Chap 7 Engg Economy PDF

CHAPTER 7 ENGINEERING ECONOMICS
GENERAL ENGINEERING & APPLIED SCIENCES
I. CASH FLOW DIAGRAMS

A cash - flow diagram is a
graphical representation of cash
flows drawn on a time scale.
Borrower’s Viewpoint
Arrow Convention:
↑ − arrows directed upward
represents positive cash flow
or cash inflow (receipts).
↓ − arrows directed downward Lender’s Viewpoint
represents negative cash flow
or cash outflow (disbursement)
➊ Single Payment Cash Flow
- can occur at the beginning of Single Payment t =n

the time line ( t = 0 ), at the end of
the time line ( t = n ), or any time
in between.
➋ Uniform Series Cash Flow t =1 t =n

Uniform Series
- consists of a series of equal
payments “A” starting at t = 1 (n-1)G
and ending at t = n .
6G
5G
4G
3G
➌ Gradient Series Cash Flow 2G
G
- starts with a cash flow “G” at t=2 t=n
t = 2 , and increases by “G” each Gradient Series
year until t = n , at which time the
final cash flow is (n − 1)G .
➍ Exponential Gradient Cash

Flow
t =1 t =n
Exponential Gradient
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GENERAL ENGINEERING AND APPLIED SCIENCES
CHAPTER 7 Engineering Economics
II. SIMPLE INTEREST

➊ Ordinary Simple Interest
" I = Pin
Future Worth, F:
" F = P + I or F = P(1 + in)
Where:
I = Interest earned
r
i= → rate of interest per day
360
P = Present worth (capital)
F = Future worth
n = Total number of interest periods in days
r = interest in one year
" Note:
For ordinary simple interest, the interest is computed based on one
banker’s year.
1 banker' s year = 12 months = 360 days

Each month = 30 days
; Computation for “n’ and “i” for ordinary simple interest:

Example:
An interest rate of 10% for a period of 9 months:
0.10
i= → interest per day
360
n = 9(30) = 270 days
An interest of 15% for 3 years:
0.15
i= → interest per day
360
n = 3 (12 )( 30 )
= 1080 days
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GEAS GENERAL ENGINEERING & APPLIED SCIENCES
➋ Exact Simple Interest
" I = Pin
Future Worth, F:
" F = P + I = P(1 + in)
Where:
r
i= → for ordinary year
365
r
i= → for a leap year
366
" Note:
A year is a leap year if it is divisible by 4 and divisible by 400 for a
centennial year. (Centennial years are: 1800, 1900, 2000, etc)
Example:
Determine the exact simple interest on P5,000 for the period from January 1
to March 28, 2006 at 9% interest.
Solution:
Given:
P = 5,000
i = 9%
Solving for n:
January − 31 days
February − 28 days (leap year)
March − 28 days
_________
n = 87 days
Thus, solving for the interest:
I = Pin
⎛ 0.09 ⎞
I = 5,000 ⎜ ⎟ 87
⎝ 365 ⎠
I = P107.26
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III. COMPOUND INTEREST

➊ Future Worth, F:
mt
⎛ r ⎞
" F = P (1 + i ) or F = P ⎜ 1 + ⎟
n
⎝ m⎠
o Present Worth, P:
−mt
⎛ r ⎞
" P = F (1 + i )
−n
or P = F ⎜ 1 + ⎟
⎝ m⎠
Where: (for both cases)

F = Future worth
P = Present worth
i = Effective interest rate per interest period (per month, per quarter,
per year, etc)
n = Total number of compounding periods
m = mode of compounding
r = specified nominal rate
t = number of years
In compound interest formula, the quantity:
(1 + i)
n
→ is known as the Single Payment Compound Amount
Factor (SPCAF).
(1 + i)
−n
→ is known as the Single Payment Present Worth
Factor (SPPWF)
➌ Continuous Compounding:
" F = Per t → future worth
" P = Fe−r t → present worth
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; Values of “n” and “i” for different modes of compounding:
9 Annually – (every 12 months)
m =1 ; i=r ; n=t
9 Semi – annually - (every 6 months)

r
m=2 ; i= ; n = 2t
2
9 Quarterly - (every 3 months)

r
m=4 ; i= ; n = 4t
4
9 Bimonthly - (every 2 months)

r
m=6 ; i= ; n = 6t
6
9 Semi-quarterly - (every 1.5 months)

r
m=8 ; i= ; n = 8t
8
9 Monthly - (every month)

r
m = 12 ; i = ; n = 12t
12
9 Semi - monthly - (every 0.5 month)

r
m = 24 ; i = ; n = 24t
24
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IV. RATES OF INTEREST

➊ Nominal Rate of Interest (NRI):
Nominal rate of interest specifies the rate of interest and the number of
interest periods per year.
" r = im
Where:
r = nominal rate of interest
i = interest rate per period
m = number of periods
Thus, a nominal rate of interest of 6% compounded monthly simply means

that there are 12 interest periods each year. The rate per interest period
being:
r 6%
"i= = = 0.5%
m 12
" Note:
For compound interest, the rate of interest usually quoted is the NRI. In
order to accurately reflect time - value considerations, NRI must be
converted into ERI before applying the formulas for compound interest.
➋ Effective Rate of Interest (ERI):
" ERI = (1 + i)m − 1

Where:
ER = Effective Rate of Interest
i = interest per interest period
r
=
m
m = number of periods
p Effective Interest Rate for Continuous Compounding:
" ERI = er − 1
Where:
r = Nominal rate of interest
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To find the nominal rate when given the effective continuous rate:
" r = ln (1 + i )
Where:
i = the effective continuous rate
q Equivalent Nominal Rates
For two nominal rates to be equal, their effective rates must be equal.
Example: (Effective interest rate - Continuous compounding)

Calculate the effective interest rate per month for an interest rate of 15%
in a continuously compounded account.
Solution:
The nominal monthly rate, r is:
15
r= = 1.25%
12
i = e0.0125 − 1 = 0.012578
i = 1.2578%
Example: (Equivalent Rates)
What nominal rate, which if converted quarterly will have the same effect
as 12% compounded semi - annually?
Solution:
Let:
r = the unknown nominal rate
For two nominal rates to have the same effect, their corresponding
effective rates must be equal.
ERIquarterly = ERIsemi − annualy

4 2
⎛ r⎞ ⎛ 0.12 ⎞
⎜1+ 4 ⎟ − 1 = ⎜1 + 2 ⎟ − 1
⎝ ⎠ ⎝ ⎠
4
⎛ r⎞
⎜ 1 + 4 ⎟ = 1.1236
⎝ ⎠
r = 0.11825 or 11.825%
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V. ESTIMATING DOUBLING AND TRIPLING TIME OF AN INVESTMENT

➊ Doubling Time:
The time required for an initial single amount to double in value with
compound interest is:
log 2
" n=
log(1 + i)
Approximate Formula: (Rule of 72)

The time required for an initial single amount to double in value with
compound interest is approximately equal to:
72
" Estimated n =
i
Where:
i = effective interest in percent
For example, at a rate of 2% per year, it would take 72 2 = 36 years for a

current amount to double in size.
➋ Tripling Time:
The time required for an initial single amount to triple in value with
compound interest is:
log3
"n=
log(1 + i)
➌. General Formula:
The time required for an initial single amount to become k times in value
is:
logk
"n=
log(1 + i)
Where:
k = 2, 3, 4,...k n
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VI. DISCOUNT
; Relationship Between Rate of Interest and Rate of Discount
d
"i=
1− d
Where:
i = rate of interest
d = rate of discount
; Successive Discount
Two successive discounts of p% and q% allowed on an item are
equivalent to a single discount of:
⎛ pq ⎞
d = ⎜p + q − %
⎝ 100 ⎟⎠
Example:
Two discounts of 15% and 5% are equivalent to what single

discount?
Solution:
⎛
d = ⎜⎜ 15 + 5 −
(15 )( 5 ) ⎞ %
⎟
⎝ 100 ⎟⎠
d = 19.25%
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VII. ANNUITIES
Annuity is a series of equal payments “A” made at equal intervals of
time.
n Ordinary Annuity
- the type of annuity where the payments are made at the end of
each period
Future Worth of Ordinary Annuity:

Cash Flow Diagram
⎡ (1 + i )n − 1⎤ (Ordinary Annuity)
"F= A⎢ ⎥
⎢⎣ i ⎥⎦ 0 1 2 3 4 (n − 1) n
Present Worth of Ordinary Annuity:

A A A A A A
⎡ (1 + i )n − 1⎤ F
"P= A⎢ ⎥
⎢⎣ i (1 + i ) ⎥⎦ P
n
o Deferred annuity
- is the type of annuity where the first payment is made later than the
first or is made several periods after the beginning of the annuity.
Future Worth of Deferred Annuity:

Cash Flow Diagram
⎡ (1 + i )n − 1⎤ (Deferred Annuity)
"F= A⎢ ⎥
⎣⎢ ⎦⎥
i 0 1 2 3…… n
0 1 2 m
Present Worth of Deferred Annuity:

⎡ (1 + i )n − 1⎤ A A A A A
"P= A⎢ ⎥
⎣⎢ i (1 + i ) ⎦⎥
m +n
n periods F
P m + n periods
Where:
A = periodic equal payments
n = number of periods (equal to the number of payments)
i = interest rate per payment
m = number of periods before the beginning of the first payment
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p Annuity Due
- is the type of annuity where the payment is made at the beginning
of each period
Future Worth of Annuity Due: Cash Flow Diagram

(Annuity Due)
⎡ (1 + i )n − 1⎤ 1 2 3 4 5 (n − 1) n
"F= A⎢ ⎥
⎢⎣ i ⎥⎦
A A A A A A A
Present Worth of Annuity Due:
F
⎡ (1 + i )n − 1⎤ P n − 1 periods
"P= A⎢ ⎥
⎢⎣ i (1 + i ) ⎥⎦
n −1
Where: (in both cases)

A = periodic equal payments
n = number of periods (equal to the number of payments)
i = interest rate per payment
q Perpetuity
- is an annuity in which the periodic payments continue indefinitely.
Present Worth of Perpetuity:

( For payments made at the end of each period)
Cash Flow Diagram
(Perpetuity)
A
"P=
i 0 1 2 3…. n → ∞
Where:
A = periodic payment A A A A
i = interest per payment
P
234
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VIII. CAPITALIZED COST

Capitalized Cost refers to the present worth of a property that is
assumed to last forever. The capitalized cost of any property is the “sum
of the first cost and the present costs of perpetual replacement,
operation and maintenance”.
; CASE 1:
No replacement, only maintenance.
A
" CC = FC +
i
Where:
CC = Capitalized Cost
FC = first cost or original cost
A = Annual maintenance cost
; CASE 2:
No maintenance, only replacement.
P
" CC = FC +
(1 + i)
n
−1
Where:
P = the amount needed to replace the property every n periods
; CASE 3:
Replacement and maintenance every period.
A P
" CC = FC + +
i (1 + i )n − 1
Where:
A = Annual maintenance cost
P = the amount needed to replace the property every n periods
235
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IX. DEPRECIATION
Depreciation is the decrease in the value of physical property due to
passage of time.
Symbols used and their meaning:
d = annual depreciation charge

dn = depreciation charge during the nth year
Dn = total depreciation after “n” years
FC = first cost /original cost
SV = estimated salvage value after “L” years
L = expected depreciable life of the property
n = number of years before L
; METHODS OF COMPUTING DEPRECIATION
n Straight Line Method

Straight line method of depreciation assumes that the loss in value
of the property is directly proportional to the age of the property.
Annual depreciation:
FC − SV
"d=
L
Depreciation after “n” years:
⎛ FC − SV ⎞
" Dn = ⎜ ⎟n
⎝ L ⎠
" Dn = d × n
Book value after “n” years:
" BVn = FC − Dn
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o Sinking Fund Method
Annual depreciation:
"d=
(FC − SV ) i
(1 + i)L − 1
Depreciation after “n” years:
d ⎡(1 + i ) − 1⎤
n
⎢⎣ ⎥⎦
" Dn =
i
Book value after “n” years:
" BVn = FC − Dn
p Declining Balance Method

Also called as the constant percentage method or the Mateson
Formula:
Depreciation during the nth year:
" dn = k (FC )(1 − k )

n −1
Salvage Value at the end of its useful life:
" SV = FC (1 − k )
L
Book Value at the end of n years:
" BV = FC (1 − k )
n
n
⎛ SV ⎞ L
" BV = FC ⎜ ⎟
⎝ FC ⎠
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Rate of depreciation:
⎛ BV ⎞ ⎛ SV ⎞
k = 1− n ⎜ n ⎟ = 1− L ⎜ ⎟
⎝ FC ⎠ ⎝ FC ⎠
q Double Declining Balance Method (DDBM)

Also called as the constant percentage method or the Mateson
Formula:
Depreciation during the nth year:
2 (FC )(1 − k )
n −1
" dn =
L
Salvage Value at the end of its useful life:
L
⎛ 2⎞
" SV = FC ⎜ 1 − ⎟
⎝ L⎠
Book Value at the end of n years:
n
⎛ 2⎞
" BV = FC ⎜ 1 − ⎟
⎝ L⎠
Note that the formulas for DDB method are obtained form the formulas for
Declining Balance Method by simply replacing k with 2/L.
r Sum - of - the - Year’s - Digits (SYD) Method

Depreciation charge during the nth year:
L −n +1
" dn = (FC − SV )
SYD WHERE:
SYD = sum of the year's digit
Total depreciation after n years
n
SYD = ( n + 1)
n ( 2L − n + 1) 2
" Dn = (FC − SV )
2 ( SYD )
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TEST - 7
1. It is defined to be the capacity of a commodity to satisfy human want
A. necessity
B. utility
C. luxuries
D. discount
2. It is the stock that has prior right to dividends. It usually does not bring
voting right to the owners and the dividend is fixed and cannot be higher
than the specified amount.
A. Common stock
B. Voting stock
C. Preferred stock
D. Non par value stock
3. It is a amount which a willing buyer will pay to a willing seller for the
property where each has equal advantage and is under no compulsion to
buy or sell.
A. Book value
B. Market value
C. Use value
D. Fair value
4. _________ is the loss of value of the equipment with use over a period
of time. It could mean a difference in value between a new asset and the
use asset currently in a service.
A. Loss
B. Depreciation
C. Extracted
D. Gain
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5. An economic condition in which there are so few suppliers of a particular

product that one supplier’s actions significantly affect prices and supply.
A. Oligopoly *
B. monopsony
C. monopoly
D. perfect competition
6. A market whereby there is only one buyer of an item for when there are
no goods substitute.
A. Monopsony
B. Monopoly
C. Oligopoly
D. Oligopsony
7. It is the worth of a property as recorded in the book of an enterprise.
A. Salvage value
B. Price
C. Book value
D. Scrap value
8. Reduction in the level of national income and output usually

accompanied by a fall in the general price level.
A. Devaluation
B. Deflation
C. Inflation
D. Depreciation
9. A formal organization of producers within industry forming a perfect

