Ecomomics
Ecomomics
Where:
F = PP I
which has been loaned (lender’s viewpoint). Ans. P 4,133.33
Example 5: How long will it take for a deposit of P 1, 500.00 to earn
P 186 if invested at the simple interest rate of 7 1/3%?
I = interest Ans. 1.6909 years
P = principal or present worth Example 6: If you borrow money from your friend with simple
F = accumulated amount or future worth interest of 12%, find the present worth of P 20,000 at the end of 9
months.
Cash-Flow Diagrams Ans. P 18,348.60
Cash-Flow Diagram – is a graphical representation of cash flows Example 7: (CE Board) A deposit of P 110,000 was made for 31
drawn on a time scale. days. The net interest after deducting 20% withholding tax is P
↑ - receipt (positive cash flow or cash inflow) 890.36. Find the rate of return annually.
↓ - disbursement (negative cash flow or cash outflow) Ans. 11.75%
Example: A loan of P100 at simple interest will becomeP150 after Example 8: A man buys an electric fan from a merchant that
5 years. charges P1500.00 at the end of 90 days. The man wishes to pay
cash. What is the cash price if money is worth 10% simple
interest?
Ans. P 1,463.41
Example 9: What amount will be available in eight months if P
15,000.00 is invested now at 10% simple interest per year?
Ans. P 16,000.00
Example 10: P 1000.00 becomes P 1500.00 in three years. Find the
simple interest rate.
Ans. 16.67%
Example 11: An engineer borrowed a sum of money under the
Cash flow diagram on the viewpoint of the lender
following terms: P 650,000.00 if paid in 90 days, or P 600,000.00
if paid in 30 days. What is the equivalent annual rate of simple
interest?
Ans. 50%
Compound Interest
Compound Interest – the interest for an interest period is
calculated on the principal plus total amount of interest
accumulated in previous period.
Simple Interest
Simple Interest – is calculated using the principal only, ignoring
F =I P=1Pni in
any interest that has been accrued in preceding periods.
Where:
I = interest Principal at
Interest Interest Earned Amount at End
P = principal or present worth Beginning
Period During Period of Period
of Period
n = number of interest periods
i = rate of interest per period 1 P Pi P(1+i)
F = accumulated amount or future wor th 2 P(1+i) P(1+i)i P(1+i)2
For Ordinary Simple Interest: 3 P(1+i)2 P(1+i)2i P(1+i)3
Interest period = 1 year = 360 days
For Exact Simple Interest: … … … …
Interest period = 1 year = 365 days (ordinary year) n P(1+i)n-1 P(1+i)n-1i P(1+i)n
= 366 days (leap year)
SAMPLE PROBLEMS
F = P 1 i
F⁄P = 1 i = (F⁄−P,i%,n)
Example 1: Determine the ordinary simple interest on P 20,000
for 9 months and 10 days if the rate of interest is 12%.
Ans. P 1,866.67
P⁄F = 1Pi=iF−1 =i i(P⁄F,i%,n)
Where: Example 9: Find the present worth of a future payment of P
F = accumulated amount or future worth 300,000 to be made 5 years with an interest rate of 8% per annum.
P = principal or present worth Ans. P 204,174.96
i = rate of interest per interest period Example 10: How long will it take money to double itself if
n = number of compounding periods invested at 5% compounded annually?
F/P = single payment compound amount factor Ans. 14.2 years
P/F = single payment present worth factor Example 11: The amount of P 50,000 was deposit in the bank
earning an interest of 7.5% per annum. Determine the total
Nominal Rate of Interest – specifies the rate of interest and the amount at the end of 5 years, if the principal and interest were not
i = mr
number of interest periods in one year. withdrawn during the period?
Ans. P 71,781.47
ER = F PP r
interest in one year to the principal amount.
P5, 000 3 years after his last deposit for the purpose of buying
shoes, what will be the amount of money left in the bank after one
ER = 1 i 1 = 1 m 1 year of his withdrawal? Effective annual interest rate is 10%.
Ans. P 1,549.64
Example 17: If the interest rate of a certain account is 6.5%,
SAMPLE PROBLEMS compute the (a) single payment present worth factor; and (b)
Example 1: The amount of P 20,000 was deposited in a bank single payment compound amount factor at the end of 18 years.
earning an interest rate of 6.5% per annum. Determine the total Ans. (a) 0.322; (b) 3.107
amount at the end of 7 years if the principal and interest were not
withdrawn during this period. Continuous Compounding Interest
Ans. P 31,079.73
Example 2: A man expects to receive P 25,000 in 8 years. How
F = P1 rm
From the compound interest formula for m periods per year:
compounded quarterly.
