Republic of the Philippines

Laguna State Polytechnic University

Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

LSPU Self-paced Learning Module (SLM)

Course ENGINEERING ECONOMY

Sem/AY Second Semester/2022-2023

Module No. 2
Lesson Title Interest and Money – Time Relationships
Week Duration 3-7
Date
This material will discuss about the simple interest, compound interest, annuities and
Description of the Lesson
amortization.

Learning Outcomes
1. Explain the time value of money and discounting at normal and inflationary conditions;
1.1 Determine the future value of an investment and the present worth of a targeted
Intended Learning future amount;
Outcomes 1.2 Prepare using manual computations and computer the detailed investments,
operating costs; financial an economic benefit of any engineering projects;

After this topic students are expected to:

1. Solve problems about simple interest, compounding, annuities, and amortization.
Targets/ Objectives 2. Relate the topic aforementioned to real life applications.

Student Learning Strategies

You are expected to attend a face to face class:

Online Activities
(Synchronous/ 2A – Room
2B – Room
Asynchronous)
2C – Room

LECTURE GUIDE

I. Time Relationship
Student Activity 1.1 Simple interest
1.2 Compound interest
1.3 Annuities
1.4 Amortization

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Interest and Money – Time Relationship

Time value of money (TVM) is a concept in finance that states that money in the present
is worth more than the same amount of money in the future. This is because money has
the ability to earn interest and, as a result, its value increases over time. The time value
of money is an important concept in finance because it helps people and organizations
make informed decisions about how to allocate and invest their money.

There are several key concepts that are related to the time value of money:

Present value: The current value of a future sum of money, taking into account the time
value of money and a specified interest rate.

Future value: The value of a sum of money at a future date, taking into account the time
value of money and a specified interest rate.

Interest rate: The percentage at which money earns interest over a specified period of
time.

The time value of money is used in various financial decisions such as investment,
retirement planning, and capital budgeting. This concept is used to evaluate the
profitability of a project or an investment, by calculating the net present value and internal
rate of return of a cash flow. This helps in identifying the projects which are profitable
and worth investing in.

Interest is the amount of money paid for the use of borrowed capital or the income
produced by money which has been loaned.

Simple Interest
Simple interest is calculated using the principal only, ignoring any interest that had been
accrued in preceding periods. In practice, simple interest is paid on short – term loans in
which the time of the loan is measured in days.

I = Pni (EQUATION 1)
Where:
I = interest (simple)
P = principal or present worth
n = number of interest periods
i = rate of interest per interest period

F=P+I
F = P(1 + ni) (EQUATION 2)
Where:
F = accumulated amount or future worth

If you are the (a) Ordinary simple interest is computed on the basis of 12 months of 30 days each
lender, which do or 360 days a year.
you think is
advantageous on
your side? 1 interest period = 360 days

(b) Exact simple interest is based on the exact number of days in a year, 365 days
for an ordinary year and 366 days for a leap year.

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

1 = interest period = 365 or 366 days

Ordinary simple interest and exact simple interest are used in different situations
depending on the requirements of the problem.

Ordinary simple interest is used when the interest is calculated for a whole year,
regardless of the actual number of days in the year. It is typically used in
situations where the exact time period is not important and only a rough estimate
of the interest earned is needed. For example, when calculating the interest on a
loan taken for a few years, ordinary simple interest can be used to quickly
estimate the total interest owed.

Exact simple interest, on the other hand, is used when the exact time period is
important and a more accurate calculation of the interest earned is required. It is
calculated based on the exact number of days in the time period, which is then
converted to years by dividing the number of days by 365. Exact simple interest
is often used in financial transactions where the exact time period is known, such
as the calculation of interest on a savings account for a specific number of days.

In summary, ordinary simple interest is used for rough estimates and exact simple
interest is used for more precise calculations.

Sample 2 – 1
Determine the ordinary simple interest on P700 for 8 months and 15 days if the
rate of interest is 15%.

Sample 2 – 2
Determine the exact simple interest rate on P500 for the period from January 10
to October 28, 1996 at 16% interest.

Sample 2 – 3
What will be the future worth of money after 14 months, if a sum of P 10 000 is
invested today at a simple interest rate of 12% per year?

Sample 2 – 4
Engr. Rarela has saved P50,000 in a bank that offers an interest rate of 4% per
year. How much interest will Engr. Rarela earn after 2 years?

Cash – Flow Diagrams

A cash flow diagram is a visual representation of the inflow and outflow of money in a
business or personal finance scenario. It shows the amount of cash coming into a system
(inflows) and the amount of cash going out of the system (outflows) over a specific period
of time.

