Introduction to

Engineering
Economics

ENGR. MJC
 Engineering Economics

Eco no mics is a social science concerned with

the production, distribution, and consumption
of goo ds and services.

Engineering Eco no mics is a subject of vital importance to

Engineers. It is the analysis and evaluatio n of the factors
that will affect the economic success of engineering
projects to the end that a recommendation can be made
which will insure the best use of capital of the project.
 Consumer and
Producer Goods and
Services
Co nsumer go ods and services are those
pro ducts and services are directly
co nsumed or use by a co nsumer after its
purc hase and satisfy their wants

Producer go ods and services are used by

pro ducers to pro duced co nsumer go ods
and services or other pro ducer go ods

Co nsumer Goods Producer Goods

• Choosing the best design for a high-
efficiency gas furnace
Economic Environment
• Selecting the most suitable robot for
a welding operation on an
automotive assembly line

• Making a recommendation about

whether jet airplanes for an
overnight delivery service should be
purchased or leased

• Considering the choice between

reusable and disposable bottles for
high-demand beverages
 The prices of goods and services
can go upward or downward,
and therefore, the purchasing
Purchasing power of money can change

Power of with time.

Money • Price Reductions : Caused by

increases in productivity and
availability of goods.

• Price Increases : Caused by

government policies, price
support schemes, and deficit
financing.
 A key objective in engineering applications is
the satisfaction of human needs, which will
Classification of Cost nearly always imply a cost.

• First (or Initial) Cost : Cost to get activity started such

as property improvement, transportation,
installation, and initial expenditures.

• Operation and Maintenance Cost : They are

experienced continually over the useful life of the
activity.

• Fixed Cost : Fixed costs arise from making

preparations for the future, and includes costs
associated with ongoing activities throughout the
operational life-time of that concern.
Supply and Demand
• Demand curve shows the number of units people
are willing to buy and cost per unit (decreasing
curve).
• Supply curve shows the number of units that
vendors will offer for sale and unit price (increasing
curve).
• The intersection defines the exchange price.
• Elasticity of demand. Price changes and their
effect on demand changes. It depends on whether
the consumer product is a necessity or a luxury.
• Law of diminishing return. A process can be
improved at a rate with a diminishing return.
Example: cost of inspection to reduce cost of repair
and lost production.
Simple Interest and
Cash Flow Diagram
 Simple Interest Formulas:

Simple Interest is calculated using the

principal only. Ignoring any interest that had
been accrued in preceding periods. In
practice, simple interest is paid on short-term
loans in which the time of the loan is
measured in days.
Where:

I = interest
P = principal or present worth
n = number of interest period in years
i = interest rate per interest period
F = future worth
Problem 1 Problem 2

Find the interest on Php Dave borrows Php 1,500.00 to repair his
6,800.00 fo r 3 years at 11% closet. He will pay off the loan after 3
simple interest. years. By paying back the principal plus
3.5% interest fo r each year. How much he
payback altogether?
 Problem 1 Problem 2

Find the interest on Php Dave borrows Php 1,500.00 to repair his
6,800.00 fo r 3 years at 11% closet. He will pay off the loan after 3
simple interest. years. By paying back the principal plus
3.5% interest fo r each year. How much he
payback altogether?

Ans: Php 2,244.00 Ans: Php 1,657.50

 Problem 3 Problem 4

Determine the exact simple What is the principal amount if the

interest on Php 500.00 fo r the amount of interest at the end of 2 1/2 year
period from January 10, 1996 is PHP 4,500.00 fo r a simple interest of 6%
to December 31, 1997 at 16% per year?
interest rate
 Problem 3 Problem 4

Determine the exact simple What is the principal amount if the

interest on Php 500.00 fo r the amount of interest at the end of 2 1/2 year
period from January 10, 1996 is PHP 4,500.00 fo r a simple interest of 6%
to December 31, 1997 at 16% per year?
interest rate

Ans: Php 157.82 Ans: Php 30,000.00

 Problem 5
Yo u are tired at the end of the term and decide to borrow Php 500.00 to go on a
trip to Star City. Yo u go to the bank and borrow the money at 11% fo r 2 years.

a) Find the interest you will pay b) How much will you have to pay the
on the loan. bank at the end of the two years?
 Problem 5
Yo u are tired at the end of the term and decide to borrow Php 500.00 to go on a
trip to Star City. Yo u go to the bank and borrow the money at 11% fo r 2 years.

a) Find the interest you will pay b) How much will you have to pay the
on the loan. bank at the end of the two years?

Ans: Php 110.00 Ans: Php 610.00

 Problem 6

a) Find the interest on a loan of Php b) How much wo uld it cost to

2,500.00 that is borrowed at 9% fo r 7 repay the loan fo r 7 months?
months.
 Problem 6

a) Find the interest on a loan of Php b) How much wo uld it cost to

2,500.00 that is borrowed at 9% fo r 7 repay the loan fo r 7 months?
months.

