CEE109 ENGG- Economics ULO2 PDF

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2 nd Floor, B&E Building Matina Campus, Davao City Telefax: (082) 296- 1084 Phone No.: (082)300-5456/300-0647 Local 133Big PictureWeek 4-5: Unit Learning Outcomes-Unit 2 (ULO-2): At the end of the unit, you are expected toa. Be able to apply several depreciation methods in a real life applic...

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College of Engineering Education 2nd Floor, B&E Building Matina Campus, Davao City Telefax: (082) 296-1084 Phone No.: (082)300-5456/300-0647 Local 133

Big Picture Week 4-5: Unit Learning Outcomes-Unit 2 (ULO-2): At the end of the unit, you are expected to a. Be able to apply several depreciation methods in a real life applications such as straight line method, sum of year’s digit method, declining balance method, double declining balance method and sinking fund method. b. Be able to introduce the basic economic study methods such as the present worth, future worth, annual worth, internal and external rate of return methods.

Big Picture in Focus: ULO-2a. Be able to apply several depreciation methods in a real life applications such as straight line method, sum of year’s digit method, declining balance method, double declining balance method and sinking fund method.

Metalanguage The most essential terms below are defined for you to have a better understanding of this section in the course. 1. DEPRECIATION The capital investments of a corporation in tangible assets—equipment, computers, vehicles, buildings, and machinery—are commonly recovered on the books of the corporation through depreciation. Although the depreciation amount is not an actual cash flow, the process of depreciating an asset on the books of the corporation accounts for the decrease in an asset’s value because of age, wear, and obsolescence. Even though an asset may be in excellent working condition, the fact that it is worth less through time is taken into account in after-tax economic evaluation studies.

2. IMPORTANCE OF DEPRECIATION TO ECON ECONOMY OMY Why is depreciation important to engineering economy? Depreciation is a tax-allowed deduction included in tax calculations in virtually all industrialized countries. Depreciation lowers income taxes via the general relation Taxes = (income - deductions) (tax rate) 3. DEPRECIATION ME METHOD THOD Depreciation is a book method (noncash) to represent the reduction in value of a tangible asset. The method used to depreciate an asset is a way to account for the decreasing value of the asset to the owner and to represent the diminishing value (amount) of the capital funds invested in it. The annual depreciation amount is not an actual cash flow, nor does it necessarily reflect the actual usage pattern of the asset during ownership.

College of Engineering Education 2nd Floor, B&E Building Matina Campus, Davao City Telefax: (082) 296-1084 Phone No.: (082)300-5456/300-0647 Local 133

Essential Knowledge The objective of a cost engineer is to deal with the money and economy. In order to understand the flow of money, one must know the following economic parameters:

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College of Engineering Education 2nd Floor, B&E Building Matina Campus, Davao City Telefax: (082) 296-1084 Phone No.: (082)300-5456/300-0647 Local 133

7. SINKING FUND METHOD (1 + 𝑖)𝑛 − 1 𝐷𝑛 = 𝑑 ( ) 𝑖

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SUPPLEMENTARY PROBLEMS:

Example 1.1 A Xerox machine costing ₱75,000 with salvage value of ₱10,000 at the end of its life can print 3,000,000 sheets in its entire life. If it has already printed 500,000 sheets, determine the total depreciation of the Xerox machine at that time.

Example 1.2 A machine costing ₱3,000,000 has a salvage value of ₱0.1M at the end of its useful life, 20 years. It can be used for 5,000 hours in its entire life. Find the accumulated depreciation after using it for 1,000 hours.

Example 1.3 A tax and duty free importation of a 30hp sand mill (for paint manufacturing) cost ₱360,000. CIP Manila Bank charges, arrester and brokerage cost ₱5000. Foundation and installation cost were ₱25,000. Other incidental expenses amounted to ₱20,000. Salvage value of the mill is estimated to be ₱60,000 after 20 years. Determine the appraisal value of the mill using straight line method of depreciation at the end of 10 years.

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Example 1.4 A contractor imported a bulldozer for his manufacturer paying P250 000. Freight and insurance amounted to P18 000, broker’s fees and arrester services, P8500. Taxes, permits and others is P25000. If the contractor estimates the life of the bulldozer to be 10 years with a salvage value of P20 000, determine the book value at the end of 6 years using sinking fund method.