Imagine a bucket that represents your finances. The bucket starts empty, and every time
you receive money, you pour it into the bucket. Every time you spend money, you scoop
it out of the bucket. The cash flow diagram represents this process by showing the inflows
as upward arrows and the outflows as downward arrows. The height of each arrow
represents the amount of cash being added to or removed from the system.

For example, imagine that you receive P500 in allowance from your parents, spend P300
on clothes, and save P200 in a piggy bank (Refer to the illustration during the class).

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Receipt (positive cash flow or cash inflow)

Disbursement (negative cash flow or cash outflow)

A loan of P 100 at simple interest of 10% will become P 150 after 5 years.

Cash flow diagram on the viewpoint of the lender

Cash flow diagram on the viewpoint of the borrower

Cash flow diagrams are useful for tracking and analyzing the movement of money in a
system, which can help individuals and businesses make informed decisions about
spending, saving, and investing.

Sample 2 – 5
Engr. Cabrera has taken a loan of P2,500,000 from a bank at an interest rate of
8% per year for 5 years. After 2 years, Aiden pays back P1,000,000 as partial
repayment plus the interest. How much is the interest he paid for the duration of
5 years? Draw the Cash Flow Diagram for Engr. Cabrera.

Sample 2 – 6
Engr. Cabrera has taken a loan of P2,500,000 from a bank at an interest rate of
8% per year for 5 years. After 2 years, Aiden pays back P1,000,000 as partial
repayment plus the interest. How much interest does Aiden still owe after 24
months up to 48 months?

Compound Interest
In calculations of compound interest, the interest for an interest period is calculated on
the principal plus total amount of interest accumulated in previous periods. Thus,
compound interest means “interest on top of interest”.

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Compound interest is a type of interest that is calculated on the principal amount and the
accumulated interest of a previous period. In other words, with compound interest, you
not only earn interest on the original amount of money you have saved, but also on the
interest that has accumulated over time. This means that the interest you earn becomes
part of your principal, and the next interest calculation is based on the larger amount.
This creates a snowball effect, where the interest earns more interest, leading to faster
growth over time.

𝐹 = 𝑃(1 + 𝑖)𝑛

The symbol (1 + 𝑖)𝑛 is called the “single-payment compound amount factor” – is a

mathematical term used to calculate the future value of a single lump-sum investment
with compound interest. It represents the value of an investment at a future date, given
the principal amount, the interest rate, and the number of compounding periods.

𝐹
𝐹 = 𝑃 ( , 𝑖%, 𝑛)
𝑃

The symbol F/P, i%, n is read as “F given P at i per cent in n interest period.”

The single-payment compound amount factor can be used to calculate the future value
of a present investment or the present value of a future investment, depending on how
the formula is applied. If you know the present value of an investment, the interest rate,
and the number of compounding periods, you can use the single-payment compound
amount factor to calculate the future value of the investment. If you know the future
value of an investment, the interest rate, and the number of compounding periods, you
can use the single-payment compound amount factor to calculate the present value of
the investment.

𝑃 = 𝐹(1 + 𝑖)−𝑛

The quantity (1 + 𝑖)−𝑛 is called the “single payment present worth factor” and is
designated by the functional symbol P/F, i%, n. Thus,

𝑃
𝑃 = 𝐹 ( , 𝑖%, 𝑛)
𝐹

The symbol P/F, i%, n is read as “P given F at i per cent in n interest periods.”

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Single Payment Compound Factor (SPCF) and Single Payment Present Worth Factor
(SPPWF) are both used in finance to calculate the present value of a future lump sum
payment, taking into account the effect of compounding interest. However, there is a
difference between the two:

SPCF: The SPCF calculates the present value of a single lump sum payment to be
received at a future date. It is used to determine the value of future cash flows
discounted to their present value.

SPPWF: The single payment present worth factor is used in finance to calculate
the present value of a future lump sum payment, which is a one-time payment
received or paid at a future date. This factor is also known as the present value
factor or the discount factor.

In other words, SPCF is used to calculate the present value of a one-time payment, while
SPPWF is used to calculate the present value of a stream of payments.

Rates of Interest
Interest rate is the cost of borrowing money, or the rate at which money can be invested
to earn a profit. It is usually expressed as a percentage of the principal amount (the initial
amount of money borrowed or invested) per year.

Interest rates play a crucial role in finance and economics as they impact the cost of
borrowing and the return on investment. They also affect the decisions made by
individuals, businesses, and governments in relation to saving, borrowing, investing, and
spending.

Interest rates can be categorized into two types: nominal interest rates and effective
interest rates. Nominal interest rates are the interest rates that are quoted or advertised,
while effective interest rates take into account the effect of inflation, providing a more
accurate picture of the true cost of borrowing or return on investment.

(a) Nominal rate of interest

A nominal interest rate is the stated or named interest rate on a loan or
investment that does not take into account the effect of compounding. It is the
rate that is quoted by a lender or borrower, and it represents the simple annual
interest rate that is charged or earned on a loan or investment.

For example, if a borrower takes out a loan with a nominal interest rate of 6%
per year, this means that the borrower will pay 6% of the loan amount as interest
each year, regardless of whether the interest is compounded monthly, quarterly,
or annually.

Nominal interest rates are often used to compare the costs of loans or to evaluate
the returns of investments. However, since they do not take into account the
effect of compounding, they may not accurately reflect the true cost or return of
a financial product. To get a more accurate measure of the cost or return of a
loan or investment, it is important to consider the effective interest rate, which
takes into account the compounding effect of interest.

𝑟
𝑖=
𝑚

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Where: i = rate of interest per interest period

r = nominal interest rate
m = number of compounding periods year

Number of compounding periods of year Rate of interest per interest period

Annually r/1
Semi – annually r/2
Quarterly r/4
Monthly r/12
Daily r/365

Example:
Suppose you invest 50,000 PHP in a savings account that pays 5% nominal
interest rate, compounded monthly. The nominal interest rate of 5% per year
means that the account pays 5%/12 (or 0.4167%) interest each month, without
taking compounding into account. After one year, the account would have
earned:

Interest earned in month 1 = 50,000 PHP x 0.4167% = 208.33 PHP

Interest earned in month 2 = (50,000 PHP + 208.33 PHP) x 0.4167% = 208.61
PHP
Interest earned in month 3 = (50,000 PHP + 208.33 PHP + 208.61 PHP) x
0.4167% = 208.89 PHP
... and so on for 12 months

At the end of the year, the account balance would be:

50,000 PHP + 208.33 PHP + 208.61 PHP + 208.89 PHP + ... + 230.49 PHP =
52,573.94 PHP

Sample Problem 2 – 7
If the nominal rate of interest is 10% compounded quarterly what is the rate of
interest per interest period?

Solution:
We need to find the interest rate per quarter by dividing the nominal interest rate
by the number of compounding periods per year:

Interest rate per quarter = Nominal interest rate / Number of compounding

periods
= 10% / 4 periods
= 2.5%

So, the rate of interest per interest period is 2.5%. This means that for each
quarter, the interest charged or earned would be 2.5% of the outstanding
balance.

(b) Effective rate of interest

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

The effective rate of interest is the actual amount of interest that a borrower pays
on a loan or the actual yield earned by an investor on an investment after taking
into account the effects of compounding.

Note that n = number of periods

𝐹 = 𝑃(1 + 𝑖)𝑛

We get:
𝐹 = 𝑃(1 + 𝑖)𝑚𝑛

If P1.0 is invested at a nominal rate of 15% compounded quarterly, after one

year this will become:

0.15 4(1)
𝐹 = 1 (1 + ) = 1.1586
4

The actual interest earned is P0.1586, therefore, the rate of interest after one
year is 15.86%.

𝐹1 − 1 = (1 + 𝑖)𝑛 − 1
Where:
𝐹1 − 1 = 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒 𝑅𝑎𝑡𝑒

Sample Problem 2 – 8
Find the nominal rate which if converted quarterly could be used instead of 12%
compounded monthly. What is the corresponding effective rate?

Sample Problem 2- 9
Suppose you deposit Php 5,000 in a savings account that pays an annual interest
rate of 5% compounded annually. What will be the balance after 3 years?

Sample Problem 2- 10
Suppose you take out a loan of Php 50,000 at an annual interest rate of 8%
compounded monthly. How much will you have to pay after 13 months?

Sample Problem 2 – 11
Find the amount at the end of two years and seven months if P1000 is invested
at 8% compounded quarterly using simple interest for anytime less than a year
interest period.

Sample Problem 2 – 12
A P2000 loan was originally made at 8% simple interest for 4 years. At the end
of this period the loan was extended for 3 years, the loan was extended for 3
years without the interest being paid, but the new interest rate was made 10%
compounded semiannually. How much should the borrower pay at the end of 7
years?

Equation of Value
An equation of value is obtained by setting the sum of the values on a certain comparison
or focal date of one set of obligations equal to the sum of the values on the same date of
another set of obligations.

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

For compound interest:

If the focal date is in the future, use positive exponent for n.
If the focal date is in the past, use negative exponent for n.

Continuous Compounding and Discrete Payments

In discrete compounding, the interest is compounded at the end of each finite – length
period, such as a month, a quarter or a year.

In continuous compounding, it is assumed that cash payments occur once per year, but
the compounding is continuous throughout the year.

