ENGINEERING ECONOMICS SOLVED PROBLEMS

( SIMPLE AND COMPOUND INTEREST )

1. P 8,000 is borrowed for 75 days at 16% per annum simple interest. How much will
be due at the end of 75 days?

Solution:
F =P(1+in)
= 8,000[(1+0.16)(75/360)]
F = ₱8266.667

2. A deposit of P 210,000 was made for 31 days. The net interest after deducting
20% withholding tax is P 850. Find the rate of return annually.

Solution:
850 = 0.8 I
I = 1062.5
I = Pin
1062.5 = 210, 000(I)(31/360)
I = 5.876%

3. Gielmae Aniñon was granted a loan of P 20,000 by her employer CPM Industrial
Fabricator and Construction Corporation with an interest of 6 % for 180 days on the
principal collected in advance. The corporation would accept a promissory note for
P 20,000 non-interest for 180 days. If discounted at once, find the proceeds of the
note.

Solution:
Interest = 0.06(20, 000) = 1,200
Proceeds on the note = 20,000 – 1,200 = ₱18,800

4. What will be the future worth of money after 12 months, if the sum of P 35,000 is
invested today at simple interest rate of 1% per month?

Solution:
F = P(1+in)
= 35, 000[(1+(0.01)(12)]
F = ₱39,200

5. If you borrowed money from your friend with simple interest of 12%, find the
present worth of P 45,000, which is due at the end of 6 months.

Solution:
 F = P(1+in)
45,000 = P[(1+(0.12)(6/12)
P = ₱42,452.830

6. Nicole buys a television set from a merchant who ask P 2,150 at the end of 65
days. Nicole wishes to pay immediately and the merchant offers to compute the
cash price on the assumption that money is worth 8% simple interest. What is the
cash price?

Solution:
F = P(1+in)
2,150 = P[(1+(0.08)(65/360)]
P = ₱2,119.387

7. It is the practice of almost all banks in the Philippines that when they grant a loan,
the interest for one year is automatically deducted from the principal amount upon
release of money to a borrower. Let us therefore assume that you applied for a loan
with a bank and the P 60,000 was approved at an interest rate of 14 % of which P
10,200 was deducted and you were given a check of P 49,800. Since you have to
pay the amount of P 60,000 one year after, what then will be the effective interest
rate?

Solution:
I = Pin
10,200 = 49,800(I)(1)
I = 20.48%

8. A woman borrowed P 25,000 from a local commercial bank which has a simple
interest of 16% but the interest is to be deducted from the loan at the time that the
money was borrowed and the loan is payable at the end of one year. How much is
the actual rate of interest.

Solution :
I = 0.16(25,000) = 4,000
I = Pin
4,000 = (25,000 – 4,000)(I)(1)
I = 19.05%

9. A bank charges 12 % simple interest on a P 500.00 loan. How much will be repaid
if the loan is paid back in one lump sum after five years?

Solution:
F = P(1+in)
= 500[(1+(0.12)(5)]
F = ₱800
10. A man borrowed P 100,000 at the interest rate of 12% per annum, compounded
quarterly. What is the effective rate?

Solution:
ER = (1+I/4)⁴ -1 = (1+0.12/4)⁴ -1
ER = 12.55%

11. What is the corresponding effective rate of 18% compounded semi-quarterly?

Solution:
ER = (1+I/8)⁸-1 = (1+0.18/8)⁸-1
ER = 19.48%

12. Philippine Bank advertises 9.5 % account that yields 9.84 % annually. Find how
often the interest is compounded.

Solution:
ER = (1+1/n)^n -1
0.0984 = (1+0.0984/n)^n -1
1.0984 = ( 1+1.0984/n)^n
n=4

13. A bank pays one percent interest on savings accounts four times a year. The
effective annual interest rate is?

Solution:
ER = (1+I/4)⁴-1 = (1+0.01/4)⁴-1
ER = 1.00%

14. The effective rate of 14% compounded semi-annually is?

Solution:
ER = (1+I/6)²-1 = (1+0.14/2)²-1
ER = 14.49%

15. An interest rate is quoted as being 7.5% compounded quarterly. What is the
effective annual interest rate?

Solution:
ER = (1+I/4)⁴-1 = (1+0.075/4)⁴-1
ER = 7.71%

16. The amount of P 15,800 in 5 years at 5 % compounded quarterly is?

Solution:
F = P(1+I)^n
I = 0.05/4 = 0.0125
 n= 4(4) = 16

F = 15,800(1+0.0125)¹⁶
F = ₱19,274.255

17. Find the present worth of a future payment of P 150,000 to be made in 10 years
with an interest of 12% compounded quarterly.

Solution:
F = P(1+I)^n
I = 0.12/4 = 0.03
n= 4(10) = 40

150,000 = P(1+0.03)⁴⁰
P = ₱45,983.526

18. On his 6th birthday a girl is left an inheritance. The inheritance will be paid in a
lump sum of P 10,000 on his 21st birthday. What is the present value of the
inheritance as of the boy’s 6th birthday, if the interest is compounded annually?
Assume I = 4%.

Solution :
F = P(1+I)^n
10, 000 = P(1+0.04)²¹
P = 4,388.336
F1 = 4,388.336(1+0.04)⁶
F1 = ₱5,552.645

19. The amount of P 60,000 was deposited in the bank earning at interest of 7.5%
per annum. Determine the total amount at the end of 5 years, if the principal and
interest were not withdrawn during the period?

Solution:
F = P(1+I)^
= 60,000(1+0.075)⁵
F = ₱86,137.76

20. Jeanlie Redoble owes P 25,000.00 due in 1 year and P 75,000 due in 4 years. He
agrees to pay P 50,000.00 today and the balance in 2 years. How much must he
pay at the end of two years if money is worth 5% compounded semiannually?

Solution:
ER = (1+I/2)²-1 = (1+0.05/2)²
ER = 0.050625

50,000+P/(1+I)² = 25,000/(1+I)¹+75,000/(1+I)⁴
50,000+P/(1+0.050625)² = 25,000/(1+0.050625)¹+75,000/(1+I)⁴
 P = ₱39,021.28

21. At an interest rate of 10% compounded annually, how much will a deposit of P
2,500 be in 15 years?

Solution:
F = P(1+I)^n
= 2,500(1+0.10)¹⁵
F = ₱10,443.120

22. How long (in years) will it take money to quadruple if it earns 7 % compounded
semi-annually?

Solution:
I = 0.07/2 = 0.035
F = P(1+I)^n
4P = P(1+0.035)^2n
4 = (1.035)^2n

Log 4 = log (1.035)^2n

23. In how many years is required for P 2,000 to increase by P 3,000 if interest at
12% compounded semi-annually?

Solution:
I = 0.12/2 = 0.06

F = P(1+I)^n
2,000+3,000 = 2,000(1+0.06)^2n
2.5 = (1.06)^2n

Log 2.5 = log (1.06)^2n

24. Consider a deposit of P 600.00 to be paid back in one year by P 700.00. What
are the conditions on the rate of interest, i% per year compounded annually such
that the net present worth of the investment is positive? Assume I  0.

Solution:
F = P(1+I)^n
700 = 600(1+I)¹
I = 16.67%
25. A company invests P 10,000 today to be repaid in 5 years in one lump sum at
12 % compounded annually. How much profit in present day pesos is realized?

Solution:
F = P(1+I)^n
= 10,000(1+0.12)⁵
F = 17, 623.42

I=F–P
= 17,623.42 – 10,000
I = ₱7,623.42