collusion purposely formed to increase profit and block new comers from
the industry.
A. Cartel
B. Monopoly
C. Corporation
D. Competitors
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10. A market situation where there is only one seller with many buyer.
A. Monopoly*
B. Monophony
C. Oligopoly
D. perfect competition
11. A market situation where there is one seller and one buyer.
A. Bilateral monopoly*
B. Monopoly
C. Oligopoly
D. Bilateral Monopoly
12. Reduction in the level of national income and output usually

accompanied by a fall in the general price level.
A. Deflation
B. Inflation
C. Devaluation
D. Depreciation
13. A series of equal payments made at equal interval of time.
A. Annuity*
B. Amortization
C. Depreciation
D. Bonds
14. The money paid for the use of borrowed capital
A. interest*
B. amortization
C. annuity
D. bonds
15. The place where buyers and sellers come together.
A. Market *
B. Store
C. Bargain center
D. Port
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16. The value of the stock as stated on the stock certificate
A. stock value
B. par value*
C. interest
D. maturity value
17. An market situation in which two competing buyers exert controlling

influence over many sellers.
A. bilateral monopoly
B. oligopoly
C. duopsony*
D. duopoly
18. An market situation in which two powerful groups or organizations

dominate commerce in one business market or commodity.
A. Oligopoly
B. Duopoly*
C. Bilateral oligopoly
D. Bilateral Oligopsony
19. The type of annuity where the first payment is made after several
periods, after the beginning of the payment.
A. Perpetuity
B. Ordinary annuity
C. Annuity due
D. Deferred annuity*
20. The condition in which the total income equals the total operating
expenses.
A. tally
B. par value
C. Check and balance
D. Break even *
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21. The amount which has been spend or capital invested which for some
reasons cannot be retrieved.
A. sunk cost*
B. fixed costs
C. depletion cost
D. construction cost
22. An obligation with no condition attached is called
A. Personal
B. Gratuitous *
C. Concealed
D. Private
23. The sum of all the costs necessary to prepare a construction project for
operation.
A. operation cost
B. construction cost*
C. depletion cost
D. production cost
24. The amount received from the sale of an additional unit of a product.
A. marginal cost
B. marginal revenue*
C. extra profit
D. prime cost
25. The amount that the property would give if sold for junk.
A. junk value
B. salvage value
C. scrap value*
D. book value
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26. The worth of the property which is equal to the original cost less the
amount which has been charged to depreciation.
A. scrap value
B. salvage value
C. book value*
D. market value
27. The sum of the direct labor cost incurred in the factory and the direct
material costs of all materials that go into production is called
A. net cost
B. maintenance cost
C. prime cost*
D. operating cost
28. The difference between the present value and the worth of money at
some time in the future is called
A. market value
B. net value
C. discount*
D. interest
29. The additional cost of producing one more unit is
A. prime cost
B. marginal cost*
C. differential cost
D. sunk cost
30. A written contract by a debtor to pay final redemption value on an

indicated date or maturity date and to pay a certain sum periodically.
A. annuity
B. bond*
C. amortization
D. collateral
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31. Estimated value of the property at the end of the useful life.
A. Market value
B. Fair value
C. Salvage value *
D. Book value
32. Determination of the actual quantity of the materials on hand as of a

given date.
A. physical inventory*
B. counting principle
C. stock assessment
D. periodic material update
33. This consists of cash and account receivable during the next period or
any other material which will be sold.
A. fixed assets
B. deferred charges
C. current asset*
D. liability
34. A wrongful act that causes injury to a person or property and for which
the law allows a claim by the injured party to recover damages.
A. fraud
B. tort*
C. libel
D. scam
35. A series of uniform payment over an infinite period of time
A. depletion
B. capitalized cost
C. perpetuity *
D. inflation
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36. These are products or services that are required to support human life
and activities that will be purchased in somewhat the same quantity
event though the price varies considerably.
A. Commodities
B. Necessities *
C. Demands
D. Luxury
37. The quantity of a certain commodity that is offered for sale at a certain
price at a given place and time.
A. utility
B. supply*
C. stocks
D. goods
38. It is sometimes called the second hand value
A. Scrap value
B. Salvage value*
C. Book value
D. Par value
39. Decreases in the value of a physical property due to the passage of time.
A. Deflation
B. Depletion
C. Declination
D. Depreciation*
40. An association of two or more individuals for the purpose of engaging

business for profit.
A. Single proprietorship
B. Party
C. Corporation
D. Partnership*
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41. The simplest form of business organization wherein the business is own
entirely by one person.
A. partnership
B. proprietorship*
C. corporation
D. joint venture
42. Parties whose consent or signature in a contract is not considered

intelligent.
A. dummy person
B. minors
C. demented persons *
D. convict
43. It is defined as the capacity of a commodity to satisfy human want.
A. satisfaction
B. luxury*
C. necessity
D. utility
44. This 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 .
A. perfect competition *
B. monophony
C. monopoly
D. cartel
45. These are products or services that are desired by human and will be
purchased if money is available after the required necessities have been
obtained.
A. Commodities
B. Necessities
C. Luxuries *
D. Supplies
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46. Grand total of the assets and operational capability of a corporation.
A. authorized capital*
B. paid off capital
C. subscribed capital
D. investment
47. It is where the original record of a business transaction is recorded.

A. ledger
B. spreadsheet
C. journal*
D. logbook
48. The length of time which the property may be operated at a profit.
A. life span
B. economic life*
C. operating life
D. profitable life
49. The right and privilege granted to an individual or corporation to do

business in a certain region.
A. permit
B. royalty
C. license
D. franchise*
50. The worth of an asset as shown in the accounting records of an

enterprise.
A. fair value
B. par value
C. market value
D. book value*
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Solved Problems
In Economics
1. A man expects to receive P20,000 in 10 years. How much is that money
worth now considering interest at 6 %compounded quarterly?
Solution:
Given:
F = 20,000
t = 10 yrs
r = 6%;compounded quarterly(m = 4)
Formula:
F = (1 + i )
n
r
Where: i= , n = mt
m
Substitute the given values:
4(10)
⎛ .06 ⎞
20,000 = P ⎜ 1 +
⎝ 4 ⎟⎠
P = 11,025.25
2. An employee obtained a loan of P10,000 at the rate of 6% compounded

annually in order to repair a house. How much must he pay monthly to
amortize the loan within a period of 10 years?
Solution: Formula: - (Annuity)

Given: ⎡ (1 + i )n − 1⎤
P = 10,000 P = A⎢ ⎥
⎢ i (1 + i )n ⎥
r = 6% ⎣ ⎦
m = 1 (annually
t = 10 yrs
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Solving for the interest rate per month:

ERImonthly = ERIannually
(1 + i)12 − 1 = (1.06 )1 − 1
i = 0.0048675
Substitute to the formula:

⎡ (1.0048675 )12(10) − 1 ⎤⎥
10,000 = A ⎢
⎢ ( 0.0048675 ) (1.0048675)120 ⎥
⎣ ⎦
10,000 = 90.72A
A = 110.22
3. What is the effective rate corresponding to 16% compounded daily?

