CBE5 Module 3

LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)

AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY

AGUSAN
MAIN CAMPUS, BUNAWAN AGUSAN DEL SURDEL SUR STATE COLLEGE
OF AGRICULTURE & TECHNOLOGY
MAIN CAMPUS, BUNAWAN, AGUSAN DEL SUR
Learning
MODULE 2 SECOND YEAR

ENGINEERING ECONOMICS
BS CIVIL ENGINEERING
COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

INSTRUCTIONAL MATERIALS DEVELOPMENT © 2022
MAIN CAMPUS, BUNAWAN AGUSAN DEL SUR
FOREWORD
Preliminaries
Students, welcome to this Learning Module. Since you chose distance learning modality, you will be
using this material to walk you through the concepts of Science, technology and society (STS) to enable you
to face the realities brought about by science and technology, with all its socio-political, cultural, economic,
and philosophical underpinnings at play. The organization is made in a way that you will enjoy engaging in the
tasks arranged in a certain level of difficulty. This learning module is self-instructional and allows you to learn
in your own space and pace. So, relax and just enjoy doing the tasks!
To get the most out of this module, here are a few reminders:
A. Kindly take your time in reading the tasks and the topic.
B. For reference and clarification, you may take down notes. You may also discuss these points with your
instructor through Facebook Messenger and other online platforms (in case possible).
C. Accomplish and answer all tasks. The activities are designed to enhance your understanding of the ideas
and concepts being discussed. The tasks at the end of each module will give you an idea how well you
understand the lesson. Review the lessons if necessary, until you have achieved a sufficient level of
proficiency.
D. Write all your answers/responses in the spaces provided in this module. This shall be part of your formative
and summative evaluations.
E. Always keep safe.
Overview of the Module

This learning module aims to (1) enhance your competence in language and communication skills; (2)
serve as a motivation tool to improve yourself; (3) provide learning experiences that will add information to
your knowledge; and (4) contribute to your goals as a student.
The module follows the phases of 5Es Instructional Model, namely Engage, Explore, Explain,
Elaborate and Evaluate. Each lesson begins with the objectives and follows the five (5) parts vis-a-vis the
phases of 5Es Instructional Model.
The READY part is the Objectives to be achieved in each module. This part states the expectation of
the module in line with what you should know, understand or perform. The START section which is the
Engage phase starts the process of understanding the topic. This will serve as a drill. In the DISCOVER and
the Explore phase of the lesson, it relates to your common base of experience or prior knowledge like hands-
on or minds-on tasks. LEARN corresponds to the Explain phase. This will allow you to explain the concepts
you have been exploring as you will be provided with explanations about the topic. This part serves as the
discussion. In PRACTICE phase, you will practice what you have learned since this is the Elaborate phase.
You will engage in different formative tasks. EVALUATE or the Evaluate phase encourages you to assess
your understanding and abilities on the topic. This will serve as a summative assessment in understanding the
target concept or skill.
This module contains features that you need to understand as you undertake each task. There are
activities that necessitate the presence of Internet to get you to online works. This is done to tract your
progress and status with regards the module.
At the end of each lesson, answer keys to pre-assessment and practice tests are given. To really test
yourself and measure your understanding on the concept presented in each lesson, you are encouraged to
answer the activities in your own pace before counting on the answer keys through checking your own work.
The modes of delivery will be in the form of self-directed study. You are also encouraged to visit the
instructor concerned for assistance during office hours. If the office hours do not meet your schedule, notify
the instructor through Facebook or Messenger. These platforms will also be used as a communication tool
and information portal for you to access module materials, project briefs, assignments and announcements.
It is hoped that this module will achieve its aim of producing alternative learning experience on the
target concepts necessary to the development of communication abilities to effectively meet the demands of
education amidst this trying pandemic outbreak.

MODULE CONTENT
Foreword
Introduction to College Vision, Mission, Goals and Quality Policy

History of ASSCAT | ASCAT VMGQ | Institutional Outcome | Grading System | Conclusion
I. Introduction
1. Principles of Engineering
2. Engineering Economics and Design Process
3. Cost Concept for Decision Making
4. Present Economic Studies
II. Money-Time Relationships and Equivalence

1. Interest and time value of money
2. Concepts of equivalence
3. Cash flows
III. Economic study methods

1. Minimum attractive rate of Return (ROR)
2. Basic economic methods: present worth, future worth. Annual worth, internal rate of return (IRR)
3. Other methods: discounted payback period, benefit/ cost ratio
IV. Decisions under Certainty

