ECO 017: Engineering Economics

Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson title: ANNUITIES (ORDINARY Materials: Ballpoint, Notebook, Calculator

ANNUITY) Text book: Engineering Economy by
Hipolito B. Sta. Maria, 3rd Ed
Lesson Objectives: References:
At the end of the lesson, you should be able to: 1. Engineering Mathematics vol 2 by
1. Define Inflation Gillesania
2. Give example of inflation
3. Solve problems in inflation

Productivity Tip
IF YOU WANT IT,
WORK FOR IT

A. LESSON PREVIEW/REVIEW

Introduction

The following topics shall be accomplished in this module:

1. Define the discount
2. Define the inflation
3. Analyze and Solve economic problem related to inflation and discount

Activity 1: What I Know Chart, part 1

What I Know Questions: What I Learned

(Activity 4)
1 What is inflation

2. How inflation affect

the price of certain
commodity

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 ECO 017: Engineering Economics
Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

3 Importance of
having a knowledge
of Inflation?

B. MAIN LESSON

Activity 2: Content Notes

ANNUITY

An annuity is a series of equal payments made at equal intervals of time. Financial activities like
installment payments, monthly rentals, life-insurance premium, monthly retirement benefits, are familiar
examples of annuity.

Annuity can be certain or uncertain. In annuity certain, the specific amount of payments are set to
begin and end at a specific length of time. A good example of annuity certain is the monthly payments of
a car loan where the amount and number of payments are known. In annuity uncertain, the annuitant may
be paid according to certain event. Example of annuity uncertain is life and accident insurance. In this
example, the start of payment is not known and the amount of payment is dependent to which event.

Annuity certain can be classified into two, simple annuity and general annuity. In simple annuity,
the payment period is the same as the interest period, which means that if the payment is made monthly
the conversion of money also occurs monthly. In general annuity, the payment period is not the same as
the interest period. There are many situations where the payment for example is made quarterly but the
money compounds in another period, say monthly. To deal with general annuity, we can convert it to
simple annuity by making the payment period the same as the compounding period by the concept
of effective rates.

ELEMENTS OF ANNUITY

A = amount of periodic payment

P = present amount of all periodic payments
F = future worth of all periodic payments after the last payment is made
i = interest rate per compounding period
n = total number of payments
m = nominal rate (see compounded interest)
t = number of years

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 ECO 017: Engineering Economics
Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

CLASIFICATION OF ANNUITY

Simple annuity - Payment period is the same as the interest period. If the payment is made
monthly then the conversion of money also occurs monthly]
General annuity - Payment period is not the same as the interest period however it can be
converted to simple annuity by making the payment period is the same as the
compounding period by concepts of effective rates

TYPES OF ANNUITY

l Ordinary Annuity
l Deferred Annuity
l Annuity Due
l Perpetuity

ORDINARY ANNUITY

In ordinary annuity, the payment is made at the end of each period starting from the first period as
in the diagram below.

Characteristics of ordinary annuity

P - present equivalent value, occurs one interest period before the first A (uniform amount)
F - future equivalent value, occurs at the same time as the last A and n intervals after P
A - annul equivalent value, occurs at the end of each period

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 ECO 017: Engineering Economics
Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Formula:

F=
[
A (1 + i ) - 1
n
] A=
Fi
i (1 + i )n - 1

P=
F
; P=
[
A (1 + i ) - 1
n
]
(1 + i )n i (1 + i )
n

Remember that the exponent n in the numerator is the number of payment that has made and the
exponent in the denominator is the number of period from F to P

Example 1: What is the present worth of P 10,000 at the end of every three months for 5 years if the
interest rate is 12% compounded quarterly?

Solution: P=
[
A (1 + i ) - 1
n
]
(1 + i )n - 1
Number of payment = 4 times a year for 5
éæ .12 ö 20 ù years (4 x 5 =20)
P10,000êç1 + ÷ - 1ú
êëè 4 ø úû Number of periods = in ordinary annuity the
P= 20 number of payment is equal to
æ .12 öæ .12 ö number of periods
ç ÷ç1 + ÷
è 4 øè 4 ø

P = P148,774.75

Example 2: If money is worth 10% compounded quarterly, what monthly savings is required monthly in
order to have P200,000 at the end at the end of 10 years

Solution: The example problem is a general annuity where the payment period is not the same to
the interest period, so we must find the equivalent rate of compounded quarterly to
compounded monthly

4
æ 0.1 ö
÷ - 1 = (1 + i ) - 1
12
ç1 +
è 4 ø

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 ECO 017: Engineering Economics
Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

(1 + i)12 = 1.1038
i = 0.00826

Now we have the value for the interest period, for the number of payment is equal to number of period

n = 12(10) = 120

Fi P 200,000(0.00826)
A= =
(1 + i )n - 1 (1 + 0.00826 )120 - 1
A = P981.28

Example 3: An engineer wants to start a business which requires purchase of a Php 100,000 worth
machine which will produce a net income of Php 11,000 per year after deducting operating
expenses. The engineer plans to put the machine on sale after 4 years, what must be the
resale price to justify the investment if the engineer should make 12% annual return on the
investment.