𝐹 = 𝑃𝑒 𝑟𝑛

Sample Problem 2 – 14
Compare the accumulated amounts after 5 years of P1,000 invested at the rate
of 10% per year compounded (a) annually, (b) semiannually, (c) quarterly, (e)
daily, and (f) continuously.

Discount
Discount refers to a reduction in the price or value of something. In finance, discount
often refers to a deduction from the face value of a financial instrument, such as a bond
or bill of exchange, that is made when the instrument is sold at a price below its face
value. The discount represents the difference between the face value of the instrument
and the price paid for it.

Discount = Future Worth – Present Worth

Sample Problem 2- 15
Suppose you are buying an aquaflask for P1,000, but the seller offers you a
discount of 10% if you pay in cash. What is the Present worth if you grab the
10% discount rate?

Rate of Discount
The rate of discount is the percentage by which the original price of a good or
service is reduced to arrive at the discounted price. It is commonly expressed as
a percentage, and is often used in retail sales, promotions, and other marketing
campaigns to incentivize customers to buy products or services.

𝑑 = 1 − (1 + 𝑖)−1

𝑑
𝑖=
1−𝑑
Where:
d = rate of discount for the period involved
i = rate of interest for the same period

Sample Problem 2 – 16

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

A man borrowed P5,000 from a bank and agreed to pay the loan at the end of 9
months. The bank discounted the loan and gave him P4,000 in cash. (a) What
was the rate of discount? (b) What was the rate of interest? (c) What was the
rate of interest in one year?

There are a few possible reasons why the bank discounted the loan and
gave the borrower P4,000 in cash instead of the full amount of P5,000:

1. The bank charged a fee or interest for processing the loan, which
was deducted from the amount borrowed. This fee could have been
a flat fee or a percentage of the loan amount.
2. The borrower may have been considered a credit risk by the bank,
meaning that there was a higher likelihood of the borrower defaulting
on the loan. In this case, the bank may have required a higher
interest rate or a larger down payment to compensate for the risk.
3. The bank may have needed cash on hand for other purposes, such
as making loans to other customers or paying expenses. By
discounting the loan and giving the borrower less cash up front, the
bank would have more funds available to use for other purposes.

Regardless of the reason, the borrower agreed to the terms of the loan
and accepted the discounted amount of P4,000 in cash. This means that
the borrower was willing to pay the price for the convenience of having
access to cash immediately, rather than waiting for the full loan amount
to be paid out over time.

Inflation
Inflation is a term used to describe the rate at which the general level of prices for goods
and services is rising, and, as a result, the purchasing power of money is decreasing. In
the Philippines, inflation refers to the sustained increase in the prices of goods and
services over time – in a short term.

Inflation affects everyone, including college students, because it affects the prices of the
things they buy, such as food, clothing, school supplies, and transportation. When
inflation is high, prices of goods and services tend to rise quickly, which means that people
have to spend more money to buy the same things they used to buy before.

For example, let's say a college student has a weekly allowance of Php500. If the inflation
rate is 5%, this means that the prices of goods and services will increase by 5%. As a
result, the student will have to spend more money to buy the same things as before. If a
meal used to cost Php50, it would now cost Php52.50. This might not seem like a big
difference, but over time, it can add up.

Inflation also affects the value of money over time. For example, if a college student saves
Php1,000 today, but the inflation rate is 5%, the value of that money will decrease over
time. In other words, the purchasing power of that money will decrease, and it will be
able to buy fewer goods and services in the future.

It is important for college students to be aware of inflation and its effects because it can
have an impact on their financial planning and decision-making. For example, they may
need to adjust their spending habits to account for higher prices, or they may need to
consider ways to save and invest their money to keep up with inflation. Understanding

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

inflation can also help them make informed decisions about their future education and
career goals, as well as their long-term financial planning.

Advantage of Inflation
Inflation can have some advantages in certain situations, although they are often
outweighed by the negative effects on individuals and the economy as a whole.
Here are some potential advantages of inflation:

1. Encourages spending: Inflation can encourage people to spend money

rather than save it, as the value of money decreases over time. This can
help stimulate economic growth, as increased consumer spending can
lead to more jobs and higher profits for businesses.
2. Reduces debt burden: Inflation can make it easier for people and
businesses to pay off debt, as the value of money decreases over time.
This means that the amount of debt they owe in real terms (adjusted for
inflation) decreases over time as well.

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

3. Increases asset prices: Inflation can lead to higher prices for assets such
as real estate, stocks, and commodities. This can benefit those who own
these assets, as they can sell them for a higher price and potentially make
a profit.