Take 1 year = 360 days.
Formula - (Effective Rate)
ERI = (1 + i ) − 1
m
Solution:
Given: m
r = 16% ; m = 360 (daily) ⎛ r ⎞
= ⎜1+ ⎟ − 1
Substitute: ⎝ m⎠
360 Where:
⎛ 0.16 ⎞
ERI = ⎜ 1 + −1 r = no min al rate
⎝ 360 ⎟⎠
m = mod e of compounding
ERI = 0.1735
= 17.35%
4. What is the accumulated amount after 3 years of P6,500.00 invested at

the rate of 12% per year compounded semi-annually?
Solution: Formula - Future worth

F = P (1 + i )
Given: n
P = 6,500 ; r = 12%
mt
m = 2 (semi − annually) ⎛ r ⎞
= P ⎜1 + ⎟
t = 3 years ⎝ m ⎠
Substitute: Where:
6 r = no min al rate
⎛ 0.12 ⎞
F = 6500 ⎜ 1 + = 9,220.37 m = mod e of compounding
⎝ 2 ⎟⎠
t = no. of years
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5. Fifteen percent (15%) when compounded semi-annually will have an

effective rate of
Solution: Formula - (Effective Rate)

ERI = (1 + i ) − 1
m
Given: m
r = 15% ⎛ r ⎞
= ⎜1+ ⎟ − 1
m=2 ⎝ m⎠
Where:
Substitute: r = no min al rate
2
⎛ 0.15 ⎞ m = mod e of compounding
ERI = ⎜ 1 + −1
⎝ 2 ⎟⎠
ERI = 0.1556
= 15.56%
6. What rate of interest compounded annually is the same as the rate of

interest of 8% compounded quarterly?
Solution:
Given: " Note:

r = 8%
For two or more rates to be
m=4 equivalent, their corresponding
Let: effective rates must be equal.
x = unknown rate
ERIannually = ERIquarterly
4
(1 + x )1 − 1 = ⎛⎜ 1 +
0.08 ⎞
−1
⎝ 4 ⎟⎠
x = 0.0824
x = 8.24%
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7. How long will it take the money to triple itself if invested at 10%
compounded semi-annually?
Solution:
Formula - Future worth (CI)
Let:
F = P (1 + i )
n
P = present worth
F = 3P ⎛ r ⎞
mt
= P ⎜1 + ⎟
⎝ m⎠
Substitute to the formula:
2t Where:
⎛ 0.10 ⎞
3P = P ⎜ 1 +
⎝ 2 ⎟⎠ r = no min al rate
3 = (1.05 )
2t m = mod e of compounding
t = no. of years
ln 3 = 2t(ln1.05)
t = 11.3 years
8. A man wishes his son to receive P500,000.00 ten years from now. What
amount should he invest now if it will earn interest of 12% compounded
annually during the first 5 years and 15% compounded quarterly during
the next 5 years?
Solution:
Given:
F = 500,000
r = 12%
m = 1 (annually) 0 5 10
P
From:
F5
F = (1 + i )
n
F10
For the first 5 years:

r = 12% ; m = 1 (annually)
F5 = P (1.12 )
5
F5 = 1.76P
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For the next 5 years,:
F10 = 500,000
r = 15% ; m = 4 (quarterly)
20
⎛ 0.15 ⎞
F10 = F5 ⎜ 1 +
⎝ 4 ⎟⎠
500,000 = (1.12 ) P (1.0375 )
5 20
P = 135,868.19
9. What interest rate compounded monthly is equivalent to 10% effective

rate?
Solution:
Formula - Effective rate
Given: m
r = 8% ⎛ r ⎞
ER = ⎜ 1 + ⎟ − 1
m=4 ⎝ m⎠
Where:
Let:
x = unknown rate r = no min al rate
12 m = mod e of compounding
⎛ x ⎞
0.10 = ⎜ 1 + ⎟ −1 t = no. of years
⎝ 12 ⎠
12
⎛ x ⎞
1.10 = ⎜ 1 + ⎟
⎝ 12 ⎠
x = 0.0957
x = 9.57%
253
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10. A machine costs P8,000.00 and an estimated life of 10 years with a

salvage value of P500.00. What is its book value after 8 years using
straight-line method?
Solution:
Given:
Co = 8,000 ; n = 8 years
L = 10 years(life)
SV = 500
Solving for the total depreciation:

Dn = d × n → (d = annual depreciation)
⎛ C − SV ⎞
=⎜ o ⎟n
⎝ L ⎠
⎛ 8000 − 500 ⎞
=⎜ ⎟ 8 = 6000
⎝ 10 ⎠
Thus, the Book Value (BV) is:
BV = Co − Dn
= 8000 − 6000 = 2000
11. By the condition of a will, the sum of P20,000 is left to a girl to be held in
trust fund by her guardian until it amounts to P50,000. When will the girl
receive the money if the fund is invested at 8% compounded quarterly?
Solution:
Given:
P = 20,000 F = 50,000
r = 8%; m = 4 (quarterly)
Substitute given values:
4t Formula - (Compound Interest)
⎛ .08 ⎞
50,000 = 20,000 ⎜ 1 +
4 ⎟⎠
mt
⎛ r ⎞
⎝ F = P (1 + i ) = P ⎜ 1 + ⎟
n
⎝ m⎠
2.5 = (1.02 )
4t
Take ln both sides:

ln 2.5 = 4t ( ln1.02 )
t = 11.57 years
254
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12. The amount of P12,800 in 4 years at 5% compounded quarterly is
Solution:
Given:
P = 12,800
Formula - (Compound Interest)
t = 4 years mt
⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
r = 5%
⎝ m ⎠
m = 4 (quarterly)
Substitute the given values to the formula:

4(4)
⎛ 0.05 ⎞
F = 12,800 ⎜ 1 +
⎝ 4 ⎟⎠
F = 15,614.59
13. How much money must you invest today in order to withdraw P2000
annually for 10 years if the interest rate is 9%?
Solution:
Given:
A = 2000 Formula: - (Annuity)

t = 10 years ⎡ (1 + i )n − 1⎤
r = 9% P = A⎢ ⎥
⎢ i (1 + i )n ⎥
m = 1 (annually) ⎣ ⎦
Where:
P=? A = annual payment / widrawal
Substitute the given values: P = present worth
⎡ (1.09 )10 − 1 ⎤ n = number of payment / widrawal
P = 2000 ⎢ ⎥
⎢⎣ 0.09(1.09) ⎥⎦
10
P = 12,835.32
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14. Money Borrowed today is to be paid in 6 equal payments at the end of 6

quarters. If the interest is 12% compounded quarterly, how much was
initially borrowed if quarterly payments is P2,000.00?
Solution:
Given: Formula: (Present worth -Annuity)

A = 2000 ⎡ (1 + i )n − 1⎤
r = 12% P = A⎢ ⎥
⎢ i (1 + i )n ⎥
m = 4 (quarterly) ⎣ ⎦
r 0.12 Where:
i= = = 0.03 A = periodic payment
m 4
P = present worth
Substitute: n = number of payments
⎡ (1.03 )6 − 1 ⎤ r
P = 2000 ⎢ ⎥ i= → int erest per period
⎢⎣ ( 0.03 )(1.03 ) ⎥⎦
6
m
P = 10,834.38
15. The effective rate of 14% compounded semi-annually is
Solution:
Given: m
⎛ r ⎞
r = 14% ER = ⎜ 1 + ⎟ − 1
⎝ m ⎠
m = 2 (semi − annually)
Where:
ER = ?
r = no min al rate
From the formula:
2
⎛ 0.14 ⎞ t = no. of years
ER = ⎜ 1 + ⎟ −1
⎝ 2 ⎠
= 0.1449
= 14.49%
256
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16. A man expects to receive P25,000 in 8 years. How much is that money
worth now considering interest at 8% compounded quarterly?
Solution:
Given:
F = 25,000 Formula - (Compound Interest)
r = 8% mt
⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
m = 4 (quarterly)
⎝ m ⎠
t = 8 years Where;
P=? F = future worth
P = present worth
From the formula:
4(8) r = nomin al rate of int erest
⎛ 0.08 ⎞
25,000 = P ⎜ 1 + m = mod e of compounding
⎝ 4 ⎟⎠
t = no. of years
P = 13,262.83
17. What is the accumulated amount of the five-year annuity paying P6,000
at the end of each year with interest at 15% compounded annually?
Solution:
Formula: (Future worth -Annuity)
Given: ⎡ (1 + i )n − 1⎤
F= A⎢ ⎥
A = 6000 ⎢ i ⎥
⎣ ⎦
r = 15% Where:
m = 1 (annually) A = periodic payment
t = 5 years P = present worth
F=? n = number of payments
Substitute: r
i = → int erest per period
⎡ (1.15 )5 − 1⎤ m
F = 6000 ⎢ ⎥
⎢⎣ 0.15 ⎥⎦
F = 40, 454.29
257
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18. ABC Corporation makes its policy that for every new equipment
purchased, the annual depreciation cost should not exceed 20% of the
first cost at any time without salvage value. Determine the length of
service life necessary if the depreciation used is the SYD method.
Solution :
Using SYD method:

⎛ reversed digit ⎞
dn = ( Co − CL ) ⎜ ⎟
⎝ SYD ⎠
⎛ ⎞
⎜ n ⎟
0.2Co = ( Co − 0 ) ⎜ ⎟
n
⎜⎜ ( n + 1) ⎟⎟
⎝2 ⎠
2
0.20 =
n +1
n = 9 years
19. At an interest rate of 10% compounded annually, how much will a

deposit of P1500 in 15 years?
Solution:
Given:
r = 10%
m = 1 (annually)
P = 1500
t = 15 years
F=?
From:
mt
⎛ r ⎞
F = P ⎜1 + ⎟
⎝ m⎠
Substitute:
F = 1500 (1.10 )
15
F = 6,265.87
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20. A debt of P10,000 with 10% interest compounded semi-annually is to be

amortized by semi-annual payments over the next 5 years. The first due
is 6 months. Determine the semi-annual payments.
Solution:
Formula: (Present worth -Annuity)
Given:
P = 10,000 ⎡ (1 + i )n − 1⎤
r = 10% P = A⎢ ⎥
⎢ i (1 + i )n ⎥
⎣ ⎦
Where:
r 0.10
i= = = 0.05 A = periodic payment
m 2
P = present worth
n = mt = 2(5) = 10
n = number of payments
A =?
r
Substitute: m
⎡ (1.05 )10 − 1 ⎤
10,000 = A ⎢ ⎥
⎢⎣ 0.05(1.05)10 ⎥⎦
A = 1,295.05
21. If you borrowed money from your friend with simple interest of 12%, find
the present worth of P50,000.00 which is due at the end of 7 months.
Solution:
Given: Formula: (Ordinary Simple
r = 12% Interest)
0.12
i=
360 F = P (1 + in )
F = 50,000 1month = 30 days
n = 7(30) = 210 days Where:
Substitute to the formula: P = present worth
⎡ ⎛ 0.12 ⎞ ⎤ i = rate of int erest / day
50,000 = P ⎢1 + ⎜ ⎟ 210 ⎥
⎣ ⎝ 360 ⎠ ⎦ n = no. of int erest periods
P = 46,728.97
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22. The amount of P50,000.00 was deposited in the bank earning an interest
of 7.5% per annum. Determine the total amount at the end of 5years if
the principal and interest were not withdrawn during the period.
Solution:
Given: mt
⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
⎝ m ⎠
P = 50,000
Where;
r = 7.5% F = future worth
m = 1 (per annum) P = present worth
t = 5 years r = nomin al rate of int erest
F=? m = mod e of compounding
Substitute:
t = no. of years
F = 50,000 (1 + 0.075 )
5
F = 71,781.47
23. What is the corresponding effective rate of 18% compounded semi-

quarterly?
Solution:
Given:
m
r = 18% ⎛ r ⎞
ER = ⎜ 1 + ⎟ − 1
m = 8 (semi − quarterly) ⎝ m ⎠
Substitute: Where:
⎛ 0.18 ⎞
ER = ⎜ 1 + −1 m = mod e of compounding
⎝ 8 ⎟⎠
t = no. of years
ER = 0.1948
ER = 19.48%
260
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24. A telephone company purchased a microwave radio equipment for P6

million. Freight and installation charges amounted to 4% of the
purchased price. If the equipment will be depreciated over a period of 10
years with a salvage value of 8%, determine the depreciated cost during
the 5th year using SYD.
Solution:
Co = 6M + 0.04(6M) Formula :Depreciation (SYD Method)

n −m +1
Co = 6.24M dm = (FC − SV )
SYD
SV = 0.08(Co ) Where:
SV = 0.08(6.24M) F = First Cost
SV = 499,200 SV = Salvage Value
n n = life of the property in years
SYD = ( n + 1) m = number of years used before n
2
10
SYD = (10 + 1) = 55
2
Solving for the depreciation during the 5th year:
d5 = ( 6,240,000 − 499,200 )
(10 − 5 + 1)
55
d5 = 626,269.10
25. In how many years is required for P2,000 to increase by P3,000 if

interest at 12% is compounded semi-annually?
Solution:
Given: Formula - (Compound Interest)
mt
P = 2000 ; F = 5000 ⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
r = 12% ; m = 2 (semi − annually) ⎝ m⎠
Substitute: Where;
2t F = future worth
⎛ 0.12 ⎞
5000 = 2000 ⎜ 1 +
⎝ 2 ⎟⎠ P = present worth
r = nomin al rate of int erest
2.5 = (1.06 )
2t
ln 2.5 = 2t(ln1.06)
t = no. of years
t = 7.86 (say 8 years)
261
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26. A VOM has a current selling price of P400. If its selling price is expected
to decline at a rate of 10% per annum due to obsolence, what will be its
selling price after 5 years?
Formula - Mateson’s Formula
Solution:
Cm = Co (1 − k )
m
Given: Where:
Co = 400 ; k = 10% C = Book Value at the
m
m = 5 years end of m years
Substitute: k = rate of depreciation
Cm = 400 (1 − 0.1)
5 Co = first cost
Cm = 236.20
27. Find the nominal rate which if converted quarterly could be used instead
of 12% compounded semi-annually.
" Note:
Solution: For two or more rates
Given: r = 12% ; m = 2 (semi − annually) to be equivalent, their
Let: x = the unknown nominal rate corresponding effective
mx = 4 (mode of compounding of x) rates must be equal.
Equate Effective rates of interest:

ERquarterly = ERsemi− annually
4 2
⎛ x⎞ ⎛ 0.12 ⎞
⎜1 + 4 ⎟ − 1 = ⎜1 + 2 ⎟ − 1
⎝ ⎠ ⎝ ⎠
x = 0.1183
x = 11.83%
28. Find the present worth of a future payment of a P100,000 to be made in

10 years with an interest of 12% compounded quarterly.
Solution:
See Formula in Problem 25:
4(10)
⎛ 0.12 ⎞
100,000 = P = ⎜ 1 +
⎝ 4 ⎟⎠
P = 30,655.68
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29. What nominal rate, compounded semi-annually, yields the same amount
as 16% compounded quarterly?
Solution: " Note:

For two or more rates to be
Given: equivalent, their corresponding
effective rates must be equal.
r = 16%
m = 4 (quarterly)
Let:
x = the unknown nominal rate
mx = (mode of compounding of x)

ERsemi− annually = ERquarterly
2 4
⎛ x⎞ ⎛ 0.16 ⎞
⎜1 + 2 ⎟ − 1 = ⎜1 + 4 ⎟ − 1
⎝ ⎠ ⎝ ⎠
x = 0.1632
x = 16.32%
30. What rate of interest compounded annually is the same as the rate of
interest of 8% compounded quarterly?
Solution:

