I.

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 interest period
360
P = Present worth (capital)
F = Future worth
n = Total number of interest periods
r = Annual Percentage Rate (APR)
 

" N ote:

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

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

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)
 
II. 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

➋ Effective  Rate  of  Interest  (ERI):  

? ERI = (1+ i)m − 1

Where:
ERI = Effective Rate of Interest
r
i= (interest per interest period)
m
m = number of periods

# Effective  Interest  Rate  for  Continuous  Compounding:  

? ERI = er − 1

Where:
r = Nominal rate of interest

For two nominal rates to be equal, their effective rates must be equal.

TASK: Sept 20,2021.

PROBLEM SOLVING:

1. Determine the ordinary simple interest on P5,000 for 9 months and 10 days if the
rate of interest is 12%.
2. Jeffrey buys an electric fan from a merchant who asks P1,250 at the end of 60
days (cash in 60 days). Jeffrey wishes to pay immediately and the merchant
offers to compute the cash price on the assumption that money is worth 8%
simple interest. What is the cash price today?
3. Determine the exact simple interest on P10,000 for the period from January 15 to
June 20, 2004, if the rate of simple interest is 14%.
4. Determine the exact simple interest on P1,000 for the period from January 10 to
October 28, 2005 at 12% interest.
5. Find the nominal rate compounded monthly which is equivalent to 12%
compounded quarterly.    
III. COMPOUND INTEREST
➊ Future  Worth,  F:

mt
⎛ r ⎞
? F = P (1 + i ) or F = P ⎜ 1 + ⎟
n

⎝ m⎠

! 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

" N ote: 02  

In compound interest formula, the quantity:

Single Payment Compound Amount Factor:

(1 + i)
n
→ SPCAF

Single Payment Present Worth Factor:

(1 + i)
−n
→ SPPWF  
 
RATE OR RETURN

From the perspective of a saver, a lender, or an investor, interest earned:

Interest earned over a specific period of time is expressed as a percentage of the

original amount and is called rate of return (ROR).

Note: The time unit for rate of return is called the interest period, just as for the
borrower’s perspective. Again, the most common period is 1 year.

The term return on investment (ROI) is used equivalently with ROR in different
industries and settings, especially where large capital funds are committed to
engineering-oriented programs.

Recall:

When interest paid over a specific time unit is expressed as a percentage of the
principal, the result is called the interest rate.

From the above formulas , Rate of return (%) and Interest Rate (%), they are the
same, but the term interest rate paid is more appropriate for the borrower’s
perspective, while the rate of return earned is better for the investor’s
perspective.

Example:

A. Calculate the amount deposited 1 year ago to have $1000 now at an

interest rate of 5% per year.
B. Calculate the amount of interest earned during this time period

Solution:

A.

B. Interest = $1000 - 952.38 = $47.62

Compound Interest Factors

Seatwork: Justify your answer by using the formula/computation for each case.

Which of the following 1-year investments has the highest rate of return?

(a) $12,500 that yields $1125 in interest,

(b) $56,000 that yields $6160 in interest, or

(c) $95,000 that yields $7600 in interest.

Uniform Series Present Worth Factor and Capital Recovery Factor (P/A and
A/P)

The term in brackets is the conversion factor referred to as the uniform series
present worth factor (USPWF). It is the P/A factor used to calculate the
equivalent P value in year 0 for a uniform end-of-period series of A values
beginning at the end of period 1 and extending for n periods. The cash flow
diagram is

Example:

How much money should you be willing to pay now for a guaranteed P600 per year for 9 years starting
next year, at a rate of return of 16% per year?

Solution:

The cash flows follow the pattern of, with A = 600, i = 16%, and n = 9. The present worth is

P = 600(P/A,16%,9) = 600(4.6065) = P2763.90

ANNUITIES
Annuity is a series of equal payments “A” made at equal intervals of time.

! Types of Annuity:
1. Ordinary
2. Differed Annuity
3. Annuity Due
4. Perpetuity

➊ Ordinary Annuity

Is the type of annuity where the payments are made at the end of each
period
Cash Flow Diagram
(Ordinary Annuity)
" Future Worth:
0 1 2 3 4
⎡ (1 + i)n − 1⎤
? F = A ⎢ ⎥
i
⎣⎢ ⎦⎥
" Present Worth: A
A
A A A A
F
⎡ (1 + i)n − 1⎤
? P = A ⎢ ⎥ P
⎢⎣ i (1 + i) ⎥⎦
n

Where:

A = periodic equal payments

n = no. of periods (equal to the no. of payments) i = Interest rate per payment

➋ 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.

Cash Flow Diagram

(Deferred Annuity)

0 1 2 3…… n
0 1 2 m

A A A A A

n periods F
P periods
" Future Worth:
⎡ (1 + i)n − 1⎤
? F = A ⎢ ⎥
⎢⎣ i ⎥⎦

" Present Worth:

⎡ (1 + i)n − 1⎤
? P = A ⎢ ⎥
⎢⎣ i (1 + i) ⎥⎦
m+n

Where:

A = periodic equal payments

m = no. of periods before the beginning
n = no. of periods (equal to the no. of payments)
of the first payment

# Annuity Due

- is the type of annuity where the payment is made at the beginning of

each period.
Cash Flow Diagram
 
(Annuity Due)
1 2 3 4 5

A A A A A A A
F
P periods

! Future Worth:

⎡ (1 + i)n − 1⎤
? F = A ⎢ ⎥
⎢⎣ i ⎥⎦

! Present Worth:

⎡ (1 + i)n − 1⎤
? P = A ⎢ ⎥
⎢⎣ i (1 + i) ⎥⎦
n −1

Where: (in both cases)

n = no.of periods ( equal to the no. of payments)

➍ 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)

0 1 2 3….
A
? P =
i
A A A A

P
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%

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”.

A P
? CC = FC + +
i (1 + i )n − 1
Where:
CC = Capitalized Cost
FC = firstcost or original cost
A = Annual maintenance cost
P = the amount needed to replace the property every n periods

DEPRECIATION
Depreciation is the decrease in the value of physical property due to passage of
time.

Notations 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

➊ 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

➋ Sinking Fund Method

" Annual depreciation:

(FC − SV ) i
? d =
(1 + i)L − 1

" Depreciation after “n” years:

d ⎡(1 + i ) − 1⎤
n
⎢
⎣ ⎥⎦
? Dn =
i

" Book value after “n” years:

? BVn = FC − Dn
and has a salvage value of P350. determine the book value during the 4th using
declining balance method.

# Declining Balance Method

Also called as the constant percentage method or the Mateson Formula:

" Depreciation during the nth year:

? dn = kFC (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
= FC ⎜ ⎟
⎝ FC ⎠

" Rate of depreciation:

⎛ BV ⎞ ⎛ SV ⎞
F k = 1 − n ⎜ n ⎟ = 1 − L ⎜ ⎟
⎝ FC ⎠ ⎝ FC ⎠

$ 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 from the formulas for
Declining Balance Method by simply replacing k with 2/L.

% Sum - of - the - Year’s - Digits (SYD) Method

" Depreciation charge during the nth year:

L −n +1
? dn = (FC − SV )
SYD

" Total depreciation after n years

n (2L − n + 1)
? Dn = (FC − SV )
2 (SYD )

Where:
n
SYD = (n + 1) → Sum of Years Digit
2