Engineering Economy

Chapter 1

A. Ordinary Simple Interest

It is computed based on banker’s year 30 days per month or 360 days/year
B. Exact Simple Interest
It is computed based on exact number of days per year
365 days or 366 days
Note: leap year are years divisible by 4 excluding century years like 1900, 2000, etc.

Formula:

I= Pin

I – Interest in terms of peso

P – Principal or present worth in terms of peso

i – interest rate in terms of percent

n – number if period

F=P+I

Where F – Futrure worth or amount

P – Principal or present worth

Simple Discount, D

Discount = Future Value - Present Value

D=Fv-Pv

Banker’s Discount, d

i= d/I-d

Problems:

1. A man 10,000 pesos of 12% simple interest rate, how much he pay at end of 9 months and 10
days?
Given: P = 10,000
n= 280 days
i=12%
F=?
Solution: F=P+I
I=Pin
=(10000)(.12)(280/360)
I=933.33pesos
 F=P+I
=10000+933.33
F=10,933.33 pesos

2. Mr. J dela Cruz burrowed money and received Php1340.00. He Promised to pay Php1500.00 at
the end of 9months. Calculate the simple interest rate.
Given: P=PHP1340.00
n=270days
F=PHP1500.00
i=?
Solution: F= P+I
1500=1340+I
I=1500-1340
I=160
I=Pin
160=1340(9months/12months)(i)
i=.1592 or 15.92%
3. A man borrowed money money from a trust fund at 12% simple interest rate. If he is required to
pay PHP50,000.00 at the end of 7months, calculate the amount that he received now?

Given: i= 12%

F=50,000 Pesos

n= 7 months

Solution: F=P+I

I=Pin

F=P+Pin

50000=P(1+(.12)(7/12))

P=PHP46,728.97

4. A Man borrowed php20,000.00. He only received am amount of php19,200.00 after deducting

an advance interest. Calculate the discount rate and the interest rate.
Given: FV=PHP20,000.00
PV=PHP19200
SOLUTION:
Discount = FV-PV

=20000-19200

=800PHP

Discount rate = (800/20000)1000 = 4%

Interest rate = (800/19200)100 = 4.17%

 Bankers Discount

i=d/I-d

=.04/1-.04

=0.4166 or 4.17%

5. A businessman obtained a loan worth php100,000. Processing fee and other fees will be
deducted in advance worth php8000. Calculate the discount rate and interest rate.

Given: FV= PHP100,000

Discount = php8000

Solution: discount = FV-PV

PV=100000-8000

PV=92000

Discount rate =(discount/fv)100

=(8000/100000)(100)

= 8%

Interest Rate = (discount/pv)100

=(8000/92000)100

=8.69%

Assignment: Solve problems 17-18

Problems 1-6
Solve only 5
Deadline: before 1st trinal exam. Put it on a folder.
Compound Interest
F=P(1+i)n
Where:

F = compound amount of P
P=Present worth of present amount
i= interest rate

I=F-P

I=Compound interest

EIR=(1+i)n – 1
EIR = Effective interest rate

F/P = (1+i)n
(1+i)n = single payment compound amount factor
Reciprocal of it 1/(1+i)n = single payment present worth factor

Compounded Continuously
F=Pern
Where P=Present worth
r= continuous rate of compound interest
n=period
F= future worth

ern =compound amount factor

1/ern=present worth factor
Ie =er – 1
Where: Ie = effective annual interest
 r=nominal rate of interest compound continuously
Compound Interest
SP1

PHP50,000 was deposited in the bank that earns 7.5% per annum for 5 years. Calculate the
future amount.

Given: P = PHP 50,000

i= 7.5% per annuum
n=5 years or 5 period
solution:
F=P(1+i)n

F=50000(1+.075)5
F=PHP 71,781.47
SP2
If php200,000.00 was deposited in thee bank that earns 24% semi-annually. How many years
will it take so that the future worth will be php621,170.
Given: F= php621,170.

P= php200,000.00
i=24% semi-annually .24/2 = .12
n= (xyears)(2periods/year)
=2x period
Solution:

F=P(1+i)n
621,170= 200,000(1+.12)2x
621,170/200,000 = (1+.12)2x
3.10 = (1.12)2x
ln3.10 = 2xln1.12

2x = ln3.10/ ln1.12
X= 5years
SP3
How much is the money deposited in the bank 5years and 9monhts ago if the total
amount now is Php315,379.85 and the money earned 8% compounded quarterly
Given: F= Php315,379.85
P= ?

n= 5years(4periods/year) = 20 periods, 9 months = 2 periods. Total of 22 periods

i= 8% compounded quarterly =.08/4 = .02
Solution :
F=P(1+i)n
315,379.85=P(1+.02)22

P=php200,000

Compounded Interest Rate

SP4
If the interest rate is 6% compounded semi-annually, calculate the equivalent interest rate if
compounded quarterly

Cpd quarterly = Cpd Semi-annually

(1+i/4)4 = (1+i/2)2
i=.06/2 cpd semi annually
= .03
(1+i/4)4 = (1.03)2

(1+i/4)4 = 1.0609
1+i/4 = (1.0609)1/4
1+i/4 =1.0149
i/4 = 0.0149
i= .0596 or 5.96%
SP5
For instance, you have a money in the bank earning 12% interest rate cpd annually, how many
years your money will be doubled.
F=P(1+i)n
F=2P (doubled)

i=12% cpd annually

n= x years
Solution:
2P= P(1+0.12)x
2=(1.12)x

X=ln2/ln1.12
X= 6.12 years

ASSIGNMENT:
Exercises #2: problems 1-5, pg18-19
SP6
John borrowed php50000 from the bank at 25% compounded semi-annually, Calculate the
equivalent effective interest rate.
Solution : EIR=(1+i)n – 1

i=25% compounded semi-annually .25/2 = .125

n=2 periods per year
EIR=(1+0.125)2 – 1

EIR=(1.125)2 – 1
EIR=1.2656– 1
EIR= 0.2656x100%
EIR=26.56%
SP7

The single payment compounded amount factor for a period of 5 years is 1.33822. Calculate the
interest rate.
Solution:
F=P(1+i)n
F/P = (1+i)n = SINGLE PAYMENT COMPOUND AMOUNT FACTOR
1.33822=(1+i)n

1.33822=(1+i)5
(1.33822)1/5=1+i
1.05999=1+i
0.05999=i
i= 5.99% or 6%
Compounded Continously
SP8
If php10000 was deposited in the bank at 3% compounded continuously. Calculate the future
worth after 10years.
Solution: F=Pern

P= php10000
e=2.71828
r=3% compounded continuously
n=10 years or period
F=10000(2.71828).3

F=php 13498.60

SP9
Money was deposited in the bank at 5% compounded continuously. Calculate the effective
interest rate.
Solution: Ie =er – 1

r=.05
Ie=2.71828.05 – 1
Ie=1.71828.05
Ie=5.13%
SP10

Calculate the future worth of Php500 for 5 years

(a) 5% cpd annually
(b) 5% cpd continuously
(c) Which is better

A) F=P(1+i)n
=500(1+.05)5
F=PHP638.14
B) F=Pern
F= 500(2.71828).05(5)

F=PHP642.01
C) Compounded Continuously is better

Assignment : Solve # 11, 12, 15 pg.18-19

 Chapter 2
Annuities and capitalized cost
A. Ordinary Annuity
B. Annuity Due
C. Deferred Annuity
D. Perpetuity
Ordinary Annuity – an annuity whose series of equal payment of equal interval of time is
made at the end of every period (end of week, end of month, etc.)
Diagram

Diagram: Where: F= Future worth

P=present worth
A=series of equal payment
n=period
i=interest rate
𝑨[(𝟏+𝒊)𝒏 −𝟏]
P= 𝒊(𝟏+𝒊)𝒏

𝑨[(𝟏+𝒊)𝒏 −𝟏]
F= 𝒊

SP1
The son is 10 years old now. The father wishes to deposit a certain amount of money in the
bank so that on the 18th birthday, the son will have Php 120,000.00 for his college
education. If the interest rate is 5.41% cpd monthly, calculate the amount to be deposited
per month.
Given : F= php120000
i= 5.41% cpd monthly = 0.0541/12 = .00451
n=8 years(12 periods/year) = 96 periods
A=?
𝑨[(𝟏+𝒊)𝒏 −𝟏]
F= 𝒊