Solution: Create a cash flow-diagram for this problem

To solve the given problem we must compute first for all future amount of annuity and of
machine at 4th year, then we have inflow equal to outflow

FRS + FA = FP0; FRS = FP0 - FA

FA =
[
P11,000 (1 + 0.12 ) - 1
4
]= P52,572.61
0.12
FP0 = P100,000(1+0.12)4 = P157,351.94

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 ECO 017: Engineering Economics
Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

FRS = P157,351.94 - P52,572.61

FRS = P104,779.33

Activity 3: Skill-building Activities

SOLVE FOR THE FOLLOWING PROBLEM

1. A contractor bought a concrete mixer at P120,000 if paid in cash. The

mixer may also be purchased by installment to be paid within 5
years. If money is worth 8% compounded annually, the amount of
each annual payments are made at the end of each year.

2. How much money you must invest today in order to withdraw P1,000
per year for 10 years. If the interest rate is 12%

3. A service car whose cash price was P540,000 was bought with a down payment of P162,000 and
monthly of P10,874.29 for five year. What was the rate of interest compounded monthly

4. Naruto deposits P5,000 at the end of every earning 7.50% compounded continuously. Determine
the worth of his money after 15 years.

Activity 4: What I Know Chart, part 2

What I Learned
1. _________________________________________________________________________________
_________________________________________________________________________________

2. _________________________________________________________________________________
_________________________________________________________________________________

3. _________________________________________________________________________________
_________________________________________________________________________________

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 ECO 017: Engineering Economics
Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Activity 5: Check for Understanding

1. Mitsuha inherited regular endowment of P100,000 every end of 3 months for 10 years. However,
she may choose to get a single lump sum if the end of 4 years. How is this lump sum if the cost of
money is 14% compounded quarterly

2. A corporation will make the following disbursements:

a. Php 50, 000 on December 31, 1991
b. Php 100,000 on December 31, 1992
c. Php 200,000 one December 31, 1993
To accumulate these sums, a singking fund(annuity) is established by making equal year-end
deposits starting December 31, 1986 up to the end of 1993. If the fund earns 9% interest
compounded annually, what is the required amount of the annual deposit?

C. LESSON WRAP-UP

Activity 6: Thinking about Learning

A. Work Tracker

{
*
*
T
B
.

Think about your Learning

1. What motivated you to finish the lesson today?

________________________________________________________________________
________________________________________________________________________

2. What could you have done better to improve your learning today?
_________________________________________________________________________
_________________________________________________________________________

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 ECO 017: Engineering Economics
Student’s Activity Sheet #6

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

FAQs

1. How to determine if the problem is ordinary annuity?

________________________________________________________________________
________________________________________________________________________

Activity 3

1. P30,054.77
2. P5,650
3. 24%

The image
part with
relationship

ATTACH ADDITIONAL SHEETS OF PAPER FOR

ID rId37 was
not found in
the file.

YOUR SOLUTIONS!

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 ECO 017: Engineering Economics
Student’s Activity Sheet #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson title: ANNNUITY DUE Text book: Engineering Economy by

Hipolito B. Sta. Maria, 3rd Ed
Lesson Objectives: References:
At the end of the lesson, you should be able to: 1. Engineering Mathematics vol 2 by
1. Define Annuity due Gillesania
2. Give example of Annuity due
3. Solve problems in Annuity due

Materials: Ballpoint, Notebook, Calculator

Productivity Tip
YOUR PROBLEM IS’NT THE
PROBLM ISN’T THE
PROBLEM. YOUR
REACTION IS THE
PROBLEM
A. LESSON PREVIEW/REVIEW

Introduction

The following topics shall be accomplished in this module:

1. Define the Annuity due
2. Define the Annuity due
3. Analyze and Solve economic problem related to Annuity due

Activity 1: What I Know Chart, part 1

What I Know Questions: What I Learned

(Activity 4)
1 What is Annuity
due

2. How it differ to
other annuity

This document is the property of PHINMA EDUCATION

1
 ECO 017: Engineering Economics
Student’s Activity Sheet #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

3 Give an example of
annuity due

B. MAIN LESSON

Activity 2: Content Notes

ANNUITY DUE

In annuity due, the equal payments are made at the beginning of each compounding period
starting from the first period. The diagram below shows the cash flow in annuity due.

F=
[
A (1 + i ) - 1
n
] A=
Fi
i (1 + i )n-1 - 1
P=
[
A (1 + i ) - 1
n
]
i (1 + i )
n -1

Example 1: A contractor bought a concrete mixer at P120,000 if paid in cash. The mixer may also be
purchased by installment to be paid within 5 years. If money is worth 8% compounded
annually, the amount of each annual payments are made at the beginning of each year.