Disadvantages

1. Reduced purchasing power: As the general price level increases due to

inflation, the purchasing power of money decreases. This means that the
same amount of money can buy fewer goods and services, which can
reduce the standard of living for consumers.
2. Reduced investment: Inflation can reduce investment by making it more
difficult for investors to accurately predict the future value of their
investments. This can lead to a reduction in long-term investments, which
can slow economic growth.
3. Reduced savings: Inflation can also reduce savings, as the value of
money stored in savings accounts or other low-risk investments can
decrease over time. This can lead to a reduction in financial security for
savers and retirees.
4. Increased uncertainty: Inflation can create uncertainty in the economy,
as businesses and consumers may be uncertain about future prices and
demand for goods and services. This can lead to reduced economic
activity and investment.
5. Reduced international competitiveness: Inflation can reduce the
competitiveness of a country's exports, as higher prices can make goods
and services more expensive compared to those produced in other
countries. This can lead to reduced international trade and economic
growth.
6. Social and political unrest: High levels of inflation can lead to social and
political unrest, as consumers and businesses may become frustrated
with rising prices and reduced economic opportunities. This can lead to
protests, strikes, and other forms of civil unrest.

It's worth noting that not all inflation is necessarily bad, as low levels of inflation
can be a sign of a healthy, growing economy. However, high or persistent inflation
can have significant negative consequences, which is why many governments
and central banks aim to keep inflation under control.

Inflation is the increase in the prices for goods and services from one year to another,
thus decreasing the purchasing power of money.

𝐹𝐶 = 𝑃𝐶(1 + 𝑓)𝑛

Where:
PC = present cost of a commodity
FC = future cost of the same commodity
f = annual inflation rate
n = number of years

Sample Problem 2 -17

An item presently costs P1000. If inflation is at the rate of 8% per year. What will
be the cost of item in two years?

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

In an inflationary economy, the buying power of money decreases as cost increases; It is

an economy where there is a sustained increase in the general price level of goods and
services over time – long term. This means that the purchasing power of the currency
decreases, and consumers are required to pay more for the same goods and services.
Inflation can be caused by a variety of factors, including an increase in demand for goods
and services, a decrease in the supply of goods and services, an increase in the cost of
production, and an increase in the money supply.

𝑃
𝐹=
(1 + 𝑓)𝑛
Where F, future worth, measured in today’s pesos of a present amount P.

Sample Problem 2 – 18
An economy is experiencing inflation at an annual rate of 8%. If this continues,
what will P1000 be worth two years from now in terms of today’s pesos?

If interest is being compounded at the same time that inflation is occurring, the future
worth will be:

𝑟 𝑚 𝑛
𝑃(1 + 𝑖)𝑛 (1 + )
𝐹= = 𝑃[ 𝑚 ]
(1 + 𝑓)𝑛 (1 + 𝑓)

Sample Problem 2 – 19
A man invested P10,000 at an interest rate of 10% compounded annually. What
will be the final amount of his investment, in terms of today’s pesos, after five
years, if inflation remains the same at the rate of 8% per year?

Annuities
It is a series of equal payments made at a regular interval of time. It is also known as a
sinking fund which are used for future financial obligations such as educational expenses
for children, replacement of a machine or equipment, and amortization of loans.

Annuity is a type of financial product that helps you save money for the future and
provides a steady stream of income during your retirement years. It's like a savings
account that you put money into overtime, and then you receive regular payments back
from that account.

There are different types of annuities that work in different ways. With a fixed (ordinary)
annuity, you put money into the account and you're guaranteed a certain interest rate,
so you know exactly how much money you'll get back each month. With a variable
annuity, the amount of money you receive each month depends on how well the
investments you've chosen are doing.

Annuities can start making payments right away (these are called immediate annuities),
or you can wait until later in life to start receiving payments (these are called deferred
annuities). An annuity can be set up to pay out for the rest of your life, or for a certain
number of years.

Annuities can be a good way to save for retirement, but they can also be complicated, so
it's important to talk to a financial advisor to make sure you understand how they work
and if they're the right choice for you.

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ISO 9001:2015 Certified
Level I Institutionally Accredited

As we go on on this topic there are symbols that we are going to encounter:

P = value or sum of money at present

F = value or sum of money at some future time
A = a series of periodic, equal amounts of money
n = number of interest periods
i = interest rate per interest period

Ordinary Annuity

An ordinary annuity is a type of annuity where the payments are made at the end
of each period, such as at the end of each month or each year. In other words,
with an ordinary annuity, you make regular payments into the annuity account,
and then you receive regular payments back from the account at the end of each
period.

For example, let's say you purchase an ordinary annuity that pays out P1,000 per
year for five years. You would make regular payments into the annuity account
(either a lump sum or a series of payments), and then at the end of each year,
you would receive a payment of P1,000 from the account. The payments would
continue for five years, and then the annuity would be fully paid out.

