ENGINEERING

ECONOMY
INTEREST
 Interest is a fee that is charged for the use of
someone else’s money. The size of the fee will
depend upon the total amount of money borrowed
and the length of time over which it is borrowed.
EXAMPLE PROBLEM 1
An engineering wishes to borrow $20,000 in order
to start his own business. A bank will lend him the
money provided he agrees to repay $920 per
month for two years. How much interest is he
being charged? $2,080
INTEREST
 Whenever money is borrowed or invested, one party
acts as the lender and another party as the borrower.
The lender is the owner of the money, and the borrower
pays interest to the lender for the use of the lender’s
money. For example, when money is deposited in a
savings account, the depositor is the lender and the
bank is the borrower. The bank therefore pays interest
for the use of the depositor’s money. (The bank will
then assume the role of the lender, by loaning this
money to another borrower, at a higher interest rate.)
INTEREST RATE
 If a given amount of money is borrowed for a
specified period of time (typically, one year), a
certain percentage of the money is charged as
interest. This percentage is called the interest rate.
EXAMPLE PROBLEM 2
An investor makes a loan of $5000, to be repaid in
one lump sum at the end of one year. What annual
interest rate corresponds to a lump-sum payment
of $5425? 8.5%
SIMPLE INTEREST
 Simple interest is defined as a fixed percentage of
principal (the amount of money borrowed),
multiplied by the life of the loan. Thus
𝑰 =𝑷𝒓𝒕
where:
I = total amount of simple interest
t = life of the loan (no. of years)
r = nominal rate of interest (expressed as a decimal)
P = Principal
SIMPLE INTEREST
 Normally, when a simple interest loan is made, nothing
is repaid until the end of the loan period; then, both the
principal and the accumulated interest are repaid. The
total amount due can be expressed as

𝑭 =𝑷 + 𝑰 = 𝑷 (𝟏+ 𝒓𝒕)
EXAMPLE PROBLEM 3
A student borrows $3000 from his uncle in order to
finish school. His uncle agrees to charge him
simple interest at the rate of 5½% per year.
Suppose the students waits two years and then
repays the entire loan. How much will he have to
pay? $3,330
EXAMPLE PROBLEM 4
Determine the principal that would have to be
invested to provide $1650 of simple interest
income at the end of five years if the annual
interest rate is 8%. $4,125
EXAMPLE PROBLEM 5
A loan was made 3 years and 4 months ago at 6%
simple interest. The principal amount of the load
has just been repaid along with P800 of interest.
Compute the principal amount of the original loan.
P4,000
EXAMPLE PROBLEM 6
$2,000 was invested at 12% simple interest. The
investment is now worth $2,960. For how long was
the money invested? 4 years
EXAMPLE PROBLEM 7
P6,000 is borrowed for 75 days at 14% per annum
simple interest. How much will be due at the end of
75 days? P6,175
SIMPLE INTEREST
 There are basically two kinds of simple interest:
ORDINARY and EXACT. These two terms uses the
same formula for solving simple interest but they
differ on using the time.
 ORDINARY simple interest is a simple interest that
uses 360 days as equivalent number of days in a year.
On the other hand, EXACT simple is interest is a
simple interest that uses exact number of days in a
year which is 365 (or 366 for leap year)
 These two kinds of simple interest are only applicable
if the unit of time used is days,
EXAMPLE PROBLEM
Find the actual and approximate no. of days between:
February 3, 2020 – March 5, 2022
Actual = 761 days
Approximate = 752 days

Find the actual and approximate no. of days between:

November 30, 2021 – March 30, 2025
Actual = 1216 days
Approximate = 1200 days
EXAMPLE PROBLEM 8
On May 15, 2020 a businessman loans $15,000 in
the bank for the expansion of his restaurant. It was
agreed that he will pay the amount with 6% rate of
interest on August 10, 2020. What is the ordinary
simple interest to be paid? $212.5
EXAMPLE PROBLEM 9
Ronnie borrowed $1800 from his aunt last
December 25, 2019. He promised that he will pay
his aunt on February 14, 2020 at 8% interest. Find
the exact simple interest to be paid by Ronnie.
$20.12
EXAMPLE PROBLEM 10
Nolan Walker decided to buy a used snowmobile
since his credit union was offering such low interest
rates. He borrowed $3,900 at 4.25% on December
26, 2019, and paid it off February 21, 2021. How
much did he pay in interest? (Assume ordinary
interest and no leap year.) $191.07
COMPOUND INTEREST
 When interest is compounded, the total time period
is subdivided into several interest period (e.g., one
year, three months, one month). Interest is credited
at the end of each interest period, and is allowed to
accumulate from one interest period to the next.
COMPOUND INTEREST
 During a given interest period the current interest
is determined as a percentage of the total amount
owed (i.e., the principal plus the previous
accumulated interest).
COMPOUND INTEREST
 First  Second Payment  Third Payment
Payment
COMPOUND INTEREST
 In general, if there are n interest periods, we have
F = Future worth Annual, m=1
P = Present worth
i = rate of interest / real or Quarterly, m=4
true rate of interest Semi-annual, m = 2
Monthly, m=12
r = nominal rate of interest Bi-monthly, m=6
m = no. of compounding
period
n = no. of periods

t = no. of years
EXAMPLE PROBLEM 11
A student deposits $1000 in a savings account that
pays interest of 6% per year, compounded
annually. If all the money is allowed to accumulate,
how much will the student have after 12 years?
$2012.2
EXAMPLE PROBLEM 12
A student who will inherit $5000 in three years has
a savings account that pays 5% per year,
compounded annually. What is the present worth of
the student’s inheritance? $4319.19
EXAMPLE PROBLEM 13
Suppose that a man lends $1000 for four years at
12% per year simple interest. At the end of the
four years, he invested the entire amount which he
then has for 10 years at 8% per year, compounded
annually. How much money will he have at the end
of the 14-year period? $3195.21
EXAMPLE PROBLEM 14
At what rate of interest, compounded annually, will
an investment triple itself in 10 years? 11.70% or
12%
EXAMPLE PROBLEM 15
How long would it take for an investor to double his
money at 10% interest per year, compounded
annually? 7.28 years or 7.5 years
EXAMPLE PROBLEM 15
A bank pays interest at the rate of 6% per year,
compounded monthly. If a person deposits $2500
in savings account at the bank, how much money
will accumulate by the end of 2 years? $2,817.9
EXAMPLE PROBLEM 16
If P5000 shall accumulate for 10 years at 8%
compounded quarterly. Find the compounded
interest at the end of 10 years.
P6,040.2
EXAMPLE PROBLEM 17
If P500,000 is deposited at a nominal rate of 6%
per year, compounded monthly, determine the
compound interest after 7 years and 9 months.
P295,085.34
EXAMPLE PROBLEM 18
In 1626, Peter Minuit convinced the Wappinger
Indians to sell him Manhattan Island for $24. If the
Native Americans had put the $24 into a bank
account paying 4% interest, how much would the
investment worth in the year 2020 if interest were
compounded bi-monthly?
$159,212,893.48
EXAMPLE PROBLEM 19
By the condition of a will, the sum of P20,000 is left
to a girl to be held in trust fund by her guardian
until it at least amount to P50,000. When will the
girl receive the money if the fund is invested at 8%
compounded
11.57 years quarterly?
EXAMPLE PROBLEM 20
A man possesses a promissory note, due 3 years
hence, whose maturity value is P6,700.48. If the
rate of interest is 10% compounded semi-annually,
what is the value of this note now?
P5,000
CONTINUOUS
COMPOUNDING
 For continuous compounding

P = Present worth

F = Future worth

r = nominal rate compounded

t = time in years
EXAMPLE PROBLEM 21
A savings bank offers long-term savings certificates
at 7½ % per year, compounded continuously. If a
10-year certificate costs $1000, what will be its
value at maturity?
$2,117
EXAMPLE PROBLEM 22
How much money must be deposited in a savings
account so that $5500 can be withdrawn 12 years
hence, if the interest rate is 9% per year,
compounded continuously, and if all the interest is
allowed to accumulate?
$1,867.78
 EXAMPLE PROBLEM 23
Find the time required for a sum of money to triple
itself at 5% per annum compounded continuously.
21.98 years or 22 years
EFFECTIVE RATE
 The effective annual interest rate is the equivalent
interest rate if money is compounded annually
and still yields the same accumulated worth.