ERannually = ERquarterly
4
(1 + x ) − 1 = ⎛⎜1 +
0.08 ⎞
−1
⎝ 4 ⎟⎠
x = 0.0824
x = 8.24%
263
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31. You loan from a loan firm an amount of P100,000 with the rate of simple
interest of 20%, but interest was deducted from the loan at the time the
money was borrowed. If at the end of one year you have to pay the full
amount of P100,000, what is the actual rate of interest?
Solution:
Given:
n = 1 year
P = 100,000 − 20% advance interest
P = 100,000 − 0.20(100,000)
P = 80,000
F = 100,000 (to be paid at the end of 1 year)
From:
F = P (1 + in )
Substitute:
100,000 = 80,000 [1 + i(1)]
i = 0.25
i = 25%
Alternate Solution:
Think of the 20% advance interest as a rate of discount:

Relationship between rate of interest i and rate of discount d:
d
i=
1− d
Then,
0.20
i=
1 − 0.20
i = 0.25
i = 25%
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32. A loan of P5,000 is made for a period of 15 months at a simple interest

rate of 15%. What future amount is due at the end of a loan period?
Solution:
Formula: (Ordinary Simple
Given: Interest)
P = 5000
n = 15(30) = 450 days F = P (1 + in )
0.15 1month = 30 days
i=
360 Where:
Substitute: P = present worth
⎡ ⎛ 0.15 ⎞ ⎤ i = rate of int erest / day
F = 5000 ⎢1 + ⎜ ⎟ 450 ⎥
F = 5,937.5
33. Mr. J. Reyes borrowed money from a bank. He received from the bank
P1,842 and promise to repay P2,000 at the end of 10 months. Determine
the simple interest.
Solution:
Given:
P = 1842
F = 2000
n = 10 ( 30 ) = 300 days
i=?
See formula in problem 32:
⎡ ⎛ i ⎞ ⎤
2000 = 1842 ⎢1 + ⎜ ⎟ 300 ⎥
⎣ ⎝ 360 ⎠ ⎦
i = 0.1029
i = 10.29%
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34. What is the effective rate corresponding to 18% compounded daily?

Take 1 year is equal to 360 days.
Solution:
Given: m
r = 18% ⎛ r ⎞
ER = ⎜ 1 + ⎟ − 1
m = 360 (daily) ⎝ m⎠
Substitute: Where:
⎛ 0.18 ⎞
ER = ⎜ 1 + −1 m = mod e of compounding
⎝ 360 ⎟⎠
t = no. of years
ER = 0.1972
ER = 19.72%
35. Find the annual payment to extinguish a debt of P 10,000 payable for 6
years at 12% interest annually.
Solution:
Formula: (Present worth -Annuity)
Given:
P = 10,000
⎡ (1 + i )n − 1⎤
t = 6 years P = A⎢ ⎥
r = 12% ⎢ i (1 + i )n ⎥
⎣ ⎦
m = 1 (annually) Where:
n = mt = (1)(6) = 6 A = periodic payment
r 0.12 P = present worth
i= = = 0.12
m 1 n = number of payments
r
Substitute: m
⎡ (1 + 0.12 )6 − 1 ⎤
10,000 = A ⎢ ⎥
⎢⎣ 0.12 (1 + 0.12 )6 ⎥⎦
A = 2, 432.257
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36. What annuity is required over 12 years to equate with a future amount of
P 20,000? Assume i = 6% annually.
Solution: Formula: (Future worth -Annuity)

Given:
F = 20,000 ⎡ (1 + i )n − 1⎤
F= A⎢ ⎥
t = 12 years ⎢ i ⎥
⎣ ⎦
r = 6% Where:
m = 1 (annually) A = periodic payment
r 0.06 F = Future worth
i= = = 0.06
m 1 n = number of payments
n = mt = 12 r
A =? i = → int erest per period
m
Substitute:
⎡ (1 + 0.06 )12 − 1⎤
20,000 = A ⎢ ⎥
⎢⎣ 0.06 ⎥⎦
A = 1,185.54
37. Find the present worth of a future payment of 80,000 to be made in six
years with an interest of 12% compounded annually.
Solution:
mt
Given: ⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
F = 80,000 ⎝ m⎠
t = 6 years Where;
r = 12% F = future worth
m = 1 (annually) P = present worth
P=? r = nomin al rate of int erest
Substitute:
t = no. of years
80,000 = P (1 + 0.12 )
6
P = 40,530.48
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38. The amount of P 20,000 was deposited in a bank earning an interest of

6.5% per annum. Determine the total amount at the end of 7 years if the
principal and interest were not withdrawn during this period.
Solution: Formula - (Compound Interest)

mt
⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
Given:
P = 20,000 ⎝ m⎠
r = 6.5% Where;
F = future worth
m = 1 (per annum)
P = present worth
t = 7 years
F=?
Substitute: m = mod e of compounding
F = 20,000 (1 + 0.065 )
7 t = no. of years
F = 31,079.7
39. Today a businessman borrowed money to be paid in 10 equal payments

for 10 quarters. If the interest rate is 10% compounded quarterly and the
quarterly payment is 2,000 pesos, how much did he borrowed?
Solution: Formula: (Present worth -Annuity)

Given:
r = 10% ⎡ (1 + i )n − 1⎤
m = 4 (quarterly) P = A⎢ ⎥
⎢ i (1 + i )n ⎥
r 0.10 ⎣ ⎦
i= = = 0.025 Where:
m 4
A = periodic payment
n = 10 equal payments
P = present worth
A = 2000
P=?
r
Substitute: m
⎡ (1 + 0.025 )10 − 1 ⎤
P = 2000 ⎢ ⎥
⎢⎣ 0.025 (1 + 0.025 )10 ⎥⎦
P = 17,504.13
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40. What is the present worth of a P 500 annuity starting at the end of the
third year and continuing to the end of fourth year, if the annual interest
rate is 10%.
Solution:
Formula:
Given: (Present worth of deferred Annuity)
A = 500 ⎡ (1 + i )n − 1⎤
m=2 P = A⎢ ⎥
⎢⎣ i (1 + i ) ⎥⎦
m+n
n=2
Where:
r = 10% (annually) A = periodic payment
P = present worth
Substitute:
⎡ (1 + 0.10 )2 − 1 ⎤
P = 500 ⎢ ⎥ m =number of periods before
⎢⎣ 0.10 (1 + 0.10 ) ⎥⎦
2+2
the beginning of the first
P = 717.16 payment
Alternate Solution:
0 1 2 3 4
F
P1 =
(1 + i)
n
500 500
500
P1 = = 375.66 P1
(1.10 )
3
500 P2
P2 = = 341.51
(1.10 )
4
P = 375.66 + 341.51
= 717.17
269
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41. A copying machine has a useful life of 3 years and a salvage value of P
20,000 was bought for P 135,000. If the owner decides to sell after using
it for 2 years, how much should the selling price be so that he will not
lose or gain if the interest is 5%. (Hint: apply the Sinking Fund method).
Solution:
Selling Price = Book Value after n years
From Sinking Fund Formula:
d=
( Co − SV ) → annual depreciation cost
(1 + i) − 1
L
Where:
d = annual depreciation cost
Co = first cost or original cost
SV = salvage value at the end of useful life
L = life
Solving for d:
d=
(135,000 − 20,000 )( 0.05 )
(1.05 ) − 1
3
d = 36, 479
Total depreciation at the end of 2 years:
⎡ (1 + i )n − 1⎤
D2 = d ⎢ ⎥
⎢⎣ i ⎥⎦
⎡ (1.05 )2 − 1⎤
D2 = 36, 479 ⎢ ⎥
⎢⎣ 0.05 ⎥⎦
D2 = 74,782
Solving for the Book Value after 2 years:
BV2 = Co − D2
= 135,000 − 74,782
= 60,218 → selling price
270
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42. A loan for P 50,000 is to be paid in 3 years at the amount of P65, 000.
What is the effective rate of money?
Solution:
Given:
P = 50,000
F = 65,000
n = 3 years
From:
I = Pin
65,000 − 50,000 = 50,000i(3)
i = 0.10
i = 10%
43. Today an investor withdraws P50,000.00 representing the accrued

