Engineering Economics

ENEECO30
Topic: Fundamentals of
Economics, Simple Interest &
Discount
Prepared by:

Kristopher Ralph M. Lagutin

Mechanical Engineer
Registered Master Plumber (RMP)
Contents

• Fundamentals of Engineering Economics

• Origin of Engineering Economy
• Cash Flow Diagram
• Present Economy, Time Value of Money
• Simple Interest and Discount
Engineering Economics

• Economics is defined as the study of allocation of scarce

resources among unlimited ends (or wants).
• Our wants are limited or at least increasing ever and to satisfy all
these wants, we need unlimited supply of productive resources
which could provide necessary goods and services to the
community.
• All engineering decisions involve number of feasible alternatives or
options. These must be properly evaluated prior to implementing
them. If there is no alternative, there is no need of economic study.
• Mission of engineers is to transform the resources of nature for the
benefit of the human race. Engineers translate an idea into reality.
• Engineering economy involves the systematic evaluation of the
economic merits of proposed solutions to the engineering
problems must be demonstrate a positive balance of long-term
benefits over long-term costs.
Manual of Engineering Economy (Nanda Shakya)
Origin of Engineering Economics

• Development of Engineering Economy as a separate field of study

is relatively recent. It has no well recorded past history. It does not
mean that, historically, costs are overlooked in engineering
decisions. Ultimate economy is primary concern to the engineer.
• The Economics Theory of Railway Location, 2nd Ed. New York:
John Wiley & Sons, 1987 written by Arthur M. Willington, a civil
engineer, pioneered engineering interest in economic evaluation.
His interest was railway in USA.
• A text book Principles of Engineering Economy, New York: The
Ronald Press Company, 1930, was published by Eugene Grant.
He is considered as the father of engineering economy.
• Current developments are pushing to encompass new methods of
risk, sensitivity, resource conservation and effective utilization of
public funds and so on.

Manual of Engineering Economy (Nanda Shakya)

Cash Flow Diagram

Cash flow: The actual peso or dollar coming into or out of the
treasure of a firm. A cash flow occurs when money is
transferred from one organization or individual to other. Thus,
cash flow represents the economic effects of an alternative in
terms of money spend or received.

Cash Inflow or Positive Cash Flow: Actual peso or dollar coming into firm.
i.e. receipts or incomes.

Cash Outflow or Negative Cash Flow: Actual peso or dollar paid out by a firm. i.e.
expenditures or payment.

Net Cash Flow: Difference between total cash inflows (receipts) and the total cash
outflows for a specified period of time. e.g. one year.

Manual of Engineering Economy (Nanda Shakya)

Cash Flow Diagram
𝑖 = 5% Php1500

1 2 3 4 5 6 7

Php 1000
Php 2500
Deposited Php 1000 today
Deposited Php 2500 at the end of the third year
Withdraw Php 1500 at the beginning of the sixth
year
Time Value of Money

• The relationship between money and time leads to the concept of

time value of money. A peso or dollar in hand is worth more than a
peso or dollar received ‘N’ years from now.
• Money has time value because the purchasing power of money as
well as the earning power of money changes with time.
• During inflation, purchasing power of money decreases over time.
• Money can earn an interest for a period of time.
• Interest represents the earning power of money.
• Therefore, both purchasing power and earning power of money
should be considered while taking into account the time value of
money.

➢ Engineering economic investment studies involve huge capital for

longer period of time. So, the effect of time value of money should
be considered in the analysis.
Manual of Engineering Economy (Nanda Shakya)
Simple Interest (I)
Simple interest occurs when the interest
earned is directly proportional to the
principal, the interest rate and the given
interest period.

