Engineering Economy

PRELIM
Prepared by:
Hannah Jillian M. Oleta
Industrial Engineering Department
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How Well Did You Understand?

A. Introduction

1. The Almost -Graduating Senior Problem. Consider this situation faced by a first-semester senior in civil
engineering who is exhausted from extensive job interviewing and poor from excessive partying. Mary’s
impulse is to accept immediately a highly attractive job offer to work in her brother’s successful
manufacturing company. She would then be able to relax for a year or two, save some money, and
then return to college to complete her senior year and graduate. She is cautious about this impulsive
desire because it may lead to no college degree at all.

a. Develop at least two formulations for Mary’s problem.

b. Identify feasible solutions for each problem formulation in part (a). Be creative.

2. While studying for the engineering economy final exam, you and two friends find yourselves craving a
fresh pizza. You cannot spare the time to pick up the pizza and must have it delivered. “YellowTaxi
Pizza” offers a 1-1/4-inch-thick (including toppings), 20-inch square pizza with your choice of two
toppings for ₱750 plus 5% service charge and a ₱75 delivery charge (no service charge on delivery
fee). “Pizza Kubo” offers the round, deep-dish Chicago-style, which is 20 inches in diameter. It is 1-3/4
inches thick, includes two toppings, and costs ₱862.50 plus 5% service charge and free delivery.

a. What is the problem in this situation? Please state in an explicit and precise manner.
b. Systematically apply the seven principles of engineering economy to the problem you have
defined in part (a).
c. Assuming that your common unit of measure is in pesos (i.e., cost), what is the better value for
getting a pizza based on the criterion of minimizing cost per unit of volume?
d. What other criteria might be used to select which pizza to purchase?

3. Classify each of the following cost items as to ease of traceability:

a. Depreciation on factory building

b. Property tax on finished goods warehouse
c. Paper used in textbook production
d. Wages paid to assembly line workers
e. Maintenance cost for machines
f. Wheat flour in bread
g. Factory rent
h. Pulp in paper making
i. Batteries for a car manufacturer
j. Auditor’s fee

4. Classify each of the following cost items as mostly fixed or variable:

a. Raw Materials h. Administrative Salaries

b. Direct Labor i. Payroll Taxes
c. Depreciation j. Insurance (Building and Equipment)
d. Supplies k. Clerical Salaries
e. Utilities l. Sales Commissions
f. Property Taxes m. Rent
g. Interest on Borrowed Money

5. The quarrying cost of marble and granite block plus delivery cost to the plant for each is ₱2,400 per
cubic meter. The processing cost of marble into tiles is ₱200 per sqm and that of the granite is ₱600
per sqm.
Marble has a net yield of 40sqm of tile per cubic meter of block and sells at ₱400 per sqm. On the
other hand, granite gives a net yield of 50 sqm of tiles per cubic meter of block and sells at ₱1,000 per
sqm. Determine the more profitable material considering all other costs to be the same and by how
much?
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6. A manufacturer has been shipping his product (moderately heavy machines) mounted only on skids
without complete crating. To avoid crating, he must ship in freight cars which contain only his machines.
To do this he must pay freight on a car capacity load of 42 tons regardless of whether or not the car is
completely full. In the past he shipped only 30 tons in each car. The carload freight is ₱410 per hundred
pounds.
If the machines are crated so that they can be shipped in mixed car lots, along with other merchandise,
they can be shipped at a rate of ₱420 per hundred pounds with the freight bill computed only on the
actual weight shipped. The cost of crating would be ₱2,500 per machine and would increase the
shipping weight from 1,200 to 1,220 pounds per machine.
Note that 1 ton=2,200 lbs.
Which procedure should be followed?

B. Money – Time Relationships and Equivalence

1. You borrow ₱20,000 from a family member and agree to pay it back in 6 months. Because you are
part of the family, you are only being charged simple interest at the rate of 0.5% per month. How much
will you owe after 6 months? How much is the interest?