1. Evaluation of mutually exclusive alternatives
2. Evaluation of independent projects
3. Effects of inflation
4. Depreciation and after-tax economic analysis
V. Decision recognizing risk

1. Expected monetary value of alternatives
2. Discounted decision tree analysis
VI. Decision admitting uncertainty

1. Sensitivity analysis
2. Decision analysis
models

Lesson 2
Money-Time Relationships and Equivalence
READY
LESSON OBJECTIVES
Upon accomplishing this module, students will be able to:
A. Evaluate and report the time value of a structure
B. Compute the interest and equivalence value of a loan or an investment
C. Report the Cash flow of a given business activity
LEARNERS
Second Year Students
TIME FRAME
This module will be accomplished approximately in 6 hours within 2 weeks to complete all the activities
recommended. This is a distance learning program, thus the time frame is flexible and largely self-directed.
REFERENCE
Vazpayee, S., Sarder, M.D., Fundamentals of Economics for Applied Engineering, 2nd Ed., 2020, Taylor &
Francis Group, LLC.
White, J., et.al, Fundamental of Engineering Economic Analysis, 2020, John Wiley & Sons, Inc.
Khan, Z., et.al, Principles of Engineering Economics with Applications, 2nd Ed. 2018, Cambridge University
Press
Yates, J.K., Engineering Economics, 2017, Taylor & Francis, LLC.
Sharma, K. Introduction to Engineering Economics, 2015, Cognella Academic Publishing

START
ACTIVITY 1: The cost of the Suez Canal blockage
Ever Given, a 224,000-ton container ship registered in Panama, ran aground in the Suez Canal on March 23,
2021 as it was en route from China to the Netherlands.
As the blockage drags on for days, some are ringing alarm bells over how this could impact the economy and its
increasingly connected global supply chains. Approximately 1.9 million barrels of oil are routed through the Suez Canal
each day. In addition to oil, a myriad of other goods float through the canal every day -- including apparel, footwear,
accessories and home goods.
The majority of container ships passing through the canal are headed from Asia to Europe, though some do go
on to the eastern coast of the U.S.
This incident halted almost completely the operations in Suez Canal which can be translated to tremendous loss
of between US$12 and US$15 million in revenues for each day. In effect, the Egyptian authorities (who operates the
canal) are seeking US$900 million in compensation. (BBC News)
ANSWER THE FOLLOWING QUESTIONS AS BEST AS YOU CAN.
1. Suppose that in response to this demand, Ever Given will make payments into a fund to pay for some of
the compensation to the Egyptian authorities resulting from the blockage incident.
If Ever Given will start paying $300M on the second quarter of 2021 (June) and will then on pay $300M
per quarter for the opportunity cost of capital (interest rate) of 3% per quarter, what is the equivalent value
of this payment stream at the beginning of the second quarter of 2021?

(Check your answers using Answers Key at the end part of the module.)
DISCOVE
R
ACTIVITY 2: Understanding the Value of Time and Money
Matching Type: Match each word with the correct definition.
___1. Exchange price between current and a. time value of money

future value of money. b. compound interest
___2. Interest added to principal, and paid as c. simple interest
additional interest. d. discounting
___3. Only original principal earns interest. e. compounding
___4. Money is worth more at one time than at f. interest rate
another time.
___5. Process of calculating compound interest.
___6. Compares present value of money that is
received in the future.
Fill-in-the-blank: Complete the following statements.
1. Discount is a result of an investor waiting to receive __________ payment rather than receiving it now.
2. __________ is a way to determine a future salary given an annual increase.
3. Interest rates represent __________ and __________.
4. Interest paid to customers depositing money in a financial institution is to compensate _____ and ______
from other investments.

LEARN
ACTIVITY 3: EXPAND YOUR KNOWLEDGE
If you would know the value of money, go and try to borrow some.
—Benjamin Franklin
LESSON 2: THE TIME VALUE OF MONEY

The term Capital refers to wealth in the form of money Money changes in value because of
or property that can be used to produce more wealth. The the following:
majority of engineering economy studies involve commitment of ✓ interest rates,
capital for extended periods of time, so the effect of time must ✓ inflation (or deflation)
be considered. In this regard, it is recognized that a P1.00 today
✓ currency exchange rates
is worth more than P1.00 one or more years from now because
of the interest (or profit) it can earn.
Therefore, money has a time value!
It has been said that often the riskiest thing a person can do with money is nothing! Money has value,
and if money remain uninvested (like in a large bottle), value is lost.
Why Consider Return to Capital?