Ans: Php 131.25 Ans: Php 2,631.25

 Problem 7 Problem 8

Rent borrowed P10,000 from How long must a Php 40,000.00 note
his friend and agrees to pay at bearing 4% simple interest run to amount
the of 90 days under 8% to P41,350.00?
simple interest rate.
 Problem 7 Problem 8

Rent borrowed P10,000 from How long must a Php 40,000.00 note
his friend and agrees to pay at bearing 4% simple interest run to amount
the of 90 days under 8% to P41,350.00?
simple interest rate.

Ans: Php 10,200.00 Ans: 303.75 or 304 days

Cash Flow Diagram

A cash-flo w diagram is simply a graphical representation

of cash flo w drawn on a time scale. Cash-flo w diagram fo r
economic analysis problems is analo gous to that of free
body diagram fo r mechanics problems. Cash flo w
diagrams helps to visualize and simplify problems having
diverse receipts and disbursements.
 Problem 1

An electronic equipment cost P30,000. Maintenance cost is P3,000, each year. The
device will generate revenues of P15,000, each year fo r 5 years after which the
salvage value is expected to be P12,000
 Problem 2

A student deposits P1,500 in the bank today. He deposits another P3,000 after two
years, and he withdraw an amount of P5,000 after five years.

Determine the remaining balance in the stated student account if the effective
annual interest rate is 10%.

Ans: Php 1,240.00

 Problem 3

A machine cost P120,000, maintenance cost of P5,000 every two years. The device
will generate revenues of P25,000, each year fo r 6 years after which the salvage
value is expected to be P20,000. Co nstruct the cashflow diagram
Compound Interest
 Where:
Compound Interest
P = principal or present worth
F = Future worth
Compound interest is an important concept
r = nominal interest rate (stated
to understand when managing your finances.
compounded unterest)
It can help you earn a higher return on your
t = no. of year of the money is saved,
savings and investments, but it can also work
invested or borrowed
against you when you're paying interest on a
n = total number of compounding periods
loan.
m = no. of compounding peiod per year
Formulas: m = 1, if compounded annually
m = 2, if compounded semi-annually
m = 4, compounded quarterly
m = 6, if compounded bimonthly
m = 12, if compounded monthly
m = 26, if compounded fortnighly
 Problem 1 Problem 2

The amount of Php 2,825.00 in Gwen is expecting to receive Php 450,000

8 years at 5% compounded at the end of 15 years. If the money is
quarterly is? wo rth 14% compounded semi-annually,
how much is its wo rth at present?

Ans: Ans:
 Problem 1 Problem 2

The amount of Php 2,825.00 in Gwen is expecting to receive Php 450,000

8 years at 5% compounded at the end of 15 years. If the money is
quarterly is? wo rth 14% compounded semi-annually,
how much is its wo rth at present?

Ans: Php 4,203.97 Ans: Php 59,115.20

 Problem 3 Problem 4
Larry invested Php 27,000.00 in a A sum of Php 10,000 is invested now with an
savings account that pays an interest rate is 13.5% compounded annually
annual interest rate of 1.8%. The and left fo r eight years at which time the
savings account is set to principal is withdrawn. Afterwards, the
compound quarterly. How much is interest that has accrued is left fo r another
in Larry’s account after 5 years? eight years. This time, the new interest rate is
15% compounded bimonthly, what will be the
withdrawal amount of at the end of 16 years?

Ans: Ans:
 Problem 3 Problem 4
Larry invested Php 27,000.00 in a A sum of Php 10,000 is invested now with an
savings account that pays an interest rate is 13.5% compounded annually
annual interest rate of 1.8%. The and left fo r eight years at which time the
savings account is set to principal is withdrawn. Afterwards, the
compound quarterly. How much is interest that has accrued is left fo r another
in Larry’s account after 5 years? eight years. This time, the new interest rate is
15% compounded bimonthly, what will be the
withdrawal amount of at the end of 16 years?

Ans: Php 29,536.74 Ans: Php 57,382.55

 Problem 5 Problem 6
Jake invests in an annuity with Robin invested Php 12,000.00 in a bond
an annual fixed interest rate of fund with an annual interest rate of 6%
6.2%. The annuity compounds compounded quarterly. What is the
monthly. If after 10 years, the account balance after 11 quarters?
account balance is Php 27,839.45
how much was the beginning
investment?

Ans: Ans:
 Problem 5 Problem 6
Jake invests in an annuity with Robin invested Php 12,000.00 in a bond
an annual fixed interest rate of fund with an annual interest rate of 6%
6.2%. The annuity compounds compounded quarterly. What is the
monthly. If after 10 years, the account balance after 11 quarters?
account balance is Php 27,839.45
how much was the beginning
investment?

Ans: Php 15,000.00 Ans: Php 14,135.39

End
of
Discussion