Ans. 8.24%
Example 5: Find the nominal rate, which if converted quarterly Where:
ER = e 1
The effective rate of interest for continuous compounding is:
could be used instead of 12% compounded semiannually? F = accumulated amount or future worth
Ans. 11.825% P = principal or present worth
Example 6: If money is worth 5% c ompounded quarterly, find the r = nominal rate of interest
equated time for paying a loan of P 150,000 due in one year and P y = number of years
280,000 in 2 years.
Ans. 1.6455 years e1⁄
e = Euler’s number
= continuous compound amount factor
Example 7: Five years ago, you paid P 340,000 for a lot. Today you
sold it at P 500,000. What is the annual rate of appreciation?
Ans. 8%
e = present worth of continuous compounding factor
SAMPLE PROBLEMS
Example 8: John borrowed P50, 000.00 from the bank at 25%
Example 1: P 100,000 is deposited in a bank that earns 5%
compounded semi-annually. What is the equivalent effective rate
compounded continuously. What will be the amount after 10
of interest?
years?
Ans. 26.56%
Ans. P 164,872.13
Example 2: Money is deposited in a certain account for which Inflation
interest is compounded continuously. If the balance doubles in 6 Inflation – is the increase in the prices for goods a nd services from
years, what is the annual percentage rate? one year to another, thus decreasing the purchasing power of
Ans. 11.55%
Example 3: A man wishes to have P 40,000 in a certain fund at the
end of 8 years. How much should he invest in a fund that will pay
money.
Where:
FC = PC1 f
6% compounded continuously? FC = future cost of a commodity
Ans. P 24, 751.34 PC = present cost of a commodity
Example 4: If the effective annual interest rate is 4%, compute the f = annual inflation rate
equivalent nominal interest compounded continuously. n = number of years
Ans. 3.922% In an inflationary economy, the buying power of money decreases
F = 1 P f
Example 5: What is the nominal rate of interest compounded as cost increases:
continuously for 10 years if the compound amount factor is
1.34986?
Ans. 3% If interest is computed as the same time that inflation is occurring:
Example 6: Deposits of P35,000.00, P48,000.00 and P25,000.00
were made in a savings account eight years, five years, and two
F = P11 f i
years ago, respectively. Determine the accumulate amount in the Where:
account today if a withdrawal of P55,000.00 was made four years F = future worth of today’s present amount P
ago. The applied interest rate is 11% compounded continuously. f = annual inflation rate
Ans. P 113,330.66 n = number of years
i = rate of interest
Where:
D = F P
buyer to induce him to pay promptly.
investment, in terms of today’s peso, after 5 years, if inflation
remains the same at the rate of 8% per year?
D = amount of discount Ans. P 142,491
F = accumulated amount or future worth Example 2: What is the uninflated present worth of a P 200,000
P = principal or present worth future value in two years if the average inflation rate is 6% and
Discount Rate – is the discount on one unit of principal per unit of interest rate is 10%.
d = F F P = 1 1 i−
time. Ans. P 147,107
FFd1=nddF FPor 1 year
If the commodity is discounted in a certain period of time:
PP ==F1 For n years
The relationship between discount rate and interest rate
i = 1d d
becomes:
d = 1i i
and
Where:
d = discount rate for the period involved
i = rate of interest for the same period
SAMPLE PROBLEMS
Example 1: Mr. T borrowed money from the bank. He receives
from the bank P 1,340 and promised to pay P 1,500 at the end of
9 months. Compute: (a) Simple interest rate; and (b) Discount
Rate.
Ans. (a) 15.92%; (b) 13.73%
Example 2: Find the discount if P 2,000 is discounted for 6 months
at 8% simple discount.
Ans. P 80
Example 3: Discount 1650 for 4 months at 6% simple interest.
What is the discount?
Ans. P 32.35
SET 1B: ANNUITIES SAMPLE PROBLEMS
Annuity – is a series of equal payments occurring at equal periods Example 1: Find the annual payment to extinguish a debt of P
of time. 100,000 payable for 6 years at 12% interest annually.
Ans. P 24,322.57
Ordinary Annuity Example 2: What annuity is required over 12 years to equate to a
Ordinary Annuity – a type of annuity were equal payments are future amount of P 200,000? i = 8%.
made at the end of each period. Ans. P 10,539.00
Example 3: A man paid 10% downpayment of P 200,000 for a
house and lot and agreed to pay the 90% balance on monthly
installment for 60 months at an interest rate of 15% compounded
monthly. Compute the amount of monthly payment.
Ans. P 42,821.87
Example 4: Mr. Y bought a house and lot for $ 2,800,000 with a
downpayment of $ 300,000. Interest is 5% to be paid for 30 years
on a monthly basis. Compute the amount of monthly payment.
P = A1 i− AA1i
1 i−− A→1Eq.1i−3 ⋯A1 i−− Ans. $ 13,420.54
Example 5: A piece of machinery can be bought for P 10,000 cash,
Multiplying this equation by
P Pi = A A1A1i 1 i i− ⋯ A1i−+
, the equation becomes:
i −+A 1 → Eq.2
−
or for P 2,000 downpayment and payments of P 750 per year for
15 years. What is the annual interest rate of the time payments?
Ans. 4.6%
Example 6: A man inherited a regular endowment of P 100, 000
Pi = A
Subtracting Eq. 1 from Eq. 2:
A 1 i − every of 3 months for 10 years. However, he may choose to get a
P = Ai 1 1 i− = Ai 1i1i 1 single lump sum payment at the end of 4 years. How much is this
lump sum if the cost of money is 14% compounded quarterly?
F⁄A = 1 ii 1 = (F⁄ , A i%,n) Example 11: In anticipation of a much bigger volume of business
after 10 years, a fabrication company purchased an adjacent lot
for its expansion program where it hopes to put up a building
The functional symbol F/A,i%,n is called the “uniform series projected to cost P 4,000,000.00 when it will be constructed 10
A 1 i
P = A i 1 i− 1
−
Where:
P = value or sum of money at present
F = value or sum of money at some future time
A = series of periodic equal amount of payments
i = interest rate per interest period
n = number of interest periods/number of equal payments
SAMPLE PROBLEMS
Where:
P = value or sum of money at present Example 1: The present value of an annuity of R pesos payable
F = value or sum of money at some future time annually for 8 years, with the 1 st payment at the end of 10 years is
A = series of periodic equal amount of payments P 187,481.25. Find the value of R if money if money is worth 5%.
i = interest rate per interest period Ans. P 45,000
n = number of interest periods/number of equal payments Example 2: A parent on the day that child is born wishes to
determine what lump sum would have to be paid into an account
SAMPLE PROBLEMS bearing interest of 5% compounded annually, in order to
Example 1: If money is worth 4% compounded semiannually, find withdraw P 20,000 each on the child’s 18th, 19th , 20th and 21th
the present amount of an annuity due paying P 5,000 birthdays?
semiannually for a term of 3.5 years. Ans. P 30,941.73
Ans. P 33,007.15 Example 3: An asphalt road requires no upkeep until the end of 2
Example 2: A man agrees to make equal payments at the beginning years when P60, 000 will be needed for repairs. After this P90, 000
of each 6 months for 10 years to discharge a debt of P 50,000 due will be needed for repairs at the end of each year for the next 5
now. If money is worth 8% compounded semiannually, find the years, then P120, 000 at the end of each year for the next 5 years.
semiannual payment. If money is worth 14% compounded annually, what was the
equivalent uniform annual cost for the 12-year period?
Ans. P 3,537.58
Ans. P 79,245.82
Example 3: To accumulate a fund of P 80,000 at the end of 10
years, a man will make equal annual deposits in the fund at the
Example 4: A man wishes to provide a fund for his retirement such Continuous Compounding for Discrete Payments
that from his 60th to 70th birthdays he will be able to withdraw For an annuity compounded continuously, replace interest rate
equal sums of P18, 000 for his yearly expenses. He invests equal
amount for his 41st to 59th birthdays in a fund earning 10%
compounded annually. How much should each of these amounts
ER = e 1
with the effective rate for compounded continuously. Recall that:
P = e A 1 ee 1
with ER, the formula becomes:
Ans. P 2,285.25
Example 5: A lathe for a machine shop costs P 60,000, if paid in
cash. On the installment plan, a purchaser should pay P 20,000
downpayment and 10 quarterly installments, the first due at the
end of the first year after purchase. If money is worth 15%
F = e A 1 e 1
compounded quarterly, determine the quarterly installment.
Ans. P 5,439.18 SAMPLE PROBLEMS
Example 6: A man invests P 10,000 now for the college education Example 1: Determine the accumulated amount to an account
of his 2 year old son. If the fund earns 14% effective interest rate, paying P 5,000 annually (payments are made at the beginning of
how much will his son get each year starting from his 18th to the each period) for 18 years if money is worth 8% compounded
22nd birthday? continuously. Also determine the present worth.
Ans. P 20,791.64 Ans. P 209,452.57; P 49,625.13
Perpetuity
Capitalized Cost
Perpetuity – a type of annuity in which payments continue
Capitalized Cost – is the sum of the first co st and the present worth
indefinitely. of all costs of replacement, operation and maintenance for a long
period of time of any property.
Capitalized Cost = First Cost + Present Worth of Perpetual
Operations and Maintenance + Present Worth of Perpetual
Where:
R = FC SV
P = Ai R = replacement cost
FC = first cost
SV = salvage value
Where:
P = value or sum of money at present i = interest rate per interest period
A = series of periodic equal amount of payments L = useful life in years
i = interest rate per interest period
SAMPLE PROBLEMS
SAMPLE PROBLEMS Example 1: The first cost of a certain equipment is P 324,000 and
Example 1: Find the present worth of perpetuity of P 5,200 a salvage value of P 50,000 at the end of its life of 4 years. If money
payable monthly if the interest is 16% compounded monthly. is worth 6% compounded annually, find the capitalized cost.
Ans. P 390,000 Ans. P 1,367,901.15
Example 2: Find the present value of a perpetuity of P 15,000 Example 2: Find the capitalized cost of a bridge whose cost is P
payable semiannually if money is worth 8% compounded 250M and life is 20 years. If the bridge must be partially rebuilt at
quarterly. a cost of P 100M at the end of each 20 years. i = 6%.
Ans. P 371,287 Ans. P 295.3076M
Example 3: If money is worth 8%, determine the present value of Example 3: A machine cost P 150,000 and will have a scrap value
a perpetuity of P 1,000 payable annually with the 1st payment due of P 10,000 when retired at the end of 15 years. If money is worth
at the end of 5 years. 4%, find the annual investment and the capitalized cost of the
Ans. P 9,187.87 machine.
Example 4: If money is worth 8% compounded quarterly, Ans. P 324,793.85
calculate the present worth of the following: Example 4: A bridge that was constructed at a cost of P 7.5M is
(a) An annuity of P 1,000 payable quarterly for 50 years expected to last 30 years at the end of which time its renewal cost
(b) An annuity of P 1,000 payable quarterly for 100 years will be P 4M. Annual repairs and maintenance is P 300,000. What
(c) A perpetuity of P 1,000 payable quarterly is the capitalized cost of the bridge at an interest of 6%?
Ans. (a) P 49,047.35; (b) P 49,981.85; (c) P 50,000 Ans. P 13,343,260.77
Example 5: It costs P 50,000 at the end of each year to maintain a Example 5: Calculate the capitalized cost of a project that has an
section of Kennon road in Baguio City. If money is worth 10%, how initial cost of P 3,000,000 and an additional cost of P 1,000,000 at
much would it pay to spend immediately to reduce the annual cost the end of every 10 yrs. The annual operating costs will be P100,
by P 10,000? 000 at the end of every year for the first 4 years and P160, 000
Ans. P 400,000 thereafter. In addition, there is expected to be recurring major
rework cost of P 300,000 every 13 yrs. Assume i =15%.
Ans. P 4,281,936
Uniform Arithmetic Gradient A contract has been signed to lease a building at
Uniform Arithmetic Gradient – is the increase by a relatively P20,000 per year with an annual increase of P1,500 for
constant amount each period. 8 years. Payments are to be made at the end of each
year, starting one year from now. The prevailing
interest rate is 7%. What lump sum paid today would
be equivalent to the 8-year lease-payment plan?
The cash flow above is equal to the sum of the two cash flows
below:
A = P 1000, n = 5
P A=P1i P 1
analyzed using this formulas:
SAMPLE PROBLEMS
Example 1: An individual makes 5 deposits that increase
uniformly by P 300 every month in a savings account that earns
12% compounded monthly. If the initial deposit is P 4,500,
determine the accumulated amount in the account just after the
last deposit.
