Republic of the Philippines

BATANGAS STATE UNIVERSITY

BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121

Mentoy, Jan Jericho C.

ChE-2204
ENGG 404: Engineering Economics
Midterm Examination

GENERAL DIRECTIONS:
1. Answer all problem-solving type problems in a clean paper, preferably white.
2. Avoid rounding off during computations but only on final answers, up to four (4) decimal places.
3. Upload your .pdf file with complete solution at the end of the Google Form on or before March 28, 2022, 11:59 P.M. It
must be named as <Section-Last Name, F.N.-Midterms>. Example: 2201-de Guzman, M.-Midterms.pdf

I. Concept Check. Select the best answer for each item. If NONE of the choices is the correct answer, choose E.

1.Which of these is not a time-dependent economic indicator?

A. IRR B. MARR C. ERR D. B/C ratio

2.This method is based on he concept of equivalent worth of all cash flows relative to some base or beginning point
in time.
A. Future worth B. Annual worth C. Present worth D. Perpetuity

3.One special variation of the PW method involves determining the PW of all revenues or expenses over an infinite
length of time. What is this method called? E.
A. Bond Value B. IRR C. Annual worth D. B-C ratio

4.For FW Method, if FW (i= MARR) = −30, then the project is economically .

A. justified B. barely justified C. sometimes justified D. unjustified

5.Which among these pairs would provide a good market feasibility judgment on a given project?
A. B/C ratio and breakeven point
B. ERR and IRR
C. B/C ratio and payback period
D. MARR and PW method

6.If someone computes for the MARR using AW Method and AW becomes positive at a certain fixed interest ≥0
and same ≠ 0 periods, then
A. PW is always larger than FW and AW
B. PW is always larger than FW
C. AW is always smaller than PW and FW
D. AW is always larger than PW

7.Which of the following DOES NOT agree with the definition/description of B/C ratio?
A. B/C ratio can have a value less than 0, but the project is not economically feasible.
B. A B/C ratio less than 1 means that the benefits are inferior of the costs.
C. If conventional B/C ratio is less than 1, so does the modified B/C ratio.
D. If the annual costs = annual benefits, the conventional and modified B/C ratios are equal to 0.

8.A project with a smaller payback period is better than projects with higher payback period.
A. Always True
B. Always False
C. Sometimes True
D. Insufficient Data
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121
9.If the inflation rate is higher than the interest rate, then
A. it is no longer possible to earn any amount from an initial capital.
B. only if the inflation is within the same period where interest is less, the investor will not earn.
C. the amount invested at present time will be equal to the future amount.
D. any annual worth computed at any period n (of N total years) will not be equal to the annual worth at + 1
period.

10. You need to determine whether a project is profitable or not in a long run. Based on the data given, which of
these projects will be profitable according to engineering economy methods? E
A. n= 3 yrs., Net Value: 0
B. Accumulated (without interest) net values of the revenues, expenses and investments after 5 years is +300.
C. Accumulated (without interest) net values of the revenues, expenses and investments after 4 years is +100.
D. n = 6 yrs., Net Value: +400

II. Problem Solving (Part I). (5 pts. each). Solve each problem completely. Show you solution

1. A sales engineer claims that his pump is economically justifiable. He says that for a cost of P250,000.00, it will
have a market value of P30,000 at the end of 10 years. If the increased productivity attributable to this project
would beP38,804 per year, is he lying? Take MARR = 10%

 SOLUTION

 Present Worth OF Market Value

P=F(P/F,i,n)
P=30000(1+0.10)-10
P=11,566.298682885900

 Present Worth from Annuities

P = A(P/A, i, n)
P= 38804 ((1+0.1)10-1)
0.1(1+0.1)10
P=238,433.78196976500

Total P =11,566.298682885900 + 238,433.78196976500 = Php 250,000.08065265100

PW= Php 250,000.08065265100 - Php 250,000.00

PW = Php 0.08065265100

Since PW(i=MARR) ≥0, the pump is economically justifiable, therefore the engineer was not lying
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121

2.An IOU agreement was made between two persons. For a face value of P100,000, it was agreed that the borrower
will make 8 annual payments at a 10.50% interest rate. The first payment will be due at the end of the year. It
wasalso agreed that 90% of the face value will be paid for redemption. What is the bond value if it yields at a
rate of 12%?

 SOLUTION

Z= 100,000
n=8
r=10.50% = 0.1050
C=0.90 x 100000 = 90000
i=12%=0.12

Vn = C(P/F,i,n) +rZ (P/A,i,n)

Vn = 100,000(1+0.12)-8 + 0.1050(90000)(1-(1+0.12)-8)
0.12
Vn=Php 88,509.70806994842

Vn=Php 88,509.7081

3.Calculate the capitalized cost of an equipment maintained at a rate of 6% every year for P10,000, replaced every 3
years for P25,000 at the same rate, and bought for P110,500.

