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Compound Interest

Discussion about compounded interest

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7 views3 pages

Compound Interest

Discussion about compounded interest

Uploaded by

carljohncalica30
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Understanding Cash Flow Diagrams in Engineering

Economy
Cash flow diagrams are essential tools in engineering economy for visualizing the timing and
magnitude of financial transactions over a project's life cycle. These graphical representations
use a horizontal timeline to depict cash inflows (typically shown as upward arrows) and outflows
(downward arrows) at specific points in time. The diagram's vertical axis represents monetary
values, while the horizontal axis represents time periods, usually in years. Engineers and
financial analysts use these diagrams to quickly assess a project's financial structure, identify
patterns in cash movements, and support decision-making processes for investments and
economic evaluations. By providing a clear, visual summary of complex financial data, cash flow
diagrams enable more effective analysis of project feasibility, profitability, and long-term
economic impacts in engineering contexts.

1. Identify Cash Flows: Start by listing all cash inflows and outflows. For example, inflows
might include revenue from sales, while outflows might include expenses like rent and
salaries.
2. Draw a Timeline: Create a horizontal line across your page to represent time. You can
divide this line into intervals (e.g., months or quarters) depending on the time frame of
your cash flows.
3. Plot Inflows and Outflows:

 Inflows: Draw arrows pointing upwards from the timeline to represent incoming cash.
Label each arrow with the amount and the source (e.g., Sales Revenue).
 Outflows: Draw arrows pointing downwards from the timeline to represent outgoing cash.
Label each arrow with the amount and the expense type (e.g., Rent, Salaries).

4. Add Amounts and Dates: Next to each arrow, write the amount of cash flow and the
corresponding date or period. This helps to visualize when each cash flow occurs and its
magnitude.
5. Summarize Net Cash Flow: At various points along the timeline, you can sum up the net
cash flow (total inflows minus total outflows) to see how the cash position changes over
time. You can show this by drawing a cumulative line above or below the timeline.
6. Include Annotations: Add notes or explanations to clarify significant changes or anomalies
in cash flow. For example, if there’s a large expense or a major sale, annotate why it
happened.
Compound Interest

In compound interest, the interest earned by the principal at the end of each interest period
(compounding period) is added to the principal. The sum (principal + interest) will earn another interest
in the next compounding period.

Consider $1000 invested in an account of 10% per year for 3 years. The figures below shows the contrast
between simple interest and compound interest.

At 10% simple interest, the $1000 investment amounted to $1300 after 3 years. Only the principal earns
interest which is $100 per year.

At 10% compounded yearly, the $1000 initial investment amounted to $1331 after 3 years. The interest
also earns an interest.

Elements of Compound Interest


P = principal, present amount
F = future amount, compound amount
i= interest rate per compounding period
r = nominal annual interest rate
n = total number of compounding in t years
t = number of years
m = number of compounding per year
Example No. 1

Find the present worth of a future payment of Php 300, 000 to be made in 5 years with an interest rate of
8% per annum

Example No. 2

The amount of Php 20,000 was deposited in a bank earning in a bank an interest of 6.5 % per annum.
Determine the total amount at the end of 7 years if the principal and interest were not withdrawn during
this period

Example No. 3

A loan for Php 50,000 is to be paid in 3 years at the amount of Php 65,000. What is the effective rate of
money?

Example No. 4

At a certain interest rate compounded semiannually Php5,000 will amount to Php 20,000 after 10 years.
What is the amount at the end of 15 years?

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