Example 1.5 A machine is purchase for ₱100,000 with an estimated useful life of 10years, after which it will be sold for ₱2000. Find the book value at the end of the third year using sum of year’s digit method (SYDM).

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Example 1.6 A machine costing P720 000 is estimated to have a book value of P40 545.73 when retired at the end of 10 years. Depreciation cost is computed using a constant percentage method or declining balance method. What is the annual rate of depreciation in %? Conventional Solution: 𝐿 𝑆𝑉 𝑘=1− √ 𝐹𝐶 10

𝑘=1− √

40545.73 = 0.25 𝑜𝑟 𝟐𝟓% 720000

Example 1.7 Erectors Corporation owns earth moving equipment that cost ₱90,000. After 8 years, it will have estimated salvage value of ₱18,000. Compute the depreciation charge using double declining balance method at the end of 2 nd year and the book value at the end of 5th year.

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Self-Help You can also refer to the sources below to help you and guide you further understand the lesson: Park, Chan S. (2011), Contemporary Engineering Economics (5th Edition), New Jersey: Pearson Education, Chapters 8, 9, 11 Blank, L T., (2012), Engineering Economy (7th Edition), New York: McGraw Hill, Chapter 9, 10, 11, 12, 13, 16, 17 Sta. Maria, H., Engineering Economy (3th Edition), National Book Store Panneerselvam, R., (2012), Engineering Economics (Eastern Economy Edition), New Delhi: PHI Learning Private Limited Lindeburg, M., (2014), Civil Engineering Reference Manual for the PE Exam (14th Edition), California: Professional Publications, Inc. Page 7 of 19

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Let’s Check Activity 1: Now that you review the most essential principles in engineering economy. Let us try to check your understanding by solving the following cost problems:

1. A certain equipment costs ₱7000 has an economic life of “n” years and a salvage value of ₱350 at the end of “n” years. If the book value at the end of 4 years is equal to ₱2197.22, compute the economic life of the equipment using SYDM. 2. ABC Corporation makes its policy that for every new equipment purchased, the annual depreciation cost should not exceed 20% of the first cost at any time without salvage values. Determine the length of service if the depreciation used is SYDM. 3. A consortium of international communications companies contracted for the purchase and installation of a fiber optic cable linking two major Asian cities at a total cost of ₱960,000,000. This amount includes freight and installation charges at 10% of the above total contract price. If the cable depreciated over a period of 15 years with zero salvage value, what is the depreciation charge during the 5th year using SYDM? 4. The corporation purchased a machine for ₱1 million. Freight and installation charges amounted to 3% of the purchase price. If the machine shall be depreciated over a period of 8 years with a salvage value of 12%. Determine the depreciation charge during the 5th year using sum of year’s digit method.

5. A machine that cost ₱1,230,000 has estimated life of 10 years. If the predetermine salvage value is ₱80,000. Compute the annual rate of depreciation charge using declining balance method.

Let’s Analyze Activity 1: Getting acquitted with the essential terminology and basic concepts in the study of engineering economy is not enough, one should be able to analyze and solve complex cost problems involving interest, cash flow analysis, annuities and decision making methods. At this juncture, you will be required to elaborate your answers about the following questions:

1. A radio service panel truck initially cost ₱56,000. Its resale value at the end of the 5th year of the useful life is estimated at ₱15,000. By means of the declining balance method, determine the depreciation charge for the 2nd year. 2. An asset is purchase for ₱9000. Its estimated life is 10 years after which it will be sold for ₱1000. Find the book value during the first year using sum of year’s digit method (SYDM). 3. A motor cost ₱100,000 has an estimated life of 10 years and can be sold at ₱20,000 at the end of 10 years. Calculate the book value at the end of 8 years using sum of year’s digit method (SYDM).

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4. The original cost of a certain machine is ₱150,000 has an economic life of 8 years with a salvage value of ₱9000 at that time. If the depreciation of the first year is equal to ₱44475, what method is used in the calculation of depreciation?

5. A certain office equipment has a first cost of ₱20,000 and a salvage value of ₱1,000 at the end of 10 years. Determine the book value at the end of 6 years using SYDM.

In a Nutshell Activity 1: Based from the definition of the most essential terms in the study of curriculum and the learning exercises that you have done, please feel free to write your arguments or lessons learned below. I have indicated my arguments or lessons learned.

