engineering economics

INTRODUCTION LESSON 1

Engineering economics- a branch of economics that uses and applies the principles of economics in the
analysis of engineering decisions.

Interest

*for borrower- the amount of money paid for the use of borrowed capital.

*For lender- the income produced by the money which has been loaned.

2 types of interest

*SIMPLE INTEREST- If the interest is linearly proportional to the initial amount of the loan.

FORMULA FOR SIMPLE INTEREST

I=P(i)(n)

Where I = interest

P- principal value

i- interest rate

n- number of years

Example:

a) 5000, i=20% , n=3yrs

I = 5000(.20)(3)

I = 3000
To get final value, add P + I

F= P+I or P(1 + in )

F= 5000+3000 = 8000

b) To get interest for months

1930, i= 5.6% n= 1/12 (since only 1 month)

F = 1930(1 + 0.056 (1/12))

F= 1939.01

Ordinary Simple Interest - consider 360 days for 1 year

Exact Simple Interest - 365 (non leap year) or 366(leap year)

C) To get interest for days in ordinary simple interest:

P = €7500.3, i=12%, n=69 days

FORMULA:

F= €7500.30(1+0.12(69/360))

F = 7672.81

I = F-P

I = €7672.81-€7500.30

I = €172.51
FORMULA TO GET THE P, with F, i, n is given

P= F/1+in

D) F = ¥69,420.911

i= 10.5%

n= 40 days

P= ¥69,420.911/(1+0.40(40/360)

P = 68,620.34 yen

*EXACT SIMPLE INTEREST--- 366 DAYS

E) Find the simple interest on 5000 pesos for the period September 11,2001 to January 30, 2004

FORMULA:

i= 19%

n= ?

2001 Sept = 20 days

October=31

November=30

December=31

2001==== 112 days

2002= 365
2003=365

2004(l.y)=30 days

FORMULA:

I = Pin

I =5000(0.19)(112/365 +2 +30/366)

I = 2269.38 pesos

F= 5000+2269.38

F= 7269.38 pesos

LESSON 2

Compound Interest

- whenever an interest earned by the principal is not paid at the end of each interest period and added
to the principal and therefore will also earn interest for the succeeding periods.

F= P(1+i)^n

How to get the interest here

i*P (interest rate * principal value)

Example in simple interest:

A) P = 5000 PESOS

i= 5%

n= 6yrs
In compound interest:

F = P(1+in)

= 5000PESOS (1+0.05(6))

= 6500 pesos

F=P(1+I)^n

= 5000(1+0.05)^6

=6700.48 pesos

B) P = €500,000

i = 8%

n = 5 yrs

Solution:

F=P(1+i)^n

=500,000(1+0.08)^5

=€734, 664.03

C) F =600,000

i= 12%

n= 7 yrs

Solution:

F= P(1+i)^n

F/(1+i) = P(1+i)^n/(1+i)^n

= P= F/(1+i)^n
P= 600,000/(1+0.12)^7

= 271,409.53 is the PRINCIPAL VALUE

D) Given

F=1,200,000

P= 355,000

n= 8yrs

i=?

Solution:

F=P(1+i)^n

F/P = P/(1+i)^n

F/P = (1+i)^n

^n√F/P = ^n√(1+i)^n

= ^n√F/P = (1+i)

=^n√F/P -1 = I

i = [^8√1,200,000/355,000 -1] x100% (100% kasi percent or interest rate Ang hinahanap)

= 16.44% is the interest rate

HOW TO SOLVE IT IN ADVANCED CALCU...

F= P(1+I)^n

1,200,000 = 355,000(1+i)^8 = 16.44%

(Alpha solve for =)

(Shift solve for answer then ×100 for 16.44%)