 SOLUTION

Cc= Cf + A + S
i (1+i)k-1

Cc = 110,500 + 10,000 + 25,000

0.06 (1+0.06)3-1

Cc = 408,045.7553

The capitalized cost of an equipment is Php 408,045.7553

4.A new project is being planned for a study period of 8 years. It will require P250,000 for the start-up and after the
end of the first year, P13,500 shall be paid for its innovation. The board then requires to add another modified
technology which will cost P25,000 by the end of the second year. After the end of third year, the project will
startto earn P57,500 annually. Calculate the annual effective interest rate using ERR method if the interest rate
externalto this project (ε) is 13.75%.

 SOLUTION

 Calculate Expense

E= 250,000 + 13,500(P/F, 13.75%,1) + 25,000(P/F,13.75%,2)

E= 250,000 + 13,500(1+0.1375)-1 + 25,000(1+0.1375)-2
E= 281,189.4699

 Calculate Revenue

R= 57,500(F/A, 13.75%,8) + 25,000(P/F,13.75%,2)

R= (57500)((1+0.1375)8-1) + 57500(1+0.1375)6
0.1375

R=629,390.4879

 Calculate annual effective interest rate

 Republic of the Philippines
BATANGAS STATE UNIVERSITY
BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121
281,189.4699 (1+i)8= 629,390.4879
i=0.1059618346
i=10.5962%

The annual effective interest rate is i=10.5962%

5.Calculate the B/C ratio (modified) of a building that houses students during their classroom discussion. The
accommodation equates to P525,000 annually. However, the annual maintenance is P135,000. Its construction
costs for about 2.3 M. If sold 20 years from its first operating year, it will amount to P250,000. Take MARR = 15%
(3pts.)

 SOLUTION

MODIFIED B-C = B(PW) -(O&M)PW

I-(MV)PW
= B(P/A,i,n)-(O&M)(P/A,i,n)
I-S(P/F,i,n)

=(525,000)(1-(1+0.15)-20) + (135,000)(1-(1+0.15)-20)
0.15 0.15
2,300,000 -( 250,000(1+0.15)-20))

MODIFIED B-C =1.068460909

The modified B-C ratio is MODIFIED B-C =1.0685

III. Problem Solving (Part II). (50 pts). Solve each problem completely. Show you solution

Plant Design is a major requirement for you to be able to graduate BS ChE in Batangas State University. Suppose
you are a panelist, and you must evaluate if the design is feasible or not. You look at the breakdown of expenses,
possible revenues, etc. Here are some important chapters and discussions taken from a certain plant design.

Chapter 3: Market Study

This plant design, entitled “IIVSDROP: The First Ear Dropper Solution Manufacturing Plant in the Philippines”
considers a 30-year period of study, starting 2021, after finishing its construction by 2020. All projections,
and interest rates set by the company shall be evaluated within this 30-year period. The inflation rate shall
not be included in the computation and a minimum attractive rate of return is set at 20%.

Chapter 4: Products
Our company produces ear dropper solution which can be sold for PHP. 125.00 per bottle. Annually, the
company can produce 1000 pallets of the product. Each pallet is stacked with 14 layers and each layer
consists of 8 boxes. A box contains 12 bottles of ear dropper for wholesale purposes. In addition, the
company also ventures for retail services.

By-products are also produced by the company including excess chemicals that can be sold for P1,200 per
15 grams. IIVSDROP produces a total of 7,820 kg of these excess chemicals per year.

Chapter 5: Construction and Process

The company shall be constructed at Nasugbu, Batangas for PHP. 550,320,000. The permits, land
acquisition documents and other legal matters amounted to PHP 27,000,000.

Chapter 6: Company Expenses

Below is the breakdown of yearly expenses of the company:
Total Costs Amount in Pesos
Labor Costs 11,200,000/yr.
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121
Preventive Maintenance 5,580,300/yr.
Costs
Safety Regulations and 790,000/3 yrs.
Certifications
PAG-IBIG 1,300,000/yr.
Employee Benefits and
PhilHealth 2,700,000/yr.
Insurance
SSS 3,600,500/yr.

Chapter 7: Consumer Benefits

Aside from the revenues from the products sold, annual benefits from the company include PHP.
15,000,000/yr.

