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Eco Module 2 Power Point 1

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11 views18 pages

Eco Module 2 Power Point 1

Uploaded by

Joseph Sison
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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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Engineering Economy

Module 2: Interest and Money – Time Relationships (Part I)

Meaning of Interest

From the borrower’s viewpoint: Interest is the amount of


money paid for the use of borrowed capital.

From the lender’s viewpoint: Interest is the income produced


by the money that he/she has lent.
Simple Interest

Simple Interest is the interest on borrowed money.

Principal is the amount of money borrowed and on which


interest is charged.

Rate of interest is the amount earned by one unit of principal


during a unit of time.
The formula for simple interest is

Where:

I = total interest earned by the principal


P = amount of the principal
i = rate of interest expressed in decimal form
n = number of interest periods

The formula for total amount is


Ordinary and Exact simple Interest

Ordinary simple interest is computed on the basis of one


banker’s year, which is

1 banker’s year = 12 months, each consisting of 30 days


= 360 days
Ordinary and Exact simple Interest

Exact simple interest is based on the exact number of days, 365 days
for an ordinary year and 366 days for a leap year. The leap years are
those that are exactly divisible by 4, but excluding the century years
1900, 2000, etc.
If d is the number of days in the interest period, then

Note: If the problem did not specify whether it is simple ordinary interest
or exact simple interest, assume it to be an ordinary simple interest
If the problem did not specify whether it is exact ordinary year or leap
year, assume it to be an ordinary year.
Discount

Discount on a negotiable paper is the difference between what is


worth in the future and its present worth. Discount is interest paid
in advance.

The rate of discount is the discount on one unit of principal per


unit time. If d is the rate of discount, then

For the equivalent rate of interest (i) corresponding to a rate of


interest,
Problem 1: Determine the ordinary and exact simple interest
on P10, 000 for 9 months and 10 days if the rate of interest is
12%.
Given:

Required:
Ordinary interest,
Exact simple interest,
Solution:
Problem 2: Determine the ordinary and exact simple interest on
P5, 000 for the period from January 15 to June 20, 1993, if the rate
of interest is 14%.
Given:
,
January – 16 days
February – 28 days (1993 is not a leap year)
March – 31 days
April – 30 days
May – 31 days
June – 20 days
Required:
Ordinary interest,
Exact simple interest,
Solution:
Problem 3: A man borrows P10, 000 from a loan firm. The
rate of simple interest is 15%, but the interest is to be
deducted from the loan at the time the money is borrowed. At
the end of one year he has to pay back P10, 000. What is the
actual rate of interest?

Given:

Required:
Actual Rate of Interest,
Solution:
Problem 4: If P1, 000 accumulates to P1, 500 when invested
at a simple interest for three years, what is the rate of interest?

Given:

Required:
Actual Rate of Interest,
Solution:
Problem 5: A loan of P 5, 000 is made for a period of 15 months, at a
simple interest rate of 15%, what future amount is due at the end of the
loan period?

Given:

Required:
Future Amount,
Solution:
Problem 6: A man borrowed P 2,000 from a bank and promise
to pay the amount for one year. He received only the amount
of P 1,920 after the bank collected an advance interest of P80.
What were the rate of interest that the bank collected in
advance? What is the discount rate?

Given:
Required:
Rate of Interest,
Discount rate, d

Solution:

d=
d=
d = 0. 04 or 4%
References:

Fundamental of Engineering Economics by Chan S. Park 2004


Engineering Economy by Jaime R. Tiong 2002
Economy 10th Edition by William Sullivan 1997
Engineering Economy 3rd Edition by Matias Arreola 1993
Engineering Economy 2nd Edition by Hipolito Sta. Maria 1993
Engineering economics 2nd Edition by Venancio I. Besavilla Jr.
1989

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