TEMPLATE 1: ENGINEERING ECONOMY

Team Leader : RAZEL ALLAN R. VALLESER, MOP

Members : ERIC Z. DEL ROSARIO, MSAE
Course Title ENGINEERING ECONOMY

Course Description
Units / Credit Equivalent
This course have the topics on ; time value of money, money
discounting, effect of inflation; international accounting
standards (IAS); international Financial Reporting Standards
(IFRS) under the IAS; use of feasibility analysis software
adopting the IAS standards; future value and present worth;
investments, operating costs, financial and economic benefits;
annual projection of material quantities, costs and benefits,
annual cash flows, feasibility indicators – net Present Value
(NPV), Internal Rate of Return (IRR), Benefit-Cost Ratio
(BCR), Return on Investment (ROI), and Payback Period;
Financial and economic feasibility analyses with
risk/sensitivity analysis; break-even analysis, financial ratios,
and the financial statements based on International Financial
Reporting Standards (IFRS) – Income Statement, Cash Flow
Statement, Balance Sheet; preparation of international
standard feasibility studies complete with Project Summary,
Market, Technical, Financial, Socio-Economic and
Management Feasibilities. This course is modified in
compliance to new normal. The application and if this course
is in compliance to new normal.
3.0

Course Outcomes 1. Explain the time value of money and money

discounting at normal and inflationary condition;
Determine the future value of an investment and the
present worth of a targeted future amount; Prepare
using manual computations and computer the detailed
investments, operating costs, financial and economic
benefits of any engineering projects;
2. Determine annual projection of material
quantities, costs and benefits and benefits of any
engineering projects; manually and using the
computer; prepare annual cash flows for any
engineering project using the International Accounting
Standards (IAS); Quantify and explain the
implications of the following project feasibility

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 indicators.
 3. Analyze financial and economic feasibility
with risk/sensitivity analysis; interpret the implications
of break-even analysis, financial ratios and the
financial statements based on International Financial
Reporting Standards (IFRS); Prepare manually and
using a software an international standard feasibility
study.

Learning Outcomes
 Articulate and discuss the latest developments in the specific field of practice
 Effectively communicate orally and in writing using both English and Filipino
 Work effectively and independently in multi-disciplinary and multicultural teams
 Act in recognition of professional, social, and ethical responsibility
Preserve and promote “Filipino historical and cultural heritage” (based on RA 7722)
 Apply knowledge of mathematics, science and engineering;
 Design, conduct experiments, as well as to analyze and interpret data and evaluate
results;
 Design a system, component or process meeting international standards within realistic
constraints such as economic, environmental, social, political, ethical, health and
safety, and sustainability;
 Function in multidisciplinary and multi-cultural teams;
 Identify, formulate, solve engineering problems
 Understand professional and ethical responsibility;
 Communicate effectively complex AB engineering activities with the engineering
community and with society at large;
 Assess the impact of engineering solutions in a global, economic, environmental, and
societal context.
 Recognize the need for and engage in life-long learning;
 Know contemporary issues;
 Apply techniques, skills, and modern technology tools necessary for engineering
practice.
 Apply knowledge and understanding of engineering and management principles as a
member and leader in a team to managed projects and in multidisciplinary
environments.
 Understand at least one specialized field of ABE practice.

TEMPLATE 2: Course pack Structure

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 Module Intended Learning Outcomes
1 Understand and apply
Interest, and Discounting,
Inflation and Deflation,
International Accounting
Time Value Standards, International
of Money Financial Reporting
Standards
Apply Feasibility Analysis
Software adopting IAS
standards
Lessons Writer
Lesson 1 – Interest
Lesson 2 - Discount
Lesson 3 – Inflation and
Deflation
Lesson 4 – International
Accounting Standards and Eric Z. Del
International Accounting Rosario
Standards
Lesson 5 – Feasibility
Analysis Software adopting
IAS standards

2 Understand and apply Lesson 1 – Assumptions,

estimation of detailed costs Investments, and Operating
Estimation of and benefits of any Costs
Detailed Costs Engineering projects Lesson 2 – Financial and
and Benefits of Eric Z. Del
Economic Benefits
Any Rosario
Engineering
Projects

3 Perform annual projection of Lesson 1 – Material

project data manually and Quantities and Costs
Annual using computer Lesson 2 – Financial
benefits and economic Eric Z. Del
Projection of
benefits Rosario
Project Data