Ordinary annuities can be a good option for people who want to receive a steady
stream of income during retirement, because they allow you to make regular
payments into the annuity account and then receive regular payments back from
the account in the form of an income stream. However, it's important to carefully
consider the terms of the annuity contract and consult with a financial advisor
before purchasing an annuity to ensure that it's the right choice for your individual
needs and goals.

Finding P when A is Given.

1 − (1 + 𝑖)−𝑛 (1 + 𝑖)𝑛 − 1
𝑃 = 𝐴[ ] = 𝐴[ ]
𝑖 𝑖(1 + 𝑖)𝑛

The quantity in the brackets is called the “uniform series present worth factor”
and is designated by the functional symbol P/A, i%, n, read as “P given A at i
percent in in interest periods”. Hence the equation above can be expressed as

P = A(P/A, i%, n)

Finding F when A is Given.

(1 + 𝑖)𝑛 − 1
𝐹 = 𝐴[ ]
𝑖

The quantity in the brackets is called the “uniform series compound factor” and
is designated by the functional symbol F/A, i%, n, read as “F given A at i percent
in in interest periods”. Hence the equation above can be expressed as

F = A(F/A, i%, n)

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Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Finding A when P is Given.

𝑖
𝐴 = 𝑃[ ]
1 − + 𝑖)−𝑛
(1

The quantity in the brackets is called the “capital recovery factor” and is
designated by the functional symbol A/P, i%, n, which is read as “A given P at i
percent in in interest periods”. Hence the equation above can be expressed as

A = P(A/P, i%, n)

Finding A when F is Given.

𝑖
𝐴 = 𝐹[ ]
(1 + 𝑖)𝑛 − 1

The quantity in the brackets is called the “sinking fund factor” and is designated
by the functional symbol A/F, i%, n, which is read as “A given F at i percent in in
interest periods”. Hence the equation above can be expressed as

A = F(A/F, i%, n)

Relation between sinking fund factor to capital recovery factor:

𝑖 𝑖
𝑛
+1 =
(1 + 𝑖) − 1 1 − (1 + 𝑖)−𝑛

Sample Problem 2 – 20
What are the present worth and the accumulated amount of a 10 – year annuity
paying P10,000 at the end of each year, with interest at 15% compounded
annually?

Sample Problem 2 – 21
What is the present worth of P500 deposited at the end of every three months
for 6 years if the interest rate is 12% compounded semiannually?

Sample Problem 2 – 22
A man paid 10% down payment of P200,000 for a house and lot and agreed to
pay the remaining balance on monthly installments for 60 months at an interest
rate of 15% compounded monthly. Compute the amount of monthly payment.

Sample Problem 2 – 23
How much must be deposited at 6% each year beginning on January 1, year 1,
in order to accumulate P 5,000 on the date of the last deposit January 1, year 6?

Sample Problem 2 – 24
A piece of machinery can be bought for P 1,000,000 cash or P 200,000 pesos
down and 75,000 per year for 15 years. What is the annual interest rate for the
monthly payments?

Sample Problem 2 – 25

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

A businessman needs P 50,000 for his operations. One financial institution is

willing to lend him the money for one year at 12.5% interest per annum
(discounted). Another lender is charging 14% with the principal and interest
payable at the end of one year. A third financier is willing to lend him P50,000
payable in 12 equal monthly installments of P4,600. Which offer is best for him?

Sample Problem 2 – 26
An agricultural engineer wishes to set up a special fund by making uniform
semiannual end-of-period deposits for 20 years. The fund is to provide P100,000
at the end of the last 5 years of the 20 – year period. If the interest rate is 8%
compounded semiannually, what is the required semiannual deposit to be made?

Annuity Due
Type of annuity where the payments are made at the beginning of each period.

1 − (1 + 𝑖)−(𝑛−1)
𝑃 = 𝐴[ ]+𝐴
𝑖

(1 + 𝑖)𝑛 − 1 (1 + 𝑖)𝑛+1 − 1
𝐹 = 𝐴[ ] (1 + 𝑖)1 = 𝐴 [ − 1]
𝑖 𝑖

Sample Problem 2 – 27
A man bought an equipment costing P 60,000 payable quarterly for 3 years, each
installment payable at the beginning of each period the rate of interest is 24%
compounded quarterly, what is the amount of each payment?

Sample Problem 2 – 28
What is the future worth of 1,000 yearly deposited at 2% annual interest for 10
years if the payments are made at the beginning of each year.

Deferred Annuity
A deferred annuity is one where the first payment is made several periods after
the beginning of the annuity.

