David ,Mike Arthur BSGE First Year
Engineering Economics
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 = 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 loans
is measured in days.
I = Pni
F = P + I = P + Pni
F = P ( 1 +ni )
where:
I = interest
P = principal or present worth
n = number of interest per interest period
F = accumulated amount or future worth
a. Ordinary Simple Interest = computed on the basis of 12 months of 30 days each or 360 days a year.
I interest period = 360 days
b. Exact Simple Interest = based on the exact number of days in a year , 365 days for an ordinary year
and 366 days for a leap year.
I interest period = 365 or 366 days
Discount = on a negotiable paper is the difference between what it is worth in future and its present
worth.
Discount = future value - present value
The rate of discount is the discount on one unit of principal per unit of time
d = is the rate of discount
d = 1 - 1/1+I = 1 - (P/F,i%,1)
d = i /1+I = (P/F, i%,1)i
For the equivalent rate of interest corresponding to a rate of interest i,
i = d/1 -d = d/(P/F,i%,1)
Example:
1. What is the annual rate of interest if P265 is earned in four months on an investment of P15,000?
Solution:
Let "n" be the number of interest periods. Thus, on the basis of 1 year (12 mo.) the interest period will
be n= 4/12 = 1/3
i = I/Pn = P265/(15,000)(1/3)
= 0.053 or 5.3%
Annual rate of interest is 5.3% ans.
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 load period?
Solution:
F = P (1+ ni)
= 2,000(1+(13/12)(0.2))
F=P2,433.33 ans.
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.
Given: Future worth: F = P20,000
Number of interest period: n = 9/12
Simple interest: i = 12%
Solution: F = P(1 + ni )^-1
F = P20,000(1+(9/12)(0.12))^-1
F = P18,348.62 ans.
4.A man wants to invest a sum of P50,000 in two investments. The first investment earns a rate of
interest 4 times that of the second investment. In 3 years the first investment grows to P37,200. For 10
years, the second investment grows to P24,000.
1. Find the sum invested in each rate of interest.
A. P35,000 and P15,000
B. P35,500 and P14,500
C. P30,000 and P20,000
D. P32,000 and P18,000
2. Find the rate of interest of each.
A. 8% and 2%
B. 6% and 4% no
C. 7% and 3%
D. 5% and 1%
Let
x = sum invested at greater interest
y = sum invested at lesser interest
i = interest of y
4i = interest of x
F=P(1+rt)
First investment:
F = P37,200, P = x, r = 4i, and t = 3 yrs
372=x(1+12i)
x=37,2001+12i
Second investment:
F = P24,000, P = y, r = i, and t = 10 yrs
240=y(1+10i)
y=24,0001+10i
x+y=50,000
37,2001+12i+24,0001+10i=50,000
3721+12i+2401+10i=500
372(1+10i)+240(1+12i)(1+12i)(1+10i)=500
372(1+10i)+240(1+12i)=500(1+12i)(1+10i)
(372+3,720i)+(240+2,880i)=500(1+22i+120i2)
612+6,600i=500+11,000i+60,000i2
60,000i2+4,400i−112=0
i=0.02 and −0.093
Use i = 0.02 and 4i = 0.08
x=37,2001+12(0.02)=P30,000
y=24,0001+10(0.02)=P20,000
Answer for Part 1: [ C ]
Answer for part 2: [ A ]
5. 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?
Solution:
P = 10,000 - 0.15(10,000)
=8,500
F = 10,000; n=1
F = P(1 + in)
10,000 = 8,500( 1+ i)
i = 0.1765 = 17.65% ans.
