Engineering Economics

EE 602 – Engineering Sciences and Allied Subjects

 Simple Interest
Problem 1.
A woman deposits $725 into a savings account that pays 2.3% simple
annual interest. How much interest will be earned after 18 months?

Problem 2.
Determine the ordinary simple interest on $10,000 for 9 months and 10
days if the rate of interest is 12%
 Simple Interest
Problem 3.
Find the total amount on $10,500 invested at 5% for 75 days using
exact interest.

Problem 4.
Determine the exact simple interest on $1200 for the period from
January 16 to November 26, 1992 if the rate of interest is 24%.
 Compound Interest
Problem 5.
Find the amount of $1000 for 6 years at 4% compounded quarterly.

Problem 6.
Find the present value of $1250 due in 4 years, the rate of interest
being 3% compounded semi-annually.
 Compound Interest
Problem 7. The parents planned for their son to receive $50,000 ten
years from now. What amount in dollars should they invest now if it will
earn interest of 12% compounded annually for the first 5 years and 15%
compounded quarterly during the next 5 years?

Problem 8.
What single sum of money paid at the end of 3 years will fairly
discharge two debts, one $3000 due in 2 years and another $2500 due
in 5 years, if the interest rate is 3% compounded annually?
 Effective rate of Interest
Problem 9.
A person pays interest on a loan semi-annually at a nominal rate of
16%. What is the effective interest rate?

Problem 10.
Find the nominal rate which if converted compounded quarterly could
be used instead of 12% compounded monthly.
 Effective rate of Interest
Problem 11.
A man owes $25,000 due in one year and $75,000 due in four years. He
agrees to pay $50,000 today and the balance in two years. How much
must he pay at the end of two years if money is worth 5% compounded
semi-annually?
 Continuous Compounding
Example: If the nominal interest rate is 3%, how much is $5000 worth in
10 years in a continuously compounded account?

Example: A bank offers 5% interest compounded continuously in a

savings account. Determine the equivalent rate if the compounding
were done annually.
 Annuity
Problem 12.
What is the present worth of a 10-year annuity paying $10,000 at the
end of each year, with interest at 15% compounded annually?

Problem 13.
A retirement fund earns 8% compounded quarterly. If $400 is
deposited every 3 months for 25 years, the amount in the fund at the
end of 25 years is nearest to
 Annuity
Problem 14.
A man is considering the purchase of a used automobile. The total price
is $6200. With $1240 as a down payment, and the balance to be paid in
48 equal monthly payments with interest rate at 12% compounded
monthly. The payments are due at the end of each month. Determine
the monthly payment required.
 Annuity
Problem 15.
A farmer bought a tractor costing $25,000 payable in 10 semi-annual
payments, each installment payable at the beginning of each period. If
the rate of interest is 26% compounded semi-annually, determine the
amount of each installment.
 Annuity
Problem 16.
A lathe for a machine shop costs $60,000 if paid in cash. On the
installment plan, the purchaser should pay $20,000 down payment and
10 quarterly installments, the first due at the end of the first year after
the purchase. If the money is worth 15% compounded semi-annually,
determine the amount of each installment.
 Annuity
Problem 17. A father decided to provide $40,000 to his son on his son’s
21st birthday. How much should he deposit every six months in a
savings account which pays 3.5% compounded semi-annually if the first
deposit was made when the son was 3 ½ years old?
 Annuity
Problem 18.
A man borrowed $15,000 two years ago. The terms of the loan are 10%
interest for 10 years with uniform annual payments. He just made his
second annual payment. How much principal does he still owe?
 Annuity
Problem 19.
What is the present worth of a perpetual annuity of $5,000 each
payable at the end of each year? Assume money is worth 10% per
annum.
 Annuity
Problem 20.
If money is worth 12% compounded quarterly, what is the present
value of perpetuity of $1000 payable monthly?
 Uniform Arithmetic Gradient
Problem 21.
A man purchased a new automobile. He wishes to set aside enough
money in a bank account to pay the maintenance on the car for the first
5 years. It has been estimated that the maintenance cost for first 5
years are as follows: $120, $150, $180, $210 and $240. Assume them
maintenance costs occur at the end of each year and the bank pays 5%
interest. How much should he deposit in the bank now?
 Uniform Arithmetic Gradient
Problem 22.
Suppose an engineer receives initial salary of $60,000 increasing at a
rate of $5000 a year. If money is worth 10% per annum, solve his
equivalent uniform salary for the period of 8 years.
 Uniform Geometric Gradient
Problem 23.
The first year maintenance cost is estimated to be $100 and it is
increasing at a uniform rate of 10% per year. What is the present worth
of cost of the first 5 years of maintenance in this situation, using an 8%
interest rate?
 Inflation
Problem 1.
Assuming an average inflation rate of 6% during the next 5 years, how
much approximately would a car costing $400,000 now cost 5 years
hence?

Problem 2.
Ten years ago, an item cost $2500. The rate of inflation for the first 4
years was 4%, during the next 3 years 6%, and for the last 3 years, 9%.
Assuming that the increase in price were due to inflation alone, what is
the average inflation rate during the 10 years?
 Money Value
Problem 3.
A company invests $10,000 today to be repaid in 5 years in one lump
sum at 12% compounded annually. If the rate of inflation is 3%
compounded annually, how much profit in present day dollar is realized
over the 5 years?
 Interest-Inflation Rate of Return
Problem 4.
What is the uninflated present worth of $2000 in 2 years if inflation rate
is 6% and standard interest rate is 10%?

