Faculty of Engineering

Civil Engineering Department

Engineering Economy
Third Stage
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Asst. Prof. Dr. Alaa Kharbat Shadhar
Investment:
It is the process of developing
material resources, whether it is
a cash investment such as bank
deposits and loans, or an
investment in projects with
returns.

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Capital Productivity:
It is the process of recovering the borrowed amount plus the
interest due from the use of that money, so the rate of capital
productivity depends on the interest rate or the annual return
rate.

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Present Value:
It represents the amount of the borrowed money at the present
time or at the time of lending.
Future Value:
It represents the amount of the money that must be repaid after
the end of the lending period (repayment) and represents the
borrowed money plus the interest value.

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Annual Rate:
Represents the amount borrowed or the repayment amount paid in
equal annual installments over a period of time.

Annual Rate

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Dr. Alaa Kharbat Shadhar

Growth Rate:
Represents the amount borrowed or the repayment amount paid in
annual installments that increase or decrease by a fixed amount
over a period of time.

Growth Rate

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Interest:
It is the amount of money added to the borrowed amount as
profits from using that amount and is classified into two types:
1. Simple Interest
2. Compound interest

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Dr. Alaa Kharbat Shadhar

Simple Interest:
It is the fixed interest amount (profit rate) that must be paid by
the borrower at the end of each year until the full amount is
paid (end of the borrowing period).

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Compound interest:
It is the amount of interest (profit rate) that must be paid by the
borrower when the full amount is paid (at the end of the
borrowing period) in one payment.

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Dr. Alaa Kharbat Shadhar

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Simple interest is calculated from the following relationship:

I=P*n*i

Where:

I = Interest Value.

P = Present Value (amount borrowed).

n = Number of time units.

i = Interest Rate.

Example: Find the amount of simple interest obtained from borrowing

$2000 after 4 years at an interest rate of 10%?

I=P*n*i = 2000 * 4 * 0.10 = 800 $

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The future amount (refund) is calculated with simple interest from the
following relationship:

F=P+I
F = P + (P * n * i)

Where:

F = Future Value
Example: Find the amount that must be paid to the bank from borrowing
$2000 after 4 years at a simple interest rate of 10%?
I=P*n*i = 2000 * 4 * 0.10 = 800 $

F = P + (P * n * i) = 2000 + 800 = 2800 $

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Compound interest is calculated from the following relationship:

I=P*i ………. First year

I = ( P +P * i ) * i ……….Second year

Where:

I = Interest Value.

P = Present Value (amount borrowed).

n = Number of time units.

i = Interest Rate.

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Dr. Alaa Kharbat Shadhar

The future value is calculated with compound interest from the following
relationship:

F = P (1+ i) n
Year Present Value Interest Future Value

1 P Pi P+Pi

2 P+Pi (P + P i) i (P + P i) + (P + P i) i

P (1+ i) P (1 + i) i P (1+ i)+ P (1 + i) i

P (1+ i)2

3 P (1+ i)2 P (1+ i)2 i P (1+ i)3

n P (1+ i)n-1 P (1+ i)n-1 i P (1+ i)n

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Example: Find the amount that must be repaid to the bank for borrowing $2,000
after 4 years at an interest rate of 10%?

Notes:
1- When compared to the amount recovered from the previous example, the
amount in the case of compound interest is greater than the amount recovered
with simple annual interest, because the annual interest amount is included in the
interest of other years as a current amount.
2- The current amount of compound interest is calculated from the following
relationship

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Example: A company borrowed an amount of money from a commercial bank
at an interest rate of 12%, with the aim of repaying the amount after 10 years. If
you know that the amount repaid to the bank after the end of the loan period is
1552924104 dinars, find the amount borrowed.
Solution:

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Example: After 5 years, determine the compound interest rate per year which
is equivalent to a simple interest rate of 15% per year.
Solution:

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Example: Thompson Mechanical Products plans to set aside $150,000
now for possible replacement of refinery engines when they become
necessary. If replacement is not needed for 5 years, how much will the
company have in its dedicated investment account? Assume a rate of
return of 18% per year.
Solution:
F = P (1+ i) n
= 150000 ( 1 + 0.18) 5
F=343170

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Example: A person borrowed an amount of money from a bank. What is the
interest rate imposed on him if he repaid four times the borrowed amount
after 10 years?