Thefollowing are fundamental reasons why return to capital in the form of interest and profit is an
essential ingredient of engineering economy studies.
✓ First, interest and profit pay the providers of capital for forgoing its use during the time the capital is being
used.
Example: Supplier can realize a return on capital acts as an incentive to accumulate capital by
savings, thus postponing immediate consumption in favor of creating wealth in the future.
✓ Second, interest and profit are payments for the risk the investor takes in permitting another person, or an
organization, to use his or her capital.
Example: If capital is invested in a project, investors would expect, as a minimum, to receive a return
at least equal to the amount they have sacrificed by not using it in some other available opportunity of
comparable risk.
In summary, whenever capital is required in engineering and other business projects and ventures, it
is essential that proper consideration be given to its cost (i.e., time value).
Let’s talk about the Origins of Interest!

- Like taxes, interest has existed in Babylon in 2000 B.C. Interest was paid in money or in the form of grain
or other goods.
- Interest became so well established that a firm of international bankers existed in 575 B.C., they charged
high interest rates for the use of its money for financing international trade. Typical annual rates of interest
of 6% to 25% up to as high as 40%.
- During the Middle Ages, interest taking on loans of money was generally outlawed on scriptural grounds.
- In 1536, interests were reestablished as it became viewed as an essential and legal part of doing
business. Eventually, published interest tables became available to the public.

TYPES OF INTEREST
- When the total interest earned or charged is linearly proportional to the initial amount of
the loan (principal)
- this interest is not used frequently in modern commercial practice
SIMPLE
INTEREST Simple Interest is computed using the formula:
I = (P) x (N) x (i) Equation 5-1
where P = principal amount lent or borrowed;

N = number of interest periods (e.g., years)
i = interest rate per interest period
Example: If you loan P1,000 from your classmate and agreed to pay in 3 months at a simple interest
rate of 10% per month.
The interest (I) would be:
I = P1,000 x (3 months) x (0.10 per month)
= P300
Therefore, the total amount you owed after 3 months would be P1,000 + P300 = P1,300.
- Whenever the interest charge for any interest period is based on the remaining principal
amount plus any accumulated interest charges up to the beginning of that period, the
interest is said to be compound.
COMPOUND
Example: The compounding of interest can be seen in the following table for P1,000 you loaned for 3
INTEREST months at an interest rate of 10% compounded each month.
Month Amount owed at the beginning Interest charged for Amount owed at the
of the month the month end of the month
1st month P1,000 I = P1,000 x 3 x (0.10) P1,000 + 100
= P100 = P1,100
2nd month P1,100 I = P1,100 x 3 x (0.10) P1,100 + 110

= P110 = P1,210
3rd month P1,210 I = P1,210 x 3 x (0.10) P1,210 + 121

= P121 = P1,331
As you can see, a total of P1,331 would be due for repayment at the end of the third
Month. This is bigger than our computation using Simple interest!
See Figure 5.1 below to see the graphical comparison of simple interest and compound
interest.

Figure 5.1. Illustration of Simple versus Compound Interest

THE CONCEPT OF EQUIVALENCE
✓ Alternatives should be compared when they produce similar results, serve the same purpose, or
accomplish the same function.
✓ It should consider the comparison of alternative options, or proposals, by reducing them to an equivalent
basis that is dependent on:
(1) the interest rate
(2) the amounts of money involved
(3) the timing of the monetary receipts or expenses
Example:
Suppose your Sari-sari Store have a P17,000 balance on your credit from RC Grocery. You decide to repay the P17,000
debt in 4 months. An unpaid credit balance at the beginning of a month will be charged interest at the rate of 1% by the
RC Grocery.
For this situation, we are going to prepare three plans to repay the $17,000 principal plus interest owed. These three plans
are illustrated in a Table below and we will evaluate if they are equivalent (i.e., the same) when the interest rate is 1% per
month on the unpaid balance of principal.
Plan 1 – Pay interest only every month, then pay the principal at the end of the 4th month.
- You will pay P170 per month, and pay the entire P17,000 after the 4th month.
- Because interest does not accumulate here, compounding of interest is not present in this situation. You will pay a
total of P17,680 after 4 months.
Plan 2 – Pay by instalments in equal amount for 4 months.

- You will pay P4,357.10 per month.
- You should observe that interest is being compounded and that the P17,000 principal is completely repaid over the
four months.
- You will pay a total of P17,427 after 4 months.
Plan 3 – Pay all debts at end of fourth month.