amount of his investment that matured. If he invested at 10%
compounded semi-annually for 10 years, how much did he invest in
pesos?
Solution:
Given: mt
⎛ r ⎞
F = 50,000 F = P (1 + i ) = P ⎜ 1 + ⎟
n
r = 10% ⎝ m⎠
Where;
F = future worth
t = 10 years
P = present worth
Substitute:
2(10)
50,000 = P ⎜ 1 +
⎝ 2 ⎟⎠
t = no. of years
P = 18,844.47
271
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44. A man invested part of P 20,000 at 18% and the rest at 16%. The annual
income from 16% investment was P 620 less than three times the annual
income from 18% investment. How much did he invest at 18%?
Solution:
Let:
x = amount invested at 18% interest
20,000 − x = the amount invested at 16% interest
Then,
0.16 ( 20,000 − x ) = 3 ( 0.18x ) − 620
3200 − 0.16x = 0.54x − 620
x = 5, 457.14
45. What is the accumulated amount after three (3) years of P 6,500
invested at the rate of 12% per year compounded semi-annually?
Solution:
Given:
mt
⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
P = 6,500 ⎝ m⎠
t = 3 years Where;
r = 12% F = future worth
m = 2 (semi − annually) P = present worth
F=? r = nomin al rate of int erest
Substitute: t = no. of years
2(3)
⎛ 0.12 ⎞
F = 6,500 ⎜ 1 +
⎝ 2 ⎟⎠
F = 9220.37
272
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46. If the authorize capital stock of corporation is P 2,000,000 how much

must the paid-up capital be?
Solution:
Formula:
Authorized Capital Stock = 16(Paid − up Capital)
Hence,
2,000,000
Paid − up Capital =
16
= 125,000
47. In how many years will the amount of P 10,000 triple if invested at an
interest rate of 10% compounded per year?
Solution:
mt
Given: ⎛ r ⎞
F = P (1 + i ) = P ⎜ 1 + ⎟
n
⎝ m⎠
P = 10,000
Where;
F = 3P = 30000 F = future worth
r = 10% P = present worth
m = 1 (per year) r = nomin al rate of int erest
t=? m = mod e of compounding
t = no. of years
Substitute:
30,000 = 10,000 (1 + 0.10 )
t
3 = (1.10 )
t
ln 3 = t ( ln1.10 ) → taking ln both sides

t = 11.53
273
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48. What is the amount of an annuity of P5000 per year at the end of each
year for 7 years at 5% interest compounded annually?
Solution:
⎡ (1 + i )n − 1⎤ ⎡ (1 + 0.05 )7 − 1⎤
F= A⎢ ⎥ = 5000 ⎢ ⎥
⎢⎣ i ⎥⎦ ⎢⎣ 0.05 ⎥⎦
F = 40,710
50. What is the book value of an equipment purchased three years ago for
P15,000 if it is depreciated using the sum of the years digit method? The
expected life is 5 years.
Solution:
Usin g SYD method :

n ( n + 1) ( 5 )( 6 ) = 15
∑ year = 2
=
2
⎛ n ⎞
d1 = ( Co − Cn ) ⎜
⎜ ∑ year ⎟⎟
⎝ ⎠
5
d1 = (15,000 − 0 ) = 5000
15
4
d2 = (15,000 − 0 ) = 4000
15
3
d3 = (15,000 − 0 ) = 3000
15
Total depreciation :
Dn = 5000 + 4000 + 3000
= 12,000
Book Value = 15,000 − 12,000
Book Value = 3,000
274
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51. The parents planned for their son to receive P50,000 ten years from
now. What amount in pesos should they invest now if it will earn interest
of 12% compounded annually for the first five years and 15%
compounded quarterly during the next five years?
Solution:
F10 = 50,000
For the first 5 years:
F5 = P (1 + 0.12 )
5
0 5 10
F5 = (1.12 ) P
5
For the next 5 years: F5

mt
⎛ r ⎞
F10 = F5 ⎜ 1 + ⎟ P
⎝ m⎠
4(5)
⎛ 0.15 ⎞
50,000 = (1.12 ) P ⎜ 1 +
5
⎟
⎝ 4 ⎠
P = 13,586.82
52. A customer buys an electric fan from a store that charges P1,500 at the
end of 90 days. The customer wishes to pay cash. What is the cash
price if the money is worth 10% simple interest?
Solution:
Interest)
F = 1,500
F = P (1 + in )
i = 10%
1month = 30 days
P=?
Where:
P = present worth
⎡ ⎛ 0.10 ⎞ ⎤
1500 = P ⎢1 + ⎜ ⎟ 90 ⎥ i = rate of int erest / day
⎣ ⎝ 360 ⎠ ⎦
n = no. of int erest periods
P = 1, 463.41
275
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53. In how many years will P1000 double if interest is 10% compounded
quarterly?
Solution:
Given:
P = 1000
F = 2P = 2000 mt
⎛ r ⎞
r = 10% F = P (1 + i ) = P ⎜ 1 + ⎟
n
m = 4 (quarterly) ⎝ m ⎠
Where;
t=?
F = future worth
Substitute:
4t P = present worth
⎛ 0.10 ⎞
2000 = 1000 ⎜ 1 + r = nomin al rate of int erest
⎝ 4 ⎟⎠
2 = (1.025 )
4t
t = no. of years
ln 2 = 4t(ln1.025)
t = 7 years
54. Mr. Reyes borrowed money from a bank. He received from the bank
P1842 and promised to pay P2,000 at the end of 10 months. Determine
the simple interest rate.
Solution:
Given: Interest)
P = 1842 F = P (1 + in )
F = 2000
1month = 30 days
n = 10(30) = 300 days Where:
Substitute: P = present worth
⎡ ⎛ i ⎞ ⎤ i = rate of int erest / day
2000 = 1842 ⎢1 + ⎜ ⎟ ( 300 ) ⎥
i = 0.1029
i = 10.29%
276
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55. A man borrows P15,000 from Hong Kong Bank. The rate of simple
interest is 12%, 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
P15,000. What is the actual rate of interest?
Solution:
Given: Interest)
P = 15,000 − 12%(15,000) F = P (1 + in )
P = 13,200 1month = 30 days
F = 15,000 Where:
n = 360 days P = present worth
i = rate of int erest / day
Substitute: n = no. of int erest periods
⎡ ⎛ i ⎞ ⎤
15,000 = 13,200 ⎢1 + ⎜ ⎟ 360 ⎥
⎣ ⎝ 360 ⎠ ⎦
i = 0.1364
i = 13.64%
56. In how many years will it take money to quadruple if invested at 8%

compounded semi-annually?
Solution:
mt
Let: ⎛ r ⎞
F = P (1 + i) = P ⎜ 1 + ⎟
n
P = present worth ⎝ m⎠
F = 3P (quadruple) Where;
r = 8% ; m = 2 (semi − annually) F = future worth
P = present worth
Substitute:
2t
4P = P ⎜ 1 +
⎝ 2 ⎟⎠
t = no. of years
4 = (1.04 )
2t
ln 4 = 2t(ln1.04)
t = 17.67 years
277
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57. A brand new machine is estimated to have a salvage value of P 10,000

after ten years and a book value of P 30,000 after 5 years, what is the
initial cost of the machine? (Assume straight line depreciation).
Solution:
Given:
SV = 10,000 Formula: Depreciation (Straight Line
BV = 30,000 Method)-Book Value
L = 10 years ⎛ C − SV ⎞
BV = Co − Dn ; Dn = ⎜ o ⎟n
n = 5 years ⎝ L ⎠
Where:
Substitute:
⎡ ( C − SV ) ⎤ BV = Book Value
BV = Co − ⎢ o ⎥n SV = Salvage Value
⎣ L ⎦
Co = first cos t
⎡ C − 10,000 ⎤
30,000 = Co − ⎢ o ⎥5 Dn = total depreciation after n years
⎣ 10 ⎦
Co L = life
30,000 = Co − + 5,000 n = no. of years before L
2
C
25,000 = o
2
Co = 50,000
58. A machine was brought for P 50,000 with an estimated useful life of 10
years and a salvage value of P 5,000. What is its annual depreciation
assuming straight line trend?
Solution: Formula: Depreciation (Straight Line

