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Handout 4 - ES 02

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10 views2 pages

Handout 4 - ES 02

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hacker po
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epublic of the Philippines

BOHOL ISLAND STATE UNIVERSITY MAIN CAMPUS


COLLEGE OF ENGINEERING AND ARCHITECTURE
Tel:038-4113289 Telfax:038-5017516
6300 Tagbilaran City
Vision: A premier S&T university for the formation of world class and virtuous human resource for sustainable
development in Bohol and the Country.
Mission: Committed to provide quality and innovative education in strategic sectors for the development of Bohol and
the Country.

ES 02 – ENGINEERING ECONOMICS
Hand-out 4

Compound Interest

In calculation of compound interest, the interest for an interest period is calculated on


the principal plus total amount of interest accumulated in previous periods. Thus, compound
interest means “interest on top of interest”.

Interest Principal at Beginning Interest Earned Amount at End of Period


Period of Period During Period
1 P Pi P + Pi = P (1+i)
2 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)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

F = P (1 + i)n

P = F (1 + i)-n

𝑖
𝐹 = 𝑃 (1 + )2𝑛 − 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑠𝑒𝑚𝑖 − 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
2
𝑖
𝐹 = 𝑃 (1 + )4𝑛 − 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑞𝑢𝑎𝑟𝑡𝑒𝑟𝑙𝑦
4
𝑖 12𝑛
𝐹 = 𝑃 (1 + ) − 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑚𝑜𝑛𝑡ℎ𝑙𝑦
12
𝑖 52.14𝑛
𝐹 = 𝑃 (1 + ) − 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑤𝑒𝑒𝑘𝑙𝑦
52.14
𝑖 365𝑛
𝐹 = 𝑃 (1 + ) − 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑑𝑎𝑖𝑙𝑦
365

𝐹 = 𝑃 𝑒 𝑖𝑛 − 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑒𝑑 𝑐𝑜𝑛𝑡𝑖𝑛𝑢𝑜𝑢𝑠𝑙𝑦
Rates of Interest

(a) Nominal Rate of Interest


𝑟
𝑖=
𝑚

Where:
i = rate of interest per interest period
r = nominal rate of interest
m = number of compounding periods per year

(b) Effective Rate of Interest

ER = (1 + i)m – 1

Note: for two or more nominal rates to be equal, their effective rates must be equal.

Cash-Flow Diagrams

A cash-flow diagram is simply a graphical representation of cash flows drawn on a time scale.
Cash-flow diagram for economic analysis problems 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)

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