- You will pay a lump sum of P17,690 after 4 months.

***Going back to the concept of economic equivalence, the example showed same interest rate on all choices
yet pays differently on each choice. What varies among the three plans is the rate at which principal is repaid
and how interest is repaid.
CASH-FLOW DIAGRAMS AND TABLES

Take note of following notations for the calculation of interests:
i = effective interest rate per interest period;

N = number of compounding (interest) periods;
P = present value of money;
F = future sum of money;
A = end-of-period cash flows (or equivalent end-of-period
values)
DEFINE CASH FLOW

- is the increase or decrease in the amount of money a business, institution, or individual has.
- In finance, the term is used to describe the amount of Cash Inflow that is generated and Cash Outflow
which is the amount consumed or spent in a given time period.
CASH FLOW = + Cash Inflow - Cash Outflow
Why Cash Flow monitoring is important?

- The use of cash-flow (time) diagrams or tables is strongly recommended for situations in which the
analyst needs to clarify or visualize what is involved when flows of money occur at various times.
DEFINE CASH FLOW DIAGRAM

- This diagram is a visual representation of income and expenses over some time interval. The diagram
consists of a horizontal line with markers at a series of time intervals. At appropriate times, expenses and
costs are shown.
Cash Inflows
(Arrow pointing up)
Cash Outflows (Arrow pointing down)
Example 5-1: CASH-FLOW DIAGRAMMING
Before evaluating the economic merits of a proposed investment, a Construction Company insists that its engineers
develop a cash-flow diagram of the proposal. An investment of P10,000 can be made that will produce uniform annual
revenue of P5,310 for five years and then have a market (recovery) value of P2,000 at the end of year (EOY) five.
Annual expenses will be P3,000 at the end of each year for operating and maintaining the project.
Draw a cash-flow diagram for the five-year life of the project. Use the corporation’s viewpoint.
Solution:
Notice that the beginning of a given
year is the end of the preceding year.
For example, the beginning of year
two is the end of year one.

Example 5-2: DEVELOPING A NET CASH-FLOW TABLE

In a company’s renovation of a small office building, two feasible alternatives for upgrading the heating, ventilation,
and air conditioning system have been identified. Either Alternative A or Alternative B must be implemented.
The costs are as follows:
Alternative A Rebuild (overhaul) the existing HVAC system
• Equipment, labor, and materials to rebuild ........... P18,000
• Annual cost of electricity ............................. 32,000
• Annual maintenance expenses ...................... 2,400
Estimated market value after 8 years ...................... 2,000
Alternative B Install a new HVAC system that utilizes existing ductwork
• Equipment, labor, and materials to install ............ P60,000

• Annual cost of electricity ............................. 9,000
• Annual maintenance expenses ....................... 16,000
• Replacement of a major component four years hence . . 9,400
Estimated market value after 8 years ...................... 8,000
(1) Use a cash-flow table and end-of-year convention to tabulate the net cash flows for both alternatives.
(2) Determine the annual net cash-flow difference between the alternatives (B − A).
Solution:
(1) Cash Flow Table
On the basis of these results, several points can be made:

✓ Doing nothing is not an option—either A or B must be selected;
✓ Even though positive and negative cash flows are included in the table, on balance we are investigating two “cost-
only” alternatives;
✓ A decision between the two alternatives can be made just as easily on the difference in cash flows as it can on the
stand-alone netcash flows for Alternatives A and B;
✓ Alternative B has cash flows identical to those of Alternative A, except for the differences shown in the table, so if the
avoidable difference can “pay its own way,” Alternative B is the recommended choice;
✓ Cash-flow changes caused by inflation or other suspected influences could have easily been inserted into the table
and included in the analysis; and
✓ It takes six years for the extra P42,000 investment in Alternative B to generate sufficient cumulative savingsin annual
expenses to justify the higherinvestment.

NOTE: Cash-flow tables are invaluable when using a spreadsheet to model engineering economy problems.
Relating Present and Future Equivalent Values of Single Cash Flows
A. Finding F when given P
Computing for F will use the equation below:

F = P x (1 + i)N Equation 5-2
The quantity (1 + i)N is commonly called the single payment compound amount factor. Numerical
values for this factor are given in the second column from the left in the tables of Appendix C for a wide range
of values of i and N. (See Appendix C as attachment to this module.)
This quantity can also be written as (F/P, i%, N), thus

. (1 + i)N = (F/P, i%, N)
Hence, Equation 5-2 can also be expressed as:

F = P x (F/P, i%, N) Equation 5-3
Example 5-3: FUTURE EQUIVALENT OF A PRESENT SUM
Suppose that you borrow P8,000 now, promising to repay the loan principal plus accumulated interest in four years
at i = 10% per year.
How much would you repay at the end of four years?
Solution: Notice that the

beginning of a
given year is the
end of the
preceding year.
For example, the

beginning of year
two is the end of
year one.
In general, we see that F = P x (1+i)N, and the total amount to be repaid is P11,713.

