hello and welcome let's uh channel and today we will discuss about the basic method or methods for making economy studies so this topic is actually an advanced topic on engineering economy and there are several methods on making economy studies so namely rate of return method the annual work method present worth method future work method and payback or payout period method or an investment of 200 thousand pesos so the initial investment that then can be made in a project that will produce a uniform annual revenue of one eighty five thousand four hundred pesos for five years and then have a salvage value of 10 of the investment out-of-pocket costs for offering operation and maintenance will be 81 000 pesos per year the company expects a capital to earn 25 percent before income taxes is this a desirable investment and what is the payback period of the investment with taxes and insurance four percent of the investment okay so segura okay that is the initial cost or on terminating the first cost or the original cost dividend investment or a first cost no uh so any initial investment not end can be made in a project that will produce a uniform animal revenue of 185 000 pesos per year 25 400 pesos for a year uh for five years because after five years myself beachbody national ten percent of the investment so on revenue revenue or uh for operation and maintenance 81 000 pesos per year on operation and maintenance investment then the company is expects expects capital to earn 25 percent by applying this a method what is the payback period of the investment and with taxes and insurance support percent of the investment okay so it on taxes and insurance is spreading property tax franchise i know business economy studies okay so yeah password is the first method young rate of return so by rate of return method sold nothing so what is rate of return so rate of return is actually the measure of effectiveness of an investment of capital so it is a financial efficiency so efficient you uh in investment so that is the rate of return efficiency output over uh input sogano uh output over input efficiency alumni and efficiency so effectiveness okay some formula nothing on rate of return detail is uh equal to net annual profit so it um so that is efficiency shampoo times 100 so if a rate of return is greater than atom rate of return on an assault nation is greater than the desired rate of return then the the investment is justified so meaning profitable okay pero is less than the desired rate of return then the investment is not uh justified meaning nothing so uh uh the company expects capital to earn 25 percent and actually desired rate of return so your name desired rate operator nothing you own 25 percent so percentage desired uh ror is equal to 25 and actually that uh desired rate of return rate of return can be equal to the uh letter i know the interest rate or the effective rate of interest 25 percent again same problem returns interest rate for this problem interest rate so therefore that is 270 000 and then uh sulet london attending salvage value 10 salvage value pending sv or clc sub l uh 10 up to seventy thousand that is twenty seven thousand so again original cost and you or the first cost and the salvage value [Music] from the beginning of the engineering economy until now no and combination shall have so young capital invested problem four hundred so that is the annual revenue again minus nothing and volcos is actually the depreciation no uh non-investment the precision the annual cost of the precision uh lowercase d and i'm gonna go depreciation method is actually the sinking fund method sinking fund method okay interest rates interest rate okay net engine's annual cost or annual depreciation cost using sinking fund method is original cost minus salvage value all over um 1 plus i raised to life minus one over i so young life nothing dito is five years because after five years missile beach valley not in life is five years so most of the on depreciation so the original cost is 270 000 pesos minus the salvage value now 27 000 pesos all over uh one plus 0.25 again given the interest rate equaling rate of return raised to 5 minus 1 all over 0.25 then calculate langnaten 270 270 000 minus seven thousand over uh one point twenty five pina got column raised to five minus one all over point 25 okay so the annual depreciation as in is 2929 608 29608 point uh 76 and pesos that is the depreciation cost and the next um details a problem so many times operation and maintenance cost so operation and uh maintenance cost will be equal to solar animal formula now four percent four percent of the investment so not in taxes and insurance uh equals a four percent of the investment which is uh 270 000 pesos so that is equal to 0.04 times 270 000. ten thousand eight hundred yen then the precision plus the operation and maintenance cost plus the taxes to get the total annual cost so that is that would be uh 10800 plus 81 000 plus 29608.76 that is 121408.76 one two one 408.76 pesos number so yeah so that is the total annual cost okay then a four million rate of return so that is net annual profit over capital invested again capital invested a latin problem 270 000 so net annual profit is actually a net annual profit is equal to the annual revenue minus the annual cost so that uh would give us 185 000 pesos of 400 meter problem 400 minus a one two one 408.76 so minus 10 nothing and you need 101.08 minus 185 400 so that will be uh 63 so indication negative you know and you know one two one minus 185 so that is positive so the net annual profit is uh equal to sixty three thousand nine nine one point uh twenty four so meron i know net annual profit so much solder nothing your rate of return again a rate of return is equal to a net annual profit over the capital invested temporary times 100 that is 63 991.24 pesos divided by uh capital invested that is 270 000. three thousand times uh one hundred percent oh again you know time not is a negative one but among positive yeah divided by uh sorry to nano 63 091.24 divided by 270 000. 