Assume a high demand for the product and by-products that all produced goods are sold each year within the study
period. Calculate the following:
1.Payback period (tabular)
2.Payback period formula
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121
3.B/C ratio (conventional)
4.AW if i= MARR
5.Internal Rate of Return
Based on the computed values, decide whether the project is economically justifiable or not.

 SOLUTION (n=30 yrs, MARR=20%)

 CALCULATION OF REVENUE/BENEFIT

ANNUAL PRODUCTION Total Price

1000 pallet
PRODUCT 14 layers /pallet TP=1,344,000 bottles x Php
Php 125.00/bottle 8 boxes / layer 125.00/bottle
12 bottles/box
Total No.of Bottles : 1,344,000 bottles TP=Php 168,000,000
BY-PRODUCT 7,820 kg TP = Php 80/g x 7,820,000 g
Php 1200 /15g

Price=Php 80/g Production=7,820,000 g TP=Php 625,600,000

CONSUMER BENEFITS Php 15,000,000
TOTAL BENEFITS/REVENUE: Php 808,600,000

 CALCULATION OF EXPENSE

EXPENSE TOTAL COST

Labor Cost 11,200,000
Preventive MaintenanceCosts 5,580,300
PAG-IBIG 1,300,000
Employee Benefits andInsurance PhilHealth 2,700,000
SSS 3,600,500
TOTAL: Php 24,380,800
Safety Regulations andCertifications 790,000(1+0.20)-3 +790,000(1+0.20)-6 +790,000(1+0.20)-9+
790,000(1+0.20)-12+790,000(1+0.20)-15 +790,000(1+0.20)-18
+790,000(1+0.20)-21 +790,000(1+0.20)-24 +790,000(1+0.20)-27
+790,000(1+0.20)-30
=Php 1,080,593.3393075

 CALCULATION OF INVESTMENT

INVESTMENT
Construction Cost 550,320,000
Documents and Permits 27,000,000
TOTAL 577,320,000
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121

A. PAYBACK PERIOD (TABULAR)

Year Revenue Investment Expenses Total

0 0 ₱-577,320,000 0 ₱-577,320,000
1 ₱808,600,000 0 ₱-24,380,800 ₱832,980,800
TOTAL: ₱ 206,899,200

PAYBACK PERIOD ≥ 1 year

B. PAYBACK PERIOD FORMULA

PP = Fixed Capital Investment

Net Annual Profit

PP= ₱577,320,000
₱808,600,000 - ₱24,380,800

PP= 0.7361717234 yrs

PP = 0.7362 yrs

PP = 0.7361717234 yrs x (12 months / yr)

PP = 8.834060681 months

PP =8.8341 months or 0.7362 yrs

C. CONVENTIONAL B-C RATIO

CONVENTIONAL B-C = B(PW)

I- (MV)PW+PW(C)
= (₱808,600,000)(1-(1+0.2)-30)
0.2
₱577,320,000+( ₱24,380,800(1-(1+0.2)-30))) + Php 1,080,593.3393075
0.2

CONVENTIONAL B-C RATIO = 5.753100151

CONVENTIONAL B-C RATIO = 5.7531

D. AW if I=MARR

AW = E - R - CR
=₱808,600,000 -(₱24,380,800 + ₱ 1,080,593.3393075( 0.20 ))- (₱577,320,000 ( 0.20 ) )
1-(1+0.2)-30 1-(1+0.2)-30

AW=₱ 668,049,691.7000

E. INTERNAL RATE OF RETURN(AW=0)

AW = E - R - CR
 Republic of the Philippines
BATANGAS STATE UNIVERSITY
BatStateU Alangilan
Alangilan, Batangas City
College of Engineering, Architecture and Fine Arts
https://batstate-u.edu.ph/, Tel. No. (043) 425-0139 loc. 118/2121

0 =₱808,600,000 -(₱24,380,800 + ₱ 1,080,593.3393075( i ))- (₱577,320,000 ( i ) )

1-(1+i) -30
1-(1+i)-30

Through Calculation

i= 1.355840933

i=135.5840933 %

IRR = 135.5841%

CONCLUSION
Conventional B-C ratio = 5.7531 ≥ 0;
AW (i =MARR) = ₱ 668,049,691.7000 ≥ 0;
IRR = 135.5841% ≥ 20 %
Since conventional B-C ration is greater than 1, the annual worth if i=MARR is greater than zero, and internal
rate of return is greater than MARR, the project is economically justifiable

Prepared by:

Engr. Monroe H. de Guzman, AAE

Instructor, ENGG 404

Noted by:

Engr. Mary Rose F. Persincula

ChE-FE Department Head

Approved by:

Dr. Reynato A. GamboaDean,

CEAFA