MODULE 11 Part B

Project Management and Economy

– Interest and Equivalent
Expected Outcomes
After completing this module, you should be
able to describe: the interest and its
equivalent related to engineering cost
 Contents
• Verify and analyze the engineering economic based on;
• Interest and its equivalent
• Simple interest
• Compound interest
• Single payment
• Uniform series sinking fund
• Uniform series compound amount
• Capital recovery
• Uniform series present worth
• Uniform gradient present worth
• Effective and nominal (Compound Interest Table guide)
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• Mode of payment
– Single
– Annual
– gradient

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 Single payment

• Single payment
• Single Payment Compound Amount (future value, compound interest). The
future value (F) of an amount (P) initially invested at (n) compounding periods at
interest rate (i) per period. For continuous compounding; r = nominal annual
interest rate, and n = years
• The formula for single payment – compound amount factor;
(F/P, i%, n) = F = P (1+i)n …(3.2)
 Single payment- finding F
• Example - Let say you save your money in the bank RM300
today. What happen to your money 5 years from now?
Solution
(F/P,i,n)=?
F/P = P (1+i)n
F/P = $300 (1+0.1)5
F/P = $483.153 Without
compound
$450

F = P (1 + (i n ))
F = $300 (1 + (0.1 x 5)) = $450

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 Single payment- finding F
• Example - Let say you save your money in the bank RM10000
today. What happen to your money 4 years from now with
interest 10%?
F?
Solution
i=10%
(F/P,i,n)=?
0 4
F/P = P (1+i)n
F/P = $10000 (1+0.1)4 Without
P=$10000 compound
F/P = $14641 $14000

F = P (1 + (i n ))
F = $10000 (1 + (0.1 x 4)) = $14000

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 Single payment- finding i
• Example - Let say you want to save your money RM800 today. You want your money
to accumulate in 5 years to become RM12000. What is your targeted annual interest
rate? Which institution should you select? Shark loan?
Solution
F = P (1+i)n
(1+i)n = F/P
1+i = (F/P)1/n
i = (F/P)1/n – 1
i = (12000/800)1/5 – 1
i = 71.87%

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 Single payment- finding i
• Example - Let say you want to save your money RM1000 today. You want your
money to accumulate in 6 years to become RM10000. What is your targeted annual
interest rate?
• Solution
F=$10000
F = P (1+i)n
i=?
(1+i)n = F/P
1+i = (F/P)1/n
0 6
i = (F/P)1/n – 1
i = (10000/1000)1/6 – 1
P=$1000
i = 46.8%

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 Single payment- finding n
• Example - Let say you saving your money RM1300 today. With 8%
annual interest rate, how many years you should wait so your money
exceeding RM12000 to pay your 1st car instalment?
• Solution
• F = P (1+i)n
• (1+i)n = F/P
• n log (1+i) = log (F/P)
• n= log (F/P) / log (1+i)
• n= log (12000/1300) / log (1+0.08)
• n= log (9.23) / log (1.08)
• n=28.9 years
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 Single payment- finding n
• Example - Let say you saving your money RM2000 today. With 7%
annual interest rate, how many years you should wait so your money
exceeding RM15000 to get married?
• Solution F=$15000
• F = P (1+i)n
• (1+i)n = F/P i=7%

• n log (1+i) = log (F/P)

• n= log (F/P) / log (1+i)
P=$2000
• n= log (15000/2000) / log (1+0.07)
• n= log (7.5) / log (1.07)
• n=29.7 years
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 Uniform payment

• Uniform Series Sinking Fund (payments)

• The uniform series payment/investment (A) required to be
made every period for (n) periods, at interest rate (i) per period
to produce a future amount (F). For continuous compounding;
r = nominal annual interest rate, and n = years
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 Uniform payment – finding A
• Example - With interest rate offered up to 17% by banking
institution, how many should you save to accumulate your
money to RM12000 for house instalment in 7 years?
Solution
(A/F,i,n)=?
A/F= Fi/[(1+i)n-1]
A/F= (12000)(0.17)/[(1+0.17)7-1]
A/F= 2040/ 2
A/F=$1020
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 Uniform payment – finding A
• Example - With interest rate offered up to 7% by banking
institution, how many should you save to accumulate your
money to RM20000 if you decide to get married in 5 years?
Solution
F=$20000
(A/F,i,n)=?
A/F= Fi/[(1+i)n-1] 0 5
A/F= (20000)(0.07)/[(1+0.07)5-1]
A/F= 1400/ 0.40
Without
A/F=$3500 yearly ($292 monthly) A=? compound
$17500
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 Uniform payment

