Module 14: Engineering Economy – Selection of Alternatives

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  • Handouts
  • Exercises
  • Capitalization Cost
  • Depreciation

LINK: Engineering Economy C

Topics:

  • Depreciation
  • Capitalized Cost and Capital Recovery
  • Inflation and Purchasing Power
  • Selection of Alternatives

A man borrowed ₱25,000 from a bank payable in 8 months, the bank discounted the loan and gave him ₱17,000, compute:

  1. Discount
    • a. ₱8,000
    • b. ₱8,200
    • c. ₱8,520
    • d. ₱7,950
  2. Discount rate per period
    • a. 32%
    • b. 35%
    • c. 38%
    • d. 30%
  3. Interest rate per period
    • a. 45%
    • b. 47%
    • c. 43%
    • d. 38%
  4. A research laboratory is constructed at ₱100M, taxes and other miscellaneous expenses is 10% of the construction cost. It is expected that the laboratory will last 40 years at a replacement cost of ₱200M, operation and maintenance cost as follows: ₱1M each year for 5 years, ₱2M each year for the next 6 years and ₱3M each year for perpetual life. If the money is worth 14%, compute the capitalization cost.
    • a. ₱123M
    • b. ₱234M
    • c. ₱345M
    • d. ₱456M

A property is bought at ₱220,000 taxes and other miscellaneous expenses at 10% of the purchase price. It is expected that the property will last 10 years, with a salvage value of ₱30,000. Compute the book value after 5 years of service, using:

  1. Straight line method
  2. Sinking fund method at 10%
  3. 7. Recommended fair value.

The original cost of a property is ₱50,000 and is expected to last 8 years with a salvage value of ₱5000. It produces 100 units during the first year of service and is diminishing by 10 units each year thereafter. Compute the appraisal value after 3 years of service using:

  1. Declining balance method
  2. 9. Double declining balance method
  3. 10. Sum of the years digit method
  4. 11. Service output method
  5. 12. A public works project has an initial cost of ₱1,300,000 benefits with a present worth of ₱1,900,000 and dis-benefits with a present worth of ₱288,000. What is the benefit-cost-ratio?
    • a. 1.35
    • b. 1.24
    • c. 1.62
    • d. 1.80
  6. 13. Company A purchases ₱190,000 of equipment in year zero. It decides to use straight-line depreciation over the expected 20 years life of the equipment. The interest rate is 9.7%. If its average tax rate is 28%, what is the present worth of the depreciation tax held?
    • a. ₱25,771
    • b. ₱23,117
    • c. ₱28,978
    • d. ₱32,019
  7. 14. An alternative for manufacturing a certain part has a first cost of $65,000, an annual cost of $7,520 and a salvage value of $3,800 after its 8 year life. At an interest rate of 11% per year, the capitalized cost of the alternative is ____.
    • a. $170,917
    • b. $180,276
    • c. $165,333
    • d. $196,210
  8. 15. A member of congress wants to know the capitalized cost of maintaining a proposed national park. The annual maintenance cost is expected to be $22,000. At an interest rate of 7% per year, the capitalized cost of the maintenance is ____.
    • a. $239,288
    • b. $320,165
    • c. $314,285
    • d. $333,290
  9. 16. A bond pays ₱355 interest per year and has face value of ₱7,900 at the end of 10 years, when it has to be redeemed. If the current value of the bond is ₱5,950, what is the interest earned on the bond?
    • a. 7.30%
    • b. 6.67%
    • c. 5.43%
    • d. 8.20%
  10. 17. A bond worth ₱43,000 has a bond rate of 12.5% has a redeemable value of ₱52,000 after 15 years. If interest rate is 10% annually, find the present value of the bond.
  11. a. ₱53,331
  12. b. ₱56,313
  13. c. ₱50,200
    • d. ₱62,220
  14. 18. An equipment has a first cost of ₱29,000 and salvage value of ₱11,000 after 5 years. If the interest is 9.45%, find the capital recovery rate per year.
    • a. ₱4,311.2
    • b. ₱5,721.3
    • c. ₱6,981.1
    • d. ₱7,981
  15. 19. A machine has a first cost of ₱58,250 and has an expected salvage value after 10 years is ₱6,130. Find the book value after 6 years using declining balance method.
    • a. ₱12,091
    • b. ₱17,812
    • c. ₱15,086
    • d. ₱14,990
  16. 20. An item is purchased for ₱130,000. Annual cost is ₱12,000. Using 10%, what is the capitalized cost of perpetual service.
    • a. ₱200,000
    • b. ₱240,000
    • c. ₱250,000
    • d. ₱260,000
  17. 21. An asset is purchased for ₱10,300. Its estimated life is 10 years after which it will be sold for ₱1,100. Find the book value during the first year if sum-of-the-years-digit (SOYD) depreciation is used.
    • a. ₱8,627.3
    • b. ₱7,012.2
    • c. ₱8,987.1
    • d. ₱7,981
  18. 22. A company purchases an asset for ₱21,300 and plans to keep it for 15 years. If the salvage value is zero at the end of the 20th year, what is the depreciation in the third year? Use sum-of-the-years-digit depreciation.
    • a. ₱2,873
    • b. ₱2,451
    • c. ₱2,701
    • d. ₱2307.5

HANDOUTS (Handwritten)

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Capitalization Cost

(A research laboratory is constructed at P100M, taxes and other miscellaneous, expenses is 10% of the construction cost. It is expected that the laboratory will last 40 years at a replacement cost of P200M, operation and maintenance cost as follows: P1M each year for the first 5 years, P2M each year for the next 6 years and P3M each year for perpetual life. If money is worth 14%, computer the capitalization cost.

SOLUTION:

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Depreciation

The original cost of a property is P50,000 and is expected to last 8 years with a salvage value of P5,000. It produces 100 units during the first year of service and is diminishing by 10 units each year thereafter. Compute the appraisal value after 3 years of service using (a) Declining balance method (b) Double declining balance method (c) Sum of the year’s digit method and (c) Service output method.

SOLUTION:

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