𝑨[(𝟏+𝟎.𝟎𝟎𝟒𝟓𝟏) 𝟗𝟔 −𝟏]
120000= 𝟎.𝟎𝟎𝟒𝟓𝟏

A = Php 1001.64 the amount to be deposited per month

SP2
A man decided to deposit php5000 of the end of every 6 months to a bank that pays
6.5% compounded semi-annually. Determine the accumulated amount at the end of 8 years.
Let F= Future worth or accumulated amount
𝑨[(𝟏+𝒊)𝒏 −𝟏]
F= 𝒊

A = php 5000 (series of equal payment

I = 6.5% cpd semi-annually = .065/2 = .0325
n = 8 years (2 periods/ year) = 16 periods
5000[(1+0.325)16 −1]
F=
0.0325

F = PHP 100,000

SP3
A car is worth Php 650000 in cash. If purchased through installment the buyer is required to pay
a down payment of php 120000 and the balance is payable on monthly basis of 10% cpd
monthly for 2 years. Calculate the monthly payment.
Solution: Cash Price = 650000
Down payment = 120000
Balance = 530000

i = 10% cpd monthly = 0.10/12 = 0.0083

n= 2years(12periods/year) = 24 period
A=?
Assignment: # 3,4,5
𝐴[(1+𝑖)𝑛 −1] Pg. 31 & 32
P=
𝑖(1+𝑖)𝑛

𝐴[(1+0.0083)24 −1]
530000=
0.0083(1+0.0083)24

A = Php 24,447.03 monthly payment for 2 years

Annuities and Capitalized Cost
B. Annuity Due – an annuity whose series of equal payment at equal interval of time are
made at the beginning of every period (1st day of the week, 1st day of the month, 1st day of the
month, etc.)
Where:
P= present worth

F= future worth
i= interest rate
n= periods
A= the series of payment
𝑨[(𝟏+𝒊)𝒏−𝟏 −𝟏]
P= +𝑨
𝒊(𝟏+𝒊)𝒏+𝟏

𝑨[(𝟏+𝒊)𝒏+𝟏−𝟏]
F= −𝑨
𝒊

SP1
A man decided to deposit php 25,000 at the beginning of each year at 4% compounded
annually. Calculate the sum of his money at the end of 5 years.
Given: A= PHP25,000

i= 4% cpd annually
n= 5 years or periods
F=?
𝐴[(1+𝑖) 𝑛+1 −1]
F= −𝐴
𝑖

25000[(1+0.04)5+1−1]
F= − 25000
0.04

F= PHP 140,824.39
SP2
A man borrowed money payable on the 1st day of every quarter at 6% cpd quarterly for 5 years.
If he is required to pay php 1721.55, determine the amount of money he received now.
Given: i= 6% cpd quarterly = .06/4 = 0.015
n= 5yrs(4periods/year) = 20 periods

A=PHP 1721.55
𝐴[(1+𝑖) 𝑛−1 −1]
P= +𝐴
𝑖(1+𝑖) 𝑛−1

1721.55[(1+0.015) 20−1 −1]

P= + 1721.55
0.015(1+0.015) 20−1

P=PHP 30,000

SP3
A Certain amount of money was deposited at the beginning of each year at 6% cpd annually. If
the total amount at the end of 6 years is php 29,575.35, calculate the periodic deposit and the
compound amount at the end of 10 years
Give: i= 6% cpd annually
n= 6 years or periods
F=PHP29,575.35

A=?
𝐴[(1+𝑖) 𝑛+1 −1]
A.) F= −𝐴
𝑖

𝐴[(1+0.06) 6+1 −1]

29,575.35 = −𝐴
0.06

A= PHP 4000

B.) Compound amount after 10 years

F=𝑃(1 + 𝑖 )𝑛
F=29,575.35(1 + 0.06)4
F=PHP 37,338.20
Deferred Annuity
An annuity whose series of equal payment at equal interval of time is deferred (or not
yet implemented) for a certain number of periods.
Where:
P1 = present worth of F1

F1 = compounded amount of P1
P2 = present worth of annuity
P 2 = F1
𝑨[(𝟏+𝒊)𝒏𝟐 −𝟏]
P 2= 𝒊(𝟏+𝒊)𝒏𝟐