I = P𝑖n
Simple Interest
Where:
I = P𝑖n n = Interest Period
𝑖 = Interest Rate
(% per year)

F=P+I P = Present Worth

F = Future Worth
If no. of months are given,
F = P + P𝑖n
months
n=
12

F = P 1 + 𝑖n If no. of days are given,

days
n=
x
 Simple Interest

Exact Simple
Ordinary Simple
1 yr = 1 Banker’s year 1 yr = 365 days
1 month = 30 days
For leap year,
∴ 1 yr = 360 days
1 yr = 366 days

Note: if year is NOT given assume ORDINARY. Hence, if

year given assume EXACT.
Exact Simple Interest
Checking for leap year

1990 1600

1991 1700

1992 1800
For century years to be
Leap year should be
leap year it should be
divisible by “4”
divisible by “400”
Discount (D)
- Occurs when a transaction requires that interest be
paid advance, usually at the start of the interest
period.

D=F−P
D = Fdn
Fdn = F − P
d = discount rate (%)

𝑖=𝑑 P = F − Fdn

𝑖 = d𝑖 + d P = F 1 − nd
Sample 1: A bookstore purchased a best selling book at P200.00
per copy. At what price should this book be sold so that by giving
a 20% discount, the profit is 30%?
a. P 200.00 c. P 400.00
b. P 300.00 d. P 500.00

Solution:
Required:
Selling Price
Let
x = selling price
Equate eq. 1 & 2
Assume, profit is 30% of the selling price
0.3(x) = 0.80(x) – P200
Profit = 0.3(x) → Eq. 1 P200 = 0.80(x) – 0.3(x)
P200 = 0.50(x)
Also,
Profit = Selling Price - Capital - Discount
Profit = x - P200 - 0.2(x)
x = P400.00
Profit = 0.80(x) - P200 → Eq. 2
Sample 2: The selling price of a TV set is double that of its net
cost. If the TV set is sold to customer at a profit of 25% of the net
cost, how much discount was given to the customer?
a. 37.5% c. 38.2%
b. 37.9% d. 38.2%
Required:
Discount
Discount = 0.75(x)
Solution:
Solve for discount in terms of
Let, percent of selling price,
x = net cost
0.75(x)
Selling Price = 2x Discount =
2(x)
Profit = 0.25(x)
Profit = Selling Price - Net cost - Discount
0.25(x) = 2x - x - discount

Discount = 2x - x Discount = 0.375 or 37.5%

- 0.25(x)
Sample 3: A manufacturing firm maintains one product assembly
line to produce signal generators. Weekly demand for the
generators is 35 units. The line operates for 7 hours per day, 5
days per week. What is the maximum production time per unit in
hours required of the line to meet the demand?
a. 1 hour c. 1 hour & 15mins
b. 1 hour & 30mins d. 1 hour & 30mins
Required:
Production time
Solution:

Let, t = maximum production time per unit

7hours 5days 1week
t= day week 35units

t = 1hour per unit

Sample 4: A group of workers were given a task to apply a rubberized paint to
a 750sqm basketball court flooring. They can finish 75sqm per day on
average rate. Compute for the total man-hour cost considering the following
manpower daily rates:
• (1) Foreman – 1,000/day Daily man-hour cost
• (6) Skilled Worker – 700/day Foreman 1 ×1,000 1,000
• (4) Laborer – 600/day Skilled 6 × 700 4,200
Required: Laborer 4 × 600 2,400
Total Man-hour cost Total manpower cost per day 7,600
Solution:
750sqm
Total No. of days = sqm 7,600
75 Man-hour = × 10days
day day
Total No. of days = 10 days
Man-hour = 76,000

Man-hour Cost = Manpower x Daily Rate

Sample 5: A man borrowed P 4000 for 75 days at 16% per
annum interest rate. How much will be due at the end of 75
days?
a. P 4186.43 c. P 4133.33
b. P 5124.64 d. P 5625.43
Given: Required:
n = 75 days Future Amount
i = 16%
P = P 4000
I = P𝑖n
Solution:
F=P+I
75
F = 4000 + 4000 0.16
360

F = P 4,133.33
Sample 6: If P1,000 accumulates to P1,500 when invested at a
simple interest for three years, what is the rate of interest?
a. 14.12% c. 16.67%
b. 15.89% d. 16.97%

