ENGINEERING ECONOMY
ENGR. GENJOHN B. TIMBREZA
ENGR. BENNYLIZA MARIE A. GREGORIO
ENGINEERING ECONOMY
Grading System:
MIDTERM PERIOD 40%
FINAL PERIOD 60%
Task: -30%
Attendance
Recitation
Notebook
Performance: -30%
Problem sets
Quizzes
Midterm/Finals -40%
ENGINEERING ECONOMY
Engineering Economy is the analysis and evaluation of the factors that will affect
the economic success of engineering projects to the end that a recommendation
can be made which will insure the best of capital.
• Simple Interest • Amortization
• Compound interest • Depreciation
• Effective Rate of Interest • Capital Financing
• Discount • Rate of Return
• Annuity • Break even analysis
• Capitalized Cost • Benefit/Cost Ratio
ENGINEERING ECONOMY
• Consumer goods and services are those products or services
that are directly used by people to satisfy their wants
• Producer goods and services are used to produce costumers'
goods and services or other producer goods
• Necessities are those products or services that are required to support
human life and activities, that will be purchased in somewhat the same
quality even though the price varies considerably.
• Luxuries are those products or services that are desired by humans
and will be purchased if money is available after the required
necessities have obtained
ENGINEERING ECONOMY
• Demand is the quantity of a certain commodity that is bought at
a certain price at given place and time.
• Supply is the quantity of a certain commodity that is offered for
sale at a certain price at given place and time.
Luxuries
Demand
Demand
Necessities
Price Price
Figure 1-1. General price demand Figure 1-2. Price-demand relationship for luxuries and necessities
relationship
ENGINEERING ECONOMY
• Perfect competition occurs in a situation where a commodity or service
is supplied by a number of vendors and there is nothing to prevent
additional vendors entering the market.
• Monopoly is the opposite of perfect competition. A perfect monopoly exist
when a unique product or service is available from a single vendor and that
vendor can prevent the entry of all others into the market.
• Oligopoly exist when there are so few suppliers of a product or service that
action by one will almost inevitably result in similar action by the others.
ENGINEERING ECONOMY
LAW OF SUPPLY AND DEMAND
• Under conditions of perfect competition, the price at which a given product will be
supplied and purchased is the price that will result in the supply and the demand
being equal.
Supply
Units, N
Supply
Demand
Price Price
Figure 1-3. General price-supply relationship. Figure 1-4. Price-supply-demand relationship.
SIMPLE
INTEREST
ENGR. GENJOHN B. TIMBREZA
ENGINEERING ECONOMY
CASH - FLOW DIAGRAM
is simply a graphical representation of cash flows on a time scale. Cash-flow
diagram for economic analysis problem is analogous to that of free body diagram
for mechanics problems.
Receipt - positive cash flow or cash inflow
Disbursement - negative cash flow or cash outflow
Example:
A loan of P100 at a simple interest of 10% will become P150 after 5 years.
P150 P100
Viewpoint of the lender: Viewpoint of the borrower:
0 1 2 3 4 5 0 1 2 3 4 5
P100 P150
ENGINEERING ECONOMY
SIMPLE INTEREST
- interest directly proportional to the length of time and the amount of principal borrowed.
I ∝ Pn
I = k Pn , where k is proportionality constant
I=Pni , where i is interest rate
F=P+I Where:
F = P + Pni
F = Future worth
F = P (1 + ni)
P = Present worth / Principal
i = Simple interest rate (per year)
n = Number of interest period (in years)
ENGINEERING ECONOMY
SIMPLE INTEREST
ORDINARY SIMPLE INTEREST EXACT SIMPLE INTEREST
1 banker’s year = 12 months 1 year = 365 days in a year Ordinary year
1 banker’s year = 360 days 1 year = 366 days in a year Leap year
1 month = 30 days
There is a leap year every year divisible by four
except for century years and not divisible by 400
1700 1800 1900 2000
ENGINEERING ECONOMY
1. If a man borrowed money from his girlfriend with simple rate of 12%, determine the
present worth of P74, 900.00, which is due at the end of seven months.
F = P (1 + ni) Solution:
Given: F = P ( 1 + ni )
i = 0.12 7
74, 900 = P [ 1 +
12 (0.12)]
F = 74, 900
P = 70, 000
n = 7 /12
ENGINEERING ECONOMY
2. Clara has invested P10,000, part at 5% and the remainder at 10% simple interest.
How much is invested at higher rate if the annual interest from this investment is
P950.00.
Given: Solution:
I = Pni
I = I1 + I2
950 = X (0.05)(1) + (10,000 – X) (0.10)(1)
10, 000
X = 1000 (1st investment)
X 10,000 - X 10,000 - X = 9,000 (2nd investment)
i = 0.05 i = 0.10
P = 9, 000
I = P950.00
ENGINEERING ECONOMY
3. Determine the accumulated amount using exact simple interest on P10,000 for the
period from January 20, 1990 to November 28 of the same year at 15% interest rate.
January - 31 - 20 = 11 F = P (1 + ni )
February - 28
March - 31 P = 10, 000
April - 30 i = 0.15
May - 31
312
June - 30 n=
July - 31 365
August - 31
- 30 312
September F = 10,000 [ 1 + ( )(0.15)]
- 31 365
October
November - 28 F = 11, 282.19
312 days
SEATWORK
1. Determine the ordinary simple interest on P700 for 8 months and 15days if the rate
of interest is 15%. Ans:P74.38
2. Determine the exact simple interest on P500 for the period from January 10 to
October 28, 1996 at 16% interest. Ans:P63.83
3. What will be the future worth of money after 14mnths, if a sum of P10,000 is
invested today at a simple interest rate of 12% per year? Ans:P11,400
PROBLEM SETS
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 rate of 20%. What a 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