Method)-Book Value
Substitute: C − SV
d= o
L
50,000 − 5,000 Where:
d=
10 d = annual depreciation
d = 4,500 SV = Salvage Value
Co = first cos t
L = life
278
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59. What annuity is required over 10 years to equate with a future amount of
P20,000. Assume i = 8% per year.
Solution:
Formula: (Future worth -Annuity)
Given:
F = 20,000
⎡ (1 + i )n − 1⎤
r = 8% F= A⎢ ⎥
m =1 ⎢ i ⎥
⎣ ⎦
A =? Where:
A = periodic payment
Substitute: F = Future worth
⎡ (1 + .08 )10 − 1⎤ n = number of payments
20,000 = A ⎢ ⎥
⎢⎣ 0.08 ⎥⎦
A = 1,380.59
60. A merchant loaned P 500,000 payable in 10 years at an interest rate of

12 percent compounded annually. What is the monthly amortization for
10 years?
Solution:
Solving for the interest per month:

(1 + i) − 1 = (1.12 ) − 1
12 1
i = 0.009489 or 0.9489%
A ⎡(1.009489 ) − 1⎤
120
500,000 = ⎣ ⎦
( 0.009489 )(1.009489 )
120
A = 6997.43
279
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61. 10 years ago a businessman purchased a machine for P50,000 with an

expected life of 20 years based on a straight line depreciation. Today,
he decided to replace it with a modern one that costs P120,000. If the
salvage value of the old unit is P20,000, how much more will he raise to
buy the new machine?
Solution:
Given:
Co = 50,000
SV = 20,000
L = 20
n = 10
Let: x = amount needed to buy the new equipment
Solving for the Book Value:
⎡ ( C − SV ) ⎤
BV = Co − ⎢ o ⎥n
⎣ L ⎦
⎡ ( 50,000 − 20,000 ) ⎤
BV = 50,000 − ⎢ ⎥ 10
⎣ 20 ⎦
BV = 45,000
Solving for x:
x = Co − BV
x = 120,000 − 45,000
x = 75,000
280
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62. A heavy duty copying machine was procured for P100, 000 with an
estimated salvage value of P10, 000 after 10 years. What is the book
value after 5 years? (Assume straight line depreciation).
Solution:
Given:
Co = 100,000
SV = 10,000
L = 10 years
n = 5 years
Substitute:
⎡ ( C − SV ) ⎤
BV5 = Co − ⎢ o ⎥n
⎣ L ⎦
⎡ (100,000 − 10,000 ) ⎤
BV5 = 100,000 − ⎢ ⎥5
⎣ 10 ⎦
BV5 = 55,000
63. Based on its purchased price a machine is expected to depreciate at a

uniform rate of 18 percent annually until it has zero salvage value.
Approximate the useful life of the machine in years using the SYD
method?
Solution:
Given:
⎛ ⎞
⎜ n ⎟
0.18C0 = ( Co − 0 ) ⎜ ⎟
n
⎜⎜ ( n + 1) ⎟⎟
⎝2 ⎠
2
0.18Co = C0
n +1
0.18n + 0.18 = 2
n = 10
281
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st
64. A man deposited P5, 000 on the date his son celebrated his 1 birthday.
If the money is worth 10% compounded semi-annually, what is the
maximum amount the son can withdraw on his 21st birthday?
Solution:
P = 5000
t = 20 years
r = 10%, semi − annually
Solving for the future worth, F:

F = P (1 + i )
n
2(20)
⎛ 0.10 ⎞
F = 5000 ⎜ 1 + ⎟
⎝ 2 ⎠
F = P35,200
65. What will be the value of P 6,000 four and one-half years from now if
invested at 15% compounded quarterly?
Solution:
P = 6,000
r = 15%, quarterly
t = 4.5 years
F=?
Solving for F:
4.5(4)
⎛ 0.15 ⎞
F = 6000 ⎜ 1 + ⎟
⎝ 4 ⎠
F = P11,640
282
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CHAPTER 7 ENGINEERING ECONOMICS

GENERAL ENGINEERING & APPLIED SCIENCES

I. CASH FLOW DIAGRAMS

- can occur at the beginning of Single Payment t =n

➋ Uniform Series Cash Flow t =1 t =n

➍ Exponential Gradient Cash

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II. SIMPLE INTEREST

" F = P + I or F = P(1 + in)

1 banker' s year = 12 months = 360 days

; Computation for “n’ and “i” for ordinary simple interest:

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➋ Exact Simple Interest

" F = P + I = P(1 + in)

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III. COMPOUND INTEREST

Where: (for both cases)

In compound interest formula, the quantity:

" F = Per t → future worth

" P = Fe−r t → present worth

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; Values of “n” and “i” for different modes of compounding:

9 Annually – (every 12 months)

9 Semi – annually - (every 6 months)

9 Quarterly - (every 3 months)

9 Bimonthly - (every 2 months)

9 Semi-quarterly - (every 1.5 months)

9 Monthly - (every month)

9 Semi - monthly - (every 0.5 month)

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IV. RATES OF INTEREST

Thus, a nominal rate of interest of 6% compounded monthly simply means

➋ Effective Rate of Interest (ERI):

" ERI = (1 + i)m − 1

p Effective Interest Rate for Continuous Compounding:

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q Equivalent Nominal Rates

Example: (Effective interest rate - Continuous compounding)

ERIquarterly = ERIsemi − annualy

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V. ESTIMATING DOUBLING AND TRIPLING TIME OF AN INVESTMENT

Approximate Formula: (Rule of 72)

For example, at a rate of 2% per year, it would take 72 2 = 36 years for a

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; Relationship Between Rate of Interest and Rate of Discount

Two discounts of 15% and 5% are equivalent to what single

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 Future Worth of Ordinary Annuity:

 Present Worth of Ordinary Annuity:

 Future Worth of Deferred Annuity:

 Present Worth of Deferred Annuity:

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 Future Worth of Annuity Due: Cash Flow Diagram

Where: (in both cases)

 Present Worth of Perpetuity:

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VIII. CAPITALIZED COST

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Symbols used and their meaning:

d = annual depreciation charge

; METHODS OF COMPUTING DEPRECIATION

n Straight Line Method

 Depreciation after “n” years:

Future Worth of Ordinary Annuity:

Present Worth of Ordinary Annuity:

Future Worth of Deferred Annuity:

Present Worth of Deferred Annuity:

Future Worth of Annuity Due: Cash Flow Diagram

Present Worth of Perpetuity:

Depreciation after “n” years:

Book value after “n” years:

Book value after “n” years:

Depreciation during the nth year:

Salvage Value at the end of its useful life:

Book Value at the end of n years:

Depreciation during the nth year:

Salvage Value at the end of its useful life:

Book Value at the end of n years: