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ENGS 31 – Engineering Economics

Present Economy Studies, Simple Interest, Compound Interest, Effective Rates

Problem Set

Direction: Read and analyze each problem carefully. Copy and answer each problem on clean CE papers. Maximum of 3 problems per
page is allowed. Show the cash flow diagram on problems involving compound interest. This page will serve as the front page of
your output.

1. A machine part to be machined may be made either from an alloy of aluminum or steel. There is an order for
8,000 units, steel costs P3.80 per kg., while aluminum costs P8.70 per kg. If steel is used, the steel per unit
weighs 110 grams; for aluminum, 30 grams. When steel is used, 50 units can be produced per hour with the aid
of a tool costing P640, which will be useless after the 8,000 units are finished. The cost of the machine and
operator is P10.80 per hour. If all other costs are identical, determine which material can be more economical.
(Ans. Aluminum is cheaper)
2. A certain manufacturing company received an order for producing 100,000 pieces of a certain machine part. A
jig is necessary for production and two designs are presented whose properties are as follows:
JIG A JIG B

Estimated life 100,000 pcs. 100,000 pcs.

First cost P2,000 P1,900

Hourly wage of operator P2.50 P2.20

Number of pieces 80
100
produced/hour
If the only consideration is economy of operation, determine which jig should be used. (Ans. Jig A is cheaper
by P150 and should be used.)

3. Two workers, A and B, each produce 200 pieces of a product per hour. Because of defects, 2% of the pieces
produced by B are rejected. These defective pieces are repaired at a unit cost of P0.10 per piece. The cost of
materials per piece is P0.42.
a. If each worker is paid P3.00 per piece, determine his total cost per acceptable piece. (Ans. A=P0.435,
B=P0.4459)
b. How much should A receive per hour in order that his cost per acceptable piece will equal that of B?
(Ans. P5.18)
4. Determine the ordinary and exact simple interests on P5,000 for the period from January 15 to June 20,1978,
if the rate of simple interest is 14% (Ans. Ordinary=P303.33, Exact=299.18)
5. A man borrows P10,000 from a loan firm. The rate of simple interest is 15%, but the interest is to be deducted
from the loan at the time the money is borrowed. At the end of one year, he has to pay back P10,000. What
is the actual rate of interest? (Ans. i=17.65%)
6. If the sum of P12,000 is deposited in an account earning an interest at the rate of 9% compounded quarterly,
what will it become at the end of 8 years? (Ans. P24,457.24)
7. At a certain interest rate compounded quarterly, P1,000 will amount to P4,500 in 15 years. What is the
amount at the end of 10 years? (Ans. P2,725.68)
8. A man possesses a promissory note, due 3 years hence, whose maturity value is P6,700.48. if the rate of
interest is 10% compounded semi-annually, what is the value of this note now?
9. An 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, P1,000,000; building, P3,500,000. Since these
 are not needed immediately, the firm plans to defer the purchase of the land and construction of the building
until they are needed. If the value of land and cost of the building is 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?
10. If P1,000 becomes P1,811.36 after 5 years when invested at an unknown rate of interest compounded bimonthly
(every two months), determine the unknown nominal rate and the corresponding effective rate. (Ans. 12%
compounded bimonthly and 12.616% compounded annually)
11. If you are investing your money, which is better: 12% compounded monthly or 12.5% compounded annually?
12. Find the nominal rate compounded monthly which is equivalent to 12% compounded quarterly. What is the
corresponding effective rate? (Ans. 11.882% compounded monthly and 12.55% compounded annually.)
13. An advertisement of an investment corporation states that if you invest P500 in their firm tody, you will
get P1,000 at the end of 4½ years. What nominal rate of interest is applied if interest is compounded (a)
quarterly? (b) monthly? Determine also the effective rate of interest in each case.
14. Annual deposits were made in a fund earning 10% per annum. The first deposit was P2,000 and each deposit
thereafter was P200 less than the preceding one. Determine the amount in the fund after the sixth deposit
(ans. P12.000)
15. A debt of P15,000 was paid for as follows: P4,000 at the end of 3 months, P5,000 at the end of 12 months,
P3,000 at the end of 15 months, and a final payment F at the end of 21 months. If the rate of interest was
18% compounded quarterly, find the final payment. (Ans. P6,221.98)