23.7 times 100 that is 23.70 seventy percent so by uh inspection sempre 23 is less than in the desired rate of return not twenty five percent no i am so simple not this investment is not justified because a less than decide rate of return on 63 900 plus uh every year a indian enough for 25 rate of return so final answer nathan is in terms of uh sentence no so since rate of return or 23.70 is less than the desired um rate of return 25 therefore the investment is this a desirable investment so therefore not desirable or are not justified about that rate of return separating my comment and then put that is an x and the next method okay the annual work method so in this method uh interest on the original investment so interest on the original investment or sometimes called the minimum required profit is included as a cost okay is depreciation operation maintenance and taxes insurance having interest on the original investment or the minimum required profit meaning [Music] okay so it says included as a cost if the excess of the annual cash inflows over the annual cash outflows is not less than zero the proposed investment is justified or valid influences outflows is not less than zero meaning positive numbers no sempre mekita so the the proposed investment is justified or valid so i'm formulating to annual work is equals annual cash inflows minus cash outflow kappa greater than zero annual worth nothing the investment is justified and per less than zero young investment and therefore the investment is not justified okay so get on parent inflows and out close revenue okay um methods interest on the original capital or investment is included as a cost so interest on capital so not again so interest on capital interest on capital so so interesting is actually the rate of return so your interest detail uh interest will be equal rate of return nah 25 percent given interest rate of return okay that to is the interest on the original investment or the interest on capital so that is 0.25 or 25 percent times the capital of 270 000 so that is um 270 000 times 0.25 367 thousand five hundred seven thousand five hundred okay denis for the total annual cost so atlanta in 67 500 times 10 800 plus 81 000 plus 29608.76 so the total annual cost for this problem is 188 908 908.76 okay so in total uh revenue inflow output so annual work will be equal to revenue now 185 400 minus um the outflow now 188 thousand 908.76 185 400 minus 188 908.76 so that is negative uh negative five 35350 eight point seventy six and so sabina and kapag uh less than zero then the investment is not justified so since uh a w or annual albert is less than a zero which is in a negative 3p 508.76 therefore the investment is not justified or desirable the investment is not justified and actually the annual word method is one of the easiest method datosa economy studies again my question and uh okay and then proceed that is nx method but before we proceed um interest on capital is the rate of return the present word method so from the word present word so this pattern for economy studies is based on the concept of present word if the present word of all of the net cash flows is equal to or greater than zero the project is justified economy okay so present word will be present worth of net cash inflows minus present worth of net cash outclose so again inflows not in guess out loud present word pan or future word is uh justifying investment nothing so if present worth is greater than zero the investment is justified in present worth is less than zero then the investment is not justified details cash flow for um cash inflows and cash flow for cash outflows so inflows or outflows or kaita no no depending on support so for cash uh inflows okay so ankash influence is actually uh in revenue every year for five years the ban one eighty five thousand pesos so gaga valentine and cash blog for so for five years my puma pass off saturn and 200 185 400 so every year yen so sabine bracket could 185 thousand pesos or 400 so that is a equal payment occurring at equal interval of time at the end of its life for five years young revenue and after five years value not ten percent of the investment which is which is twenty seven thousand so after five years aton salvage value papa uni inflow uh inaudible that is a compound interest um and for mililani and papantael native present that is 27 thousand times one plus i so i again is equal to rate of return that is twenty five percent so again kappa may separate given attending okay so interest uh 0.25 raised to 5 or negative 5 present for tayo and the tone 185 400 is actually a anvitino 185 400 times one minus one plus zero point twenty five raised to elongate negative five all over zero point twenty five and to compute the present worth of cash inflows so present worthy inflow is equal to and 185 400 times 1 minus 1.25 raised to negative five all over zero point twenty five again pinagat colonto plus twenty seven thousand times one point twenty five raised to negative five super negative okay 185 400 times uh one