Interest is the amount of money paid for the use of borrowed capital or the income

produced by money which has been loaned.

Simple interest is calculated using principal only, ignoring any interest that had been accrued in
preceding periods. In practice, simple interest is paid on short-term loans in which the time of
the loan is measured in days.
Where: I = interest
I = Prt
P = principal or present worth
A = P + I = P + Prt t = time period or number of interest periods
A = P(1 + rt) r = rate of interest per interest period
A = accumulated amount or future worth
Ordinary simple interest is computed on the basis of 12 months of 30 days
each or 360 days a year.

one interest period = 360 days

Exact simple interest is based on the exact number of days a year, 365 days
for an ordinary year and 366 days for a leap year.

one interest period = 365 or 366 days

Many types of transactions involve - e.g., borrowing money, investing money, or
purchasing machinery on credit – but certain elements are common to all types of these
types of transactions:
1. The initial amount of money invested or borrowed in transactions is called the
principal (P).
2. The interest rate (i) measures the cost or price of money and is called the percentage
per period of time.
3. A specified length of time marks the duration of the transaction and thereby establishes a
certain number of interest periods (n).
4. A plan for receipts or disbursements that yields a particular cash flow pattern over a
specified length of time. (For example, we might have a series of equal monthly
payments that repay a loan.)
5. A future amount of money (F) results from the cumulative effects of the interest rate
over a number of interest periods.
The way interest operates reflects the fact that money has a time value. This is why
amounts of interest depend on lengths of time; interest rates. For example, are
typically given in terms of a percentage per year.
We may define the principle of the time value of money as follows:
• The economic value of a sum depends on when the sum is received. Because
money has both earning power and purchasing power over time (i.e., it can
be put to work, earning more money for its owner).
• A dollar received today has a greater value than a dollar received at some
future time. When we deal with large amounts of money, long periods of
time, or high interest rates, the change in the value of a sum of money over
time becomes extremely significant.
Total
Principal rate of Interest Principal
Accrued
Amount interest Amount
amount
rate of
interest

time time
period period

Where: I = interest
P = principal or present worth
t = time period or number of interest periods
r = rate of interest per interest period
A = accumulated amount or future worth
 P = Principal A = Total Accrued Amount I = Interest
principal future worth earn
present worth future amount
deposit total
sum of / investment/invested accumulated
receives(borrowing money) repay
loan
1. Supposed you deposit Php 1, 000 in a bank savings account that pays interest at a rate
of 8% per year. Assume that you don’t withdraw the interest earned at the end of each
period (year), but instead let it accumulate. How much would you have at the end of year
three with simple interest?
Solution:
Given: P = Php 1,000.00 Required:
t = 3 years A=?
r = 8% = 0.08

A = P(1 + rt)
A = 1000(1 + (0.08)(3))
A = Php 1,240.00
2. Determine the exact simple interest on Php 500 for the period from January 10 to
October 28, 1996 at 16% interest.

Solution:
1996 is a leap year
January 10-31 = 21 (excluding Jan. 10)
February = 29 I = Prt
March = 31 𝟐𝟗𝟐
April = 30
I = (500)(0.16)( )
𝟑𝟔𝟔
May = 31 I = Php 63.83
June = 30
July = 31
August = 31
September = 30
October = 28 (including October 28)
Total = 292 days
3. Determine the ordinary simple interest on Php 700 for 8 months and 15 days if the rate
of interest is 15%.
Solution:
Number of days = (8)(30) + 15 = 255 days
I = Prt
𝟐𝟓𝟓
I = (700)(0.15)( )
𝟑𝟔𝟎
I = Php 74.38

4. What will be the future worth of money after 15 months, if a sum of Php 10,000.00 is
invested today at a simple interest rate of 12% per year?

A = P(1 + rt)
𝟏𝟓
A = 10,000[1 + (0.12)( )]
𝟏𝟐
A = Php 11, 500.00
5. How long would it take you to earn P45,000 if you invest P300,000 in
an account with a simple annual interest rate of 3%?

Given: I = Php 45,000 Solution:

P = Php 300,000
r= 3% = 0.03 I = Prt
45,000 = 300,000(0.03)t
Required: 45,000 = 9,000t
t=? t=5
t = 5 years
6. Winnie invested P100,000 in a simple savings account and kept it
there for 10 years. If by the end of it, she had P180,000, what was the
interest rate of the account?

Given: P = Php 100,000 Solution:

t = 10 years
A = Php 180,000
A = P(1 + rt)
180,000 = 100,000(1 + r10)
Required: 180,000 = 100,000(1 + 10r)
r=? 180,000 = 100,000 + 1,000,000r
r=8% 180,000 – 100,000 = 1,000,000r
80,000 = 1,000,000r
r = 0.08 = 8%
Winnie invested P100,000 in a simple savings account and kept it there
for 10 years. If by the end of it, she had P180,000, what was the interest
rate of the account.