1. Straight line method is mostly used in equipment estimates. Your Turn 2. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 3. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 4. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 5. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 6. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 7. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 8. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 9. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 10. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 11. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ 12. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________

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13. ____________________________________________________________________________________________________ ____________________________________________________________________________________________________ ____________________________________________________________________________________________________

Q & A List List 1: After series of discussion and exercises, kindly list down your questions or issues in conjunction with the topics. Write the answers after clarification under the column provided. This portion helps you in the review of concepts and essential knowledge. Do you have any questions for clarification? Questions/Issues Answers 1. 2. 3. 4. 5.

Keywords Index Index: The keywords presented here will help you remember the concepts and essential knowledge. Here are the few subject index. C Constant percentage of depr.

D Depreciation Double declining balance method Declining balance method

F Fixed value

S

U

W

Sinking fund method Sum of years digit method Scrap value

Unit production method

Working method

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M Mattheson formula

hours

College of Engineering Education 2nd Floor, B&E Building Matina Campus, Davao City Telefax: (082) 296-1084 Phone No.: (082)300-5456/300-0647 Local 133

Big Picture in Focus: ULO-2b. Be able to introduce the basic economic study methods such as the present worth, future worth, annual worth, internal and external rate of return methods.

Metalanguage The most essential terms below are defined for you to have a better understanding of this section in the course. 1. Economic Factors In a day to day scenario in somebody’s personal life or even in a business events, there are a large number of economic decision making that an individual may involve. One can be manage by using simple economic analysis. For instance, an industrial plant can source out its materials from a places nearest to them or far-off places. The following factors will affect the decision: i. The price of the materials needed ii. Delivery cost of the materials iii. Availability of the materials iv. Quality of the materials

2. Nearby Place F Factors actors Now, if the source is from nearby place, the following conditions may be put into considerations: i. The materials is more costly in the nearby area ii. The availability may not be sufficient enough iii. The material may requires pre-processing pr procedure ocedure which will certainly result to additional cost iv. The cost of delivery is minimal 3. Far-Off Place Facto Factors rs However, considering the source is the far-off place, the following conditions may be put into considerations: i. The material is less costly than the nea nearby rby area ii. The delivery cost is very high iii. The material ma may y not requi require re pre pre-processing -processing procedure before using it for production iv. The availability is abundant. Under such characteristics and factors, the procurement of the material to be use by the plant should be decided in such a way that the overall cost is minimized.

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College of Engineering Education 2nd Floor, B&E Building Matina Campus, Davao City Telefax: (082) 296-1084 Phone No.: (082)300-5456/300-0647 Local 133

Essential Knowledge The objective of a cost engineer is to deal with the money and economy. In order to understand the flow of money, one must know the following economic parameters:

1. Simple Economic Analysis The concept of simple economic analysis is best defined using the suitable examples in the following areas: i. Material Selection for a product ii. Design Selection for a product iii. Design Selection for a process industry iv. Building Material Selection for Construction Activities v. Process Planning or Process Modification 2. Material Selection The cost of a product can be reduced greatly by substitution of raw materials. Raw material cost is the most beneficial and it represents a major portion of the total cost of any product. So, in most cases, finding raw material from several suppliers will bring a reduction in the total cost in any of the following ways: i. Cheaper raw material price ii. Reduced machining/Process Time iii. Enhanced Durability of the Product In the process, if a material provides an additional benefits, then it should be treated as its welcoming feature. 3. Design Selection The design modification of product may result in reduced raw material requirements, increased machinability of the materials and reduced labor cost. Design is an important factor which decides the cost of the product for a specified level of performance of that product. 4. Buildin Building g Material Selection In a building material selection, the souring of raw materials will have a beneficial effect on the cost of any product. Hence, it is assumed that the price of raw material is dependent to its location. While sourcing a raw material, the cost of transportation is to be considered in conjunction with the price of the raw material. SUPPLEMENTARY PROBLEMS:

Example 1.1 In the design of a jet engine part, the designer has a choice of specifying either an aluminum alloy casting or a steel casting. Either material will provide equal service, but the aluminum casting will weigh 1.2 kg as compared with 1.35 kg for the steel casting. The aluminum can be cast for ₱80.00 per kg. And the steel one for ₱35.00 per kg. The cost of machining per unit is ₱150.00 for aluminum and ₱170.00 for steel. Every kilogram of excess weight is associated with a penalty of ₱1,300 due to increased fuel consumption. Which material should be specified and what is the economic advantage of the selection per unit? Page 12 of 19

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Example 1.2 The m...