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Example: How long does it take to recover an amount deposited in a bank to
become four times its value at an interest rate of 14.87%?

Solution:

F = P (1+ i) n

4 P = P (1+ 0.1487) n

4 = (1.1487) n

log 4 = n log (1.1487)

n = 10 Year

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Example: The construction of the HBNA steel plant will require an investment
of US$200 million. Delays beyond the expected year of implementation (2020)
will require additional funds to build the plant. Assuming the cost of money is
10% per year compounded interest, if the board of directors of the Italian
company plans to develop the plant, find the following.

(a) The equivalent investment required if the plant is delayed by 3 years.

(b) The equivalent investment required if the plant is built sooner than
originally planned by 4 years.

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Dr. Alaa Kharbat Shadhar

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Finding the value of equal payments:
If the repayment was made in equal payments, the present and future value are
found from the following relationships:

While the value of the annual installment A is found as follows:

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Example: For the cash flow diagram shown below, find the present value and
future value, knowing that the interest rate is 8%?

Solution:

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Dr. Alaa Kharbat Shadhar

Example: A factory was purchased with price to be paid in a fixed annual

installment of $10 million, with the first installment to be paid on the date of
purchase and three more installments in the following years. The maintenance
costs of the factory in the fifth year were $20 million.

The total revenues from the sale of the equipment in the eighth year were $40
million, with the factory to be renovated in the ninth year at a value of $22
million and in the tenth year at $30 million.

If the annual interest rate is 10%, find:

1. The present investment value.

2. The future investment value.

3. The equivalent fixed annual installment.

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Example: A person invested an amount according to the cash flow chart
shown in the figure below. Find:
1. The present investment value.

2. The future investment value.

3. The equivalent fixed annual installment.

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Solution:
P1 = 10
P2 = A{(1+i)n -1 / i (1+i)n} = 10{(1+0.1)3 -1 / 0.1 (1+0.1)3} = 24.87
P3 = F/ (1+i)n = 20 / (1+0.1)5 = 12.42
P4 = - 40 / (1+0.1)8 = -18.66
P5 = 22 / (1+0.1)9 = 9.33
P6= 30 / (1+0.1)10 = 11.566
Po= 10 + 24.87 + 12.42 - 18.66 + 9.33 + 11.566 = 49.526
F = Po (1+i)n = Po (1+i)n = 49.526 (1+0.1)11 = 141.30
A= P {i (1+i)n/ (1+i)n -1} = 49.526 {0.1 (1+0.1)11/ (1+0.1)11 -1} = 7.625

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Dr. Alaa Kharbat Shadhar

Growth Rate:

Finding the value of increasing and decreasing installments:

In the event that the installments are increasing or decreasing at a fixed value,
the future and present value and the annual installment are found from the
following relationships:

Growth Rate

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Growth Rate:

Finding the value of increasing and decreasing installments:

Note: In the cash flow diagram above, the value of G represents the value of
the increase in the installment, which is 2000 annually, and the value of P
becomes as follows:

Po = PA + PG
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Example: A person invested an amount according to the cash flow chart
shown in the figure below. Find:
1. The present value.

2. The future value.

3. The annual worth.

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Solution:

P1 = 24.87

F2 = PA + PG

P1 = 49.74

PG = 31.75
F2 = 49.74 + 31.75 = 81.49 It represents a future value in the fourth year.

= 55.659

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Example: A person invested an amount according to the cash flow chart
shown in the figure below. Find:
1. The present value.

2. The future value.

3. The annual worth.

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Dr. Alaa Kharbat Shadhar

Solution:
P = PA – PG Note: The signal has become
minus because the installment is
decreasing.

P = 99.474 – 23.308= 76.166

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Solution:

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Solution:
F = P ( 1+ i )n
F = 76.166 ( 1+ 0.1 ) 4
F = 111.515

A = 24.028

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H.W.

Example: A person invested an amount according to the cash flow chart

shown in the figure below. Find:
1. The present value.

2. The future value.

3. The annual worth.

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