘Tho inystnnt it justifo (649 A proposed poi wll esg thoimmeditsinvestnen of ‘P50 000 eadveximettohave yor ed evens aeons: Yeor Revenue ets 1 P 75000 P 60,000 2 6300 77500 ‘ 0.00 15,000 4 35,00 n,00 5 0,00 ats00‘Am suditional investment of F000 wil be euied a hs ond the son yr The prio woul tarminat atthe ad fot yor, iar dhe mots ar estimated ta have amalvage valu of P2000 a that is this good investment? Solution Solve for de intra rate freuen (IRR) andthe desde whether theinvestment juste ornot,Thetaeraateoretaron stata frecue dat wil exo dace he worth of Ueinvesunent to or ab Gheendtthe if fteinvetient Ths, prasont worth ofeash inflows ‘Binae presen worth of eagh ottows mst eal £0220, can ints: 25,000 100, poopin 710 paso ft 1P15,000 aoe) eee 3 f E = | Piso PW of ne cash lows = —PON0O0 P5AOO(L 4 PTO + *+ P5000 + {FIB}000 (1 #7 + POT (L 4° =O Tay i= 19H PW cath les = P00275 "rey 16 PW eft cash flows i 2 15+ 068- 15.60% ‘Theinvssimestixotjnstifiod Theiatealrataofrtura ef 15.62% incall eine ncasy tnostnentPROBLEMS 1. Agoung meshenicl engine is teeing etal i caveat aman An ancestnent of 400,00 el be request be mem in 1 YS Wf seattle il be PD 0 qyenting ones l Boa fallow yar and tha Mocorals 160,000 yer yoae ator P28 00 pe yea Grorhead ANON # KBE sles pee year Tingespense —_ POO.00O per yee -the dang ap his nagube jb paying P216.000 per Yor ett ine operation of hetsies this wil resull > Teper cat by P10 Oper yor, material cst hy FRO deere tat overnead est by P3000 per yea, TL ahe man expects Peat Teast 2G hw eaptal,eould he invest "us h eae tur se 1% che nan shou not im 1 The ABC cmmapany is considering constructing o pant, snmgarace prognent new prot Te and ests P16,00,000, rma cate 30,0000, Ue exuipment casts P120,000, onl aa uring opal requied Ate eno 12 year the and Fs ya 0 00, dn bulding for P12, 000,200, the aspen Tr Pas0.000 anal nil of te working copia reoovered. ‘he nal for F200 8 or labor materia andallther expenses are estimate Seer T90 000 Ke company ries annum rear of 25%, eae raid be tho mins snnualsaes-fr 12 years to justly the Uivestment? "ans, 9,148,500 5 Amoa formes employed as chi mechani of an automa esac chop mest P0000 whieh are ses ean Fey nghin measnuathdend of 15%, Henow pla tafovest Fea iis own ropa sap. tn his present ob, he emi aes ef ast rnin to run hs own business, P| ne series of tn following. 2 mechanics each earmeig aan neal elpersearh earning P200aday. These en will ean tks nverage 40 days 2 year is otber expenses are dhe fallowing Testa 30,000» month Moorea: P25.000a month Sales ine ivf ges coe Insurance a cach carpal by eer service inons your > dat he 8 ol f 208 on his aveste 0? toy tmeking company. Forty tons per day archos f 1 yea itt a desi inal a alay syste wie won down the cost of hauling 10 F660 pec ton Ma 15 P1200 per mouth. Tax is 1% Average a ca nergy analy ad pay ‘mode ta generat ts power!o sappy telat hs eneay rie, ‘Tad tha the power part waalled woul xt P2,000000. Annual treatin and maintenance, PSD Our expenses, P2000 pee Sorte pomer plant 15 yeas savage vas ath edo ‘P2c0,000; anal nase and nese, OS of Gre cosy and rate interetiis Value hesinkng nd woo ordpncatin, dea ifthe power plat justifiable 260,000. Annual depreatonn i et ‘cota nvestment Deterinete rae ofrtamon hetstalinvesinent {tn the payout period the ancual pois F2£00,000 he yt of his bas 9 ye ‘Aas 2.02 4. Airis changed PI peo (a) Af he cormpany hae he cash ees or wou yon recomend the hg? {OIE the company hs 12 Abst P5O00000 wosth of cata bonds at 15% that wil ise 1 years oben forthe projet woul you recomend change “ans Rate of return 26689 essen sie (0) Reo eam 10614 invetent oie. 5. A fand processing plat consumed &,000 koh of lee verge P00 er sy iin "Anu Rate of rtm ic 7.11% the pore plant aba god Aayestment ‘manufoctoing plant and etinatd working capital of edb 10% of Fx ‘os, 12.50%, 48 yeas 7. smal business purchased now for P50, 000 wil love P00 och year forthe fist 4 yeas. An atonal imesinet of F000, In the basins il retire atthe rd ofthe Fath esr. Aor 1S years the Paine can sol for P7000. What sho sts ‘rot each year from the fh though the feet yer oa Fae of ret of 2587 Toe PSS 83 i Sis Stee" Setsteor-Seeadicsntlcessdedusenersnditetsetceusssueniaryseses”™ "tau sutaasenalChapter Comparing Alternatives InChapter6, the diferetmethed oriovestment ofcapital more incensed Iathot chapter theprable at was sesolved waswhother detectnt of eapitel i a certain enterprise was justified or not Meeeevetmost engineering sad businesu projects can bo aah Hee Ty mora thanoneinethodor alternative Thihapter wil eat with dace tes of problems "rhe fondamonal principle which oernstiveshoubeusod stad a lows “Gh altecative that equires the iniamamiavestment ofa nd wil pce satisfactory Fanaional resnlt wil always be ed seiiselere are definite rearons why am alternative requiring & {ger investment sould be adopted “METHODS OR PATTERNS IN COMPARING ALTERNATIVES, -ahore are anveral methods fr comparing alteratives, but only sie peter vl be diseustod> ‘THE RATE OF RETURN ON ADDITIONAL INVESTMENT Menton ‘th formula forthe rate of vebra on aaitina investment, gate of reiuro.o kitonlnvement = -Sanutl ae sR, ane Mal west sina nvstest ‘11K ANNUAL COST (AC) MENT 1s apply thi weed, the an ing intetot on investment le data Teast anual cat ehosen, This par, ice ‘nlionalavetanatpatlar, apps nial ‘uniform ent daa foreach year and sire tie Begining he st yee ft ‘HEEQUIVALENTONIFORM ANNUALCOSTCSUACMEReHOD fn this mathod, ll cash sows (regular or aio) net be cenvertedtoan equivalent uniform saaksl ot hat isa earend ‘Tmauat which isthe sate each yor, The altoenative wit the last ‘Squivalent uniform annual cost prefered Whon the EUAC wet andthe equivalent waif annval xt of tn ltematives mu Ihecleulted fron ify uly This wood islesble ad ane od for any type af alert sein geolews. The nh = todiicstion of he annual east pattern, “rie PRESNT WORTH Cost (PWO) METHOD Ta comparing alterativesiy thie muthod, determina he wort tthencteash oto och alteralivefor the same period Hime Thealterative with theloestpresentworthofonsisseeted, {HE CAPITALIZED METHOD ‘the capitalized cost mathod ia variation of the prsant worth costpatern Thismethodie ted fr alteroatveshavig fone ves. ‘She ve etind deters the expitaeed est fal Ue alternatives hd chose that one with the laos enpaied cot - PAYBACK (PAYOUT) PERIOD METHOD “To uco this mathod, the payback pei ef each alternative i computed Thellerotve ih thezherspaybas-psio it {fhe method seldom ese1-1) A compat i considering to types of eauipeat siterng plant. Porbnant data are alo ‘Types Type B First est 200000 200 000 ‘Aunoal operating ost 32,000, "24,000 ‘Ava Yb eos 59,000 yom surance and property taxes % Payroll taxes % “ tiated ie in 10 ‘ene miniawum required rate of etura is 15%, which eswipmant shouldbe selected? Solution ‘By the rate of return on additional investment method Type A ‘annual cost: eprsiation = 220000... 20,000 FIAI%,10" 203007 Operation Labor Payroll taxes = PS0,000) (0.08 ‘Taxes & insurance = (°200,000) (003) ‘Total annual ost Type B son = -2800,000- 900,000 Deprecntion = pra 135,40 "20.5087 operation ~ Tabor Payroll tees = (F52,000) (0.04) > nnn nsarance = (300,00) (0.08) = ‘Toa annual cost 99,850 - PSI, 086 =P, 704 Piaim76 24,000 2.000 1280 9,900 Psi,056 Aino invent 0,90 Rata ‘Tape B sold bo = By the sama ons eth ‘Type ‘hones ct: ‘Depron = 12.00 P9800 Opeeation ml 22.0 {aoe 0,00 Past ince (2500000000 > 3000 aves insranca = 200000 (008) = 6000 Tovorst on cial =(P230.9001¢015) = 3008 ‘Tolalamual ast PADD ‘Ded “anal ats: .f3a0000- raogoon Deoresatin = 000, rare Deore = FA 158,10" 200007 > "Ahan Taine Papell tes =(92,000/0400) 0 = 280 ‘Taree € insurance = (2300.0) (058) = 9,000 Treat oncpital»P300/000) 0.18) = _ 4.000, "Total anal ost Pings Since AC, < AG tye H should be ase By the preset worth cont method Tome “Annual ots erlang deprecation) = PB,000 + 790,000 “P8000 (0.08) + (200,00 0.0) = FH,000 eens ee aon mn | 90,000 90,000 0,000 90,000, 20000 200,000 + F90,000 F, 1,10) Po 000+ (90,000 (5) = PBL 92Type Annual cost oreluing daprciotion = 24,000 + #2000 passant (2 04 + (P200,000 0.03) = 6,280 4 pesias0 eed s0 Ps.280 8 30 30000 Pw, 00,000 + P66:260 (PA, 1510) = P300,000 + (Pa, 280165 0185 = POP, 64G Since FHC, PANG, forthe same period of Lin, kype Bshould be selected By the equivalent niform annual ost shod - » a | salen rl wl who, hc 0 wslbe rate, no a A 1 2e tte th eS chided - EVAG, = P00, 000M, 157610) + P6520 (P30, 000) (0.1998) + 6,280 = PI2B TO Since BUAG, < EUAC, type Bis more economic | 1-8) Choo eo h Prat cost ‘00 ito Salvage vow ° 2000, ‘nova operation . 7 | fone tn | ‘axor end amr | Life, yours Maney ia worth a oct 10%, | Sotation By the rate of roar on oii! nvestaent mcd ‘Tero and insurance =(F8,000) (008) = "2A “Tota annual cat’ POSIS Machine B Gapalene eas ‘Depredation = P1000, P2000 " Falee tw" 5iams =? Operation 0 Maintenance ‘te00| | ‘onal sonsal cost PDE Annual savings = P48 PA052 = PIES ‘Additonal investment = P14000-~P8,000 "= P6,000 Rate of rtum on ution investment = 2I6B.e 109 6,00 | Machine Ais more canonical oresBy the anual cost method Mchine A ‘anon ate: oor = FO = P16 neration 00 Natntmance 1300 Mota and insurance (28000 (209) = 240 Tetereston expial = (28,000)(0.10) = 1280 ‘Toul nual cst’ P6086 Machine ‘Anmoal cos: _pu.000_ P12,000 00 = FAR 18 SLE Operation ‘Maintenance ‘Paaee and insurance = (P14,000) (0.0) atest on empital = (P34,000)(0.10) ‘roal annual ont ‘Sine AC, < ACy Machine Ais noréeemomiea By the present wart est mathod ‘Use B0.yene sty peri, whieh isthe Jenst common mutile of Wand 15. Moasine A “Aime costs = F000 + PA,200 + (P8000) (008) = P4440 10 ae 4 Patio Paddo PUaMo PAAd0 PACD PAAAO 4 Paom F300 Mach “Anal cols = P00 + B00 + (P4400 (148 > P20 PH,000 P14 000 PWC, = P14,000 + P5820 (A, 1650) + P1200 (FF, 105,15) P2000 (P2168 30) = P5869 ‘Machin A should ba chosn, since FWC, < PWC, By dhe equiva uniform annual cot method Machine A P40 PAW PAA UAC, UAC, BURG, 5,000 BUAG, » PS,000 V0, 10%, 10) + PAsMachin 2.000 cee i tea 5 Pas00 PAg20 FON “HUUAG, HUIAC, UAC, 14,000 EUIAG, = P14900(16%,191+75520-P2,000(A0 16% 18) = Poo ‘Machine A shouldbe chon, sinco BUAC, < BUAG, (7.3) Acompanyegoingtabuy anow machine for anafecaring fas profuc. Four diferent machines aro avila, Cost, peraing thn other expenses are allows: A B a > Firstenst 1P24,000PH,000 49,600 52,000, Powerperyenr 1,300,960, 400. 3,020 Tatorperyenr 116009320 4,200 2000 Maotaunce peryear 2800 2800 1,300 700 TTaves and insurance 2% KO Life, years 5 5 cee ‘Money is worth 17% before taxes the company. Which mace ald be chosen? Solution ‘By the nanual cost method Deprosiation: Machine A = 224000. PP4000 p34 8s pagans oie Mockine ts » 230000 paar Tod By Oh vats of abun on st rhe sonsamicentaiag st ehwose Gat mraative vit adel eas, which Ss machina D, Honore, {oh aa exci B avery eho show total sana cst niy Pa esi PistoP 82d more than machine Power P s00 P Lg60 P2400 P 2020 Labor sae dam) 500 ‘Marntonance 100 taap ‘ton ‘Fanos and insoranco 3%) Depreciation otal aaa ost ta Comparing Machine Ath MochineB ‘noRon adding! eesinent on B= (ELBIT 2 MTR 1TH 08 Machine Bis sono then Boebine A, comparing Machin B with Machine on Fat ee 6.60% 1% ROI sada invest“Machine Bs eooaomical than Machine Comparing Machine B with Machine ROW on additional investnnt on D =(ELRISTHEIRER 00) 18a 1% Machina Ds economical thn Mochine B choose Machine D. (7-4) An untroaiad electric wooden poe that wl fat 10 ene ‘unr cotati soit costs P2000. 