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 ECO 017: Engineering Economics
Student’s Activity Sheet #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

P=
[
A (1 + i ) - 1
n
] =
Pi (1 + i ) n -1
[ ]
Solution: A
i (1 + i ) (1 + i )n - 1
n -1

P120,000(0.08)(1 + 0.08)5-1
A=
[ ]
(1 + 0.08)5 - 1
A = P27,828.44

Activity 3: Skill-building Activities

SOLVE FOR THE FOLLOWING PROBLEM

1. A farmer bought a tractor costing Php 25,000 payable in ten 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.

2. A man bought an equipment costing P60,000 payable in 12 quarterly payments each installment
payable at the beginning of each period. The rate of interest is 24% compounded quarterly.
What is the amount of each payment

3. Find the difference between the sums of annuity due and ordinary annuity for the following data
Periodic payment = P14,000
Payment interval = 3 months
Term = 16 years
Interest rate = 10% compounded quarterly

Activity 4: What I Know Chart, part 2

What I Learned
1. _________________________________________________________________________________
_________________________________________________________________________________

2. _________________________________________________________________________________
_________________________________________________________________________________

3. _________________________________________________________________________________
_________________________________________________________________________________

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 ECO 017: Engineering Economics
Student’s Activity Sheet #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Activity 5: Check for Understanding

1 A young woman 22 years old has just graduated from college. She accepts a good job and desire
to establish her own retirement fund. At the beginning of each year thereafter she plans to deposit P
2,000 in a fund at 15% annual interest. How old will she when the fund has an accumulated value of P
1,000,000

C. LESSON WRAP-UP

Activity 6: Thinking about Learning

A. Work Tracker

{
*
*
T
B
.

Think about your Learning

1. What motivated you to finish the lesson today?

________________________________________________________________________
________________________________________________________________________

2. What could you have done better to improve your learning today?
_________________________________________________________________________
_________________________________________________________________________

FAQs

1. How to identify if the problem is annuity due?

________________________________________________________________________
________________________________________________________________________

2. It is need to create a cash flow diagram in anuity due?

________________________________________________________________________
________________________________________________________________________

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 ECO 017: Engineering Economics
Student’s Activity Sheet #7

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Activity 3

1. P4077.20
2. P7,371.91
3. P53,991.62

The image
part with
relationship

ATTACH ADDITIONAL SHEETS OF PAPER FOR

ID rId23 was
not found in
the file.

YOUR SOLUTIONS!

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 ECO 017: Engineering Economics
Student’s Activity Sheet #8

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson title: DEFERRED ANNUITY Text book: Engineering Economy by

Hipolito B. Sta. Maria, 3rd Ed
Lesson Objectives: References:
At the end of the lesson, you should be able to: 1. Engineering Mathematics vol 2 by
1. Define deferred annuity Gillesania
2. Give example of deferred annuity
3. Solve problems in deferred annuity

Materials: Ballpoint, Notebook, Calculator

Productivity Tip

Sometimes later becomes

never. Do it now.

A. LESSON PREVIEW/REVIEW

Introduction

The following topics shall be accomplished in this module:

1. Define the deferred annuity
2. Define the deferred annuity
3. Analyze and Solve economic problem related to deferred annuity

Activity 1: What I Know Chart, part 1

What I Know Questions: What I Learned

(Activity 4)
1. What is deferred `
annuity

2. How it differ to
other annuity

This document is the property of PHINMA EDUCATION

1
 ECO 017: Engineering Economics
Student’s Activity Sheet #8

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

3 Give an example of
deferred annuity

B. MAIN LESSON

Activity 2: Content Notes

DEFERRED ANUITY

An ordinary annuity where the first cash flow of the series is not at the end of the first period or
it is deferred for sometime.

F=
[
A (1 + i ) - 1
n
] P=
[
A (1 + i ) - 1
n
]
i (1 + i )
(k +n)
i
Example 1: Takao buys a piece of lot for P100,000 down payment and 10 deferred semi-annual
payment pf P8,000 each starting from 3 years from now. What is the present value of the
lot if the rate of interest is 12% compounded semi-annually

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 ECO 017: Engineering Economics
Student’s Activity Sheet #8

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Solution: Analyze the problem using cash flow diagram, we have a inflow of lot and a outflow of
P8,000 annuity and P100,000 down payment as shown in the cash flow

PLOT = P100,000 + PA

PA =
[ ] [
A (1 + i ) - 1 A (1 + i ) - 1
n n
]
i (1 + i ) i (1 + i )
(k +n) (k +n)

éæ 0.12 ö10 ù
P8,000êç1 + ÷ - 1ú
ëêè 2 ø ûú
PA = 0.12 15 æ 0.12 ö
(1 + ) ç ÷
2 è 2 ø
PA = P43,999.08

PLOT = P100,000 + P43,999.09

PLOT = P143,999.08

Example 2: You need P4,000 per year for four years to go to college. Your father invested P5,000 in
7% account for your education when you were born. If you withdraw at the end of your
17th, 18th, 19th and 20th birthday how much will left in the account at the end of your 21st
birthday?

