Engineering Economy: Cheerobie B. Aranas

Engineering Economy
Lecture
Cheerobie B. Aranas
Simple Interest
•
Where:
Two Types of Simple Interest:
• Ordinary – banker’s year

12 months of 30 days = 360 days
• Exact Simple Interest – actual no. of days in a given year.

365 – normal year
366 – leap year
•
Sample Problem
1. If P 1,000 accumulates to P 1, 500 when invested at a simple interest for three years, what is the rate of interest?
2. You loan from a loan firm an amount of P 100,000 with a rate of simple interest of 20% but the interest was
deducted from the loan at the time the money was borrowed. If at the end of one year, you have to pay the full
amount of P 100,000. What is the actual rate of interest?
3. A loan of P 5,000 is made for a period of 15 months, at a simple interest rate of 15% what future amount is due
at the end of the loan period?
4. If you borrowed money from the bank. He received from the bank P 1,842 and promise to repay P 2,000 at the
end of 10 months. Determine the simple interest.
5. Determine the exact simple interest of P 5,000 invested for the period from January 15, 1996 to October 12,
1996, if the rate of interest is 18%.

Solution
Compound Interest
Compound Interest – interest of loan or principal which is based not only on the original amount of the loan or
principal plus the previous accumulated interest.
• n
• Where:
Rate of Interest – cost of borrowing money.
• Nominal Rate – basic annual rate

• Effective Rate – actual or the exact rate of interest earned on the
principal during a 1-year period.
Continuous Compounding
•
• Where:
P = Principal
e = 2.71828…..
NR = nominal rate
n = number of years
e(NR)n = continuous compounding amount factor
Sample Problem
1. The amount of P 20,000 was deposited in a bank earning an interest of 6.5% per annum. Determine the total
amount at the end of 7 years if the principal and interest were not withdrawn during the period.
2. A loan of P 50,000 is to be paid in 3 years at the amount of P 65,000. What is the effective rate of money?
3. Find the present worth of a future payment of P 80,000 to be made in 6 years with an interest of 12%
compounded annually.
4. What is the effective rate corresponding to 18% compounded daily? Take 1 year as equal to 360 days.
5. What nominal rate, compounded semi-annually, yields the same amount as 16% compounded quarterly?
6. If P 5,000 shall accumulate for 10 years at 8% compounded quarterly, then what is the compounded interest at
the end of 10 years?
7. In how many years is required for P 2,000 to increase by P 3,000 if interest at 12% compounded semi-annually?
8. How long will it take money to double itself if invested at 5% compounded annually?
9. A firm borrows P 2,000 for 6 years at 8%. At the end of 6 years, it renews the loan for the amount due plus P
2,000 more for 2 years at 8%. What is the lump sum due?
10. If money is worth 5% compounded quarterly, find the equated time for paying a loan of P 150,000 due in 1 year
and P 280,000 due in 2 years.
Solution
Solution
Solution
Annuity
• Annuity is defined as a series of equal payments occurring at equal
interval of time. When an annuity has a fixed time span, it is known as
annuity certain. The following are annuity certain:
• Ordinary annuity is a type of annuity where the payments are made
at the end of each period beginning from the first period.
Derivation of formula for the sum of ordinary annuity:
Let A be the periodic or uniform payment and assuming only four
payments:
SUM OF ORDINARY ANNUITY:
0 1 2 3… n
0 1 2 3… n
A
A
F
F
Where: i = interest per period

n =number of periods
A = uniform series compound
amount factor

𝑃= ¿ ¿
Annuity due is a type of annuity where the payments are
made at the beginning of each period starting from the first
period.
0 1 2 3… n-1 n
A A A A A
P
Deferred annuity is a type of annuity where the first payment
does not begin until some later date in the cash flow.
0 1 2 3 4 5 6…n
P A A A A A
When an annuity does not have a fixed time span but continues
indefinitely, then it is referred to as perpetuity. The sum of a
perpetuity is an infinite value.
• •PRESENT WORTH OF PERPETUITY:

Sample Problem
1. Today, a businessman borrowed money to be paid in 10 equal payments for 10 quarters. If the interest
rate is 10% compounded quarterly and the quarterly payment is P2,000, how much did he borrowed?
2. A manufacturer desires to set aside a certain sum of money to provide funds to cover the yearly
operating expenses and the cost of replacing every year the dyes of a stamping machine used in making
radio chassis as model changes for a period of 10 years.
Operating cost per year- P500
Cost of dye -P1200
Salvage value of dye -P600
The money will be deposited in a saving account which earns 6% interest. Determine the sum of money that
must be provided, including the cost of the initial dye.
4. Mr. Ayala borrows P100,000 at 10% effective annual interest. He must pay back the loan over 30 years with
uniform monthly payments due on the first day of each month what does Mr. Ayala pay each month?
Sample Problem
5. Instead of paying P100,000 in annual rent for office space at the beginning of each year for the
next 10 years, an engineering firm has decided to take out a 10 year 1M loan for a new building at 6%
interest. The firm will invest P100,000 of the rent saved and earn 18% annual interest on that
amount. What will be the difference between the firm’s annual revenue and expenses?
6. A person buys a piece of lot for P100,000 down payment and 10 deferred semi-annual payments
of P8,000 each, starting 3 years from now. What is the present value of the investment if the rate of
interest is 12% compounded semi-annually?
7. You need P4,000 per year for four years to go to college. Your father investedP5000 in 7% account
for your education when you were born. If you withdraw P4,000 at the end of your 17th, 18th,19th, and
20th b-day. How much will be left in the account at the end of the 21st year?
8. Find the present value in pesos of a perpetuity of P15,000 payable semi-annually if money is worth
8% compounded quarterly.
9. A man borrowed P300,000 from a lending firm which will be paid after 10 years at an interest rate
of 12% compounded annually. If money is worth 8% per annum, how much should he deposit to a
bank in order to discharge his debt 10 years hence?
Solution

Engineering Economy: Cheerobie B. Aranas

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Engineering Economy

• Ordinary – banker’s year

• Exact Simple Interest – actual no. of days in a given year.

• Nominal Rate – basic annual rate

Where: i = interest per period

• •PRESENT WORTH OF PERPETUITY:

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