minus 1.25 so padding at angling parenthesis n raised to negative 5 all over 0.25 plus 27 000 times 1.25 raised to negative five so answering that data will be five hundred seven four three nine so present worth the inflow is 507 four three nine point eighty seven two eight seven two seven attacks present worthy influence uh outflow okay and so now additional uh cash flow for a cash outflow so for cash outflows no is actually excluding uh depreciation or indica sama in the precision support um uh simplification or no no not on depreciation every year in 27 000 pesos operation costs and taxes and maintenance taxes and insurance and sabinate and indiana depreciation is the operational cost or the maintenance cost 81 000 plus the taxes and insurance ten thousand eight hundred so uh annual cost eighty one thousand plus ten thousand eight hundred so that is uh ninety one thousand eight hundred so that is one two three is 81 000. so every year 800 1-1 plus 0.25 raised to 5 years negative 5 all over 0.25 so the present word of cash outplays sorry yeah so present worth of the cash outflow will be equal to two hundred seventy thousand young first are nothing uh investment plus you annuity nothing 91 800 so annual cost uh 1.25 raised to negative 5 over 0.25 outflow 270 000 plus ninety one thousand eight hundred times uh one minus one point twenty five raised to negative five all over point twenty well check along uh 270 000 times 91 thousand eight hundred one minus one printed base pipe yet because so the present word nathan's a cash outflow is equal to 516 uh 875 875.904 so meaning it is outflow rush cash outflow is less than present worth nika's inflow other four and investment is not justified is not justified unpleasant word cash outflow is less than present worth cash inflow therefore the investment is not justified okay so actually uh uh determine future word so sabinat and this is the future word of the inflow cash inflow um 27 000 engineers so you want eighty five thousand you know nothing and vt so on future is my only one plus i know 0.25 raised to 5 positive 5 minus 1 over 0.25 so the future worth of the cash inflow is 27 000 plus uh 185 400 times 1.25 raised to 5 minus 1 over 0.25 so nothing 27 000 plus 185 400 times 1.25 raised to 5 minus 1. all over 0.25 then equal to so the future worth of the cash inflow input satin pera is 1 million 1 million 548 [Applause] inflow okay so outflow okay so future word uh picture word 0.25 raised to positive five and the new 91800 that is nvt so 91 800 times future word one plus 0.25 raised to 5 minus 1 over 0.25 yen okay uh future word legend future worthy outflow so the future word of the cash outflow will be equal to uh 270 000 times 1.25 raised to 5 plus 91 800 times 1.25 raised to 5 minus 1 over 0.25 so solve nothing so that is 270 000 times 1.25 raised to 5 plus 91 800 and 91 800 times 1.25 raised to 5 minus 1 all over point 25 okay so on future work me cash outflow is one million five seven seven one million five seven seven three eighty point zero seven eight and again by visualization again namaste in future with me cash outlander one five seven seven compares to the uh future word nikash implona one five four eight also so since uh future worthy outflow is greater than future worthy inflow therefore the investment is not justified is not justified and okay so a similar similar young future word and then uh last method of making economy study is the payback period or payout period method so it don't matter nettle is commonly defined as the length of time required to recover the first cost of an investment from the net cash flow produced by that investment at interest rate of zero oh yeah so let up time required to recover the first course so um capital investment okay from this example in 270 thousands payback period or payout period in years is investment in initial investment that and minus salvage value all over a net annual cash flow okay so sabi potito note in computing the total annual cost depreciation will not be included so again it didn't include the tone of suppressant words the future word period in the included depreciation because a method does not require the time value of money or interest no so in the indiana so the use of payback period for making investment decisions as it may okay annual profit make up nothing yet 185 thousand so happy language same process thousand four hundred annual revenue one eighty five thousand four hundred yen so again my investment attire salvage value net annual cash flow is actually the net annual profit okay another revenue minus annual cost pero this time velasie 10 800 that is 91 800 and then the annual net profit or the annual uh uh annual net annual cash flow okay you know annual profit or the net annual cash flow so same language net annual cash flow is annual revenue minus annual cost so this one balance yeah so 91 800 so minus 185 400 minus 91 800 so that is 93 thousand six hundred then applying this formula payout period so payout period is equal to investment minus salvage valued investment minus salvage value all over net annual that is 2 27 000 pesos all over the net annual cash flow is 93 600. yeah so therefore i'm payout period nothing detail is equal to 270 000 minus 27 000 divided by 93600 so that is equal to 2.59 years two point two point fifty nine years okay so uh capital for this uh problem is a problem update what is the payback period of the investment investment uh business by using this for method the rate of return annual word present word and future word questions and thank you