1 a treabad poe wil as atop yon, what ithe msisum justifiable mount thal exo be Teri the read pet, i hes masinant rebar a ivestment + So. Consider anal tes av ingurance amount tobe 15 of ist ont Solution ev = maim amin tha ea be invest onthe teat pole Untrsated Pole mul csts anon _ p20,000, nt opraiaion = 20000, = LBDEDD. = PTO "ps nen = 20.000 (0.01) 200 Tnvewes on eat = «P20, 089 (020) a.) "Tocl anual east Past. ‘Treated Pole Depreciation =p cag “Tan eRT ~ 0008286C = noe sane: ‘Taal anal ost qvating annual oss Pooissise = paso c= pxons soling ha at ofdheeaing decompo ht lf cost P20,000 which eorafinndateafmpplcain, and Gtapatiction. A whol rate f etura are the two invesitie! BUAG, = P20 00 (A175. Second option \ . UAC, RUAC, BUAD, a0.o00 UAC, = P20000 (A 45) oct two altercalives tar equally eemomea, BUAC, = FUSS,0,000 (MPa) = B20, 000 (AME agus __ps0.000, MEBs ~“P20,000 ALi? — 9 sala y= 1% 102 - g6o67 cu 62» 0 Rate of eturn = 12% 1-49 Theengiaser of» medinsn seal indstey wos strated to propre at east Ewe pans hich so be considered by masayamatt Birt improvement of ther operations. Plan" calls fran ntl ‘Seestment ef P200 000 iw with a prospective savase vale of 20% ie frat samt 20 yoars hanea The operation and maintenanc Gisbursementsarecstinatadto bs P15 000a year and taxes millbo ‘tfiat ost "Ton #B" cals for an immediate favastnant of PLLOO00 and Secon veatnent of P160,000 eight years ater. The operation ad vecrtenncr drmarermente wil Se P8000 year fr the inital wratatataon, cl P8,000 a yea forthe sacond instalation, Atte end pba yeace a salvage vee salle 27% of Ure investment. Tats ‘lle 2 of he frst cast, Itmoney is worth 12% which plan would you recomend? Solution Dy tho present wart cost method Plan A i. "Annual costs = PAS,000 + (200,000) (0.02 = P30,000 Salvage rata CP200,000 (020) = F40,000 gq 99 , rales ruipo Putian eon vets ea ish 900 4 vz ertom PWC, = P10 000+ PL SKI, 952m PIER HAIE 128 8 "P11 2000, AVE, a8) - POD OOOC, 2,20) “pats Pian Bis mare exonomica, By the equivalent uniform ansual cos wid BURG, =P200,0000,P, 128,28 + P1000 PAO DORA, Let 0) = PAB. BUAC, =PHOONANP.2G 20 « P1800 {PLeU ODN 2% BKAP,LEe.20 1 PLLA ie RRA 1220) P60 aon 802%, 20) P081.9) ve National Covornmnti planning wo cmsteas sugrosatnd hanebridge wie duil butiisexpactl Ue dts coco ane brdge wl bo added. “Wao lane ridge tito, tl east P8100, 000. sin Inns hedge cb bul oa for 25,500,000 i estate Wanda ane brag ab tater date sl cost A,000,090 Aono iipkanp on each 4tane rg would be F91,30, aad fr te ane ‘gs wld bo P115,000, Money to bl he ridge wl est ‘sume n 0-year nctonal ire pees and detection the ston neat which Une akiiona 4 Zanes would be requir bo ake equals econonical to bud the Blane bei imosoatly > [ kk a Pwo, = PA,100,000 + PA, 0002/2550) = 9,058,000 ‘Aano bree 185,000 P183,000 5,500,000, 000,000, PWC, =P' 50,000 POSOOA, 2% a P8,000, 00010) “89,000 P/, 1260-0} (AR 12%) Whoa n= 10 5,500,000 + P92, 50000141280) {P00 00¢ra 13% 0) 4} P189,000(874 1255 40K, 12,10) = P9.079,000, To years (9-3) plat eo provi th somatrvete for P2800 000 wit as! sont ‘PDO, 000, Tis axpotad thatthe on he gr rexuirament could doubled, whic Snestznsion cating P40. hol Ueswiae double. Aplan tprovide ts cansircsad fr P4000 00 a its ‘B00 wen oporating hic POD) 00 on al expat. Th pnts smnsdey longi The rogired rate somended? Belution Deferred apni fan | ttt Vd Pie P00 Pein Reajon Panto eaten Fe = Pawo aptind et RN AN,00 «ata OA. P4000 coreg» 2122000 yan Pr aoa Fullsion Plant [ttt P4oinpo Capitalize ost = Pa000,000 + R540 p14 2075) + PABA (Pea. Pr 030 ‘The fullsize plont shoul be oostructa,PROBLEM dang tak testallaton in iz ssevico otaions which wil ‘hransa ths ife ofthe rank fon the wut 1 yours to 19 yeas. he wre af the suse costing wil increase the cot ofthe PA, c08 90 Te PSAO00, Cas of mstaltadan foro afte Lk ss P2400, vage mae Fr bah son, and intent rata 30, wl 7 nd tne use of the spi oat? “Ans Th spacial eating sald not be ww ‘wai sompany boing eo An atric omporstiveisconsiering ho win en Dole inthe expansion fa power distelatin Lines. & vats P1800 ah wn wl ast 20 ys. ‘The caumany be preety En reesote wooden poles which erat P1200 go pol al wl inst Yoyoure, If money b worth 12 yor cent, whieh ple ston be tra. Aowiue annul tases tenn 8 I pak est of Get ost ad ‘aro alae va in bth eas. Tans Fe costed woodon pokes shoul be 45 14s proposed to slae a eeblo oan sating pola ine an the Shore af ake tcamnet tro goints on apposite ies Land Rowe ~ Submarine Route Length, los io é iat cot of ele per mile P40.000 e000 ‘Annual maintenance pore 960, 3500 fterstaninvratment 8% 8% Pase 3% % Neb wlvage vali pr i 12.000 2.000 Lie, years is 16, Whish ie more economical? “Ans, Phe submarine eahle is more economical the ents of ‘tue itiong vestinon i onby 97% 4. toacold tory plan, it 8 desired to determine wheter to ose insubios two inches thick of the ines im nsoltng the als of the cold sornge watehoaee, Heat sbsorbed through the walls without nition sould cost P96 0 pe year per square eter. A two-inch Mito il oeot P3040 por agee meter ae wil ut cl 293 of tie tos, “ne inch amgoltion wail cutout 92% of de iss ad wid hat S00 por sare maar. Using a te of 15 yo fo che 5, La building shai plan, i iat Lo ammpany hth ee diet iin bua oot PROUNICO Labor felis PLD nd ‘areal PAD 000 “Tene i ares omhL al 6 hes om of he lat "Tho soon alsematie yi be to blll in Budean a plant cnsting Pi260,000. Labor sould sally P40 000 sod Grerind wou be PSB Tue on aswranes ould be O% thefirsteust Thscostof rp eerste would be thane i eihoe Plant i pital ust be eersvot within (Dears and MoM Veoh at lnat 20%, whish ib sald che oor of he cmpany hase? ‘ns Plant Metro Manis 6. Asaity sompany