Solution: Analyze the problem using cash flow diagram, we have a inflow P4,000 annuity and a
remaining money at year 21, outflow of P5,0000 deposit as shown in the cash flow

F21 + FA = F0; F21 = F0 - FA

FA =
[
A (1 + i ) - 1
n
](1 + i )1 = [
P 4,000 (1 + 0.07 ) - 1
4
](1 + 0.07 )
i 0.07
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 ECO 017: Engineering Economics
Student’s Activity Sheet #8

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

FA = P19,002.96

F0 = P5,000 (1 + i )21
F0 = P20,702.81
F21 = P20,702.81 - P19,002.96
F21 = P1,699.86 = P1,700

Example 3: In five years P18,000 will be bedded to pay for a building renovation. In order to generate
this sum an annuity consisting of three annual payments is established now. What
payment is necessary if money is worth 15% annually

Solution: PA = PF
[
A (1 + i ) - 1
n
]=
F
(1 + i ) i
n
(1 + i )n
[
A (1 + 0.15) - 1
3
=
]P18,000
(1 + 0.15) (0.15) (1 + 0.15)5
3

A = P3,919.53

Activity 3: Skill-building Activities

SOLVE FOR THE FOLLOWING PROBLEM

1. What lump sum of money must be deposited in a bank account at

present time so that Php 500 monthly can be withdrawn for five years
with the first withdrawal scheduled six years from today? Interest rate
is 9% compounded quarterly.

2. Tatsumi invested Php 10,000 now for the college education of his
three-year old son. If the fund
earns 14% effective, how much will the sun get each year starting from 19th to 22nd birthday?

3. Mr. Nara borrows P600,000 at 12% compounded annually agreeing to repay the loan in 15 equal
payments. How much of the original principal is still unpaid after he has made the 8th payment?

This document is the property of PHINMA EDUCATION

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 ECO 017: Engineering Economics
Student’s Activity Sheet #8

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

4. The present value of an annuity of “P” pesos payable annually for 8 years, with the first payment at
the end of 10 years, is P187,481.25. Find the value of “P” if money is worth 5%

5. Find the present value of an annuity of P30,000 payable annually for 10 years with the first
payment at the end of the 10th year, if the money is worth 8% compounded annually.

Activity 4: What I Know Chart, part 2

What I Learned
1. _________________________________________________________________________________
_________________________________________________________________________________

2. _________________________________________________________________________________
_________________________________________________________________________________

3. _________________________________________________________________________________
_________________________________________________________________________________

Activity 5: Check for Understanding

1. Today you invest P100,00 into a fund that pays 25% interest compounded annually. Three years
later you borrow P50,000 from a bank at 20% annual interest and invest in the fund. Two years
later you withdraw enough money from the fund to repay the bank loan and all interest due on it.
Three years from this withdrawal you taking P20,000 per year out of the fund. After five
withdrawals you withdrawn the balance in the fund. How much was withdrawn?

2. If P10,000 is deposited each year for 9 years, how much annuity can a person get annually from
the bank every year for 8 years starting one year after the 9th deposit is made. Cost of money is
14%

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 ECO 017: Engineering Economics
Student’s Activity Sheet #8

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

C. LESSON WRAP-UP

Activity 6: Thinking about Learning

A. Work Tracker

{
*
*
T
B
.

Think about your Learning

1. What motivated you to finish the lesson today?

________________________________________________________________________
________________________________________________________________________

2. What could you have done better to improve your learning today?
_________________________________________________________________________
_________________________________________________________________________

FAQs

1. How to identify if the problem is annuity due?

________________________________________________________________________
________________________________________________________________________

2. It is need to create a cash flow diagram in annuity due?

________________________________________________________________________
________________________________________________________________________

KEY TO CORRECTIONS (refer TG’s)

CONGRATULATIONS!
Activity 3

1. P14,170.27
2. P36,294.49
3. P402,040
4. P45,000.06
5. P100,701.34

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 ECO 017: Engineering Economics
Student’s Activity Sheet #9

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson title: PERPETUITY Materials: Ballpoint, Notebook, Calculator

Text book: Engineering Economy by
Lesson Objectives: Hipolito B. Sta. Maria, 3rd Ed
At the end of the lesson, you should be able to: References:
1. Define perpetuity 1. Engineering Mathematics vol 2 by
2. Give example of perpetuity Gillesania
3. Solve problems in perpetuity

Productivity Tip
THE SECRET TO GETTING
AHEAD IS GETTING
STARTED

A. LESSON PREVIEW/REVIEW

Introduction

The following topics shall be accomplished in this module:

1. Define the perpetuity
2. Define the perpetuity
3. Analyze and Solve economic problem related to perpetuity

Activity 1: What I Know Chart, part 1

What I Know Questions: What I Learned

(Activity 4)
1. What is perpetuity `

2. How it differ to
other annuity

This document is the property of PHINMA EDUCATION

1
 ECO 017: Engineering Economics
Student’s Activity Sheet #9

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

3 Give an example of
perpetuity

B. MAIN LESSON

Activity 2: Content Notes

PERPETUITY

It is an annuity where series of uniform payment where they extend forever or continues in
indefinite time.

From the formula of present worth of an ordinary annuity

é1 - (1 + i) - n ù
P = Aê ú
ë i û

The expression (1 + i)-n approaches to zero when n approaches to infinity. Thus, the present worth
of a perpetuity becomes:
A
P=
i
Example 1: Find the present worth of perpetuity of P6,000 annually with an interest rate of 10%
annually

This document is the property of PHINMA EDUCATION

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 ECO 017: Engineering Economics
Student’s Activity Sheet #9

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

A P 6,000
Solution: P= =
i 0 .1

P = P60,000

Example 2: Find the present worth of perpetuity of P6,000 annually with an interest rate of 10%
annually, if the first payment will be given after 3 years.