A = the series of equal payment at equal interval of time

F2 = Future worth of P2
𝑨[(𝟏+𝒊)𝒏𝟐 −𝟏]
F2 = 𝒊

SP1
On the day the son was born, the father wishes to deposit a certain amount of money in the
bank so that on the 18th,19th,20th, and 21st year, the son will able to withdraw Php100,000 per
year for his college education. Determine the amount of money deposited now if interest rate
is 6% cpd annually.
Solution:
F1= P1(1+i)n1
i= 0.06 cpd annually
F1 = P 2

𝐴[(1+𝑖)𝑛2 −1]
P2 = 𝑖(1+𝑖)𝑛2

100000[(1+0.06)4 −1]
P2 = 0.06(1+0.06)4

P2= Php 346,510.56

F1 = P 2
346,510.56= P1(1+0.06)17 = P1 = Php 128,681.69
SP2
The cash price of a low-cost house and lot is php 600,000. If purchased thru installment basis a
down payment of 10% is required and the balance is payable monthly due after 2 years at 10%
cpd monthly for 25 years. Calculate the monthly payment.
Solution:
Cash Price = php 600000

Down payment =Php 60,000 A = monthly payment (?)

Balance = php 540,000
i=.10 cpd. Monthy
= .00833
From ord. annuity
𝐴[(1.00833) 300 −1]
P2=0.00833(1.00833)300

But P2= F1
F1= P1(1+i)n1
F1= 540,000(1.00833)23
F1= Php 653,513.40
𝐴[(1.00833)300 −1]
653,513.40=0.00833(1.00833)300

A = php 5,936.64 monthly payment

SP3
A house and lot are worth php500,000 in cash. If purchased thru installment basis, 10% down
payment is required and the balance will be paid on a monthly payment of php 6,000 the first
payment due is after 1 year. If the interest rate is 10% cpd monthly, how any years will it take to
pay the obligation.
Solution: Cash Price =PHP500,000
Down Payment=PHP50,000
Balance =Php 450,000

x = the number of years to pay the obligation (?)

𝐴[(1+𝑖) 𝑛2 −1]
from P2= 𝑖(1+𝑖) 𝑛2

6000[(1+0.00833)12𝑥 −1]
P2 = 0.00833(1+0.00833) 2𝑥

But P2= F1
F1= P1(1+i)n1

F1= 450000(1+0.00833)11
F1= Php 492,994.59 ; P2= F1
6000[(1+0.00833) 12𝑥 −1]
492,994.59= 0.00833(1+0.00833) 2𝑥

492,994.59 [(1+0.00833) 12𝑥 −1]

=0.00833(1+0.00833)2𝑥
6000

82.16575(0.00833)(1.00833)12x=(1 + 0.00833)12𝑥 − 1
0.68444(1.00833)12x =(1 + 0.00833)12𝑥 -1

1 = (1 + 0.00833)12𝑥 − 0.68444(1.00833)12x
1 = 0.31556(1.00833)12x
1
=(1.00833)12x
0.31556

3.16897 = (1.00833)12x
ln3.16897= 12x ln(1.00833)
 ln3.16897
12x =ln(1.00833)

X = 11.57 years

Assignment: #5,6,7,8,9; pg. 32

D. Perpetuity
- an annuity whose series of equal payment at equal interval of time is continue indefinitely
∞
𝐴
Formula: P = 𝑖

Where: P = Present worth of perpetuity ₱

A = Series of equal payment ₱
i = interest rate %
SP1
A wealthy philanthropist donated 1M to provide an annual scholarship to poor but
deserving students.
It is proposed that annual grant of ₱150,000 shall be withdrawn from the fund. If the
money earned an interest rate of 8% cpd. annually, how many years from now that
scholarship grant be given so that the money will last forever
Let x = the no. of years from
now that scholarship grant
be given so that the money
will last forever

𝐴
From P2 = where P2 = present worth of perpetuity
𝑖
150000
P2 = 0.08
= ₱ 1,875,000 PROOF:

But P2 = F1 F1=P1(1+i)

F1=P1(1+i)n-1 F1=1,000,000(1.08)9.2

F1= 1,000,000(1.08)x-1 F1= ₱ 2,030,000

1,875,000 = 1,000,000(1.08)x-1 ₱2,030,000 – ₱150,000 = ₱1,880,000

(1.08)x-1 =1.875 F1=1,880,000 (1.08)1

(x-1)ln 1.08 = ln 1.875 F1=₱ 2,030,400

x – 1 = 8.2
x = 9.2 years