sepoidering th lowing pans to provide furtnin servi Faquiad bi yee dana at Ue prospective (Eeowth of dena fet ning 18 jaa ‘lan ceuitsan madats invests 6 P00 00 in propery thot has an estat il of Syrah 208 seven savage "Annual disbursements fo operation and salnansice 0). Anaual property exes wil of it et, Plan roomices a monet estan! of PSO 00 in property hat aan etna ie of (8 yon th 20% tarminalsaknge Yalua." Anya diabursoments fr its operation and maintenance Thring thes 8 yes wil i at oan, Aft 8 years, aon inventunent of P400,000 si bo vequired in property having an aaeeeera Ma of te pare th ath tarmac alu AR {hi uditional property in installed, annval disbursements for “peraton and maintenance f the combined property wills PA 000 Renu ropetty anor willbe 2 tho est cot of property iservne = ny tana Money oath 12%, Whst would you recomend? “Ana, Plant 8 biCaptor B Fixed, Increment, and Sunk Costs ‘types OF Coats ‘laud cattasrethows costa which remain coustsot, whether oot given change Sa operations or payin adopted ‘Varnble conta ace thve cotta which vary with onipat or any ‘change nthe actos of an enterprise. fereonent conta aro thove tha rise as Uh result of change in or policy. “nrginal costs the additonal coat f producing ne more nit ot product. "Gam cost represnts money wich has been spent or capil which hes been invested and whidhcanaotbe recovered det certain (6-1) A saachine coting P30,000 is expecind to proce 10,000 sunita a cortain product during ita entitle before bang eplced [Nh ead ify wil havo serap value of P2000 The cont of using the cachine willbe F900 n year. The power consumption pet ‘itis B.8s end the maintenaaee pr wt wil be POSS. Labor will TREE per unit deprecation by sinking fund metodo, Ratrniue Ov cost gee ut produced if the annal production §* (2) 10,000 wits ana) 2,600 unit. G) Annan! prdvetion ‘ho machine wl Depreitian = PX Hsing ‘Total ‘otal oa por unit = P50 0) Aunaa pradtion 2500 uni Ph uackine wil Ist rt yor Anal cst: ayg0 P20 sor Dapreain = 22900 PRO 50 Housing - #0 “rat sor opm PRO fn pr nt P25» 47,000 ‘Toad 855,000 Pre B90 Modernization would be profitable, but it anid not be as go a procera the price reaction. oot programs should bo cambio (6:1) The ABC Company has two plants i ths samo ety, ach a te pao ao0 per oth ands variable cits are P1600 Sesettias eed casio of Plant are 60,000 per month and A Mibcatrane BEDDOW -U0Y" Xand Yara the number of unis rare iat pest the sles have Bon stalished a 14 unis per reed cach plat podng 7 wits, Should he prodscion oltne ato plants be changed, and twat extent? Solution ised eno at both plants will bo malfectad nd ara therefore reglected. Plant 1 Vacible conte P4200 e Y Vari Coste » P00 ry 18 8 ‘seo ql eas é ey 5 505 ‘ 480 Ualkpermanth Variable Cats oa Pt Rant rat “PaO 4 Past P7Om —Piosw s 3 is9 11908 fo Sao Tivo Baan - 4 6510 ss 1a In6 oo 7380 aaa - aio 8813s ‘ so0 ~4A80 1880 (Operate Plant Ia fallenpacty, ‘he manactnd should price Us ei G2) Amautocturing Grwrhaso wostepredact hat ano baing dumped incon iv The wastetnatertaculdbeprocaedt produce Tevger,Thiswoald eee te nsetecat of PSOOD) ceeevil aoe would ies P14 000 ana P5000 oth other soon Overhead expenses wil at PSS, 0 egaranon amino 28 a the frst eos of Us Paral cates and ether befits amount to 4%, The bie of the eae ein Spears withansalvagevalooatheendo tse, Money {Sworth 20% wo the frm arab etercer are pause preinonth, whic eanbosak for Wak O poe sl ths frm sak tho investment? Increment sevens 8.600 (12) (2200) sa 40 nceement ess Peo.o00 _pa2.90 op, ‘Depreciation =FS23 008 = Pea 5.002 ‘Maceciats = (P53.0000 12) = 636,000 abr = (P0002 108,000, Gerhead 56,000 Pasta taxes & beneits = (P163.000)(000= 6.720 Fazeeland msurance = (P3200 0 = 900 Teast on eapital = (320.000, (0.20) = 64.000 Tal anual cost Poss 322 ‘The Gira shoal not invest "5)_ An old machine wos purchased & years ogo ok Sa of 150000. Je was catimated to have a useful ie of 8 years, with 8 canes valoe af B50. Te ix now gun ta be replaced by & new sara ctng P1000 ond 790,000 aden wil bo atlowet for Ee ti NBetarmine the aun cost if depreciation bax Deen OM ety thea) nght Hine mend, aking fund method ot om, and (SYD mo. Solution: c= Ps0.000 9 £0000 (0) Straight ne method p, = 250,000 F00 8) pig. 6, = 6, By = PD, 000 — P16.875 = P99,125 Sunk cost = bank value resale value ag, k25- P20 00 = Ps.ias 6 1D, = API, tm, 81.160 2,5056)= Pro 4 6,28, P5000 PHL OTR = Pa one Sank ent book yan —real vale = eam Pon = 5922 (© S€D method ‘Sam ois A 844TH ast40, 259,000 - P5000 Sank cost = 28,750 — P9000 = -P6 20 “The native sign means a the amount i aot sc but vin PROBLEMS (0 TWX Camas st npg Spee” 2 taste feng epee ce fr tm ran Yn intone Tanta cuts ny nary fo ae prac ‘maxcimum-capacity production. 7 noma rth Pea Maxima Cpa, Unis soon ‘Tal ed Cot vas an ‘Variable (incremental) a ~ mee CmtacimemCyecy FOOL FANN (2) Performance has not bien gd, 5 the company expt a recsive domestie orders for oaly 1.200 unis ext moni a price 100 pr, Hsu proton eit ton(09 ta fondly forsign pewor offers t"buy Y5U abdonal unit ot PLIOD partly shoal Des company acta? te of incremental exo Hes meee) Sead 1,000 nite Plant Aan} 200 ans oo eect gain PE, 600 tha company should ncsept Une ole, (2) Acompnny has enay Flat Aand aod Plant ch am motion ren, each wih a expat of 12 sails of pads por eee vised expense A PU,000 per mont and at Bis P2000 aoreath, Varable expense por aoa a8 i P0001 8%, whore N Pfemurnber of unite preucod ALE itis F2,000x BF, where M= tbe Tnrot atte produc, Ae prevn: tae aaleshavebeenestablisha mrp its per month with cack plant producing 7 wil. Show! Bio {eorplant Yad bs roistebata? Wh? Hos ‘Ano, ania a 5 wns. (0) An acet was purchased sx yeas agp at cent oF #70000 was Coyne tote a useful ie often years wih asalmage vale Teepsu0 atthe end ofthe tne. Tis now of no fare we wd cB BE sb ter only BAON. Determine he sok cost f depreciation has exe by (athe stalghtiine metod {0) The sur th-year's digits method ‘Ans. (a) 72,300() P30 9 Chapier Replacement Studies “The Four Major Reasona For Replncomest 1. Physical impairment "Thorwutng asl completly or pasty wer ut Anger funeionntifectaiy witha extnsive ros 2 Inadoquaey "The mitng asset does st he present deans Ut ate pee 3, Obetasconce ‘The may be eaused ier by a eseing in che demand forte sercice rendered by the ese or the weiaity of more efit ‘azo which wil operate wit lor ot pce! cst 4 Rental ort eis EADS tent or parable use or oer, ‘thus froeing capital for other and more profitable use. oe ‘Sool Coot Due to Unarortiod Vaan ‘Unamortied value of equipaant.e property he dient between tsbmntvlonandtersaleyalur wen replacel Unsorted Taive shouldbe sidered ave unt" tora besXs sow ses nay bo ma 5 ai proceso lien hich howe bee disenated pravinsty. Hoo torn cost eoveseitherthorateot aturn gato er thes ost i). An evi factory eat be galanged or ropa to 8 caaimousto nom prodsten machinse. ‘Te erasture was bil 89 SEEIGFPs fun, proven bal va, bused an sermght line ‘Sopeeintion 5 (7,000 bat ths ben appraised st FHOD,O0D.1 be Chasse iselterohihscoat willbe PI Seaitionandiiservicelie wil, ipceatonde) 3 yours ith a salvage yaw o PDO, 000. A new factory ‘ald be parent or baer PS Oran, Hew.vkt have of 20 Jour: sd a selvage vlive of P00,000. Annual asitaaaiee of te aw baiting would bs PI60,000 comparod with PIO0,000 sn the Shlargedstrachars Howsvae,thoimprowed layoutinhenew biking ould reduce annual pentuctiocortby P2400. Allother expenses Tr the new aructre are eotnvated az being equal. Using an invest- ‘Sent cate of 8 por cen detarmine which Jo the ore attractive Tavestinent for Sis Bee Solution ioe Building cn = PAOD OOM + PL.NOOD PN 0 : 8 gon = riea22r tame i Maintonone = 109000 Loreen) poms Fea anna ost wove Now Building : a a _ Baanog00 ~ Seren : “Tot anual est Annoal savings = 600,237 Atiiogal invstnent = 50059 Bata of arn ou wie naseuce te new balling (92) Adesiion mustbamade sts to repars acta eine with a new ano, ot tere the indo of ts ok anyine ‘Boroughty ream t The ergial east th ob 2nine ts [ago wea PT,000; to vcore an acon no wil 25 3 Pa Wout ertand its wef ie fr yaar now engine wih ist coaket 8,000 and wlth an asus st Hyon ‘hposad nat dhe anna eotof fos ac fbsennt wth Us 220 ona engine wilim boat F20 000 endo is cot ll be £8 nth he eve sncine, I alo beliaad that rps will be P2500 (Joa lena with the new engin than withthe reconditinued ons etume dat usither eogiae bua any ost vananble rahue when pated Ir eoney it wor 1, wht Hoa yor rere Sointion Rocasitioned engine nal oot ion = P2000 ABO Tepreition = pi2AUH = FELON 407 ol nod Ibsiemts i ‘Tal acwoat cut PELOSI New engine aeepredation « PO2000 FARGO 4 p 2.95 Fi tos, 10" 210 acl and sbrieants = 25 000(085) Irtseet on eapital» P5200 16) “atl al et roe ‘Phe old engine shawl be replat : wt(0: Your yearseiga a ore-crucing uni shih ot PALOO0, Anal operating ost or ‘hes unt was etimated thave aif of 10 years, The quantity of Fee anGlodintabedeubled ad expected a coninur ath sbighes rea taant I years, Aunt hat wile the same gunn of rae edove the san operating cots as Une ane now in seven ca Fe Aad tor B7,000 "hs nt wl have w used il of 6 yore rat wlth double the eapaaty of tho axe now in wae ean be sated for P1120. Is ie ertinatod at 8 years and is ant valle east are etimated at P4950 The rene eliza value anno ine P2B OOO, All ants under consioration wilh tithe an omatedsuivage value at retirement age of 12% of the a cont Interest rate 20% Anal taxes wl nsorance Sr the egal eos. ‘What would yon reoromond? Solution ‘Augntation ‘haa oss: Old wnt Deoveciation = 228.0005; Basso. = Pi an Operation 380 ‘ae iene = (83,900 (025) os ‘New small unit. cSimalune_, B00 (71,0001) FA 2,6 = Ps6.000 9.9259 operation "Taner and iourance = (PTS, 600) (0.025) “Peta annual east Replacement ‘nal cote Now big unit ‘Depreciation = (132,000) 0. FIA, 2046 98.00 Operation ~ 9.9288 ROR om ational ives ‘Bay the new smal nt osu (0-4) Acar can be purchased for 00000 when new ‘The fotlows 0 stbele Hf annual apertiog esperar ach yone ad trade values at theend afew year. Ass that thse argon trod be een or ature enlaces, chat ee car wl a Tnekopt mare than 3 years, i inarest om insta espta 1 before taten determine nt winch pease scseshaald be replac Sadat conte wl be minnie Year) Your? Years Operating esyenses for yea P34 58.000 PAL-DOD ‘Tradoin salueacendotyeae 408.000 396000 240.000 Solution cst of kong enchyeae 1 a Operation scoop 38.00 PAt.000 Drpreciat 192000 4G) sR Trdocrt on cata (5%) 0.000, PSL. 200 Pa 4a "Taal Paieon0 P243.200 PIB7.A00 m6.a ‘pUAC =[Pa1.009+ reason gm, 1%, 2)] VP, 1%. 2) = 0907 385 yea: rerid sion BUAC = [P91s.o00 + F243,000 7, 15%, 2)+ PIB? 400 PF. 15%. 9] AM, 15%, 9) Purest ‘Tous tie cheaper t boop PROBLEIIS L.A rapping plant i planning to acquire a aew Dietel gon xanga toroplas presen unitish ie randurng brea ‘The new st would cot PIS, 000 yuh a Ove (6) your, and aa ‘timated salvage vlan, Variable cst wld P150000 a yar ‘The prewent generating st hs ack clue of P5000 and & emlning ifoafS years a depo value no PY500 bat would be aero afar 5 years. Variable operating soo nou be P1B7,500 a {year Money ie worth 108 ‘Which is prttable, wo buy the new genuctae stor retain the preset set? Support your answer by showing Your computation ‘Ans. Buy the new gencating st. 2 Acsspany hatselscompatershesproposedteascillpoblie uty company that it purchazs «sual sletroic computer fr 1,000,000 replace tn cletating machines und thir operators. ‘An annual service maintenance contract the enter wl be provided ata east ef P1000 per year One pacatc will by equa fa salary of P96 000 per year and ono programmer a salary of L4,000 pee yase. The sadnater econo! feat the computes 10 yeas, ‘Thacalulting machine cots P,000 coh vhon new, $year ag, snd presenty cont fr P2000 aac. They hve un sims is F8 yoore and an expected wltimote rule valu of PON each. Eachoalevating wachine aperaar receives? 8400 per year Frage ‘enol fo al labor cost 8% of anal slay. Annus! maintenance fost on the eating machines have bean PS00 each, Taxes and {ngurance on all equipmantis 2 ofthe fat ot pe en. ‘eapital eats thecompanysbout 25%, would ourecommend the lotors should be repacd 8 Wis dsire to determine to present anemic value ancl machine by considering of how it eompaes withthe best aodern ‘machine chat cold glace. Th od nahin sexed to equity ‘ou of pocket ests af PBE.00, each yaar fr yeas und then be ‘scrapped or P5000 residual value” Theor machine eequites an investment of PD 00and would have out packet cote 97.000 ‘sear for 8 years and then ero salve vue Invest etal Should eaen 2 imum retuen of 15% belorstaos, Determine tie peoseat value ef the old machine ‘ae PIL2O0chapter LO Break-even Analysis Inengineering economy, many situations are encountered where the ont af two or mace alternatives may be affected ya common ‘aril, Brankceven printf the value ofthe variable for which the tte forthe alternatives wl be equal Ceti) and {60 ‘certain speed total cost applicable to Alternative 1 ‘etninspeifid total coat apliabla to Alarnative 2 ‘tcunaon independent variable affecting Ateraaive 1 td Alternative 2 ‘The breskceven point where C, and Cao eau f= th) hich nay be sled for the breakeven point BREAK-EVEN CHART Break.oven chart isa graphical representation of break-oven analysis Thebrealeeven point she quantity of production at which ‘heineoroe sequal ottal eat. [ietheintersetion afthe incoming land ths ftal et Hin on te break-even chart. When two aenatves rst compared, the break-even point isthe intersection of the total ast ine for ach alteuatve on he break-even chae. (10-1 Twa nachines ave sing onder fr Ue production particular part for which there ss tar demand, Machine A ents P5000 and is expecta! slat 3 years and have a P1OOD0 Sivage aloe Machine Bist PS,000aadisenpectad lat Sears i have zero salvage vac. Machine Acan produce part 18 Seconds; Machine Brequtes only 12 seconds pee part. The outa pocket hourly cst of operation is F8for Aad PO for B. Monthy ‘aitenance ets are P200 for A sd P220 fr B Ti terot oa avestad capital is 2%, determine the number of parts yor yenr at which the achines are ually coerce Expected numberof parts per ye greater han this breakeven ‘quantity, which machine wuld be favored? Algebraic Solution Let «number ofpats per year for ol este By the annual ene meth “Machine A “Annual costs ‘Depreciation = PSBOUO-P10000 . P40.000 _ proeo0 : waAzGS 315 Maintenance = (F200) (12) = 2400 _ 18 . Operatin = 728585) a0 = 0108 Interest on capital =(P50,000) (0.25) Machine ® anual ote ag P7500» PISO Ling FrAae6 tases ~ P86 Maintenances 202 = 3610 ton = 0 (22, + ao Operas «(290 (12) 00 oun Invern = (T5902 = — 8D aml axon +0308Bguating total annual cut, P2s,t92 » POAON = P29,051 + PO.10N N= 20,544 parts “Machine B willbe more economical for nuimber of parts ‘more than 29,564 By the rate of return on additional investaent wetbod Machin A ‘cows roitin = PH.-P10000 . P1000 = pup an ae FIA,25%,9 38125 Maintenance = e201) = 240 Operation P36 (JO aon u Tal anmannt i040 Machine ‘tna cat ePthoon_. F750 Daren = ET6 IO, PABOD yap = 260 Operation = (P30) (12) in = _010N ‘otal annual cot P 9,901 4 F0.10N (Pram + eos) = 9,801 + POON) ‘Annual savings on Machine PS,501 + POON Aaditonal investment on Machine B = P75,000 ~P50,000 = P25,000 18 ate of vetur on ional veto = P85 N= 29544 part Machine Bis more economical fer numberof parts wore than 29544 GRAPHICAL SOLUTION Machi Fixed costs = P25,392 Variable costa = 0.19 When N= 8000 pares Warinble oss = (P10) (6,000) P9800 ‘Total cot = 25,392 + P9500 = F492 A ‘Machine 8 Fixed costs = P28 061 Vanbic soa F018 ‘When N = 60,000 parts arial cats (P00) (50,000) = P5000 ‘Total cot = 28,051 + P50 = Past . Breal-Sven Chart 49 a T eae aching ronson Tora cotfachine thy | tt — fos ost sop ee =u {Filet hack ps ost 302 Corts x P10000 1 ' sales rr ee ee) No. ofpartsx 100 | Breal-even point = 2.500 parts (approximately)(1022) ‘Two electric eaotars are being considered to power an Sndustril hoist Bash is capable of proving 100 hp. Pertinent data for each maar area follows: Motor A Motor B Investment 25,000 Pr2,000 Blecrical oicieney 0% ‘as Maintenance por your 400, 600 Tie, years Py 10 Money in worth 20% Iuheexpectd usage of theboistis 700 hours ‘er yenr, what would the coat of elecrieal power have tobe betore ‘Motor Ais favored over Motor B? Solution Latx-contofelecrial power forbuth mators abe equally eonomical Motor A ‘Banal cost: Depreciation «225,000. £25,000 ation = Finaomt0 "25.0587" * °° ower meta) : oasrx Maintenance 400 Interest om capital = P25,000 (0.20) Scam ‘Total annval cnet Pessoa SEIS Motor B “Annual cost: son = —-P22,000 752,000 Depression = pEIR000, ESO = ies _(20H0.146, 70048) : ta Power 45x 59,94 Maintenance = 60 Interest on expital = P82,000(020) = 6,400 ‘Total annual oat Pega sana 6,369 + P62 67x = P4252 + P59.B41 x= PUEBLA perk Motor A willbe moresconomicalforlatrical pawer ost esha Po.6514 per wl [BREAK-EVEN CHART FOR BUSINESS ENTERPRISE Breakeven pit oat and Reveaue o 1 Vaile 1 + 1 of lo Units output or percent production ino CC represents the fice sts of paduction, Aron °COOC {is the ced cote region, 2 Tine CV shows the variation i tal arable cost with produc: tion, C'V actualy represent che sum ofall production cst sie is arting point is at ©: Area CVC isthe variable cots yegion nn teem CVO fe the foal coat oon petite Tepes the rm come mae, Area OTOO he income region. Area BIVB is the profit rgion and area BOC'B 3 the loss region(1043) Theos ofprausing smal trio radio consis «72809 fbr nd PU mata Th dharani the plat re 10,000 por month, The variable PCO per seo ast ean be sal for P15 0 eat, Determine Tw my ais ust be proced per month ta Breskeven Algebraic Solution Leta = umber of sts te prodaced por mooth to breakeven ‘Tal income = PTSD ‘Total cost = P100,000 + (P23 + P37 + PD ung oon' ste ‘Tobreskoven, Prin P1000 + Pls 1a ts Graphics! Solution 5 es hs ee! . ¥g 24 i = i : 1 a4 5 1 i i af 3 ies 1 4 1 Fixedoste | | 1 L oasis 00 7500 ——1,000 ‘Number of Ste Brake pint = 7.10 so rs (04) company hat production capacity of 500 units pe rmoath dit fixed exes ae 250,000 month Tho vacable cote pat tlt are P1150 and each unit canbe sold for P2000, Renae retsures are nailed Wo eon the fad css by 10 per con ad thevarableceatby 20percent Determine he olan vem prints, What are the old andthe new profit 100 per om capac? Algebraic Solution Income P2000 pe nit (la xed costs» P250,000 per month (Old variable corte = PI, 150 par unit. [Leb old breakeven pint Income P2000 “Total cast» 250,000 + P1150 ‘Tobresk-even 2.000% = P2500 + F150" X= 28 unite per oath (2,000 (00) ~ F280 00 = (P1180) (600) 175,000 per meoth [Now fizad cota» (P250,000 (00) = P25,000 [Now variable coat = (P1150) (080) = PD per wit Tory = there breakeven pine Income = P2000) ‘Talent = P226,000 + P20 ‘Toresk-evn, 'PROO0y = P225.000 + PRD) 1 208 is pe mth [New profit ~ (P3000) (500) = P226,008 = (9980 (oR) += P315,000 per month 01a preGraphical Sotution . Hy 1 Lt] AT | Tine : ’ z on a z 2 i 8 al IL Z ‘abyrineafate Zi | LL : 1 | i 300" ees cole Spero tear ee ta [New break-even point = 208 units per month [New profit = P515,000 per ant 0:5) Abel factory assembling leu ‘pee month nd all them at P00 each Dvir ‘ooo chars wth par vlueot P50 ech. Thetis tnocth is F25000, Other costs sro P,000 per ‘arenkcoven point. f only 200 vite were rouce ‘ine the proto bs. Solution Taco = P,800 per unit Fed cont 2 25,000 por month Yori eosts = BI,000 por unit Dividend = 8% por year {Letts number a ealealators per month to bres Income = PA ‘Total est = P25,000 + PA, 000% ‘Tabreakaven, income = Total ost, PLAGOE = 25,000 + P1000 X= 3125 sy 82 its Dividond = 2501068) (8,.000) p38 per month Income = Total net Dividend + Profs or 20 wits (P1A00) (200) = P5000 + (P2000 cn + PIA 28 {p Pefivios Profit = P121,867 per month {100 Acrpany manfaarigaleultshsacapsty 20 fant, The arab D por us. alling price of th elealatre ent of hope ‘inant P150,000 per month whihincludlltaxs Thoeompany faye an anol dividend P12 persharecm each ofthe 80,00 shaves ff common stoke a) Daterming the number fcalealators that must be sold each moni o braakcevan and the sale volame cortesponding to the Uuahealthy point (0) Whats the profit oss if 150 units were produced and sd month? ‘Unhealthy point” ithe aes volome at which tho business will be able to pay exaty the desired rate of dividend)Algebraic Solution Income = P2500 per unit Five ste = PH80,000 per enon ‘Variable cots = P,000 per unit Divident« PLE per share per year (e) Let x= the break-even paint Income = P2500 "Total cot = P150,000 + F1,0005 ‘Tobreak-even, income = Total cost PD,Biix = P150,000+ P1000 "<= 10D unite per moot Dividend = (P1280000 «9000 per month Lety = theunbeslthy po ‘Ache unhealthy point, income. = Total cost + Dividend PEIG00y = P160,000 + P1000 + 730,000, () Income = Total eat « Dividend + Protons For 150 unis (P2500) C150)= PUB, 000 + P4000) (480) + P32,000 + Profittoss Profit = P45,000 per month Graphical Solution Cost and Inevane = P100,000 Cr a ae) Caleulatrs per month (@) Break-evn point = 100 units por month Prof: (5000 por oath PROBLEMS ment which neds The alleratie ar lls ‘ternative A: Parchaee a Coat e enuipment -Pow,o00 Salvage value 100900 Daily operating cost ‘a0 Beanie ie, years 10 [NerativeB: Rental at P1500 pe dy. ‘At 1 aterest haw many Gaye per yar ms th equipment be snyacifAltomative Aistobechesen. ‘Ane 152 days ro2, Data fortwo 50.49 motors ace 23 fllows: ‘Aa Motor Beta Motoe Original ost parson 48,000 ‘nal sintonance 1500 "50 Life, years 10 0 Eicieney are om ‘Taens and surance 3% ‘3 Power ent is P2.00 por kh, IF money is worth 20%, how many hours por year would the motors have to be operated a al Yad for Cham do be equally economical? If Ube expactod rumber of hours of tperation per year exceeds Gh brosl-even pont which motoe ie more ‘Honomica? Ans 4 hours, Bota motor 4. A small shop in Bulacan fabrsates portable threshers for play producers in the Tait. Th shop cap produce each Uresher ba labor cst of PL,800, The xa af materials foreach units 2,600. ‘The variable ests aimount to PESO per unit, while feed charges {Incurred pe anim ale P5900. Ithe portable threshers are sod {117,800 por unis, ow many ants must be produced wad wll per “Sonu to break-even? Support your answer with eompttion> and tls by sraphieal luton ‘Ke 25 nits 4 Compute for the munber of blocks that ane plant must be sie eal per month to reak-oven based on the fllowing dat {Cost ofeletiity per block = P20 "Tax ta be pot per block 2 Realestate tax {rants Salaries and wages 25 000/month thers {8/month Selling peice of ico Ssfback ‘Aa. 1.228 lack 5. Alea company assembling storen radio cassette produces ‘0 tits por eth at cst of PBOQ per wait. Bach sere eno hsvite self P1200 Ifthe frm makes aprtit of 10% nt 1,000 “Shves with pr salve of P200 per share, and the fixed costs are 20,000,000 pee anh a) What i the bevak-even point? {0} Tow mad the