r = nominal rate, compounded n times per year

EXAMPLE PROBLEM 24
Determine the effective annual interest rate
corresponding to a nominal interest rate of 8½%
per year, if the interest is compounded monthly?
8.84%
EXAMPLE PROBLEM 26
What is the effective annual interest rate if the
nominal annual rate of interest is 14%
compounded continuously?
15.03%
EXAMPLE PROBLEM 27
Which of these gives the lowest effect rate of
interest?
12.35%
A. 12.35% compounded annually
12.93%
B. 12.20% compounded quarterly
12.24%
C. 11.60% compounded monthly 11.94%
D. 11.90% compounded semi-annually
EXAMPLE PROBLEM 28
Which of these gives the highest effect rate of
interest?
12.00%
A. 12.00% compounded annually
12.55%
B. 12.00% compounded quarterly
12.36%
C. 12.00% compounded bi-monthly
12.75%
D. 12.00% compounded continuously
EXAMPLE PROBLEM 29
What is the smallest nominal rate to yield an
effective rate of 10.15%?
9.67%
 EXAMPLE PROBLEM 30
What nominal interest compounded monthly is
equivalent to a nominal interest rate of 14%
compounded quarterly?
13.84% per year, compounded monthly
CASH FLOW
 A cash flow is the difference between total cash
receipts (inflows) and total cash disbursement
(outflows) for given period of time (typically, one
year). Cash flow are very important in engineering
economics because they form the basis for
evaluating projects, equipment, and investment
alternatives.
CASH FLOW
 The easiest way to visualize a cash flow is through
a cash flow diagram, in which the individual cash
flows are represented as vertical arrows along a
horizontal time scale. Positive cash flows (net
inflows) are represented by upward-pointing
arrows, and negative cash flows (net outflows) by
downward-pointing arrows; the length of an arrow
is proportional to the magnitude of the
corresponding cash flow. Each cash flow is
assumed to occur at the end of the respective
time period,
EXAMPLE PROBLEM 31
A company plan to invest $500,000 to manufacture
a new product. The sale of this product is expected
to provide a net income of $70,000 a year for 10
years, beginning at the end of the first year.
Construct a cash flow diagram.
EXAMPLE PROBLEM 32
Suppose that you have a savings plan covering the
next ten years, according to which you put aside
$600 today, $500 at the end of every other year
for the next five years, and $400 at the end of
each year for the remaining five years. As part of
this plan, you expect to withdraw $300 at the end
of every year for the first 3 years, and $350 at the
end of every other year thereafter. (a) Tabulate
your cashflow. (b) Draw your cash flow diagram.
EXAMPLE PROBLEM 33
A student deposits P1,500 in a 9% account today.
He intends to deposit another P3,000 at the end of
two years. He plans to purchase in five years his
favorite shoes worth P5,000. Calculate the money
that will be left in his account on year after the
purchase.
P1,300.39
EXAMPLE PROBLEM 34
An investment consisting of deposits of P1,000,
P1,500, and P2,000 are made at the end of the 2nd
year, 3rd year, and 4th year, respectively. If money
is worth 10%, what is the equivalent present worth
of the investment?
P3,319.45
 EXAMPLE PROBLEM 35
An amortization of a debt is in a form of a gradient
series of P5,000 on the first year, P4,500 on the
second year, P4,000 on the third year and P3,500
on the fourth year. What is the equivalent present
worth of the debt if interest is 5%?
Present Worth = P15,178.35
Future Worth = P18,449.38
EXAMPLE PROBLEM 36
A man opened an account P200,000 in the bank
today at the rate of 3% per annum. After two
years, he deposits another P400,000. After another
five years, he will withdraw P500,000. How much
money does he have on his account after the 10 th
year?
P229,127.81
EXAMPLE PROBLEM 37
Fifteen years ago, P1,000.00 was deposited in a
bank account, and today it was worth P2,380.00.
The bank pays interest semi-annually. What was
the interest rate paid on this account?
EXAMPLE PROBLEM 38
John borrowed a certain amount on June 1990 from
Bogart. Two years later, John borrowed again from
Bogart an amount of P5,000, John paid P1,000 on
June 1993 and discharged his balance by paying
P7,500 on June 1995. What was the amount
borrowed by John on June 1990 if the interest rate
is 8% compounded annually?