Economics principal only while compound interest is calculated on the principal

plus the interest per interest period.

An economy is the system of human activities related to the
production, distribution, exchange, and consumption of goods and 1. Simple Interest:
services. The ancient economy was mainly based on subsistence I =P in F=P+ I F=P(1+i)
farming. The exchange of goods happened within a barter basis. Where: I = interest, P = principal, F = future worth, I =
Aristotle (384-322 B.C) was the first to differentiate between a use interest rate
value and an exchange value of goods. In Medieval times the great 2. Ordinary Simple interest:
conquerors raised venture capital to finance their captures. The I =P in
capital should be refunded by the goods they would bring up in the d
Where: n= , d is the no. of days invested (borrowed)
New World. The first economist in the true meaning of the word 360
“economy” was the Scotsman Adam Smith (1723-1790). He is often 3. Exact Simple interest:
seen as the founding father of economics. He developed much of I =P in
the theory about markets that we regard as standard theory now. d
Where: n= → for ordinary year
Smith laid the intellectual framework that explained the free market 365
and still holds true today. He is most often recognized for the d
n= → for leap year
expression “the invisible hand,” which he used to demonstrate how 366
self-interest guides the most efficient use of resources in a nation’s Note: years divisible by 4 are all leap year, except for
economy, with public welfare coming as a by-product. century years which are not divisible by 400 (i.e, 1700,
1800, & 1900). A number is divisible by 4, when the last 2
Introduction digits is also divisible by 4.
The mathematics of business and finance is based on the 4. Compound interest:
time value of money. The analysis and evaluation of the factors that F=P ¿
will affect the economic success of any engineering project is the Where: (1 + i)n is the single payment compound amount
very essence of Engineering Economy. The best used of borrowed factor
capital is the fundamental concept behind all investments. (1 + i)-n is the single payment present worth factor
5. Nominal rate of interest (NR):
Interest NR
i=
m
Interest is a fee paid for the use of money. Interest can be
simple or compound. In simple interest, the interest is based on the
 Where: I is the rate of interest per period, r is the nominal d
i=
rate of interest, m is the number of compounding periods 1−d
per year. 9. Annuities: - is the series of equal payment occurring at
equal interval of time. This includes anything involving fixed
Mode of compounding M weekly, monthly, or yearly payments.
Annually 1 - Ordinary annuity is one where the payments are made
Semi-annually 2 at the end of each period
Quarterly 4
a. Present Worth (P) of annuity:
Bi-monthly 6
Monthly 12 P
Semi-monthly 24 b. Future worth (F) of annuity
Daily 360
F
6. Effective Rate (ER): - Annuity Due is one where the payments are made at
ER=¿ the beginning of each period.
Note for two or more nominal rates to be equal, their A
effective rates must be equal. - Deferred annuity is one where the first payment is made
7. Continuous Compounding: several periods after the beginning of the annuity.
rn −r n
F=P e P=F e
Where: F is the future worth, P is the present worth, t is the n - periods
nominal interest rate, n is the number of interest period
8. Discount: - refers to an interest change that is collected at - Perpetuity - is an annuity in which the payment
the beginning of terms of a loan. continue indefinitely
- Discount (D) = Future worth – Present worth
P
D=F−P
10. Uniform of Arithmetic Gradient:
- Rate of discount (d):
discount FG
d= =d=1−¿
principal
- Relation between rate of discount (d) and rate of
interest (i):
A
The accumulated amount F: 2. Sinking fund Formula
3. Declining Balance
(n-1)G 4. Double declining balance method
5. Sum of the years digit
11. Geometric Gradient 6. Service output
7. Working hours
G(1+r)² 1. Straight Line Depreciation:
- The annual cost of depreciation (d):
Case I – If z ≠ 1 (r ≠ i): C o−C L
d=