4 Apply and prepare annual Lesson 1 – Applying the

cash flows manually and International Accounting
Cash Flow using computer Standards (IAS) Eric Z. Del
Lesson 2 – Cash Flow Rosario
Preparation

5 Quantify and interpret project Lesson 1 – Net Present

feasibility indicators Value (NPV)
Lesson 2 – Internal Rate of
Quantification manually and using compute Return (IRR)
and Lesson 3 – Benefit-Cost
Interpretation Ratio (BCR) Eric Z. Del
of Project Lesson 4 – Return of Rosario
Feasibility Investment (ROI)
Indicators Lesson 5 – Payback Period

6 Performed financial and Lesson 1 – Applicable Eric Z. Del

economic feasibility analyses provisions of International Rosario
using the life cycle cash flow Accounting Standards

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 Financial and accounting method and Lesson 2 – Financial
economic considering risks Feasibility Analysis
Analysis Lesson 3 – economic
Feasibility Analysis
Lesson 4 – Inflation and
other risk factors
Lesson 5 – Sensitivity
analysis

7 Perform financial statements, Lesson 1 –International Eric Z. Del

Introduction break-even analysis and Financial Reporting Rosario
to Financial
Standards
financial ratios and their Lesson 2 – Cash Flow
Statements, interpretations Statement
Break even Lesson 3 – Balance Sheet
analysis and Lesson 4 – Break-Even
Financial Analysis
ratios and Lesson 5 – Financial Ratios
their
interpretations

8 Prepare international standard Lesson 1 – Project Eric Z. Del

feasibility studies Summary Rosario
International
Lesson 2 –Market
Standard
feasibility
Feasibility
Lesson 3 – Technical
Studies
Feasibility
Lesson 4 – Socio-Economic
Feasibility
Lesson 5 – Management
Feasibility and Appendices
9 Understand and Apply Lesson 1 – Management Eric Z. Del
Engineering Management and its functions Rosario
Engineering
Lesson 2 –Planning,
Management
Leading, Organizing and
Controlling
Lesson 3 – Managing
Product and Service
Operations
Lesson 4 – Managing the
Marketing and Finance
Function

TEMPLATE 3: Module Template

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Module No. Module 1: Time Value of Money
& Title
Module
Overview Hello Students! In this module we are going to understand “Time Value of
Money”. Time value of money is the economic concept that money (or capital)
received today has a different value than money that will be received in the
future. Understanding and applying the concept of the time value of money is
important in deciding which alternative to pursue when the alternatives will
generate revenue or incur costs at different times in the future. This module
reviews the concept of time value of money, discusses money discounting at
normal and inflationary, International Accounting Standards, International
financial reporting standards and the application of feasibility analysis software
adopting IAS standards.

Module
Objectives/
Outcomes At the end of this module, the students will have the following outcomes:
 Understand and apply Interest, and Discounting, Inflation and Deflation,
International Accounting Standards, International Financial Reporting
Standards
 Apply Feasibility Analysis Software adopting IAS standards

Lessons in For students to have an idea, just simply enumerate lessons contained in a
the module module.

Lesson 1 – Interest
1.1 Simple Interest
1.2 Compound Interest
Lesson 2 - Discount
Lesson 3 – Inflation and Deflation
Lesson 4 – International Accounting Standards and International Accounting
Standards
Lesson 5 – Feasibility Analysis Software adopting IAS standards

Module No. Module 2: Future Value and Present

& Title
Module
Overview Hello Students! In this module we are going to understand “Time Value of
Money”. Time value of money is the economic concept that money (or capital)
received today has a different value than money that will be received in the
future. Understanding and applying the concept of the time value of money is
important in deciding which alternative to pursue when the alternatives will
generate revenue or incur costs at different times in the future. This module
reviews the concept of time value of money, discusses money discounting at
normal and inflationary, International Accounting Standards, International
financial reporting standards and the application of feasibility analysis software

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 adopting IAS standards.

Module
Objectives/
Outcomes At the end of this module, the students will have the following outcomes:
 Understand and apply Interest, and Discounting, Inflation and Deflation,
International Accounting Standards, International Financial Reporting
Standards
 Apply Feasibility Analysis Software adopting IAS standards

Lessons in For students to have an idea, just simply enumerate lessons contained in a
the module module.

