Ordinary annuity in engineering economics An “ordinary annuity” (equal payments at equal intervals, compounding at a fixed rate) is directly used in the calculation of which one of the following in plant cost accounting?

Introduction / Context:In chemical engineering economics, time value of money concepts are essential for estimating equipment charges and annual costs. An ordinary annuity represents a stream of equal end-of-period payments and underpins several common costing methods. This question asks where, specifically, the ordinary annuity relationship is applied.

Given Data / Assumptions:

• Ordinary annuity: payments occur at the end of each period.
• Constant interest rate i and term n periods.
• Standard capital-recovery factors may be used.

Concept / Approach:The sinking fund method of depreciation assumes that the owner makes equal periodic deposits (an annuity) into a fund that accumulates with interest to replace the asset at the end of its life. The required deposit A is obtained from the future worth S using the uniform series sinking fund factor: A = S * i / ((1 + i)^n − 1). Thus, the ordinary annuity structure is fundamental to this depreciation approach.

Step-by-Step Solution:

Verification / Alternative check:Textbook factor tables list the sinking fund factor alongside present/future worth and capital recovery factors, all derived from annuity relations.

Why Other Options Are Wrong:

• Manufacturing cost: A composite of materials, labor, overhead; not derived directly from annuity math.
• Discrete compound interest: A single future value from a single present value, not an annuity series.
• Cash ratio: A liquidity metric from the balance sheet, unrelated to annuity factors.

Common Pitfalls:Confusing capital recovery (which also uses annuity math) with depreciation methods; the question explicitly asks for “ordinary annuity” use and lists the sinking fund depreciation method.

Final Answer:Depreciation by sinking fund method