Engineering Economy

Ryan Jeffrey P. Curbano, CIE

 CAPITALIZED COST
Capitalized Cost
- application of perpetuity. It is sum of its first cost
and the present worth of all costs for replacement,
operation and maintenance for a long time or forever

Capitalized Cost = First Cost + Cost of Perpetual

Maintenance
 Formula

Capitalized Cost = FC + S
k
(1 + i) - 1
Where: FC = First Cost
S = the amount needed to replace
or maintain the property every k period
X = the amount of principal invested
at i% per period, the interest on which will
amount to S every k periods
 Example 1.0
• A manufacturing plant installed a new
boiler at a total cost of P150,000 and is
estimated to have useful life of 10years. It
is estimated to have a scrap value at the
end of its useful life of P5,000. If interest is
12% compounded annually. Determine its
capitalized cost.
 Example 2.0
• The capitalized cost of a piece of
equipment was found to be P142,000. the
rate of interest used in the computation
was 12%, with a salvage value of P10,000
at the end of a service life of 8 years.
Assuming that the cost of perpetual
replacement remains constant. Determine
the original cost of the equipment.
 Example 3.0
• Compare the capitalized cost of the following road
pavements.
– An asphalt pavement costing P100,000 which
would last for 5 years with negligible repairs. At the
end of 5 years, P5,000 would be spent to remove
the old surface before P100,000 is spent again for a
new surface.
– A thick concrete pavement costing P250,000 which
would last indefinitely, with a cost of P20,000 for
minor repairs at the end of every 3 years. Money is
worth 8% compounded annually.
 Example 4.0
• A research foundation wishes to set up a trust fund
earning 10% compounded annually to
(a) provide P2,000,000 for the lot and building and
P1,000,000 for the initial equipment of a structural
engineering and materials laboratory
(b) pay P400,000 for the annual operating costs every
year
( c) pay P500,000 for the purchase of new equipment
and replacement of some equipment every 5 years
beginning 5 years from now.
How much money should be paid into the fund for the
building and equipment and to pay for perpetual
operation and equipment replacement?
 ARITHMETIC and GEOMETRIC
GRADIENT
• Uniform Arithmetic Gradient
– Is a series of disbursement or receipt that
increases or decreases in each succeeding
period by constant amount.
• Geometric Gradient
– Is a sequence consisting of end of period
payments, where each payment is increases
or decreases by the fixed percentage.
 Cash Flow Diagram for Uniform
Arithmetic Gradient
0 1 2 3 N-1 n

A
A+G
A + 2G A + (n-2)G

A + (n-1)G

P
2 3 N-1 n
0 1 0 1 2 3 N-1 n

A A A A A
P1 F1 G
2G
(N-2)G

P2 (N-1)G
F2
 Formula
• Present Worth
Where:
-n
P = G 1 – (1+i) - n G = arithmetic gradient
change in the periodic
n
amount at the end of each
i i (1+ i) period.

Total Present Worth

P = P1 + P2
 Formula
• Future Worth
Where:
n
F = G (1+ i) - 1 - n G = arithmetic gradient
change in the periodic
amount at the end of each
i i period.

Total Future Worth

F = F1 + F2
 Formula
• Equivalent Periodic Amount

A= G 1- n
n
i (1 + i) - 1

2 3 N-1 n
0 1 0 1 2 3 N-1 n

A A A A A
G
2G
(N-2)G

(N-1)G
Uniform Geometric Gradient
0 1 2 3 N-1 n

G 2
G(1+r) 3
G(1+r)

G(1+r)n-2
n-1
G(1+r)

CASH FLOW DIAGRAM

 Formula
Present Worth:
P=G 1 – xn If r = i, then x = 1
1+i 1–x
P = Gn
(1 + i)
Where: x = 1 + r ≠ 1, thus r ≠ i
1+ i
G = first payment at the end of the first period
(1 + r) = rate of increase or decrease
 Formula
• Future Worth

n-1
F = G(1+i) 1 – x n

1–x
when x = 1, r = 1
n-1
F = Gn(1+i)
 Example 1.0
• Compute the value of the amount P
P150
P100
P50

1 2 3 4

P i = 10%
 Example 2.0
• Compute the value of A in below figure
P400
P300
P200
P100 A A A A A

0 1 2 3 4 5 0 1 2 3 4 5
i = 10%
 Example 3.0
• Suppose a man receives an initial annual
salary of P60,000, increasing at the rate of
P5,000 a year. If money is worth 10%,
determine his equivalent uniform salary for
the period of 8 years.
 Example 4.0
• Deposit are made to an account listed below which bears interest at
the rate of 12% compounded annually.
– A. what is the present worth of the series
– B. how much will there be in the account at the end of tenth year.
– C. what is the equivalent uniform series?
End of Year Deposit
1 500
2 1100
3 1700
4 2300
5 2900
6 3500
7 4100
8 4700
9 5300
10 5900
 Example 5.0
• Annual maintenance cost for a machine
are 1,500 this year and are estimated to
increase 10% each year every year. What
is the present worth of the maintenance
cost for six years if (a) i = 8% (b) i = 10%
and (c ) i = 12%
 Example 6.0
• Two sisters Joan and Jocelyn decided to save money
in funds that earns 14% compounded annually but on
different ways. Joan decided to save by making an
end of the year deposit of P1,000 on the first year,
P1100 on the second year, P1210 on the third year
and so on increasing the next year’s deposit by 10% of
the deposit in the preceding year until the end of the
10th year. Jocelyn decided to save by just making an
equal deposit of P1400 annually for 10 years. Who
has more savings at the end of 10 years?
 Example 7.0
• Engr. Hermo, believing that life begins at 40,
decided to retire and start enjoying life at age
40. he wishes to have upon his retirement the
sum of P5,000,000. on his 21st birthday, he
deposited a certain amount and increased his
deposit by 15% each year until he will be 40. if
the money is deposited in a super savings
account which earns 15% interest compounded
annually. How much was his initial deposit