In general, a good way to interpret a relationship such as Equation 5-3 is that the calculated amount,
F, at the point in time at which it occurs, is equivalent to the known value, P, at the point in time at which it
occurs, for the given interest or profit rate, i.
B. Finding P when given F
From Equation 5-2, F = P(1 + i)N. Solving this for P gives the relationship
Equation 5-4
The quantity (1 + i)−N is called the single payment present worth factor. Numerical values for this
factor are given in the third column of the tables in Appendix C for a wide range of values of i and N.
We shall also use the functional symbol (P/F, i%, N) for this factor. Hence,
P = F x (P/F, i%, N) Equation 5-5
Example 5-4: PRESENT EQUIVALENT OF A FUTURE AMOUNT OF MONEY
An investor (owner) has an option to purchase a tract of land that will be worth P10,000 in six years. If the value of the
land increases at 8% each year, how much should the investor be willing to pay now for this property?
Solution:
The purchase price can be determined from Equation 5-5 and Table C-11 in Appendix C as follows:
P = P10,000 x (P/F, 8%, 6)

P = P10,000 x (0.6302)
= P6,302.
Thus, the investor should find a tract of land now with a worth of P6.302.
Another example of this type of problem, together with a cash-flow diagram and solution, is given in
Table 1.
See Table 1 below.

TIPS: Three (3) simple rules apply when performing arithmetic calculations with cash flows:
Rule A. Cash flows cannot be added or subtracted unless they occur at the same point in time.
Rule B. To move a cash flow forward in time by one time unit, multiply the magnitude of the cash flow
by (1 + i), where i is the interest rate that reflects the time value of money.
Rule C. To move a cash flow backward in time by one time unit, divide the magnitude of the cash flow
by (1 + i)
C. Finding the Interest Rate given P, F. and N

We can easily solve for the interest rate (i), using Equation 5-2 :
Equation 5-5
Inflation is another example of when it may be necessary to solve for an interest rate. Suppose you
are interested in determining the annual rate of increase in the price of gasoline. Given the average prices in
different years, you can use the relationship between P and F to solve for the inflation rate.
Example 5-5: THE INFLATING PRICE OF GASOLINE
The average price of gasoline in 2005 was P2.31 per gallon. In 1993, the average price was P1.07. What was the average
annual rate of increase in the price of gasoline over this 12-year period?
Solution:
With respect to the year 1993, the year 2005 is in the future.
Thus, P = P1.07, F = P2.31, and N = 12.
Using Equation 5-6, we find i = 12√2.31/1.07 − 1 = 0.0662 or 6.62% per year
Thus, the average annual rate of increase in the price of gasoline over this 12-year period is 0.62%

D. FINDING N WHEN GIVEN P, F, AND I
We can use the equivalence relationship given in Equation 5-2 to obtain an expression for N:
F = P(1 + i) N
(1 + i) N = (F/P)
Using logarithms,
N log(1 + i) = log(F/P)
And
Equation 5-7
Example 5-6: WHEN WILL GASOLINE COST $5.00 PER GALLON?
In the last Example 5-5, the average price of gasoline was given as P2.31 in 2005. We computed the average annual rate
of increase in the price of gasoline to be 6.62%.
If we assume that the price of gasoline will continue to inflate at this rate, how long will it be before we are paying P5.00
per gallon?
Solution:
We have P = $P.31, F = P5.00, and i = 6.62% per year. Using Equation 5-7, we compute:
Thus, if gasoline prices continue to increase at the same rate, we can expect to pay P5.00 per gallon in 2017 or 12 years
from 2005.
Relating a Uniform Series (Annuity) to Its Present and Future Equivalent Values
General Cash-Flow Diagram Relating Uniform Series (Ordinary Annuity) to Its Present
Equivalent and Future Equivalent Values
The general cash-flow diagram shown above shows a series of uniform (equal) receipts, each of
amount A, occurring at the end of each period for N periods with interest at i% per period. Such a uniform
series is often called an Annuity.
It should be noted that the formulas and tables to be presented are derived such that A occurs at the
end of each period, and thus:

