ENEECO30 -Engineering Economy

PROBLEM SET # 3 (SOLUTION)

CASHFLOW, INTEREST, DISCOUNT, INFLATION

PROBLEM #1:
Brian borrowed P30,000 from a financing company charging 11 % simple interest for
180 days. How much did Brian pay back the company at the end of the term?
Given:
𝑃 = 𝑃ℎ𝑝 30,000.00
𝑖 = 11.8%
𝑚 = 180 𝑑𝑎𝑦𝑠
Solution:
 𝐹 = 𝑃(1 + 𝑖𝑛)

 𝐹 = 30,000 1 + (0.118)

 𝐹 = 𝑃ℎ𝑝 31,770.00

Answer:
𝑭 = 𝑷𝒉𝒑 𝟑𝟏, 𝟕𝟕𝟎. 𝟎𝟎

PROBLEM #2:
If you deposit $5000 into an account, how many years will it take for the account to be
worth $9350 using 8.25% simple interest rate?
Given:
𝑃 = $ 5,000.00
𝑖 = 8.25%
𝐹 = $ 9,350.00
Solution:
 𝐹 = 𝑃(1 + 𝑖𝑛)
 = (1 + 𝑖𝑛)

 𝑖𝑛 = − 1

 𝑛= =
.
= 10.54 𝑦𝑒𝑎𝑟𝑠 𝑜𝑟 11 𝑦𝑒𝑎𝑟𝑠

Answer:
𝒏 = 𝟏𝟏 𝒚𝒆𝒂𝒓𝒔

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #3:
If the total interest paid equals the borrowed principal over 25 years, determine the simple
interest rate applied.
Given:
𝑃=𝐼
𝑛 = 25 𝑦𝑒𝑎𝑟𝑠
Solution:
 𝐹 = 𝑃 + 𝐼 = 𝑃 + 𝑃 = 2𝑃
 𝐹 = 2𝑃
 𝐹 = 𝑃 (1 + 𝑖𝑛)
 2𝑃 = 𝑃(1 + 𝑖𝑛)
 2 = 1 + 𝑖𝑛
 2 − 1 = 𝑖𝑛
 1 = 𝑖𝑛
 𝑖= =

 𝑖 = 0.04 𝑜𝑟 4%

Answer:
𝒊 = 𝟒%

PROBLEM #4:
A loan of P100,000 made today (December 7, 2020) at 8.75% simple interest rate will be
repaid on February 14, 2021. What amount should be paid by the borrower?
Given:

𝑃 = 𝑃ℎ𝑝 100,000.00
𝑖 = 8.75%
𝐹𝑟𝑜𝑚 𝐷𝑒𝑐𝑒𝑚𝑏𝑒𝑟 7, 2020 𝑢𝑝 𝑡𝑜 𝐹𝑒𝑏𝑟𝑢𝑎𝑟𝑦 14, 2021

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

Solution:

Get the value of n by counting number of days.

Year Months Days

2020 December 24
2021 January 31
February 14
TOTAL 69 days

 𝐹 = 𝑃 (1 + 𝑖𝑛)

 𝐹 = 100,000 1 + (0.0875)(

 𝐹 = 𝑃ℎ𝑝 101,677.08

Answer:
𝑭 = 𝑷𝒉𝒑 𝟏𝟎𝟏, 𝟔𝟕𝟕. 𝟎𝟖

PROBLEM #5:
If the total interest paid equals the borrowed principal over 20 years, determine (a) the
applied nominal rate compounded quarterly, and (b) applied rate compounded continuously.
Given:
𝑃=𝐼
𝑛 = 20 𝑦𝑒𝑎𝑟𝑠
Solution:
 𝐹 = 𝑃 + 𝐼 = 𝑃 + 𝑃 = 2𝑃
 𝐹 = 2𝑃
A. For nominal rate compounded quarterly
 𝐹 = 𝑃 (1 + 𝑖)
 2𝑃 = 𝑃 (1 + 𝑖)
 2 = (1 + 𝑖)
 √2 = 1 + 𝑖
 𝑖 = √2 − 1 note: 𝑖 =

 = √2 − 1

 𝑖 = 𝑚 √2 − 1 note: for quarterly, m = 4

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

 𝑖 = 4 √2 − 1
 𝑖 = 0.14105 𝑜𝑟 14.105%
B. For compounded continuously
()
 𝐹 = 𝑃𝑒
()
 2𝑃 = 𝑒
()
 2=𝑒
()
 𝑙𝑛2 = 𝑙𝑛𝑒
 𝑙𝑛2 = 𝑛(𝑖)𝑙𝑛𝑒

 𝑖=

 𝑖=

 𝑖 = 0.0347 𝑜𝑟 3.47%

Answer:
A. 𝒊𝒏 = 𝟏𝟒. 𝟏𝟎𝟓%
B. 𝒊 = 𝟑. 𝟒𝟕%

PROBLEM #6:
Two hundred years ago, your great, great, great grandfather deposited P1 in a savings
account. Today, the bank notified you that you are the sole heir to the account. How much is the
account today if it earns 8% compounded annually?
Given:

𝑃 = 𝑃ℎ𝑝 1.00
𝑛 = 200 𝑦𝑒𝑎𝑟𝑠
𝑖 = 8%
Solution:

Consider perspective of your great, great, great, grandfather

 𝐹 = 𝑃 (1 + 𝑖)
 𝐹 = 1.00 (1 + 0.08)
 𝐹 = 𝑃ℎ𝑝 4,838,949.59

Answer:
𝑭 = 𝑷𝒉𝒑 𝟒, 𝟖𝟑𝟖, 𝟗𝟒𝟗. 𝟓𝟗

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #7:
If the total interest paid equals the borrowed principal over 20 years, determine the discount
rate applied. Determine the equivalent simple interest rate.
Given:

𝑃=𝐼
𝑛 = 20
Solution:

For rate of discount

 𝑑 =

( )
 𝑑 =
( )

( )
 𝑑 =
( )

( )
 𝑑 =
( )

 𝑑 =

 𝑑 = 0.04761 𝑜𝑟 4.76%

For simple interest rat

 𝑖=

 𝑖=

 𝑖= =

 𝑖 = 0.05 𝑜𝑟 5%

Answer:
𝑑 = 4.76%
𝑖 = 5%

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

PROBLEM #8:
If you deposit $5000 into an account, how many years will it take for the account to be
worth $9350 using 8.25% simple discount rate?
Given:
𝑃 = $ 5,000.00
𝑖 = 8.25%
𝐹 = $ 9,350.00
Solution:

 𝑖=
.
 𝑖=
.

 𝑖 = 0.0899 𝑜𝑟 8.99%
 𝐹 = 𝑃(1 + 𝑖𝑛)
 = (1 + 𝑖𝑛)

 𝑖𝑛 = − 1

 𝑛=
9350
−1
 𝑛= 5000
0.0899

 𝑛 = 9.67 𝑦𝑒𝑎𝑟𝑠 𝑜𝑟 10 𝑦𝑒𝑎𝑟𝑠

Answer:
𝒏 = 𝟏𝟎 𝒚𝒆𝒂𝒓𝒔

PROBLEM #9:
What rate compounded quarterly is equivalent to (a) 10% effective, (b) 10% compounded
monthly, (c) 10% simple interest for two years, and (d) 10% simple discount rate for 2 years?
Given:
a.) 𝐸𝐼𝑅 = 10%
b.) 𝑖 = 10% 𝑚𝑜𝑛𝑡ℎ𝑙𝑦
c.) 𝑖 = 10% ; 𝑛 = 2 𝑦𝑒𝑎𝑟𝑠
d.) 𝑑 = 10% ; 𝑛 = 2 𝑦𝑒𝑎𝑟𝑠

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

Solution:
a.) For 𝐸𝐼𝑅 = 10%

 𝐸𝐼𝑅 = 1 + −1

 10% = 1 + −1

 𝑖 = 0.0965 𝑜𝑟 9.65%
b.) For 𝑖 = 10% 𝑚𝑜𝑛𝑡ℎ𝑙𝑦
 𝐸𝐼𝑅 = 𝐸𝐼𝑅

 1+ −1= 1+ −1

.
 1+ −1= 1+ −1

 𝑖 = 0.1008 𝑜𝑟 10.08%
c.) For 𝑖 = 10% ; 𝑛 = 2 𝑦𝑒𝑎𝑟𝑠
Consider F = P(1+in) and F = P(1+i)^n wherein F and P at simple interest and
compound interest are both equal in n = 2 years.
 (1 + 𝑖𝑛) = (1 + 𝑖)

 (1 + 𝑖𝑛) = 1 +
( )( )
 (1 + (0.10)(2)) = 1 +

 𝑖 = 0.0922 𝑜𝑟 9.22%
d.) For 𝑑 = 10% ; 𝑛 = 2 𝑦𝑒𝑎𝑟𝑠

 𝑖=
.
 𝑖=
.

 𝑖 = 0.1111 𝑜𝑟 11.11%
Consider equation used in c wherein F and P are both equal for simple and
compound interest.
 (1 + 𝑖𝑛) = (1 + 𝑖)

 (1 + 𝑖𝑛) = 1 +
( )( )
 (1 + (0.11)(2)) = 1 +

Instructor: Engr. Michael Benjamin M. Diaz

 ENEECO30 -Engineering Economy

 𝑖 = 0.1006 𝑜𝑟 10.06%

Answer:
a. 𝑖 = 9.65%
b. 𝑖 = 10.08%
c. 𝑖 = 9.22%
d. 𝑖 = 10.06%

PROBLEM #10:
If you have two options where to invest your money, which one will you choose? Option
1 offers 11% simple interest rate per annum, while option 2 offers 10% simple discount rate per
annum. Explain your answer.

Given:

Option 1 𝑖 = 11% simple interest rate annum

Option 2 𝑑 = 10% discount rate annum

Solution:

Get the value of simple interest of Option 2 using the formula below

 𝑖=

.
 𝑖=
.

 𝑖 = 0.1111 𝑜𝑟 11.11%

Therefore, 𝑖 = 11% < 𝑖 = 11.11%

Answer:

Option 2 will be chosen since it provides 11.11% of simple interest rate which is

greater compared to Option 1 with 11% simple interest rate.

Instructor: Engr. Michael Benjamin M. Diaz