Lesson 1 – Interest
1.3 Simple Interest
1.4 Compound Interest
Lesson 2 - Discount
Lesson 3 – Inflation and Deflation
Lesson 4 – International Accounting Standards and International Accounting
Standards
Lesson 5 – Feasibility Analysis Software adopting IAS standards

TEMPLATE 4: The Lesson Structure

(Will be used individually during the self-paced write shop)
Module No. Module 1: Time Value of Money
and Title
Lesson No. Lesson 1 – Interest
and Title
Learning Understand and apply interest; its concept and computations
Outcomes
Time Frame Week 1
Introduction
Hello Students! Our first lesson is all about Interest. Most of us are familiar in a
general way concept of interest. From the viewpoint of the borrower, interest is
the amount of money paid for the use of borrowed capital. For the lender, interest
is the income produced by the money which he has lent.
In this lesson, we examine how interest applies and operates in a free-market
economy and establish a basis for understanding the more complex interest
relationships that follows later on in the module. Expect that this week it will be
full of exciting learning activities, problem solving and critical thinking.

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Activity When it comes to basics of engineering economy you have to learn about
interest! Interest will affect your loans and investments and understanding this
concept will make money or lose you money.

Think one of your dreams like having a luxury car or having a modern house.
These things need a lot of money and affording would be impossible in one-time
payment, except if you borrowed a money.
Borrowing money in banks and other financing agencies would require you to
pay the amount you’ve borrow and an extra amount as a form of payment for the
use of the money they lent which is called interest.
For our activity, cite at least 5 instances that interest may applies agreed by the
lender and borrower.

Analysis Analysis questions:

Has the lender or borrower losses a money?
Do you know how the interest incurred was computed?

We know that borrowing a money means repaying an amount over time, that
includes interest, and that it is greater than the amount borrowed. What may be
unfamiliar to us is the idea that, in the financial world, money itself is a
commodity, and like other goods that are bought sold, money cost money. In this
lesson, you will learn the concept behind interest; its transactions, and
computations.

Abstraction Money is Not Free to Borrow!

People can always find a use for money, so it costs to borrow money.

How Much does it Cost to Borrow Money?

Different places charge different amounts at different times!

Interest may be defined as the cost of having money available for use.
From the viewpoint of the borrower, interest is the amount money paid for the
use of borrowed capital. For the lender, interest is the income produced by the
money which he has lent.

Simple Interest and Compound Interest

1. Simple Interest
Simple interest is interest calculated on the principal portion of a loan or the
original contribution to a savings account.

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Example:
Alex wants to borrow $1,000. The local bank says "10% Interest". So to borrow
the $1,000 for 1 year will cost:
$1,000 × 10% = $100

What if Alex wanted to borrow the money for 2 Years?

If the bank charges "Simple Interest" then Alex just pays another 10% for the extra year.

Example: Alex borrows $1,000 for 5 Years, at 10% simple interest:

Interest = $1,000 × 10% x 5 Years = $500
Plus the Principal of $1,000 means Alex needs to pay $1,500 after 5 Years

The important part of the word "Interest" is Inter- meaning between (we see inter- in
words like interior and interval), because the interest happens between the start and end
of the loan.

Simple Interest Formula:

I = Pin
F=I+P
where
I = interest
P = amount borrowed (called "Principal")
i = interest rate
n = number of interest periods
F = Total Amount to be paid

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Simple Interest. Example 1:
Jan borrowed ₱3,000 for 4 Years at 5% interest rate, how much interest is that?
What is the total amount to be paid?
Given: P= 3,000; i= 0.05; n= 4.
I= Pin
I= ₱3,000 × 5% × 4 years
I= ₱3000 × 0.05 × 4
I= ₱600 (interest)

F=I+P
F = ₱600 + ₱3000
F = ₱3,600 (Total amount to be paid)

Ordinary and Exact Simple Interest

1.1 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
1.2 Exact Simple Interest is based on the exact amount of days, 365 for an
ordinary year and 366 days for a leap year. The leap years are those which are
exactly divisible by 4, but excluding the century years such as the years 1900,
2000, etc.

For Ordinary simple interest, I = Pi (d/360)

For Exact simple interest, I = Pi (d/365) -for ordinary year
I = Pi (d/366) -for leap year

Simple Interest. Example 2:

Determine the ordinary and exact simple interests on 5,000 for the period from
January 15 to June 20, 1993, if the rate of simple interest is 14%.
Solution: First determine the number of days in the given period.
January 15-31 = 16 days (excluding January 15)
February = 28
March = 31
April = 30
May = 31
June 1-20 = 20 (including June 20)
Total = 156 days
Ordinary simple interest is based on a banker’s year of 360 days, while exact
simple interest is based on the actual number of days in the year, 366 days for a
leap year and 365 days otherwise. Note that 1993 is not a leap year, we have
Ordinary simple interest = Pin = 5,000 (0.14)(156/360) = 303.33 (answer)
Exact simple interest = Pin = 5,000 (0.14)(156/365) = 299.18 (answer)

2. Compound Interest

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In compound interest, the interest earned by the principal is not paid at the end of
each interest period, but is considered as added to the principal, and therefore
will also earn interest for the succeeding periods.

Example Illustration:
The bank says "If you paid me everything back after one year, and then I loaned
it to you again, I would be loaning you $1,100 for the second year!" so I want
more interest:

And Alex pays $110 interest in the second year, not just $100.

Because Alex is paying 10% on $1,100 not just $1,000

This may seem unfair ... but imagine YOU lend the money to Alex. After a year
you think "Alex owes me $1,100 now, and is still using my money, I should get
more interest!"

It is like paying interest on interest: after a year Alex owed $100 interest, the
Bank thinks of that as another loan and charges interest on it, too.

After a few years it can get really large. This is what happens on a 5 Year Loan:

So, after 5 Years Alex has to pay back $1,610.51

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 And the Interest for the last year was $146.41 ... it sure grew quickly!
(Compare that to the Simple Interest of only $100 each year)

Compound Interest formula:

If Future Amount (F) is Unknown and Present value (P) is given,
F = P(1+i) n
If Future Amount (F) is given and Present value (P) is unknown,
P = F(1+i) -n
Where:
F = Future Amount
P = Present amount/Value (Principal)
i = interest rate
n = number of interest periods

Nominal rate and Effective rate on Compound Interest

2.1 Nominal rate of interest. For compound interest, the rate of interest
usually quoted is nominal rate of interest which specifies the rate of interest and
the number of interest periods per year.
Interest rate (i) = 8% compounded quarterly = 8%/4 = 2% = 0.02
Interest rate (i) = 8% compounded semi-annually = 8%/2 = 4% = 0.04
2.2 Effective rate of interest. The effective rate of interest is the actual rate
of interest on the principal for one year. It is equal to the nominal rate if the
interest is compounded annually, but greater than the nominal rate if the number
of interest periods per year exceeds one, such as for the interest compounded
semi-annually, quarterly or monthly.
Formula: Effective rate of interest = (1 + i) n - 1
Example:
a. i = 8% compounded quarterly = 8%/4 = 2% = 0.02
Effective rate of interest = (1 + i) n – 1 = (1 + 0.02)4 – 1 = 0.0824
b. i = 8% compounded semi-annually = 8%/2 = 4% = 0.04
Effective rate of interest = (1 + i) n – 1 = (1 + 0.04)2 – 1 = 0.0816

Compound Interest. Example 1.

If the sum of 12,000 is deposited in an account earning interest at the rate of 9%
compounded quarterly, what will it become at the end of 8 years?
Given: P = 12,000; i= 9%/4 = 2.25%= 0.0225; n= 8(4) = 32.
F = P(1+i) n = 12,000(1 + 0.0225)32 = 24,457.24 answer

Compound Interest. Example 2.

If you are investing your money which is better: 12% compounded monthly or
12.5% compounded annually?
Solution: Compare the effective rate of the two alternatives
Given: i1= 12%/12= 1%=0.01, n=12; i2= 12.5%/1 = 12.5%=0.125, n=1
a. For 12% compounded monthly,
Effective rate = (1 + 0.01)12 – 1 = 0000.12683 = 12.683%
b. For 12% compounded annually,

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 Effective rate =12.5%
Thus, as investor,12% compounding monthly is better. answer

Application Solved Problems. Try to observe and comprehend how the sample problems are
being solved.
1. A man borrows 10,000 from a loan firm. The rate of 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 10,000. what is the
actual rate of interest?
Given: P = 10,000 – 0.15(10,000) = 8,500; F = 10,000; i= 15%=0.15;n= 1
Solution:
F = P (1 + in)
10,000 = 8,500 (1 + i)
i = 0.1765 = 17.65% (answer)