lcs profit only 100 unis aro produced ‘ns (a) SD units per mont, P3388 per neath 8 A plant produces 300 ust of an eugene of P3500 teach. Ait sells for P00. ‘Thocompany he 1000 shuns of tack i P2C0 par rahe whose unm vied i 0, Te ied cos af pradutonf P2000 month (a) Whit ithe eke po?” {by What ete unhey {6} What sth profi oof prgucton 5 OF apis? ‘Ans. (a) 100 unison, (25 uisonh P2667 yer vontChapter LL Benefit/Cost Ratio ‘The method ofsclecting alternatives that is most commonly ed by government agencies for analyzing the desirability of public project is the benefivenet ratio (BC ratio). The BIC method of [aya ie bao onthe ratio of the bones to costs ancclaed with Spanicalar project. c= baafisadibenets 1.) enefits ave advantages, expressed in terms of pesos which happen ta the owner. On the ether hand, whon the project under canrideration involves disadvantages tothe owner, these are known, ts dsbonefits, The eosts are the anticipated expenditures for com. Steuction, operation, maintenance, ete. A BVC ratio greater than or ‘Squat t 10 indicator thatthe peject undareonsidcration is eco ‘omicallyadvaatagsous 1-1) A nonprofit educatlnal research organization, ix con. templating an invertment of P,S00,000 ia rants to dvelop new trays to tach people Ue rudiments of profession. The grasts would ‘rtendovera ten-year period and would achieve an estimated savings £700,000 per yearn professors saris, student ition and other xpenses The program would ban addition to ongoing and planned ‘tivities, Gos am estimated P100,000 a year would have to be feleated from other program to support the educational rescerch. a {ate of return of 15% la expected. Isis a good progeam? 500,000 per your Diabenafit = P100,000 por yr Cat = P1500,000 (A, 15,10) = P2980 por your ic = BOLO = FLO «54 PI 0 "The print fortied, sacs BO > LOW (11.2) The National Goverament intends t build a dam and Inydroelecteie project In the Cagayan Valley a a total cost of PS, 500,00. "The rae wil be nace bys oreign lan wth & rate of interest of 6% per year. The anual est for operation, ‘mintenanse ditrivatia ca ters would otal P1100 0080, ‘Rana revenae ad benefits nr estimated ta be P5600 00. ube structure are expecta sas 0 oar with no salrage saan dri te Es th se, Solution By the equivalent wniform annual ost method Annas bene UAC 56,500,000 PAS, 500000 OVP, 8,50 + P15, 100,000 40,051,400 .P56,50,000 B= Paosnaog M4 ‘Thin good project sine BO > 1.0 By the present worth ast methad PW, = PSE,500,000 (PA, 5%, 50) = PL, 051 x 10" PW, = PUBB 5 10+ PIB. x 1A S50) = PraLie4 x1 bo = Puostx 10 Pracioes i "Tiss good project, sinoe BE > 1.0,[Alternative Comparison by Bouetit/Cost Analyst Im computing the benefiveest ratio hy Bg. (U1) fora given ternative the benefits and casts used in ths ealeulation represent {he diferdnces between the alternatives, (118) we routes are under consideration for w new highway. Route A would be located about five miles fom the central business Aitriet and would require longer travel distances hy lea commuter traffic Routo B would pass directly Unrough the dawn townaren and, lithough ite constrocion cose wold be igher, it wood reduce Use travel time and distance for local commuters. Tho costs or the two routes areas follows: Route A Route B itil cast 'P200.900,000 250,000,000 Maintenance por year "700,000 1: 100,000, TRoad-aser cotter year 10,000,000, 400,000 the roads are ssrumed tolast 30 years with no salvage valu which route shoul be aeepted on thobasis ofa benefiveost analy Using an intro rate of 15%, Solution UAC, = P200,000,000 (A, 165%, 80) + P700,000 «PS. 16¢ 10" [EUAG, = P250,000,00(47, 15,80)» PY, 100,000=F99.175x 10" PIO x 10 Pax 10 = POX 10° {neremental annual benefit. Incremeatal annus est = EUAC,~EUAC, = P39,115 x 10" P91.16 x 108 R015 x 10" incremental bene, _ PS. 10- B= Siremental cost ~ POI x 17" © 96 Route A shouldbe selected for construstion. (114) Poor aterativs for providing slate power supply toa soil tomn haven ntl th long sl be Alterastive Annual bnafice Annu cota A Pagano P 750,000 8 T9000 656000 © ‘coo T4000 D 1000 0,000 Select the boat alterntave using the IMC ratio analy, Solution Comparing alterative A with alternative BIC of Aver B= P152,000-21,398,0.. 150,000 P64 000 Aheraatve Ais prefered ve alterative Comparing alternative A with ternative C. BIC ofA over Cn PIS28,000—PBEOO0. 95 "180,000,000 * ‘Ntamative Ais rfereed ove aleraativeC, Comparing aeratve A with ternative D Cot A over D = ELSE 000 PH1000 ‘= "pi0,000- Panag =? Alternative Ai preferred ovr alteratveD. Select akernative A 1, The Deprtnent of Puc Works and Highway (DPWHD is sien tenn oy coor tug sso rare ‘tea The oad i xgactd ocr 950 lo wi anal wasp {stinaed at P4000, The inproved sss epctnd ina iene rom tourist Pio pr ar. Theroad is expected to haves usefol i 25 years. thorate finterest ‘815%, should the rood be constructed? ‘Ane The road shou not be constructed, BC is 0.86 2, Determine the B/C ratio for the fllowing project. First cost 100,000, | Project if, years 5 { Salvage vane 10.000 ‘Anna Benes 59,000 | ‘Annual O and M 22,000 Interest rate, % 15 Ans 119 18, Data fortwo altematves area fll: Atveenative | a B | Iavestment 35,000 50,000 | ‘Ansnal bent 20.000 25000 ‘Anat O and Mt 6b saan Eatimated ie, years « * Netalvage value 8300 ° Using an dnteret rate of 20%, which alternative should be chosen? ‘Ans, Allerative A i 4. There are five alternatives forimprovement af road: Dotan | mine which altemative shouldbe chaeen ithe highway department. | {Swillngtoinvest money aslongasthereisafCratioefatleast 1.00. | Alieatives Annual Benes Annual cost a s00000 _P,000,000 i 3 anno Laon oqa ji c Zaaono 2.100000 i D Samana 3,700,000 i z amon —— $400,000 | Ans, Alteratve Eset be the coin I i i