EXCEL REVIEW CENTER ENGINEERING SCIENCES

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Engineering Economy
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What is Economics? Simple Interest Where:

P = Principal
Economics is a social science This type of interest is computed i = interest per period
only on the principle and is I = Pin
concerned with the production, n = number of periods
distribution and consumption of goods commonly used in variable rate
and services and studies how consumer lending and in FUTURE AMOUNT, F
individuals, businesses, governments mortgage load where a borrower
and nations make choices on allocating pay interest only on funds used.
resources to satisfy their wants and Usually this type of interest is
needs and tries to determine how these used for a period less than one
groups should organize and coordinate year. Excel Review Center F = P(1 + in)
efforts to achieve maximum output.

Engineering Economics Ordinary Simple Interest Exact Simple Interest

Based on one Banker’s year. Banker’s year is Based on the exact number of days in a
Refers to the analysis and evaluation of a year that consists of 12 months, each having given year.
monetary consequences by using the 30 days and amounts to a 360-day year.
Normal Year: Leap Year:
theories and principles of economics to Excel Review Center
engineering applications, designs
Excel Review and
Center d Where: d d
projects. n= d = number of days n= n=
Excel Review Center 360 365 366

Interest Compound Interest This type of interest is computed on

the principle as well as the interest already earned. The interest may be
Is the charge for borrowing of money or
compounded monthly, quarterly, semiannually or annually, etc.
the amount paid to the borrowed capital.
FUTURE AMOUNT, F PRESENT WORTH, P
Nominal Rate of Interest
Nominal Rate (NR) is the advertised rate
and is the sum of the periodic rates in
one-year period. Also known as Excel Review Center
Annualized Percentage Rate (APR). Where:
F
Excel Review Center F = P(1 + i) n P= i = interest per period
NR Where: (1 + i)n n = number of periods
i= m = number of time money
m Excel Review Center
earns interest in one year

n = Nm
N = number of years Continuously compounded Unlike compound interest
where the money earns interest quarterly or annually depending on how it was
compounded, money invested in continuously compounded interest earns interest
Example: Excel Review Center every second immediately starting from the time the money is invested.
12 % compounded quarterly for 5 years Where: Excel Review Center
FUTURE AMOUNT, F
P = Principal
NR = 0.12 e = Mathematical constant,
M=4 N=5 F = Pert Euler’s number = 2.718…
r = rate of interest
Mode of compounding: t = period in years
Annually –> m = 1 Monthly -> m = 12 Inflation It is the rate at which the
Semiannually -> m = 2 Semimonthly -> general level of prices for goods and Discount Refers to the
Quarterly -> m = 4 m = 24 services is rising and consequently, the difference between the future
Bimonthly -> m = 6 Daily -> m = 365 purchasing power of currency is falling. worth and the present worth.
Effective Rate of Interest Where:
The rate of discount, d is the
Effective Rate (ER) is the annual rate of F=P
(1 + i ) n
P = Principal
discount on one unit of principal
i = interest rate
interest earned during a one-year period. (1 + f ) n per unit time. Excel Review Center
f = inflation rate
Where:
m = number of time money 1
d = 1−
earns interest in one year 1+ i
Excel Review Center d
i=
1− d
Excel Review Center