Problem 5.
An engineer is considering the purchase of an annuity that will pay
$1000 per year for 10 years. The engineer feels he should obtain a 5%
rate of return on the annuity after considering the effect of an
estimated 6% inflation rate per year. The amount he would be willing to
pay to purchase the annuity is
 Depreciation
Problem 6.
A sawmill company purchases a new automated log planer for $95,000.
the asset is depreciated using straight line depreciation over a useful
life of 10 years to a salvage value of $5,000. the book value at the end
of year 6 is nearest to _.

Problem 7.
An asset is purchased or $9,000. Its estimated economic life is 10 years
which it will be sold for $1,000. Find the total depreciation in the first 5
years using straight line method.
 Depreciation
Problem 8.
A welding machine costs $45,000 has an estimated life of 5 years. Its
salvage value is $2,500. Find the depreciation rate using straight-line
method.
 Depreciation
Problem 9.
A machine costs $10,000, has an estimated life of 10 years and a scrap
value of $1,500. Assuming no inflation and an interest rate of 4%, what
uniform annual amount must be invested at the end of each of the 10
years in order to replace the machine?
Problem 10.
An equipment costs $100,000 with a salvage value of $5,000 at the end
of 10 years. Use the sinking fund method, find the approximate book
value after 3 years. Assume interest rate is 4% per annum.
 Depreciation
Problem 11.
A dump truck was bought for $30,000 six years ago. It will have a
salvage value of $3,000 four years from now. It is sold now for $8,000.
What is the sunk cost if the depreciation is sinking fund at 6%?
 Depreciation
Problem 12.
A company purchased an asset for $10,000 and plans to keep it for 20
years. If the salvage value is zero at the end of the 20th year, determine
the depreciation charge using SYD.

Problem 13.
An asset is purchased for $9,000. Its estimated life is 10 years, after
which it will be sold for $1,000. Find the book value during the 3rd year
if SYD is used.
 Depreciation
Problem 14.
An equipment costs $7,000 has a life of 8 years. If the book value of the
equipment after 4 years is $2,197.22, compute the salvage value of the
equipment using SYD.
 Depreciation
Problem 15.
A machine costing $720,000 is estimated to have a book value of
$40,545.73 when retired at the end of 10 years. Depreciation cost is
computed using a constant percentage of the declining book value.
What is the annual rate of depreciation?

Problem 16.
Determine the total depreciation up to the end of the 8th year for an
asset that costs $15,000 new. Estimated scrap value is $2,000 after 10
years. Use declining balance method.
 Depreciation
Problem 17.
An equipment costs $560,000. Its salvage value at the end of the 5th
year of its useful life is estimated at $150,000. By means of declining
balance method, determine the depreciation charge for the second
year.
 Capitalized Cost
Problem 18.
An asset is purchased for $100,000. Annual cost is $18,000. Using
interest rate of 8% , determine the capitalized cost for perpetual
service.

Problem 19.
A thick concrete road pavement costs $250,000 which would last
indefinitely. Every end of 3 years, $20,000 will be spend for minor
repairs. Determine the capitalized cost of the pavement. Assume an
interest rate of 8%.
 Capitalized Cost
Problem 20.
A concrete pavement on a street would cost $10,000 and would last for
5 years with negligible repairs. At the end of each 5 years, $1,000 would
be spent to remove the old surface before $10,000 is spent again to lay
a new surface. Find the capitalized cost of the pavement at 5% interest
rate. Use sinking fund method in computing annual depreciation.
 Annual Cost
Problem 21.
A company purchased a machine for $30,000, used for 5 years and then
sold it for $10,000. If capital is worth 8%, determine the annual cost.
Use sinking fund for method for your depreciation analysis.
 Annual Cost
Problem 22.
Machine cost = 15,000; Life = 8 years; Salvage value = $3,000. what
minimum cash return would the inventor demand annually from the
operation of this machine if he desires interest annually at the rate of
8% on his investment and accumulates a capital replacement fund by
investing his annual deposits at 5%?
 Annual Cost
Problem 23.
A machine has an initial cost of $40,000 and annual maintenance cost
of $5,000. Its useful life is 10 years. The annual benefit from purchasing
the machine is $18,000. The effective interest rate is 10%. What is the
machine’s benefit-cost ratio?
 Depletion Cost
Problem 24.
To develop an oil well containing 2,000,000 barrels of oil required an
initial investment of $30,000,000. In a certain year, 400,000 barrels of
oil were produced from this well. Determine the depletion charge
during the year.
 Bond
Problem 25.
A bond with a par value of $1,000 and with a bond rate of 10% payable
annually is sold now for $1,080. If the yields is to be 12%, how much
should be the redemption price be at the end of 8 years?

Problem 26.
A man was offered a bond certificate with a face value of $100,000
which is bearing 6% per year payable semi-annually and due in 6 years.
If he wants to earn 8% semi-annually, how much must he pay the
certificate?
 Break-even Analysis
Problem 27.
A steel drum manufacturer incurs a yearly fixed operating cost of
$200,000. Each drum manufactured costs $160 to produce and sells for
$200. What is the manufacturer’s break-even sales volume in drums
per year?
 Break-even Analysis
Problem 28.
A plywood manufacturer produces a piece of plywood at a labor cost of
$0.50 and a material cost of $3. The fixed charges in the business are
$50,000 a month and the variable cost is $0.50 a piece. If one plywood
sells for $6 each, how many pieces must be produced each month for
the manufacturer to break even?