Solution:
P6,000
PA = = P60,000
0.10
PA P60,000
P0 = = 4
(1 + i) n
(1 + i )2
Po = P49,586.77

Example 3: Find the present worth of perpetuity of P6,000 annually with an interest rate of 10%
compounded monthly

Solution:
The compounding period is not equal to payment period so find the equivalent rate of
compounded annually to compounded monthly.

ERImonthly = ERI
(1 + i)12 = (1+ 0.10)
1 + i = 1.00797
i = 0.00797
P6,000
P=
0.00797
P =P752,432.20

AMORTIZATION

Amortization is any method of repaying ta debt, the principal and interest included, usually by a
series of equal payments at the equal interval of time

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 ECO 017: Engineering Economics
Student’s Activity Sheet #9

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Example: A debt of P20,000 with interest at rate of 14% compounded semi-annually is to be

amortized by 4 equal payments at the end of each 6 months; the first payment is to be
made after 2 years. Find the semi-annual payment and construct an amortization

Solution:
é (1 + i )n - 1ù
P=A ê ú
ë (1 + i ) (i ) û
n

é æ 0.14 ö 4 ù
ê ç1 + ÷ -1 ú
P20,000 = A ê è 2 ø ú
ê æ 0.14 ö7 æ 0.14 ö ú
ê ç1 + ÷ ç ÷ú
ëè 2 ø è 2 øû
P20,000 = A (2.7650)
P 20,000
A=
3.3872
A = 7,233.34

Payment Principal repaid

Outstanding Interest at the end of
made at the at the end of
Period Principal of Period of period
end of period period
period (I = P(r/m))
(A) (P = A - I)
1 P20,000 P1,400 = P20,000(0.14/2)
2 P21,400 P1,498
3 P22,898 P1,602.86
4 P24,500.86 P1,715.06 P7,233.34 P5,518.28
5 P18,982.58 P1,835 P7,233.34 P5,905.56
6 P13,077.02 P1,084.65 P7,233.34 P6,319.95
7 P6,757.07 P7,47.24 P7,233.34 P6,763.34

Activity 3: Skill-building Activities

ITS TIME TO APPLY WHAT YOU LEARN. TRY TO

SOLVE THE GIVEN PROBLEM.

1. Find the present value of a perpetuity of P15,000 payable semi-

annually if money is worth 8% compounded quarterly.

2. Find the present worth of perpetuity of P10,000 payable quarterly if

money is worth 10% compounded monthly.

This document is the property of PHINMA EDUCATION

4
 ECO 017: Engineering Economics
Student’s Activity Sheet #9

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

3. Find the present worth of perpetuity of P10,000 semi annually with an interest rate of 10%
quarterly, if the first payment will be given after 5 years.

Activity 4: What I Know Chart, part 2

What I Learned
1. _________________________________________________________________________________
_________________________________________________________________________________

2. _________________________________________________________________________________
_________________________________________________________________________________

_________________________________________________________________________________
_________________________________________________________________________________

Activity 5: Check for Understanding

1. What amount of money invested today at 15% interest can provide the following scholarships:
P30,000 at the end of each year for 6 years; P40,000 for the next 6 years and P50,000
thereafter.

C. LESSON WRAP-UP

Activity 6: Thinking about Learning

A. Work Tracker

{
*
*
T
B
.
This document is the property of PHINMA EDUCATION
5
 ECO 017: Engineering Economics
Student’s Activity Sheet #9

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Think about your Learning

1. What motivated you to finish the lesson today?

________________________________________________________________________
________________________________________________________________________

2. What could you have done better to improve your learning today?
_________________________________________________________________________
_________________________________________________________________________

KEY TO CORRECTIONS (refer TG’s)

Activity 3 ATTACH ADDITIONAL

SHEETS OF PAPER FOR
1. P371,287.13 YOUR SOLUTIONS!
2. P396,683.772
3. P133,601.72

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 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson title: CAPITALIZED AND ANNUAL Text book: Engineering Economy by

COST Hipolito B. Sta. Maria, 3rd Ed
Lesson Objectives: References:
At the end of the lesson, you should be able to: 1. Engineering Mathematics vol 2 by
1. Define capitalized cost Gillesania
2. Define annual cost 2. investopedia.com
3. Solve problems in capitalized and annual
cost

Materials: Ballpoint, Notebook, Calculator

Productivity Tip
AS LONG AS YOU HAVE THE
HUNGER FOR SUCCESS, YOU WILL
ALWAYS HAVE THE POWER WITHN
YOU TO ACHIEVE IT

A. LESSON

PREVIEW/REVIEW

Introduction

The following topics shall be accomplished in this module:

1. Define the Capitalized Cost
2. Define the Annual Cost
3. Analyze and Solve economic problem related to Capitalized and Annual Cost

Activity 1: What I Know Chart, part 1

What I Know Questions: What I Learned

(Activity 4)
1. What is capitalized `
cost

This document is the property of PHINMA EDUCATION

1
 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

2. What is annual cost

3 Differentiate the
annual and
capitalized cost

B. MAIN LESSON
Activity 2: Content Notes
CAPITALIZED COST

Capitalized cost(K) is an application of perpetuity. The capitalized cost of a project or

structure is the sum of the first cost (FC) and the present worth of all future payments and
replacements which is assumed to continue forever

If a project requires a first cost of FC, annual operation and maintenance of OM for n
years, a salvage value of SV after every n years; and a replacement cost of RC after every end of
n years, then the capitalized cost is;

Capitalized cos, K
OM RC - SV
K = FC + +
i (1 + i) n - 1

If RC is not specified, use RC = FC

Capitalized cost may also be defined as the first cost plus the present worth of annual
maintenance and operation cost plus the present worth of depreciation assumed to continue
forever

Example 1: Determine the capitalized cost of an equipment costing P2 million with an annual
maintenance of P200,000 if money is worth 20% annually.

