ENGINEERING ECONOMY

MONEY-TIME RELATIONSHIP AND

DEPRECIATION METHODS
ENGR. ROSS CREMA
 SIMPLE INTEREST

TSERETNI ELPMIS
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.

The interest on borrowed money is said to be simple

interest if the interest to be paid is directly proportional
to the length of time the amount or principal is borrowed.
 PRINCIPAL

I = Pin is the amount of money borrowed

and on which interest is charged.

I = total interest earned by the RATE OF INTEREST

Principal
is the amount of money earned by
P = amount of the principal
one unit of principal during a unit of
i = rate of interest expressed in
time.
decimal form
n = number of interest periods
 TOTAL AMOUNT " F "

F=P+I
The total amount F to be repaid is equal to the sum of the principal and the total interest

F = P(1 + in)
Ordinary
Simple Interest
Computed on the basis of 12 months
of 30 days each or 360 days a year.
1 interest period = 360 days
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.
1 interest period = 365 or 366 days
 Cash-Flow Diagrams

150
is a simply a
graphical 0 1 2 3 4 5 6 7 8
representation of
cash flows drawn on
100
a time scale
 COMPOUND INTEREST

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
DNUOPMOC
therefore will also earn interest for the succeeding
periods.
TSERETNI
The total amount due after n periods for compound interest is
given by the formula

n
F = P(1 + i)
 n
F = P(1 + i)
Nominal Rate Effective Rate of
of Interest Interest
specifies the rate of interest and a is the exact rate of interest on the
number of interest periods in one principal during one year.
year.
 Equation of Value

An equation of value is obtained by

setting the sum of the values on a certain
comparisons or focal date of one set of
obligations equal to the sum of the values
of the same date of another obligations.
 n -n
F = P(1 + i) P = F(1 + i)
SINGLE PAYMENT COMPOUND SINGLE PAYMENT PRESENT
FACTOR WORTH FACTOR
 In continuous compounding, it is assumed that cash

& GNIDNUOPMOC
payments occur once per year but the compounding is
continuous throughout the year.

In discreet compounding, the interest is compounded at

SUOUNITNOC

the end of each finite-length period, such as a month,

STNEMYAP quarter or a year.
TEERCSID

r is the nominal annual interest rate and m is the numberof

interest periods in each year, then the interest rate per interest
period is i = r/m , and the number of interest years n is mn

mn
F = P(1 + r/m)