Ans. P 25,984.67
Example 2: An amortization of a debt is in a form of a gradient
series. (a) What is the equivalent present worth of the debt if
interest is 5%. (b) Determine also the future amount of
amortization as well as the equivalent uniform periodic payment.
(c) What is the equivalent uniform annual cost?
Ans. P 15,178.34; P 18,449.37; P 4,280.47
SET 2: DEPRECIATION Example 5: A machine cost P 73,500 and has a life of 8 year s with
Depreciation – is the decrease in value of physical property with a salvage value of P 3500 at the end of 8 years. Determine the
the passage of time. book value at the end of 4 years using straight line method.
Book Value – is the worth of property as shown on the accounting Ans. P 38,500
records of an enterprise Example 6: What is the book value of electronic test equipment
Salvage/Resale Value – is the price that can be obtained from the after 8 years of use if it depreciates from its original value of P
sale of the property after it has been used. 120,000.00 to its salvage value of 13% in 12 years? Use straight-
Scrap Value – the amount of property would sell if disposed of as line method.
junk.
BVD ==FCFCDSV Ans. P 50,400
Example 7: The initial cost of paint sand mill, including its
installation is, P800 000.00. The BIR approved life of this machine
Where: is 10 years for depreciation. The estimated salvage value of the
BVm = book value of a property at any time m mill is P 50,000.00 and the cost of dismantling is estimated to be P
Dm = total depreciation of a property at any time m 15,000.00. Using straight line depreciation, what is the annual
DL = total depreciation at the end of its useful life depreciation charge and what is the book value of the machine at
FC = first cost the end of six years?
SV = salvage or scrap value Ans. P 76,500; P 341,000
Example 8: An equipment has a salvage value of P1M at the end of
Straight Line Method 50 years. The straight line depreciation charge is P2M.
Straight Line Method –a method which assumes that the loss in (a) What is the first cost of the machine?
D = FC BV
Note: This method is not applicable if there is no salvage value.
of P 25,000 after its 25 years of useful life. Using Double Declining
Balance Method, what will be the book value after 8 years?
Ans. P 256,609.44
Where: Example 3: XYZ Company has an equipment that cost P 90,000.
dm = depreciation at any time m After 8 years, it will have a salvage value of P 18,000.00. Using
BVm = book value of a property at any time m Double declining balance method, find the book value at the end
Dm = total depreciation of a property at any time m of 5 years.
L = useful life in years Ans. P 21,357
FC = first cost Example 4: Given the following data for a construction equipment:
SV = salvage or scrap value Initial cost = P 1,200,000.00; Economic Life = 12 years; Estimated
k = rate of depreciation salvage value = P 320,000.00.
(a) What is the book value after seven years?
SAMPLE PROBLEMS (b) What is the depreciation charge on the 4th year?
Example 1: A machine costing P 720,000 is estimated to have a (c) What is the total depreciation charge at the end of the 10 th
book value of P 40,545.73 when retired at the end of 10 years. year?
Depreciation cost is computed using a constant percentage of the Ans. P 334,898; P 115,740.74; P 1,006,193.30
declining value. Example 5: A machine costing P 550,000 has an estimated scrap
(a) What is the annual rate of depreciation? value of P 85,000 at the end of its economic life of 8 years. Using
(b) What is the book value after 3 years? DDBM of depreciation:
(c) What is the depreciation charge at the 4th year? (a) What is the book value after 4 years of service?
(d) What is the total depreciation after 6 years? (b) What is the book value at the end of its life?
Ans. (a) 0.25; (b) P 303,750; (c) P 75,937.50; (d) P 591,855.47 Ans. P 174,023; P 55,062.10
Example 2: A machine having a certain 1 st cost has a life of 10 years
and a salvage value of 6.633% of the first cost of 10 years. If it has
addiannual
tional inetnvestment
savings==didiffeerence
renceiinncapiannualtal incostvested is selected.
SAMPLE PROBLEMS
Example 1: Example 1: A company is considering two types of
If the rate of return on additional investment is satisfactory, then, equipment for its manufacturing plant. Pertinent data are as
the alternative requiring a bigger investment is more economical follows:
and should be chosen. Type A Type B
First cost P 200,000 P 300,000
SAMPLE PROBLEMS Annual operating cost P 32,000 P 24,000
Example 1: A company is considering two types of equipment for Annual labor cost P 50,000 P 32,000
its manufacturing plant. Pertinent data are as follows: Insurance and property taxes 3% 3%
Type A Type B Payroll taxes 4% 4%
First cost P 200,000 P 300,000 Estimated Life 10 10
Annual operating cost P 32,000 P 24,000 If the minimum required rate of return is 15%. What is the present
Annual labor cost P 50,000 P 32,000 worth of Type A? Type B? Which eq uipment should be selected?