[ ][ ]
L
G 1−z n 1+r
- P= Where: z = - The total depreciation (Dn) at the end of the nth year:
1+i 1−z 1+i
n(C o −C L )
D n=
Case II – If (r = i): then z = 1 L
- The book value (Cn) at the nth year:
G(n) C n=C o−Dn
- P=
1+ i 2. Sinking Fund Method:
The future accumulated amount F: - The annual cost of depreciation (d):
Co −C L C o−C n
n d= ∨d=
( ) ( )
- F=P(1+i) L
(1+i) −1 (1+i)n−1
Where: i = interest rate, r = common ration or rate of i i
increase or decrease in disbursement, P = equivalent - The total depreciation (Dn) at up to the nth year:
present worth, F = future worth
[ ]
n
( 1+ i) −1
12. Depreciation D n=d
i
- Depreciation is the decrease in the value of a property
with the passage of time to provide recovery of capital - The book value (Cn) at the end of the nth year:
which has been invested. Depreciation is also used to
C n=C o−Dn
recover the cost of producing products or services that Where: Cn = the original cost, CL = the scrap value, L =
result from the use of the property. the useful life of the property
Depreciation Methods: 3. Declining Balance Method or Matheson Formula
1. Straight line depreciation - The depreciation at any nth year (dn):
 d n=k Co ¿ 5. Sum of the years Digit Method (SYD)
Where: k is the constant rate of decline - The depreciation at any nth year (dn):

√ √
Cn C reverse digit
d n= (C o−C L )
k =1− =1− L Σ
Co Co
- The total depreciation at the end of the nth yr (D n)
- The book value (Cn) at the nth year period:
Σ reverse digit

[ ]
C L
n D n= (C o−C L )
C n=C o L ∨Cn =Co ¿ Σ digits
Co - The book value at the nth year (dn)
- th
The scrap (CL) value at the end of its life (L year): C n=C o−C n
L
C L =C o (1−k) - The total depreciation at the end of life (L th yr):
- The total depreciation (Dn) at the end of nth year: D L=C o −C L
D n=C o −Cn reversed digit
Note: Depreciation Factor
Where: k is the rate of depreciation, d n is the Σ digits
depreciation during the nth year. 6. Service Output Method:
4. Double declining Balance method (DDB): (Co −C L )Q n
dn =
- The depreciation at any nth year (dn): T

[ ]
2 Co 2
n−1 Where: Qn is the total number of units of output during
d n= 1− the nth year. T is the total units of output up to the end
L L
- The book value (Cn) at the nth year period: of life.
7. Working Hours Method:
[ ]
n
2
C n=C o 1− (Co −C L )H n
L d n=
H
- The scrap value (CL) at the end of its life (Lth yr):
Where: Hn is the total number of hours during the nth year.

[ ]
L
2 H is the total number of hours up to the end of the life.
C L =C o 1−
L
- The total depreciation (Dn) at the end of the nth yr: 13. Bonds
D n=C o −Cn The value of a bond is the present worth of all future
Note: Formulas in Declining Balance Method (DBM) amounts that are expected to be received through
becomes formulas in Double declining balance Method ownership of the bond.
if K is replaced by (2/L).
 Fr P10,800.00
Taxes and Insurance, ( 0.04 )( 270,000 ) =
P121,409.00
Where: P = bond value before redemption, F = face
Then;
value, R = redemption price, r = bond rate, I =
Net Annual Profit
investment rate, n = no. of periods before redemption ROR= ×100
P270,000
14. Basic Methods for Making Economic Studies:
P63,991
- Rate of return method (ROR) ROR= ×100=23.70%
P270,000
- Annual worth method (AW) Since; 23.70% < 25% (investment is not justified)
- Present Worth Method (PW) b. Annual Worth Method (AW):
- Future Worth Method (FW) Annual Revenue _________________ P185, 400.00
Example: [Basic Method for Making Economic Studies] Annual Costs:
P270,000-P27,000
Depreciation= =P29,609.00
An investment of P270,000 can be made in a project that will
produce a uniform annual revenue of P185,400 for 5 years and then
have a salvage value of 10% of the investment. Out of pocket costs
[ ]
( 1.25 )5 -1
0.25
Operation∧maintance ¿
for operation and maintenance will be P81,000 per year. Taxes and
Taxes and Insurance, ( 0.04 )( 270,000 ) = P10,800.00
insurance will be 4% of the fist cost per year. The company will be
P 67,500.00
4% of the first cost per year. The company expects capital to earn Interest on Capital = 0.25(P2700,000 =
P 188,909.00
not less than 25% before income taxes. Is this a desirable
Since; Annual cost > Annual Revenue (Investment is not
investment?
justified)
Solution: c. Present Worth Method (PW)
Cash inflow Diagram:
a. Rate of Return Method (ROR):
185,400
Annual Revenue ------------------------------ P 185,400.00
Annual Expenses:

Depreciation=
P270,000-P27,000
=P29,609.00
Pi=P185,400 [
1- ( 1.25 )-5
0.25 ]+P27,000 (1.25 )-5

[
( 1.25 )5 -1
0.25 ] Pi=P506,370.00
Cash Outflow Diagram:
Operation∧maintance ¿ 91,800
 Po =P270,000.00+P91,800 [ 1- (1.25 )-5
0.25 ] -
Note: The alternative which gives a higher rate of return
is justifiable.
Pay out Period:
Po =P 516,880
Total Investment-Salvage Value
Since; Po > Pi (investment is not justified) Pay out Period=
Net Annual cash Flow
d. Future worth Method (FW):
Note: the alternative which has a shorter pay out period
Cash Inflow Diagram:
is to be chosen.
185,400 - Annual Cost:

[ ]
( 1.25 ) -1 -5 Annual Cost =Depreciation+ Interest on capital +Operation∧mainte
Fi=27,000+185.00 Note: The alternative in which the annual revenue is
0.25
greater than the annual cost is to be chosen.
Fi=P1,548,580.00
- Future Worth:
Cash Outflow Diagram:
Note: the alternative that has a future worth cash
91,800 inflow greater than the future worth of cash outflow is

F o =P91,800 [
(1.25 )-5 -1
0.25 ]
+P270,000 1.25)
5
to be chosen.
16. Break – Even Analysis:
Break – Even – Point is the value of a certain variable for
Fo =P1,577 390.00
which the costs of the two alternatives are equal
Since; Fo > Fi (investment is not justified)
15. Selection of Alternatives: Gross Income
Studies on selection of alternatives are made to determine Income = selling price per unit x no. of units
in what manner an investment should be undertaken based I =P( x )
on any of the following methods. Expenses = (Material cost per unit + Labor Cost per unit +
- Present Economy Variable cost per unit) + Fixed cost
This involves selection of alternatives in which interest E=M ( x ) + L ( x ) +V ( x )+ Fc
is not a factor. Studies usually involve the selection - To break Even:
between alternative designs, materials or methods. INCOME = EXPENSES
- Rate of Return: 17. Benefit to Cost Ratio:
Net Profit
Rate of Return=
Total Investment
 Co CL principal at the time the money is released. Find the actual
C= −

[ ][ ]
1−(1+i)
−n n
(1+ i) −1 interest did charge to him after 1 year.
i i a. 12.97% b. 14.82%
c. 28.21% d. 18.37%
Where: C = annual equivalent of Cost, Co = original cost, CL =
5. A man borrowed P300, 000 from a bank and agreed to pay
salvage value, n = useful life
the loan at the end of months. The bank discount the loan
B- Cm
Benefit to Cost ratio= and given him 250,000. What is the rate of discount?
C
a. 20.67% b. 16.67%
Where: B = annual benefits, Cm = annual operation and
c. 28% d. 30%
maintenance cost
6. A machine has a selling price of P400, 000 after given 15%
Note: Benefit to cost ratio should be greater than 1 for the
discount. Find the original amount.
project to be justifiable.
a. P325, 000 b. P350, 000
Alcorcon Engineering Review Center c. P375, 000 d. P470, 588
7. P20, 000 is borrowed at 12% compounded quarterly for 8
Multiple choices: years. Find the amount after 8 years.
1. The amount of machine work P2600.00 is borrowed 16% a. P51, 502 b. P71, 208
simple interest. Find the amount after 10 months. c. P76, 304 d. P80, 395
a. P1600.42 b. P1790.34 8. The company wanted to receive P500, 000 6 years from
c. P1487.23 d. P2946.67 now. Considering an interest of 14% compounded semi-
2. Find the future amount of P25, 000 after 4 years if simple annually, find the amount must be deposited in the bank to
interest rate is 14%. receive the amount after 6 years.
a. P29,500 b. P39,600 a. P249,058 b. P222,006
c. P29,700 d. P29,800 c. P260,405 d. P279,197
3. A man borrowed P30,000 from Jan 18, 2004 to November 3, 9. P60,000 is invested in a bank at 8% compounded monthly
2004 with 12% simple interest. Find the exact interest. for 8 years. Find the amount earned of the investment.
a. P2,852.46 b. P3,093 a. P75,038 b. PP79,964.78
c. P5,083 d. P7,826 c. P53,547.43 d. P93,048.34
4. A mother borrowed money from a bank with 22% simple 10. An employee deposited an amount of P200,000 after his
interest. The interest is automatically deducted from the retirement 10 years ago. The money now is worth
P1,000,000. Find the annual interest did he receive.
 a. 21.93% b. 17.46% c. You will save P43.20 from borrowing from your friend
c. 25.89% d. 27.04% d. Borrowing from a bank will give P34.23 less in interest
11. If P8000 shall accumulate for 10 years at 12% compounded 16. Find the compound amount and interest if P4,500 is
quarterly. Find the compound interest at the end of 10 invested at 12% compounded quarterly for 5 years and 9
years. months.
a. P8456.28 b. P9456.28 a. P7,200 b. P8881.14 c.
c. P18,096.30 d. P11,456.28 P3,864.95 d. P5934.79
12. A sum P5,000 is invested now and left for 6 years, at which 17. Mr. Ayala borrows P1000 in 4 years the money become P2,
time the principal is withdrawn. The interest that has 500.00 compounded bimonthly. Find the nominal interest.
accrued is left for another 6 years. If the effective annual a. 12.62% b. 14.64% c.
interest rate is 8%, what will be the withdrawal amount at 23.35% d. 15%
the end of the 12th year? 18. Find the effective interest of 4% quarterly.
a. P706.00 b. 4,656.48 a. 10.29% b. 12.55% c. 14.03% d.
c. P1774.00 d. 5,211.13 16.98%
13. P3, 500.00 was deposited in a bank account, 15 years ago. 19. A machine has a compound interest of 3,000 when invested
Today it is worth P10, 000.00. Interest is paid semi-annually. at 14% compounded bi-monthly after 12 years. Find the
Determine the interest rate paid on this account? present amount of the investment.
a. 3.67% b. 5.90% a. 703.73 b. 1572.03
c. 7.12% d. 4% c. 7634.56 d. 2937.45
14. If the nominal interest rate is 6%, how much is P10,000 20. A sum of money is deposited now in a savings account. The
worth in 12 years in a continuous compounded account? effective annual interest rate is 12% and interest is
a. P20,544 b. P6750.00 compounded monthly. How much money must be
c. P7288.47 d. P6350.00 deposited to yield P8000.00 at the end of 11 months?
15. You are given the option to borrow P5,000 you need for one a. P153.00 b. P446.00
year. Which of this will you pay lesser interest. To borrow c. P6547.79 d. P7210.63
from a friend at an interest rate of 1.5% month or a loan 21. Find the nominal rate which if converted semi-annually
from a bank at a rate of 18% per year? could be used instead of 12% compounded bi-monthly.
a. You will pay P78.09 more than if you borrow from a a. 10.58% b. 11.28%
bank c. 9.38% d. 12.24%
b. You will pay P78.09 less than if you borrow from a bank
22. In how many years will an amount quadruple itself if c. P302.75 d. P539.45
invested at 10% compounded annually? 28. A company which manufactures electric motors has a
a. 9.69 b. 11.52 production capacity of 250 motors a month. The variable
c. 13.05 d. 15.34 costs are P150.00 per motor. The average selling price of
23. In how many years will an amount quadruple itself if the motor is P250.00. Fixed costs of the company amount to
invested is 14% compounded quarterly? P20,000.00 per month which includes taxes. The number of
a. 6.93 yrs b. 10.07 yrs motor that must be sold each month to break-even is closed
c. 8.84 yrs d. 11.28 yrs to:
24. When will an investment of P20, 000.00 double if the a. 40 b. 150
effective rate is 4% per month? c. 200 d. 160
a. 1.47 b. 9.0 29. A factory is running 80% efficiency with a fixed cost of
c. 6.5 d. 10.2 P80,000.00, variable cost per unit of P130.00, selling price
25. A student deposits P5, 000.00 in a 10% account today. He per unit of P400.00, and production capacity of 4000 units.
intends to deposit another P10,000.00 at the end of three What is the current profit of the factory if all products
years. He plans to purchase in 10 years a machine worth manufactured are sold?
P20, 000.00. Calculate the money that will be left in his a. P1,352,000.00 b. P430,000.00
account 4 years after the purchase. c. 1,066,000.00 d. P784,000
a. P18,237 b. P10,912 30. XYZ corporation manufactures bookcases that it sells for
c. P21,250 d. P1,260.00 P60.00 each. It cost XYZ P35,000 per year to operate its
26. A machine costs P30,000 today. If inflation rate is 12% per plant. The sum includes rent, depreciation charges on
year and interest is 16% per year, what will be the equipment, and salary payments. If the cost to produce one
appropriate future value of the machine, adjusted for bookcase is P50.00, how many cases must be sold each year
inflation, in 10 years? for XYZ to avoid taking a loss?
a. P306,300.00 b. P411,037.00 a. 2334 cases b. 539 cases
c. P289,500.00 d. P183,443.17 c. 3500 cases d. 2333 cases
27. A product has a current selling price of P1500.00. If its
selling price is expected to decline at the rate of 12% per Engineering sciences – economics
annum because of obsolescence, what will be its selling 1. A man borrowed P20, 000 and promised to pay equal
price 8 years hence? amount annually for 10 years at 10% compounded annually.
a. P425.15 b. P202.75 Find the annual amount.
 a. P1083.45 b. P2974.56 the funds required for redemption, the firm established a
c. P3254.91 d. P7623.40 sinking fund consisting of annual deposits, the interest rate
2. An employee wanted to have P100,000 at the end of 8 of the fund being 4%. What was the principal in the fund at
years. What amount must he put in the bank quarterly at the end of the 10th year?
12% compounded quarterly interest? a. P44,970.00 b. P38,378.00
a. P1904.66 b. P29.78.34 c. P41,453.00 d. P37,519.00
c. P3745.34 d. P4249.23 8. A house and lot can be acquired a down payment of
3. A man deposit P5000 each year in the bank and becomes P500,000.00 and a yearly payment of P150,000 at the end
P79,687 in 10 years with annual interest. Find the annual of each year for a period of 10 years, starting at the end of 5
interest of the investment. years from the date of purchase. If money is worth 14%
a. 9% b. 10% compounded annually, what is the cash price of the
c. 11% d. 12% property?
4. A man deposit P50, 000 and withdrawn P6635.00 per year. a. P710,100.00 b. P808,811.00
Interest rate is 8% annually. In how many years will a c. P963,253.88 d. P1,181,902.00
deposit become zero? 9. A piece of machinery can be bought for 12,000 cash, or for
a. 10 b. 11 P2000 down and payments of P963.42 per year for 15 years.
c. 12 d. 13 What is the annual interest rate for the time payments?
5. A man borrowed P30,000 and promised to pay the amount a. 4.61% b. 3.81%
annually for 10 years at the beginning of each period with c. 5.00% d. 11.00%
interest rate of 16% compounded annually. Find the annual 10. A parent on the day the child is born whishes to determine
amount. what lump sum would have to be paid into an account
a. P3092 b. P4973 bearing interest at 8% compound annually, in order to
c. P6530 d. P5351 withdraw P25,000 each on the child’s 18 th, 19th, 20th and 21st
6. A man borrowed P100,000 at 10% compounded annually birthdays.
for 10 years. And promised to pay the amount starting 5 a. P35,941.73 b. P33,941.73
years from now. Find the annual payment. c. P22,397.13 d. P25,941.73
a. P21,083.55 b. P23,837.55 11. The maintenance cost of a machine this year is expected to
c. P25,038.22 d. P27,099.34 be P5000. The cost will increase P500 each year for the
7. A company issued 50 bonds of P1,500 face value each, subsequent 9 years. The interest is 15% compounded
redeemable at par at the end of 15 years. To accumulate
 annually. What is the approximate worth of maintenance the amount in the account at the end of five years would be
for the machine over the full 10 years? nearest to
a. P14,814.67 b. P44,481.76 a. $564 b. $13,954
c. P82,414.67 d. P33,583.58 c. $6,977 d. $7,992
12. A man borrowed P50,000 and promised to pay annually for 17. A small company wants to have enough money saved to
10 years at 10% interest. Find the amount unpaid after the purchase a new $200,000 warehouse in five years. If the
4th payment was made. company can invest money at 16% per year, the amount
a. P30,048.23 b. P35,439.89 that must be invested each year is closed to:
c. P37,084.11 d. 39,044.56 a. $29,082 b. $3,920
13. A machine has a maintenance of P40,000 in 2 nd year, 60,000 c. $49,650 d. $63,960
in the 6th year and P80,000 in the 8th year. If interest is 10% 18. A company expects the cost of equipment maintenance to
compounded annually, find the equivalent equal annual be $6,000 in years one, $6, 500 in year two and amounts
maintenance of the machine for a period of 10 year. increasing by $500 per year through year 10. At an interest
a. P14,973.45 b. P12,084.02 rate of 10% per year, the present worth of maintenance
c. P16,965.70 d. P18,028.89 cost is nearest to.
14. A company expects that the material cost of a certain a. $38,220 b. $42,170
manufacturing operation to be $15,000 per year. At an c. $48,313 d. $51,790
interest rate at 8% per year, the present worth of this cost 19. The cash flow associated with a stripper oil well is expected
over a five year project is closed to: to be $4,000 in month one, $3,900 in month two and
a. $29,386 b. $56,220 amounts decreasing by $100 each month through year five.
c. $79,854 d. $59,891 At an interest rate of 12% per year compounded monthly,
15. A piece of machinery has a first cost of $35,000 with the equivalent uniform monthly cash flow is closed to:
monthly operating cost of $12,000. If the company wants to a. $1,332 b. $1,673
recover its investment in five years at an interest rate of 1% c. $2,794 d. $4,327
per month, the monthly income must be closed to: 20. A man applied for a long with 12% compounded semi-
a. $5,498 b. $6,386 annually. He promised to pay an amount P20,000 semi-
c. $8,295 d. $12,779 annually starting 4 years from now for 10 years. Find the
16. If a person deposits $200 per month into an account which amount stated in the loan.
pays interest at a rate of 6% per year compounded monthly, a. $122,563 b. $132,563
c. $142,563 d. $152,563
21. A series bank deposits of P2000 quarterly from 5 th year to a. P48,000.00 b. P24,000.00
11th year. If interest rate is 16% compounded quarterly, find c. P32,000.00 d. P16,800.00
the total amount at the 15th year. 27. A machine has an initial cost of P50,000 and a salvage value
a. $177,177 b. $146,401.97 of P5,000 after 10 years. What is the book value after five
c. $197,177 d. $207,177 years using straight line depreciation?
22. A man is applied for a long that pays P10, 000 annually for 8 a. P27,500.00 b. P25,000.00
years starting today. If interest rate is 10% annually, find the c. P15,500.00 d. P30,000.00
present amount of the loan. 28. A machine has a first cost of P50,000 with interest rate of
a. $58,684 b. $68684.19 10% annually. Expected salvage value after 10 years is
c. $78,687.19 d. $88,684.19 P5,000. Find the book value after 5 year using sinking fund
23. A series of deposits of P1000 bi-monthly starting today up method.
to the 10th year. Find the amount at the 12th year if interest a. P12,039 b. P22,084
rate is 8% compounded bi-monthly. c. P42,084 d. P32,762
a. $98,106 b. $107,976
c. $138,106 d. $178,106
24. A man wants to have P1,000,000 in the bank 20 years from
now. He deposit a uniform amount in the bank annually.
Find the amount in the bank at the 15 th year if interest is 6%
annually.
a. $546,758 b. $646,758
c. $746,758 d. $632,747
25. A man is applied for a loan of P100,000 and pays P10,000
annually from 1st year to 9th year. Considering an interest
rate of 10% per year, what amount he has to pay at the 10 th
year in order to pay off the loan.
a. $100,000 b. $110,000
c. $120,000 d. $130,000
26. An asset is purchases for P500,000. The salvage value in 25
years is P80,000. What are the depreciation in the first
three years using straight line method?