2. A 12-cylinder heavy-duty diesel engine will have a guaranteed residual value of ₱50,000 in 5 years.
Today (year zero) the equivalent worth of this engine is how much if the interest rate is 9% per year?

3. You just inherited ₱1,000,000. While you plan to squander some of it away, how much should you
deposit in an account earning 5% interest per year if you would like to have ₱1,000,000 in the account
in 10 years?

4. The expansion plan of a business firm requires the purchase of a parcel of land on which to build a
structure, which they will need 5 years hence. The current costs are land, ₱1,000,000; building,
₱3,500,000. Since these are not needed immediately, the firm plans to defer the purchase of the land
and the construction of the building until they are needed. If the value of the land and the cost of the
building are expected to appreciate at the rates of 20% and 8% per annum respectively, what will be
the total cost of the land and structure 5 years hence?

5. Calculate the effective rate corresponding to each of the following rates:

a. 9% compounded semi-annually
b. 9% compounded quarterly
c. 9% compounded monthly
d. 9% compounded continuously

6. Today you invested ₱100,000 into a fund that pays 25% interest compounded annually. Three years
later, you borrow ₱50,000 from a bank at 20% annual interest and invest the fund. Two years later you
withdraw enough money from the bank to repay the bank loan and all interest due on it. Three years
after the withdrawal, you start taking ₱20,000 per year out of the fund. After 5 withdrawals, you
withdraw the balance in the fund. How much was withdrawn?

7. A man wishes to provide a fund for his retirement such that from his 60th to 70th birthdays he will be
able to withdraw equal sums of ₱18,000 for his yearly expenses. He invests equal amounts for his
41st to 59th birthdays in a fund earning 10% compounded annually. How much should each of these
amounts be?

8. A company will borrow a loan to finance a 10-year project that will require an initial installation cost of
₱2,500,000. After 2 years another P500,000 and a regular annual upkeep cost of ₱75,000 paid every
end of the year. If the interest rate of the loan is 2% per annum, what amount should be loaned?

9. A businessman has to settle a debt of 4 equal semi-annual payments of ₱50,000 at 9% rate of interest
compounded semi-annually. However, he was not able to do so. Instead, he negotiated with the bank
to settle it into 8 quarterly payments at the same 9% interest rate but compounded quarterly. How
much should the new payments be?
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10. Pearl Pacific Airlines has implemented a program to recycle plastic drink cups used on their aircraft.
Their goal is to generate ₱15,000,000 by the end of the recycle program’s 5-year life. Each recycled
cup can be sold for ₱0.25.
a. How many cups must be recycled annually to meet this goal? Assume uniform annual
plastic cup usage and a 0% interest rate.
b. Repeat part (a) when the annual interest rate is 15%.
c. Why is the answer to part (b) less than the answer to part (a)?

11. What lump sum of money must be deposited into a bank account at the present time so that ₱20,000
per month can be withdrawn for five years, with the first withdrawal scheduled for six years from today?
The interest rate is 0.75% per month.

12. Lisa plans to retire on her 61st birthday. On her 22nd birthday, she will start saving ₱A per year for 40
years. Starting on her 62nd birthday, she plans on withdrawing ₱100,000 and will continue these annual
withdrawals until the account is exhausted on her 85th birthday. If Lisa’s bank account pays 3% per
year, what annual amount of ₱A will she need to invest in her bank account to achieve her retirement
goal?

13. The Atlas Machinery Corporation sells its equipment to contractors on either of the following
arrangements: a) cash basis: payments of marked price less 10%; b) installment basis: down payment
of 20% of the marked price and the balance payable in equal annual installments for the next 4 years.
If you are the engineer buying a 7S Concrete Mixer which is marked at ₱250,000 and if money is worth
5% compounded annually, which of the following arrangements will you consider better from your
standpoint? A) Pay ₱225,000 cash, or b) pay a down payment of ₱50,000 and pay the balance on
equal installments of ₱50,000 annually for the next 4 years?

14. A man owes ₱100,000 with interest at 6% payable semi-annually. What equal payments at the
beginning of each 6 months for 8 years will discharge his debt?

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