Finding P when A is Given

𝑃 𝑃
𝑃 = 𝐴( , 𝑖%, 𝑛)( , 𝑖%, 𝑘)
𝐴 𝐹

𝐴
𝑃= [1 − (1 + 𝑖)−𝑛 ][(1 + 𝑖)−𝑘 ]
𝑖

A = periodic equal payment

n = number of periods
i = interest rate per payment
P = present worth
F = future worth
k = number of periods before the beginning of the first payment

Sample Problem 2 – 29

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

Determine the present worth of a deferred annuity consisting of 10 semi – annual

payments, each P 1,000, the first at the end of the third year. Money is worth
14% compounded semi annually.

Sample Problem 2 – 30
A man loans P 187,000 from a bank with at 5% compounded annually. He agrees
to pay his obligations by paying 8 equal payments, the first is being due at the
end of 10 years. Find the annual payment.

Perpetuity
The type of annuity similar to ordinary annuity except that the payments continue
infinitely.

For instance, if a high schooler's parents promised to give them a weekly

allowance of P500, for the rest of their life, this would be an example of a
perpetuity. This means that they will receive P500 every week, without any end
date or a fixed term.

𝐴
𝑃=
𝑖

F = cannot be determined

Sample Problem 2 – 31
Find the present value in pesos, of a perpetuity of P 15,000 payable semi –
annually if the money is worth 8% compounded quarterly.

Sample Problem 2 – 32
What amount of money invested today at 15% interest can provide the following
scholarships: P 30,000 at the end of each year for 6 years, P 40, 000 for the next
six years, and P 50,000 thereafter?

Amortization
Amortization is any method of repaying a debt, the principal and interest included, usually
by a series of equal payments at equal interval of time.

Sample Problem 2 – 33
A debt of P5,000 with interest at 12% compounded semiannually is to be
amortized by equal semiannual payments over the next 3 years, the first due in
6 months. Find the semiannual payment and construct an amortization table.

Sample Problem 2 – 34
A debt of P 10,000 with interest at the rate of 20% compounded semi annually
is to be amortized by 5 equal payments at the end of each 6 months, the first
payment is to be made after 3 years. Find the semiannual payment and construct
an amortization schedule.

Uniform Arithmetic Gradient

In certain cases, economic analysis problems involve receipts or disbursements that
increase or decrease by a uniform amount each period. For example, maintenance and
repair expenses on specific equipment or property may increase by a relatively constant
amount each period. This is known as a uniform arithmetic gradient.

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

1 − (1 + 𝑖)−𝑛 𝐺 (1 + 𝑖)𝑛 − 1 𝑛
𝑃 = 𝐴[ ]+ [ 𝑛
− ]
𝑖 𝑖 (1 + 𝑖) 𝑖 (1 + 𝑖)𝑛

Sample Problem 2 – 35
A certain company expects the cost of maintenance for a particular piece of heavy
equipment to be P 15,000 in year 1, P 25,000 year 2, and the amounts increasing
by P10,000 through year 8. At an interest rate of 10% per year, determine the
present worth of the maintenance cost.
Ans. P = 240,310.61

ENGAGING ACTIVITY PROBLEM SET 1

1. What is the annual rate of interest if P265 is earned in four months on an

investment of P15, 000? Ans. 5.3%

2. A loan of P2, 000 is made for a period of 13 months, from January 1 to January
31 the following year, at a simple interest of 20%. What is the future amount is
due at the end of the loan period? Ans. P2,433.33

3. If you borrow money from your friend with simple interest of 12%, find the
present worth of P20,000, which is due at the end of nine months. Ans.
P18,348.62

4. Determine the exact simple interest on P5, 000 for the period from Jan.15 to
Nov.28, 1992, if the rate of interest is 22%. Ans. P955.74

5. A man wishes his son to receive P200, 000 ten years from now. What amount
should he invest if it will earn interest of 10% compounded annually during the
first 5 years and 12% compounded quarterly during the next 5 years? Ans.
P68,758.67

6. By the condition of a will the sum ofP25, 000 is left to be held in trust by her
guardian until it amounts toP45, 000. When will the girl receive the money if the
fund is invested at 8%compounded quarterly? Ans. 7.42 years
7. At a certain interest rate compounded semiannuallyP5, 000 will amount to P 20,
000 after 10years. What is the amount at the end of 15 years? Ans. P 40, 029.72

8. Jones Corporation borrowedP9, 000 from Brown Corporation on Jan. 1, 1978 and
P12, 000 on Jan. 1, 1980. Jones Corporation made a partial payment ofP7, 000
on Jan. 1, 1981. It was agreed that the balance of the loan would be amortizes
by two payments one of Jan. 1, 1982 and the other on Jan. 1, 1983, the second
being 50%larger than the first. If the interest rate is 12%. What is the amount
of each payment? Ans. P 9,136.91: P 13,705.36