Given: P = Php 100,000 Solution:

t = 10 years A=P+I
A = Php 180,000 180,000 = 100,000 + I
180,000 - 100,000 = I
Required: I = Php 80, 000
r=?
r=8%
I = Prt
80,000 = 100,000(r)(10)
80,000 = 1,000,000r
r = 0.08 = 8%
7. Nena invested P500,000 into a simple savings account that earned 5%
per year. How much did she have in total after two years?

Given: P = Php 500,000 Solution:

t=2 1 A = P(1 + rt)
r = 5% = 0.05 A = 500,000[1 + 0.05(2)]
Required: A = Php 550,000
A=?
2 I = Prt A=P+I
I = 500,000(0.05)(2) A = 500,000 + 50,000
I = Php 50,000 A = Php 550,000
8. Maria invested P180,000 in a savings account with a 20% interest
rate for a year. How much will she earn for 3 years?

Given: P = Php 180,000 Solution:

r = 20% = 0.2
t=3 I = Prt
I = 180,000(0.2)(3)
Required:
I = Php 108,000
I=?
9. Mr. Lopez borrowed money from the bank. He receives from the
bank P1,842 and promise to repay P2,000 at the end of 10 months.
Determine the rate of simple interest.

Given: P = 1,842 Solution:

A = 2,000 A = P(1 + rt)
t = 10 months 𝟏𝟎
2,000 = 1,842(1 + r( ))
𝟏𝟐
Required: 2,000 = 1,842(1 + 0.83r)
r=? 2,000 = 1,842 + 1,528.86r
2,000 – 1,842 = 1,528.86r
158 = 1,528.86r
r = 0.10 = 10%
10. What will be the future worth of money after 12 months, if the sum of
P25,000 is invested today at simple interest rate of 1% per month?

Given: P = 25,000 Solution:

r = 1% = 0.01
t = 12 months 1 A = P(1 + rt)
A = 25,000[1 + (0.01)(12)]
A = 25,000(1 + 0.12)
Required:
A=? A = Php 28,000

2 I = Prt A=P+I
I =25,000(0.01)(12) A = 25,000 + 3,000
I = Php 3,000 A = Php 28,000
11. What is the annual rate of interest if P500 is earned in five months
on an investment of P20,000?

Given: I = 500 Solution:

P = 20,000
t = 5 months I = Prt
𝟓
500 = 20,000(r)( )
𝟏𝟐
Required: 500 = 8,333.33r
r=? r = 0.06 = 6%
12. If you borrow money from your friend with simple interest of 15%, find
the present worth of P20,000, which is due at the end of ten months.

Given: A = 20,000 Solution:

r = 15% = 0.15 A = P(1 + rt)
t = 10 months 𝟏𝟎
20,000 = P[1 + (0.15)( )]
𝟏𝟐
Required: 20,000 = P(1 + 0.125)
P=? 20,000 = P + 0.125P
20,000 = 1.125P
P = Php 17,777.78
13. A loan of P3,000 is made for a period of 13 months, from January 1 to
January 31 the following year, at a simple interest rate of 35%. What future
amount is due at the end of the loan period?

Given: P = 3,000 Solution:

t = 13 months
1 A = P(1 + rt)
r = 35% = 0.35 𝟏𝟑
A = 3,000[1 + (0.35)( )]
𝟏𝟐
Required: A = Php 4,137.5
A=?

2 I = Prt A=P+I
𝟏𝟑
I = 3,000(0.35) ( ) A = 3,000 + 1,137.5
𝟏𝟐
I = Php 1,137.5 A = Php 4, 137.5
A cash-flow diagram is simply a graphical representation of cash flows drawn on a
time scale. Cash-flow diagram for economic analysis problems is analogous to that
of free body diagram for mechanics problems.

Receipt (positive cash flow or cash inflow). Cash inflows are the receipts,
revenues, incomes, and savings generated by project and business activity. A
plus sign indicates a cash inflow.

Disbursement (negative cash flow or cash outflow). Cash outflows are costs,
disbursements, expenses, and taxes caused by projects and business Cash flow
activity. A negative or minus sign indicates a cash outflow. When a project
involves only costs, the minus sign may be omitted for some techniques, such
as benefit/cost analysis.
A loan of Php 100.00 at simple interest of 10% will become Php 150.00 after 5 years.

Cash flow diagram on the Cash flow diagram on the

viewpoint of the lender viewpoint of the borrower