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 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Solution: The only given in the problem is first cost and maintenance cost therefore

OM
K = FC +
i
P 200,000
K = P2,000,000 +
0.20
K = P3,000,000

Example 2: A financial analysis of two bridges based on capitalized cost on the following data

Bridge A B
Initial cost P2,000,000 P2,500,000
Cost of renewal P2,000,000 P2,500,000
Salvage value 0 P200,000
Annual maintenance P100,000 0
Repair every 5 years P500,000 P600,000
Life 30 years 40 years
It the
rate of interest is 18% compounded annually. Determine the capitalized cost for each

Solution:

OM RC - SV
K A = FC + +
i (1 + i) n - 1

P100,000 P500,000 P2,000,000 - 0

K A = P2,000,000 + + +
0.18 (1 + i)5 - 1 (1 + 0.18)30 - 1

KA = P2,957875.18

OM RC - SV
K B = FC + +
i (1 + i) n - 1

P600,000 P2,000,000 - P200,000

K B = P2,500,000 + +
(1 + i)5 - 1 (1 + 0.18) 40 - 1

KB = P2,968,995.35

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3
 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Example 3: At 6% interest rate, find the capitalized cost of a bridge whose cost is P200 million and
life is 20 years, if the bridge must be partially rebuilt at a cost of P100 million at the end
of each 20 years

Solution:
RC
K = FC +
(1 + i) n - 1

P100M
K = P200M +
(1 + 0.6) 20 - 1

K = P245.31 M

Example 4: Determine the capitalized cost of a research laboratory which requires P5 million for
original construction; P100,000 at the end of every year for first 3 years and then
P120,000 thereafter, for operating expenses and P500,000 every year fir replacement of
equipment.

Solution:

Base on our cash-flow diagram we have

RC
F = FC + PA + PP +
(1 + i ) n - 1

PA =
[
A (1 + i ) - 1
n
]=
[
P100,000 (1 + 0.12 ) - 1
3
]
(1 + i ) (i)
n
(1 + 0.12)3 (0.12)

PA = P240,183.13 Note: “n” in numerator is the number of payment and n in the

denominator is the number of period

This document is the property of PHINMA EDUCATION

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 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

PPerpetuity
Pp =
(1 + i )3

P120,000
PP =
0.12(1 + 0.12)3

Pp = P711,780.25

P500,000
K = P5 million + P240,813.13 + P711,780.25 +
(1 + 0.12)5 - 1

K = P6,607,837.26

ANNUAL COST

The Annual cost of project is the annual interest investment + Annual operation and
maintenance + annual depreciation cost

In accountancy, depreciation refers to two aspects of the same concept: first, the actual
decrease in value of fair value of an asset, such as the decrease in value of factory equipment each
year as it is used and wears, and second, the allocation in accounting statements of the original cost
of the assets to periods in which the assets are used (depreciation with the matching principle).

In relation to capitalized cost (K), where annual cost is the total annually cost of the project
while the capitalized is the total present cost of the project, so we have;

AC
K= ; AC = Ki
i
Therefore;

("#$%&)(
AC = (FC)i + OM +
()*()! $)

Example 1: A machine has an initial cost of P80,000 with a useful life of 20 years with a salvage
value of 20% of the initial cost of the machine. What is the annual cost of the machine if
it has a annually maintenance cost of P6,0000 and an interest rate of 10%?

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 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Solution:
("#$%&)(
AC = (FC)i + OM +
()*()! $)

AC = P80,000(0.10) + P6,000 +
[P80,000 - 0.20(P80,000)](0.10)
(1 + 0.10) 20 - 1

AC = P15,117.42

Example 2: A bridge that was constructed at a cost of P2,000,000 is expected to last 30 years with
an annual maintenance cost of P100,000. In addition, the bridge needed to be repaired
every 5 years at a cost of P500,000. What is the Annual cost of the bridge if the interest
rate is 18% per annum?

Solution:
("#$%&)(
AC = (FC)i + OM +
()*()! $)

AC = P2 million + P100,000 +
(P500,000)(0.18) + ( P 2milllion)(0.18)
(1 + 0.18) - 1
5
(1 + 0.18)30 - 1

AC = P532,41

Activity 3: Skill-building Activities

ITS TIME TO APPLY WHAT YOU LEARN. TRY TO

SOLVE THE GIVEN PROBLEMS.

1. Determine the capitalized cost of a structure that requires an initial

investment of Php 1,500,000 and an annual maintenance of P
150,000.Interest is 15%.