9. A woman borrowed P3, 000 to be paid after 1½ years with interest at 12%
compounded semiannually and P5, 000 to be paid after 3 years at 12%
compounded monthly. What single payment must she pay after 3½ years at an

LSPU SELF-PACED LEARNING MODULE: ENGINEERING ECONOMY

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

interest rate of 16% compounded quarterly to settle the two obligations? Ans.
P12, 627.59

10. Mr. J. de la Cruz borrowed money from a bank. He received from the bank P1,
342 and promises to repay P1, 500 at the end of 9 months. Determine the simple
interest rate and the corresponding discount rate or often referred to as the
“Banker’s discount.” Ans. 11.7%, 10.53%

11. A man deposits P50, 000 in a bank account at 6% compounded monthly for 5
years. If the inflation rate of 6.5% per year continues for this period, will this
effectively protect the purchasing power of the original principal? Ans. P49,225

12. What is the future worth of P600 deposited at the end of every month for 4 years
if the interest rate is 12% compounded quarterly? Ans. P36,641

13. Mr. Reyes borrows P600, 000 at 12% compounded annually, agreeing to repay
the loan in 15equal annual payments. How much of the original principal is still
unpaid after he has made the8th payment? Ans. P402,040

14. M purchased a small lot in a subdivision, paying P200, 000 down and promising
to pay P15,000 every 3 months for the next 10 years. The seller figured interest
at 12% compounded quarterly.
(a) What was the cash price of the lot?
(b) If M missed the first 12 payments, what must he pay at the time the
13th is due to bring him up to date?
(c) After making 8 payments, M wished to discharge his remaining
indebtedness by a single payment at the time when the 9th regular
payment was due, what must he pay in addition to the regular payment
then due?
(d) If M missed the first 10 payments, what must he pay when the 11th
payment is due to discharge his entire indebtedness?

15. A man approaches the ABC Loan Agency for P100, 000 to be paid in 24 monthly
installments. The agency advertises an interest rate of 1.5% per month. They
proceed to calculate the amount of his monthly payment in the following
manner:

Amount requested P100,000

Credit investigation P500
Credit risk insurance P1,000
Total P101, 500

Ans: 38.83%

16. A new office building was constructed 5 years ago by a consulting engineering
firm. At that time the firm obtained the bank loan for P 10,000,000 with a 20%
annual interest rate, compounded quarterly. The terms of the loan called for equal

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 Republic of the Philippines
Laguna State Polytechnic University
Province of Laguna
ISO 9001:2015 Certified
Level I Institutionally Accredited

quarterly payments for a 10-yearperiod with the right of prepayment any time
without penalty.
Due to internal changes in the firm, it is now proposed to refinance the loan
through an insurance company. The new loan is planned for a 20- year term with
an interest rate of 24% per annum, compounded quarterly. The insurance
company has a onetime service charge 5% of the balance. This new loan also
calls for equal quarterly payments.
a.) What is the balance due on the original mortgage (principal) if all
payments have been made through a full five years?
b.) What will be the difference between the equal quarterly payments in
the existing arrangement and the revised proposal?

Ans. (a) P 7,262.733 (b) P 120, 862

17. An asphalt road requires no upkeep until the end of 2 years when P60, 000 will
be needed for repairs. After this P90, 000 will be needed for repairs at the end of
each year for the next 5 years, then P120, 000 at the end of each year for the
next 5 years.
If money is worth 14% compounded annually, what was the equivalent uniform
annual cost for the 12-year period?
Ans. P 79, 245

18. A man wishes to provide a fund for his retirement such that from his 60th to 70th
birthdays he will be able to withdraw equal sums of P18, 000 for his yearly
expenses. He invests equal amount for his 41st to 59th birthdays in a fund earning
10% compounded annually. How much should each of these amounts be?
Ans. P 2,285

19. Determine the present worth and the accumulated amount of an annuity
consisting of 6 payments of P120, 000 each, the payment are made at the
beginning of each year. Money is worth 15% compounded annually.
Ans. P 52,226.40 and P 120,801.60

20. The will of a wealthy philanthropist left P5, 000,000 to establish a perpetual
charitable foundation. The foundation trustees decided to spend P1, 200,000 to
provide facilities immediately and to provide P100, 000 of capital replacement at
the end of each 5 year period. If the invested funds earned 12% per annum,
what would be the year end amount available in perpetuity from the endowment
for charitable purposes? Ans. P 440,259

LEARNING RESOURCES References

Hipolito B. Sta. Maria, Engineering Economy, 3rd Edition. National Bookstore

Investopedia.com
Google

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