• Uniform Series Compound Amount (Annuity)

The future amount (F) for making a uniform series
payment/investment (A) every period for (n) periods, at
interest rate (i) per period. For continuous compounding; r =
nominal annual interest rate, and n = years
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 Uniform payment – finding F
• Example - You saving your money annually RM1300 in the
bank. What happen to your money after 4 years with 17%
interest rate?
Solution
(F/A, i,n)=?
F/A= A[(1+i)n-1]/i
Without
F/A= 1300 [(1+0.17)4-1]/0.17 compound

F/A=$6682.67
F = 1300 + 1300 + 1300 + 1300
F = RM5200

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 Uniform payment – finding F
• Example - You saving your money annually RM2400 in the
bank. What happen to your money after 4 years with 7%
interest rate?
F?
Solution
(F/A, i,n)=? 0 4

F/A= A[(1+i)n-1]/i
Without
F/A= 2400 [(1+0.07)4-1]/0.07 A=$2400 compound

F/A=$10655.86
F = 2400 + 2400 + 2400 + 2400
F = RM9600

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 Uniform payment – finding A from P

• Capital Recovery (Amortization)

The series of uniform payment, income, or amount (A)
required for n periods at interest rate (i) per period to pay off a
debt or to recover an initial capital investment (P). For
continuous compounding; r = nominal annual interest rate, and
n = years
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 Uniform payment – finding P from A

• Uniform Series Present Worth (Annuity)

The present value (P) of a series of uniform payments (A) to be
made for (n) periods at interest rate (i) per period. For
continuous compounding; r = nominal annual interest rate, and
n = years
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 Uniform payment – finding P
• Example - With 17% annual interest rate, how much you need
to save today to get RM400 annually as your dividend in 5
years?
Solution
(P/A,i,n)=?
P/A= A[(1+i)n-1] / i(1+i)n Without
compound
P/A=400[(1+0.17)5-1] / (0.17)(1+0.17)5 $2352.94 x
0.17 = $400
P/A=400[1.192] / (0.373)
P/A=$1279.26
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 Uniform payment – finding P
• Example - With 7% annual interest rate, how much you need to
save today to get RM4000 annually as your dividend in 20
years (after retired)?
Solution
(P/A,i,n)=?
P/A= A[(1+i)n-1] / i(1+i)n
P/A=4000[(1+0.07)20-1] / (0.07)(1+0.07)20
P/A=4000[2.869] / (0.271)
P/A=$42346.86
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 Uniform payment – finding P
• Example - With 7% annual interest rate, how much you need to
save today to get RM4000 monthly as your dividend in 20
years after retired?
Solution
(P/A,i,n)=?
P/A= A[(1+i)n-1] / i(1+i)n
P/A=(4000 x 12)[(1+0.07)20-1] / (0.07)(1+0.07)20
P/A=(4000 x 12)[2.869] / (0.271)
P/A=$508162.36
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 Uniform Gradient payment
• Uniform Gradient Present Worth
The present value (P) of a series of uniform gradient payments
(G) to be made for (n) periods at interest rate (i) per period

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 Uniform Gradient payment

• Example - After getting your 1st job as mechanical engineers,

you make a saving for future use. In 1st year you make a $200
annual saving. Then during 2nd year due to increment you
gained, you raised your saving $400 yearly. You increase your
saving $200 yearly until ten years. What is you equivalent
present sum of money today?

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Uniform Gradient payment
Solutions
P = PA + PG
P = 200 (P/A, 5%, 10) + 200 (P/G, 5%, 10)
(1+𝑖)𝑛 −1 1 (1+𝑖)𝑛 −1 𝑛
P = 200( ) + 200( − )
𝑖(1+𝑖)𝑛 𝑖 𝑖(1+𝑖)𝑛 𝑖 1+𝑖 𝑛
P = 200 (7.722) + 200 (31.652)
P = 1544.4 + 6330.4
P = $7874.8

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