Insurance and property taxes 3% 3% Ans. P 651,689; P 632,643; Type B
Payroll taxes 4% 4%
Estimated Life 10 10
If the minimum required rate of return is 15%, which equipment
should be selected? What is the rate of return of return on
additional investment?
Ans. Type B; 18.79%
SAMPLE PROBLEMS
Example 1: Example 1: A company is considering two types of
equipment for its manufacturing plant. Pertinent data are as
follows:
Type A Type B
First cost P 200,000 P 300,000
Annual operating cost P 32,000 P 24,000
Annual labor cost P 50,000 P 32,000
Insurance and property taxes 3% 3%
Payroll taxes 4% 4%
Estimated Life 10 10
If the minimum required rate of r eturn is 15%. What is the annual
cost of Type A? Type B? Which equipment should be selected?
Ans. P 129,850; P 126,056; Type B
SAMPLE PROBLEMS
Example 1: Example 1: A company is considering two types of
equipment for its manufacturing plant. Pertinent data are as
follows:
Type A Type B
First cost P 200,000 P 300,000
Annual operating cost P 32,000 P 24,000
Annual labor cost P 50,000 P 32,000
Insurance and property taxes 3% 3%
Payroll taxes 4% 4%
Estimated Life 10 10
If the minimum required rate of return is 15%. What is the EUAC
of Type A? Type B? Which equipment should be selected?
Ans. P 129,850; P 126,060; Type B
Break-Even Analysis
SAMPLE PROBLEMS
Example 1: The cost of producing a small transistor radio set
consists of P 23.00 for labor and P 37.00 for materials. The fixed
charges in operating the plant are P 100,000 per month. The
variable cost is P 1.00 per set. The radio set can be sold for P 75.00
each. Determine how many sets must be produced per month to
break-even.
Ans. 7,143 sets
Example 2: A company has a production capacity of 500 units per
month and its fixed costs are P 250,000 a month. The variable
costs per unit are P 1,150 and each unit can be sold for P 2,000.
Economy measures are instituted to reduce the fixed costs by 10%
and the variable cost be 20%. (a) Determine the old break-even
point.
(b) Determine the new break-even point.
(c) What is the old monthly profit at 100% capacity?
(d) What is the new monthly profit at 100% capacity?
Ans. 294 units per month; 208 units per month; P 175,000; P 315,
000
Example 3: Two machines are being considered for the production
of a particular part for which there is a long term demand.
Machine A costs P 50,000 and is expected to last 3 years and have
a P 10,000 salvage value. Machine B cos ts P 75,000 and is expected
to last 6 years and have zero sa lvage value. Machine A can produce
a part in 18 seconds; Machine B requires only 12 seconds per part.
The out-of-pocket hourly cost of operation is P 38 for A and P 30
for B. Monthly maintenance costs are P 200 for A and P 220 for B.
If interest on invested capital is 25%, determine the number of
parts per year at which the machines are equally economical.
Ans. 29, 544 parts
Benefit-Cost Ratio
SAMPLE PROBLEMS
Example 1: A non-profit educational research organization, is
contemplating an investment of P 1,500,000 in grants to develop
new ways to teach people the rudiments of profession. The grants
would extend over a ten-year period and would achieve an
estimated savings of P 500,000 per year in professors ’ salaries,
student tuition, and other expenses. The program would be an
addition to ongoing and planned activities, thus an estimated P
100,000 a year would have to be released from the other program
to support the educational research. A rate of return of 15% is
expected, calculate the B/C ratio. Is this a good program?
Ans. B/C = 1.34; It is a good program
Example 2: The National Government intends to build a dam and
hydroelectric project in the Cagayan Valley at a total cost of P
455,500,000. The project will be financed by soft foreign load with
a rate of interest of 5% per year. The a nnual cost for operation and
maintenance, distribution facilities and others would total P
15,100,000. Annual revenues and benefits are estimated to be P
56,500,000. If the structures are expected to last for 50 years, with
no salvage value, determine the B/C ratio of the project.
Ans. B/C = 1.41