Given: Required:
P = P 1000 Rate of Interest
F = P 1500
n = 3years
Solution:
F = P 1 + 𝑖n
1500 = 1000 (1 + 𝑖 3 )

i = 16.67%
Sample 7: A loan of P 5,000 is made for a period of 15 months,
at a simple interest rate of 15%, what future amount is due at the
end of the load period?
a. P 5,937.50 c. P 5,712.40
b. P 5,873.20 d. P 5,690.12
Given: Required:
P = P 5000 Future Amount
n = 15months
i = 15%
Solution:
F = P 1 + 𝑖n
15
F = 5000 (1 + (0.15) )
12
F = 5,937.50
Sample 8: Compute how much is the interest on P 3000.00 from Jan 15 to
June 20, 2007, if the rate of simple interest is 14%?
a. P 179.51 c. P 149.81
b. P 239.51 d. P 154.51

Given: Required:
i = 14% Interest (I)
P = 3000
Solution:
I = P𝑖n
I = P𝑖n
156
Months Days
I = 3000 0.14
Jan 16 365
Feb 28
Mar 31
April
May
30
31
I = 179.51
June 20
Total 156
Sample 9: A man borrowed P 2,000 from a bank and promised to
pay the amount for one year. He received only the amount of P
1,920 after the bank collected an advance interest of P 80. What
was the rate of discount?
a. 3.67% c. 4.15%
b. 4.00% d. 4.25%
Given: Required:
P = P 2000 Rate of Discount
Discount = P 80

Solution: 80
𝑑 =
2000
𝑑 = 4%
𝑑 = 0.04
Sample 10: A man borrowed P 2,000 from a bank and promised
to pay the amount for one year. He received only the amount of
P 1,920 after the bank collected an advance interest of P 80.
What was the rate of interest that the bank collected in advance?
a. 3.67% c. 4.17%
b. 4.00% d. 4.25%
Given: Required:
P = P 2000 Rate of Interest (i)
Discount = P 80
𝑖 = d𝑖 + d
Solution: 80 𝑑 0.04
𝑑 = 𝑖= =
2000 1 − 𝑑 1 − 0.04
𝑑 = 0.04
𝑑 = 4%
𝑖 = 4.17%
Sample 11: A man borrowed P 50,000 from a bank and agreed to pay the loan
at the end of 9 months. The bank discounted the loan and gave him P 40,000
in cash. What was the rate of discount? The rate of interest and the rate of
interest in one year?
a. 20%, 22.5%, 33.3% c. 10%, 25%, 30.3%
b. 20%, 22%, 30% d. 20%, 25%, 33.3%
Given: Required:
F = 50,000 Rate of Discount, Rate of Interest, Rate of
Interest (1 yr)
n=9 𝑖 = 0.2 + 0.2𝑖
P = 40,000
Solution:
Recall: 𝑖 = d + 𝑖d 𝑖𝑚𝑜𝑛𝑡ℎ = 25%
P = F 1 − nd
40,000 = 50,000 1 −
9
d 0.25 9
12 =
𝑑1 𝑦𝑒𝑎𝑟 = 0.2667 iyear 12
dmonth = d1 year n
9
𝑖year = 33.33%
dmonth = 0.2667 dmonth = 20%
12
SEATWORK: LECTURE NO. 1 (Instruction: Provide your Name & Section.
Write your solution in an A4 paper. Show your COMPLETE solution, consider
3 decimal number and box your final answer)

1. Cleofas borrowed P2,000.00 from a bank and agreed to pay the loan at the
end of one year. The bank discounted the loan and gave him P1950 in
cash. Determine the rate of discount.
2. Vicente made a loan from a bank. The bank charges him 12 % simple
interest on a P300.00 loan. How much will be repaid if the loan is paid in
one lump sum after three years?
3. A deposit of P 110,000 was made for 31 days. The net interest after
deducting 20% withholding tax is P 890.36. Find the rate of return annually.
4. Determine the exact simple interest on P 5,000 invested for the period
from January 15, 1996 to October 12, 1996, if the rate of interest is 18%.
5. What is the ordinary interest on P 1,500.50 for 182 days at 5.2%