2. If the future amount is 50% more than the principal after 10 months,
determine the simple interest rate.
Given: F=P+0.5P; n=10/12
Solution:
F = P (1+in)
P + 0.5P = P(1 + in)
1.5P = P[1+i(10/12)]
i = 60% (answer)

3. 5,000 is borrowed for 75 days at 16% per annum simple interest. How
much will be due at the end of 75 days?
Given: P= 5,000; i= 16%=0.16; n= 75 days/360 days
Solution:
F=P(1+in)
F=5000(1 + ((0.16x75)/360))
F= 5,166.67 (answer)

4. Compute the equivalent rate of 6% compounded semi-annually to a rate

compounded quarterly.
Solution:
1 + (0.06/2))2 = (1+ i/4) 4
(1.03)2 = (1+ i/4)4
1 +i/4 = 1.0149
i = 0.0596
i = 5.96 % compounded quarterly (answer)

5. A man expects to receive 20,000 in 10 years. How much is that money

worth now considering interest at 6% compounded quarterly?
Given: F=20,000; i= 6%/4 = 1.5%; n= 10 years (4) = 40 quarters
Solution:

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 F = P(1+i) n
20,000 = P(1+0.015)40
P = 11,025.25 (answer)

6. A man possesses a promissory note, due 3 years hence, whose maturity

value is 6,700.48. if the interest is 10% compounded semi-annually, what
is the value if this note now?
Given: F = 6,700.48; i= 10/2 = 5%; n = 3(2) = 6 periods
Solution:
F = P(1+i) n; P = F (1+ i)−n
P = 6,700.48(1.05)−6
P = 5,000 (answer)

7. An ABE student plan to deposit 1,500 in the bank now and another 3,000
for the next 2 years. If he plans to withdraw 5,000 3 years after his last
deposit for the purpose of buying shoes, what will be the amount of
money left in the bank after one year of his withdrawal? Effective annual
interest rate of 10%
Given: P1=1,500 n1=5; P2=3,000, n2= 3; i= 10%=0.10
Solution:
Amount left after withdrawal of 5,000
F= 1,500 (1 + 0.1)5 + 3,000 (1 + 0.1)3 – 5,000
F= 1,408.76
Amount 1 year after withdrawal of 5,000
F= 1,408.76 (1 + 0.1)1
F=1,549.64 (answer)

Closure Congratulations and job well-done. Let’s continue our exciting ride on exploring
our next lesson, which is all about “Discounts”.

MODULE ASSESSMENT
Lesson 1 - Interest. Exercises
Direction: Solve the following problems and show your solutions.
1. If the sum of 12,000 is deposited in an account earning interest at the rate of 9%
compounded quarterly, what will it become at the end of 8 years?
2.
MODULE SUMMARY

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Interest may be defined as the cost of having money available for use. From the viewpoint of the
borrower, interest is the amount money paid for the use of borrowed capital. For the lender,
interest is the income produced by the money which he has lent.
Simple interest is interest calculated on the principal portion of a loan or the original
contribution to a savings account.
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
Exact Simple Interest is based on the exact amount of days, 365 for an ordinary year and 366
days for a leap year.
Compound interest, the interest earned by the principal is not paid at the end of each interest
period, but is considered as added to the principal, and therefore will also earn interest for the
succeeding periods.
Nominal rate of interest. For compound interest, the rate of interest usually quoted is nominal
rate of interest which specifies the rate of interest and the number of interest periods per year.
The effective rate of interest is the actual rate of interest on the principal for one year.

REFERENCES

Book:
Park, Chan S. 2002. Engineering Economics Third Edition. PEARSON EDUCATION SOUTH
ASIA PTE LTD. ISBN 981-274-137-5. Copyright 2004
Internet sources:
https://www.mathbootcamps.com/compound-interest-formula/

https://ocw.mit.edu/courses/engineering-systems-division/esd-70j-engineering-economy-module-fall-
2009/lecture-notes/

https://www.studocu.com/en-us/document/michigan-state-university/engineering-cooperative-
ed/tutorial-work/engineering-economics-module-2-time-value-of-money-cont/1144416/view

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