2. A manufacturing plant installed a new boiler at a total cost of

P150,000 and is estimated to have a useful life of 10 years. It is estimated to
have a scrap value at the end of the useful life P5,000. If interest is 12% compounded annually,
determine its capitalized cost.

3. A new engine was installed by a textile plant at a cost of P300,000 and projected to have a
useful life of 15 years. At the end of its useful life, it is estimated to have a salvage value of
P30,000. Determine its capitalized cost if interest rate is 18% compounded annually.

This document is the property of PHINMA EDUCATION

6
 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

4. A concrete pavement on a street would cost P10,000 and would last for 5 years with negligible
repairs. At the end of each years. P1,000 would be spent to remove the old surface before
P10,000 is spent again to lay a new surface. Find the annual cost of the pavement at 5%

5. An asset was purchased for P100,000 and retired at the end of 15 years. with a salvage value of
P4,000. The annual operating cost was P18,000. Determine the annual cost of the asset based
on an interest rate of 8%

6. Determine the capitalized cost of a research laboratory which requires P5,000,000 for original
construction, P100,000 at the end of every year for the first 6 years and then P120,000 each
year thereafter for operating expenses and P500, 000 every 5 years for replacement of with
interest at 12% per annum.

Activity 4: What I Know Chart, part 2

What I Learned
1. _________________________________________________________________________________
_________________________________________________________________________________

2. _________________________________________________________________________________
_________________________________________________________________________________

_________________________________________________________________________________
_________________________________________________________________________________

Activity 5: Check for Understanding

1. Calculate the capitalized cost of a project that has an initial cost of P3, 000,000 and an additional
cost of P100, 000 at the end of every 10 yrs. The annual operating costs will be P100, 000 at the
end of every year for the first 4 years and P160, 000 thereafter. In addition, there is expected to
be recurring major rework cost of P300, 000 every 13 yrs. Assume i =15%

2. Calculate the annual cost of the project that has an initial cost of P2.5 Million and an additional
investment cost of 1 Million at the end of every ten years. The annual operating cost will be
P100,000 at the end of every year for the first four years and P150,000 thereafter. In addition,
there is expected to be recurring major rework cost of P200,000 every 13 years. Assume i =
10%

This document is the property of PHINMA EDUCATION

7
 ECO 017: Engineering Economics
Student’s Activity Sheet #10

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

C. LESSON WRAP-UP

Activity 6: Thinking about Learning

A. Work Tracker

{
*
*
T
B
.

Think about your Learning

1. What motivated you to finish the lesson today?

_______________________________________________________________________
_______________________________________________________________________

2. What could you have done better to improve your learning today?
_________________________________________________________________________
_________________________________________________________________________

KEY TO CORRECTIONS (refer TG’s)

Activity 3

1. P2,500,000.00
2. P218,855.87
3. P324,604
4. P2,490.72
5. P29,536
6. 6,753,650

Activity 5

1. P4,281,934.994
2. P405,051.77
ATTACH ADDITIONAL SHEETS OF PAPER FOR
YOUR SOLUTIONS!

This document is the property of PHINMA EDUCATION

8
 ECO 017: Engineering Economics
Student’s Activity Sheet #11

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Lesson title: GRADIENT Text book: Engineering Economy by

Hipolito B. Sta. Maria, 3rd Ed
Lesson Objectives: References:
At the end of the lesson, you should be able to: 1. Engineering Mathematics vol 2 by
1. Define gradient Gillesania
2. Define different types of gradient
3. Solve problems in gradient

Materials: Ballpoint, Notebook, Calculator

Productivity Tip
When pressed to make a big choice,
people expose their true feelings, and
at times they’ll struggle with
everything they’ve got

A. LESSON

PREVIEW/REVIEW

Introduction

The following topics shall be accomplished in this module:

1. Define the gradient
2. Identify the types of gradient
3. Define the arithmetic and geometric gradient
4. Analyze and Solve economic problem related to gradient

Activity 1: What I Know Chart, part 1

What I Know Questions: What I Learned

(Activity 4)
1. What is gradient in `
economy

This document is the property of PHINMA EDUCATION

1
 ECO 017: Engineering Economics
Student’s Activity Sheet #11

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

2. What is arithmetic
gradient

3 Formula for
arithmetic gradient

B. MAIN LESSON

Activity 2: Content Notes

UNIFORM GRADIENT UNIFORM SERIES
The change in the amount of an account that has uniform increases or decreases applied to it
for some number of compounding periods.

ARITMETHIC GRADIENT

An arithmetic gradient cash flow is one wherein the cash flow changes (increases or decreases)
by the same amount in each cash flow period. In certain, economic analysis problems involves receipt
or disbursement that increase or decrease by a uniform amount each period. For example,
maintenance and repair expenses on specific equipment or property may increase by a relatively
constant amount each period.
Suppose that the maintenance expense on a certain machine is ＄100 at the end of the first
year and increasing at a constant rate of ＄25 each year for 3 years.

This cash flow may be resolved into two components

= +

n=4 A = ＄100 n = 4 G = ＄500 n = 4

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2
 ECO 017: Engineering Economics
Student’s Activity Sheet #11

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

G is known as the uniform gradient

P = PA + PG

é (1 + i )n - 1ù
PA = A ê ú
ë (1 + i ) (i ) û
n

PG = G(1 + i)-2 + 2G(1 + i)-3 + . . . (n-1)G(1 + i)-n

G é (1 + i ) - 1 ù é 1 ù
n
PG = ê - nú ê nú
i ë i û ë (1 + i ) û
Therefore:

é (1 + i )n - 1ù G é (1 + i )n - 1 ù é 1 ù
P=A ê ú+ ê - nú ê nú
ë (1 + i ) (i ) û û ë (1 + i ) û
n
i ë i

é (1 + i )n - 1ù G é (1 + i )n - 1 ù
F = Aê ú+ ê - nú
ë i û i ë i û
Suppose that the maintenance expense on a certain machine is P10,000 at the end of the first year
and decreasing at a constant rate of P2,500 each year for 3 years

= -

é (1 + i )n - 1ù G é (1 + i ) - 1 ù é 1 ù
n
P=A ê ú - ê - nú ê nú
ë (1 + i ) (i ) û û ë (1 + i ) û
n
i ë i

é (1 + i )n - 1ù G é (1 + i )n - 1 ù
F = Aê ú- ê - nú
ë i û i ë i û

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3
 ECO 017: Engineering Economics
Student’s Activity Sheet #11

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

Example: The DPWH expects the cost of maintenance for a particular piece of heavy equipment to
be P50,000 in year 1, P55,000 in year 2, and amounts increasing by P5,000 through
year 10. At an interest rate of 10% per year, the present worth of the maintenance cost
is nearest to:
Solution:

é (1 + i )n - 1ù G é (1 + i )n - 1 ù é 1 ù
P=A ê ú+ ê - nú ê nú
ë (1 + i )n
(i ) û i ë i û ë (1 + i ) û

é (1 + 0.10 )10 - 1 ù P5,000 é (1 + 0.10 )10 - 1 ù éæ 1 öù

P = P50,000 ê ú+ ê - 10ú êçç ÷
10 ÷ú
ë (1 + 0.10 ) (0.10 )û ëêè (1 + 0.10 ) øûú
10
0.10 ë 0.10 û

P = P50,000(6.14457) + P5,000(22.89134)

P = P421,685.07
Example: A loan to be amortized by a group of four end of year payments forming an ascending
arithmetic progression. The initial payment was to be P5,000 and the difference between
successive payments was to be P400. But the loan was renegotiated to provide for the
payment of equal rather than uniformly varying sums. If the interest rate of the loan was
15%, what was the annual payment?

Solution:

= +

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4
 ECO 017: Engineering Economics
Student’s Activity Sheet #11

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

é (1 + i )n - 1ù G é (1 + i )n - 1 ù é 1 ù
P=A ê ú+ ê - nú ê nú
ë (1 + i )n
(i ) û i ë i û ë (1 + i ) û

é (1 + 0.15)4 - 1 ù P 400 é (1 + 0.15)4 - 1 ù éæ 1 öù

P = P5,000 ê ú+ ê - 4ú êçç ÷
4 ÷ú
ë (1 + 0.15 )4
(0.15 ) û 0.15 ë 0 .15 û êëè (1 + 0.15) øúû

P = P5,000(2.8550) + P400(3.7865)
P = P15,789.60

é (1 + i )4 - 1ù
A’ ê ú= P15,789.60
ë (1 + i) (i ) û
4

A’ (2.8850) =P15,789.60

A’ = P5,530.51

Activity 3: Skill-building Activities

ITS TIME TO APPLY WHAT YOU LEARN. TRY TO

SOLVE THE GIVEN PROBLEMS.

1. The cash flow associated with a strip mining operation is expected to

be P2,000,000 in year 1, P1,800,000 in year 2, and amounts
decreasing by P200,000 per year through 8. At an interest rate of 12%
per year, the equivalent annual cash flow is nearest to:

2. The present worth of of P40,000 in the first year and amounts of

increasing by P3,000 per year through five years at an interest rate of
13% per year is?

Activity 4: What I Know Chart, part 2

What I Learned
1. _________________________________________________________________________________
_________________________________________________________________________________

This document is the property of PHINMA EDUCATION

5
 ECO 017: Engineering Economics
Student’s Activity Sheet #11

Name: _________________________________________________________________ Class number: _______

Section: ____________ Schedule: ________________________________________ Date: ________________

2. _________________________________________________________________________________
_________________________________________________________________________________

_________________________________________________________________________________
_________________________________________________________________________________

Activity 5: Check for Understanding

1. The present worth of of P40,000 in the first year and amounts of decreasing by P3,000
per year through five years at an interest rate of 13% per year is?

C. LESSON WRAP-UP

Activity 6: Thinking about Learning

A. Work Tracker

{
*
*
T
B
.

Think about your Learning

1. What motivated you to finish the lesson today?

_______________________________________________________________________
_______________________________________________________________________

2. What could you have done better to improve your learning today?
_________________________________________________________________________
_________________________________________________________________________

KEY TO CORRECTIONS (refer TG’s)

Activity 3

1. P1,417,371.218
ATTACH ADDITIONAL SHEETS OF
2. P159,229.98 PAPER FOR YOUR SOLUTIONS!

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6