ENGINEERING ECONOMICS

GEOMETRIC GRADIENT

1. It is likely that airplane tickets will increase 8% in each of the next four years. The cost of a plane
ticket at the end of the first year will be $180. How much money would need to be placed in a
savings account to have money to pay a student’s travel home at the end of each year for the next
four years? Assume the savings account pays 5% annual interest.

Solution: The problem describes a geometric gradient where 𝑔 = 8% and 𝑖 = 5%.

1−(1+𝑔)𝑛 (1+𝑖)−1
𝑃 = 𝐴1 ( )
1−𝑔

1−(1.08)4 (1.05)−4
= 180.00( 0.05−0.08
)

= $715.67

Thus, $715.67 would need to be deposited now.

UNIFORM SERIES

2. A couple sold their home. In addition to cash, they took a mortgage in the house. The mortgage
on the house will be paid off by monthly payments of $232.50 for 10 years. The couple decides to
sell the mortgage to a local bank. The bank will but the mortgage, but requires a 1% per month
interest rate on their investment. How much will the bank pay for the mortgage?

SOLUTION:
A = $232.50
n = 120 months
I = 1% per month
P = unknown

𝑃 = 𝐴(𝑃/𝐴, 𝑖, 𝑛) = 232.50(𝑃/𝐴, 1%, 120)

= 232.50(69.701)
= $16,205.48

SIMPLE AND COMPOUND INTEREST

3. P200,000 was deposited on January 1, 1988 at an interest rate of 24% compounded semi-
annually. How much would the sum be on January 1, 1993?

SOLUTION:

𝑛 = 2(1993 − 1988)
𝑛 = 10
 𝐹 = 𝑃(1 + 𝑖)𝑛
𝐹 = 200,000(1 + 0.12)10
𝐹 = 621,170

4. If P500,000 is deposited at a rate of 11.25% compounded monthly, determine the compounded

interest after 7 years and 9 months.

SOLUTION:

𝑛 = 12(7) + 9
𝑛 = 93

𝐹 = 𝑃(1 + 𝑖)𝑛

0.1125 93
𝐹 = 50,000 (1 + )
12

𝐹 = 1,190,848.73

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝐹 − 𝑃

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 1,190,848.73 − 500,000

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 690,848.73

ANNUITY, DEPRECIATION, BONDS, ETC.

5. A debt of P10,000 with 10% interest compounded semi-annually is to be amortized by semi-
annual payment over the next 5 years. The first due in 6 months. Determine the semi-annual
payment.

SOLUTION:

𝐴[(1 + 𝑖)𝑛 − 1]
𝑃=
(1 + 𝑖)𝑛 𝑖
 0.10
𝐴[(1 + 2 )2(5) − 1]
10,000 =
0.10 2(5)
(1 + 2 ) (0.05)

𝐴 = 1,295.05

6. If you obtain a loan of P1M at the rate of 12% compounded annually in order to build a house,
how much must you pay monthly to amortize the loan within a period of ten years?

SOLUTION:

Solving for the interest rate per month, i:

𝐸𝑅 = (1 + 𝑖)𝑚 − 1

𝐸𝑅 = (1 + 𝑖)12 − 1

0.12 = (1 + 𝑖)12 − 1

𝑖 = 0.009488

𝑛 = 12(10) = 120

𝐴[(1 + 𝑖)𝑛 − 1]
𝑃=
(1 + 𝑖)𝑛 𝑖

𝐴[(1 + 0.009488)120 − 1
1,000,000 =
(1 + 0.009488)120 (0.009488)

𝐴 = 13,994.17