ENGINEERING ECONOMICS

INTEREST - Is the amount of money paid for the use of borrowed capital

Formula: Where:

I = Interest
P = Principal or present worth
n = number of interest periods or time

SIMPLE INTEREST - - the income produced by money which have been loaned
- Simple interest is based on the principal amount of a loan or deposit.
Formula:
I = Pin
F=P+I
F = P (1 + in )
Where:
I = Interest
P = Principal or present worth
n = number of interest periods
i = rate of interest per interest period
F = accumulated amount or future worth

ORDINARY AND EXACT SIMPLE INTEREST

a) Ordinary simple interest - is computed on the basis of 12 months of 30 days each or 360 days a year
-meaning each month has only 30 days, 360 a year

n = no. of days / 360

b) Exact simple interest - is base on the exact number of days in a year, 365 days for an ordinary year and 366 for a
leap year.

n = no. of days / 365 or 366 days

Leap years must be divisible by 4 and 400 for centuries

CASH-FLOW DIAGRAM

A cash-flow diagram is simply a graphical representation of cash flows drawn on a time scale,s imilar to the free
diagram for mechanics problems
 COMPOUND INTEREST
-In calculation of compound interest, the interest for an interest period is calculated on the principal plus the
amount of interest accumulated in previous periods. Thus compound interest means “interest on top of interest”
- The summation of the accumulated interest, the first interest accumulated on initial principal and the
second is the interest of the previous interest that accumulated on the principal

Formula:

Where:
N = number of compounding periods per year or Number of payments
i = interest rate
r = nominal interest rate
F = future worth
m = mode of compounding ( annually, monthly, semi-monthly, bi-monthly, quarterly )
n = no. Of years
P = Present worth or principal

Mode of Compounding ( m )
Period m
Annually 1
Semi-annually 2
Quarterly 4
Monthly 12
Bi-monthly 6

RATE OF INTEREST

a. Nominal rate of interest

- specifies the rate of interest and a number of interest periods in one year. Ideal interest
- the value of the interest before adjusting/full effect of interest
- The initial interest
Formula:
Where:
i = interest rate
m = number of compounding periods per year
r = nominal interest rate

b. Effective rate of interest

- the exact value of the interest after the adjustment/full effect of interest

Formula:
Where:
m = number of compounding periods per year
r = nominal interest rate
Ie = Effective rate of interest
 CONTINIOUS COMPOUNDING
Formula:

Where:
F = future accumulated amount
r = nominal interest rate
n = no. of years
P = present worth
e = exponential

DISCOUNT
-Interest in advance

Formula: Where:
F=
Future worth D =Discount
P=
Present worth

 SIMPLE DISCONT

Formula:
Where:
F = Maturity value
d = discount rate
t = time
P = Present value
D = simple discount
i = interest rate
Discount = discounted value
 ANNUITY
- A series of equal payments
Payment Interval - The time between each payment
Term of the annuity - The time from the beginning of the term to the end of the last one.

 ORDINARY ANNUITY
- The payment is paid at the end of every term
- (year end amount)

Formula:
 DEFFERED ANNUITY

-Is where the first payment is made several periods after the beginning of the annuity.

 ANNUITY DUE

-The payment start at the beginning of the period

Formula:

 PERPETUITY
-Same as annuity however the payments continue infinitely
 CAPITALIZED COST
-The summation of all the cost for a period of time or forever

CASE 1. No replacement only maintenance and or operation per period

Formula:

Capitalized Cost = First Cost + Present Worth or perpetual operation and or maintenance

CASE 2. Replacement only, no maintenance or operation

Formula:

Capitalized Cost = First Cost + Present wort of perpetual replacement

CASE 3. Replacement, maintenance and or operation every period

Formula:

Capitalized Cost = First Cost + Present Worth of Perpetual Operation + Present Worth of Perpetual
Replacement
 DEPRECIATION

L = Life of a property in years d = annual cost of depreciation

FC = CO = Original cost or first cost BVn = Cn = Book value at the end of nth year
SV = CL = Value at the end of the life, scrap n = Time
value Dn = Depreciation at the end of nth year

Method 1. The Straight line method

-The loss in value is directly proportional to the age of the property

Formulas:

Method 2. Sinking Fund Formula

-Is established to obtain the amount needed for the replacement

Formula:

Method 3. Declining Balance Method

-The money is declining by a constant percentage

Formula:
This method is not apply if SV is 0 because k will be equal to 1 and d1 will be equal to FC
Method 4. DOUBLE DECLINING BALANCE ( DDB )
-Same as DBM but k is replaced by 2/L

Formula:
The SV should not be subtracted from the FC when calculating depreciation

Method 5. The Sum Of The Years Method ( SOTY )

Formula:

Method 5. The Service Output Method ( SOM )

-The total depreciation is directly proportional to the quantity of output of the property up to
that time

Formula: