Solution
Using the formula, F=P(1+i)n
(a) F = P 1,000 (1+0.10)5 = P1,610.51
. 10 =
(b) F = P 1,000 1 + P1,628.89
. 20 =
I F = P 1,000 1 + P1,638.62
. 60 =
(d) F = P 1,000 1 + P1,645.31
. 1825 =
I F = P 1,000 1 + P1,628.89
(f) F = Pern= P 1,000I(0.10x5) = P1,648.72
Discount
Discount is defined as interest deducted in advance. In negotiable paper, it is the difference
between the present worth of the paper and its value sometime in the future.
Discount on a negotiable paper is the difference between the present worth (the amount received
for the paper in cash) and the worth of the paper at some time in the future (the face value of the paper
or principal). Discount is interest paid in advance.
Discount = Future Worth – Present Worth
The rate of discount is the discount on one unit of principal for one unit of time.
Rate of Discount
Rate of discount is defined as the discount of one unit of principal for one unit of time.
1.00
(1+i)-1
In the cash flow diagram,
P = (1+i)-1
And F = 1.00
Using the formula of discount,
d=F–P
d = 1 - (1+i)-1
d = 1 – __1__
1+i
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Simplifying the equation will give us;
i=
and,
d=
where d = rate of discount for the given period
i = rate of interest for the same period
Example
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 for one year?
Solution
P4,000 P 0.80
P 5,000 P 1.00
,
(a) d = = = 0.20 or 20%
,
Another solution, using equation (2-12)
d = 1 – 0.80 = 0.20 or 20%
.
(b) i = = = 0.25 or 25%
.
Another solution,
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,
i= = = 0.25 or 25%
( , )
,
(c) i = = = 0.3333 or 33.33%
( , )
Problem:
Mr. Cadevida was grant a loan of P20,000.00 by his employer CPM Industrial Fabricator & Construction
Corporation with an interest of 6% for 180 days on the principal collected in advance. The corporation
would accept a promissory note for P20, 000 non interests for 180 days. If discounted at once, find the
proceeds on the note.
Problem:
A man applied for a loan with 16% interest. The interest will be automatically deducted from t he loan
at the time the money is released, and after one year will have to pay the same amount as stated in
the loan. Determine the interest actually charge to him.
Problem:
How much interest is deducted in advance from a loan of P18,000.00 for one year and 6 months if the
discount rate is 9%. How much is the proceeds after deducting the interest?
Problem:
Mr. de la Cruz borrowed money from a bank. He received from the bank P1, 342 and promised to repay
P1, 500 at the end of 9 months. Determine the corresponding discount rate
Problem:
John is deciding between a loan charged at 5% bank discount, and one charged at 6% simple interest.
Either would require John to repay P1000 on August 3, 2010. It is now August 3, 2010, which loan
should John get?
Problem:
How much should the engineer borrow from a bank that charges 10% simple discount for 6 months if
he received an amount of P14, 500?
Solution:
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Inflation
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
n = number of years
Example
An item presently costs P1000. If Inflation is at the rate of 8% per year. What will be the cost of
the item in two years?
Solution
FC = PC ( 1+ f)n = P1000 (1 + 0.08)2 = P1166 .40
In an inflationary economy, the buying power of money decrease as cost increase. Thus,
F=( )
where F is the future worth, measured in today’s pesos, of a present amount P.
Example
An economy is experiencing inflation at the annual rate of 8%. If this continuous, what will
P1000 be worth two years from now, in terms of today’s peso?
Solution
F= = = P857.34
( ) ( . )
If interest is being compounded at the same time that inflation is occurring. The future worth
will be
( ) ( )
F= =P ( )
( )
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Example
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?
Solution
( ) ( . )
F = P( ) = P10,000 = P10,960.86
( ) ( . )
ANNUITY
An annuity is a series of equal payments made at equal intervals of time. Financial activities
like installment payments, monthly rentals, life-insurance premium, monthly retirement benefits, are
familiar examples of annuity.
Annuity can be certain or uncertain. In annuity certain, the specific amount of payments are set
to begin and end at a specific length of time. A good example of annuity certain is the monthly payments
of a car loan where the amount and number of payments are known. In annuity uncertain, the annuitant
may be paid according to certain event. Example of annuity uncertain is life and accident insurance. In
this example, the start of payment is not known and the amount of payment is dependent to which
event.
Annuity certain can be classified into two, simple annuity and general annuity. In simple
annuity, the payment period is the same as the interest period, which means that if the payment is
made monthly the conversion of money also occurs monthly. In general annuity, the payment period
is not the same as the interest period. There are many situations where the payment for example is
made quarterly but the money compounds in another period, say monthly. To deal with general annuity,
we can convert it to simple annuity by making the payment period the same as the compounding
periods by the concept of effective rates
.
Types of Annuities
In engineering economy, annuities are classified into four categories. These are (1) ordinary
annuity, (2) annuity due, (3) deferred annuity, and (4) perpetuity.
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