1. P (present equivalent value) occurs one interest period before the first A (uniform amount),
2. F (future equivalent value) occurs at the same time as the last A, and N periods after P, and
3. A (annual equivalent value) occurs at the end of periods 1 through N, inclusive.
A. Finding F when Given A

From the General Cash flow diagram shown above, the value F can be computed by:
which reduces to
Equation 5-8
The quantity {[(1 + i)N − 1]/i} is called the uniform series compound amount factor. Numerical values
for the uniform series compound amount factor are given in the 4th column of the tables in Appendix C for a
wide range of values of i and N.
Equation 5-8 could also be written as:
F = A x (F/A, i%, N) Equation 5-9
Example 5-7: FUTURE VALUE OF A COLLEGE DEGREE
A college degree is worth an extra P23,000 per year in income (A) compared to what a high-school graduate makes.
If the interest rate (i) is 6% per year and you work for 40 years (N), what is the future compound amount (F) of this extra
income?
Solution:
The future equivalent is the amount that can be withdrawn after the 40th deposit is made.
The Cash Flow Diagram is written as:
Notice that the future equivalent occurs at the same time as the last deposit of P23,000.
F = P23,000(F/A, 6%, 40), Refer to the 4th column of Table C-9 of the Appendix C for the
values of (F/A, 6%, 40).
= P23,000(154.762)
= P3,559,526
Thus “Get your college degree!”
Example 5-8: BECOME A MILLIONAIRE BY SAVING P1.00 A DAY!
To illustrate further the amazing effects of compound interest, we consider the credibility of this statement: “If you are 20
years of age and save P1.00 each day for the rest of your life, you can become a millionaire.”
Let’s assume that you live to age 80 and that the annual interest rate is 10% (i = 10%).
Under these specific conditions, we compute the future compound amount (F) to be.

Solution:
F = P365/year (F/A, 10%, 60 years), Refer to the 4th column of Table C-13 of the Appendix C for the
values of (F/A, 10%, 60).
F = P365 (3,034.81)
F = P1,107,706.
Thus, the statement is true for the assumptions given! The moral is to start savings early and let the “magic” of
compounding work on your behalf!
B. Finding P when Given A

We can determine P using Equation 5-2, thus
Equation 10
uniform series present worth

factor
The uniform series present worth factor numerical values for this factor are given in the 5th column of
the tables in Appendix C for a wide range of values of i and N.
Equation 10 can also be written as,
P = A(P/A, i%, N) Equation 11
Example 5-9: PRESENT EQUIVALENT OF AN ANNUITY (UNIFORM SERIES)
A micro-brewery is considering the installation of a newly designed boiler system that burns the dried, spent malt and
barley grains from the brewing process. The boiler will produce process steam that powers the majority of the brewery’s
energy operations, saving P450,000 per year over the boiler’s expected life of 10 years.
If the interest rate is 12% per year, how much money can the brewery afford to invest in the new boiler system?
Solution:
The increase in annual cash flow is P450,000, and it continues for 10 years at 12% annual interest. The upper limit on
what the brewery can afford to spend on the new boiler is:
P = P450,000 (P/A, 12%, 10), Refer to the 5th column of Table C-14 of the Appendix C for the
values of (P/A, 12%, 10).
= P450,000 (5.6502)
= P2,542,590

Thus, the brewery can spend P2,542,590.
Example 5-10: HOW MUCH IS A LIFETIME OIL CHANGE OFFER WORTH?
“Make your best deal with us on a new automobile and we’ll change your oil for free for as long as you own the car!”
If you purchase a car from this dealership, you expect to have four free oil changes per year during the five years you
keep the car. Each oil change would normally cost you P30.
If you save your money in a mutual fund earning 2% per quarter, how much are the oil changes worth to you at the time
you buy the car?
Solution:
The interest rate is 2% per quarter, and a total of (4 oil changes/year × 5 years) = 20 oil changes (cash flows) are
anticipated.
P = P30 x (P/A, 2%, 20) Refer to the 5th column of Table C-5 of the Appendix C for the
values of (P/A, 2%, 20).
= P30 x (16.3514)
= P490.54
Thus, Now you are in a position to determine how great of a deal you are being offered.
If the best price of another dealership is more than P490.54 cheaper than what you are being offered at this dealership,
maybe this deal isn’t so great
C. Finding A when Given F

Equation 12
Sinking fund factor
The Sinking Fund factor numerical values for this factor are given in the 6th column of the tables in
Appendix C for a wide range of values of i and N.
A = F x (A/F, i%, N) Equation 13

For examples of this type of problem, together with a cash-flow diagram and solution, see Table 1.
D. Finding A when Given P

Equation 14
Capital Recovery factor
The Capital Recovery factor numerical values for this factor are given in the 7th column of the tables
in Appendix C for a wide range of values of i and N.
A = P x (A/P, i%, N) Equation 15
Example 5-11: COMPUTING YOUR MONTHLY LOAN PAYMENT
You borrow P15,000 from a Credit Company to purchase a bike. The interest rate on your loan is 0.25% per month∗ and
you will make a total of 36 monthly payments.
What is your monthly payment?
Solution:
The amount of payment for the bike is easily calculated using Equation 5-15:
A = P15,000 x (A/P, 0.25%, 36), Refer to the 7th column of Table C-1 of the Appendix C for the
values of (P/A, 0.25%, 36).
= P15,000 x (0.0291)
= P436.50 per month
Thus, the monthly car payment is P436.50.
For other examples of this type of problem, together with a cash-flow diagram and solution, see Table 1.
E. Finding Interest Rate when Given P, F and A

As was the case for an unknown N, there is no single equation to determine i. However, we can use the
known relationships between i, A, F, and N and the method of linear interpolation to approximate the interest
rate.
See example below.
Example 5-12: FINDING THE INTEREST RATE TO MEET AN INVESTMENT GOAL
After years of being a poor, debt-encumbered college student, you decide that you want to pay for your dream
motorcycle in cash. Not having enough money now, you decide to specifically put money away each year in a “dream
motorbike” fund.
The motorcycle you want to buy will cost P60,000 in eight years. You are going to put aside P6,000 each year (for
eight years) to save for this.
At what interest rate must you invest your money to achieve your goal of having enough to purchase the motorcycle
after eight (8) years?
Solution:
We can use Equation 5-9 to start our computation,
P60,000 = P6,000 (F/A, i%, 8)
10 = (F/A, i%, 8)
Now we can use the interest tables in Appendix C
to help track down the unknown value of i.
We got 2 near values at:
(F/A, 6%, 8) = 9.8975 and (F/A, 7%, 8) = 10.2598,
Thus, the interest rate sould be between 6 to 7% !
To get the actual interest we can apply linear interpolation. This method is shown in the figure below.
Using Linear Interpolation to Approximate I, we get:
‘i = 0.0628 or 6.28% per year!

Thus, your money should be invested at 6.28% a year.
Solution 2: Use a an Excel spreadsheet to get the rate.

Excel has another financial function that allows you to solve for an unknown interest rate
Nper = period (N)
Pmt = amount of annuity
Pv = present value
Fv= future value
In the problem given above:

Nper = 8
Pmt = -6,000
Pv = 0
Fv= 60,000
A much simpler step to do!

Summary of Interest Formulas and Relationships for Discrete Compounding
There are several useful relationships between the compound interest factors. These relationships are
summarized in the following equations:
Equation 5-16
Equation 5-17
Equation 5-18
Equation 5-19
Equation 5-20

EXAMINE
ACTIVITY 4: CASE STUDY—TRY YOUR SKILls!
1. At a certain state-supported university, annual tuition and fees have risen dramatically in recent years as
shown in the table below.
(a) If all tuition and fees are paid at the beginning of each academic year, what is the compound annual
rate of increase from 2010 to 2014? (Hint: See Compound rate example & Example 5-5)
(b) What is the annual rate of increase from 2012 to 2014? (Hint: See Compound rate example & Example
5-5)
EVALUATE
ACTIVITY 5: WRITTEN EVALUATION
✓ Write your answers on a white paper.
✓ Take a clear picture and submit to your instructor via messenger.
1. What lump-sum amount of interest will be paid on a P12,000 loan that was made on May 1, 2021, and
repaid on November 1, 2025, with ordinary simple interest at 10% per year? (5 pts) (Show the Cash
flow diagram and your solutions).
2. The municipality of Trento has arranged to borrow P30 million in order to implement several public
projects (flood control, drainage system, etc.). The interest rate will be 3% per year, payable at the
end of each year. This P30 million debt will be retired by making principal payments of P5 million at
the end of each year. The SB Members is concerned that it will take too long to pay off this debt. How
many years will it take to fully pay the P30 million debt and its associated interest payments? (5 pts)
(Show the Cash flow diagram and your solutions).
3. What is the present equivalent of P18,000 to be received in 15 years when the interest rate is 7% per
year? (5 pts) (Show the Cash flow diagram and your solutions).

4. If a certain machine undergoes a major overhaul now, its output can be increased by 20%, which
translates into additional cash flow of P20,000 at the end of each year for 5 years. If i = 15% per year,
how much can we afford now to invest to overhaul this machine? (5 pts) (Show the Cash flow diagram
and your solutions).
Answer key
ACTIVITY 1
This is a computation using Compounding interest method. There will be 3
quarters of payments since only $300M is paid per quarter at 3% interest.
Quarter Amount owed at the Interest charged for Amount owed at

beginning of the the quarter the end of the
quarter quarter
1 $900M I = $900M x 3 x (0.03) $900M + 81
= $81M = $981M
2 $981M-300M= $681M I = $681M x 3 x (0.03) $681 + 61.3

= $61.3M = $742.3M
3 $742.3M-300M= I = $442.3 x 3 x (0.03) $442.3 + 39.8

$442.3M = $39.8M = $482.1M
4 Should pay the 0

remaining $482.1M
The problem asked for what is the equivalent value of the loan on the
second quarter after the first $300M payment is given. The answer is
$681M.
Thus, Ever Given still owed $681M on the second quarter of 2021.
ACTIVITY 2
Matching Type
1. F
2. B
3. C
4. A
5. E
6. D
Fill in the blank:
1. Future
2. Future value of salary
3. Present value, future value
4. Risk, profit/gain
ACTIVITY 4
(a) n=4 F=4,450 P=827
i= 4√(4450/827) - 1 x 100
I = 52.3%
(b) n=2 F=4,450 P=1,404

i= 2√(4450/1404) - 1 x 100
I= 78.03%



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LEARNING MODULE IN CBE5 (ENGINEERING ECONOMY)

AGUSAN DEL SUR STATE COLLEGE OF AGRICULTURE AND TECHNOLOGY

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

Overview of the Module

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

Introduction to College Vision, Mission, Goals and Quality Policy

II. Money-Time Relationships and Equivalence

III. Economic study methods

IV. Decisions under Certainty

V. Decision recognizing risk

VI. Decision admitting uncertainty

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

ANSWER THE FOLLOWING QUESTIONS AS BEST AS YOU CAN.

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

___1. Exchange price between current and a. time value of money

Fill-in-the-blank: Complete the following statements.

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

LESSON 2: THE TIME VALUE OF MONEY

Therefore, money has a time value!

Why Consider Return to Capital?

Let’s talk about the Origins of Interest!

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

where P = principal amount lent or borrowed;

2nd month P1,100 I = P1,100 x 3 x (0.10) P1,100 + 110

3rd month P1,210 I = P1,210 x 3 x (0.10) P1,210 + 121

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

Figure 5.1. Illustration of Simple versus Compound Interest

Plan 2 – Pay by instalments in equal amount for 4 months.

Plan 3 – Pay all debts at end of fourth month.

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

CASH-FLOW DIAGRAMS AND TABLES

i = effective interest rate per interest period;

DEFINE CASH FLOW

Why Cash Flow monitoring is important?

DEFINE CASH FLOW DIAGRAM

Cash Outflows (Arrow pointing down)

Example 5-1: CASH-FLOW DIAGRAMMING

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

Example 5-2: DEVELOPING A NET CASH-FLOW TABLE

• Equipment, labor, and materials to install ............ P60,000

(1) Cash Flow Table

On the basis of these results, several points can be made:

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

Relating Present and Future Equivalent Values of Single Cash Flows

A. Finding F when given P

Computing for F will use the equation below:

This quantity can also be written as (F/P, i%, N), thus

Hence, Equation 5-2 can also be expressed as:

Example 5-3: FUTURE EQUIVALENT OF A PRESENT SUM

Solution: Notice that the

For example, the

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

P = F x (P/F, i%, N) Equation 5-5

Example 5-4: PRESENT EQUIVALENT OF A FUTURE AMOUNT OF MONEY

P = P10,000 x (P/F, 8%, 6)

COLLEGE OF ENGINEERING AND INFORMATION SCIENCES

C. Finding the Interest Rate given P, F. and N

Example 5-5: THE INFLATING PRICE OF GASOLINE

Using Equation 5-6, we find i = 12√2.31/1.07 − 1 = 0.0662 or 6.62% per year