Equivalent Compounding

Engineering Economy
➔ effective rates of interest on both period
Simple Interest must be equal

ie1 = ie2
I = Pin
(1 + 𝑖1 )𝑛1 – 1 = (1 + 𝑖2 )𝑛2 – 1
I → Interest
Compound Interest
P → Present Worth
𝑗
F = P (1+ 𝑛 )yn
i → interest rate
𝑗
Types of Simple Interest P = F (1+ 𝑛 )-yn

1.) Ordinary Simple Interest Continuous Compound Interest

- 360 days/year (banker’s year)
F = Pern
- 30 days/month
- 12 months/year ie = ei - 1

2.) Exact Simple Interest Equation of Values

- 365 days/ year --------> - it is the resulting equation when comparing
(February has 28 days only) two sets of obligations at a certain point of
- 366 days/ year (Leap Year) - comparison called the focal date. At the focal
-------> (February has 29 date, the equation of value is, sum of cash
days) inflows is equal to sum of cash outflows, or at
the focal date there exists cash flow
Leap Year – a year which is exactly divisible by 4
equilibrium.
and has a total of 366 days per year
Annuity

Types of Interest Rates Annuity – series of payments every constant

period of time
1.) Interest Rate ( i ) – is the rate per
period. Types of Annuity
2.) Nominal Rate ( j ) – is the rate of 1.) Ordinary Annuity – paid every end of
interest per year. Magic word the month
“Compounded”. (1+𝑖)𝑦𝑛 −1
F=A[ 𝑖
]
3.) Effective Rate of Interest ( ie ) – is the −𝑦𝑛
1− (1+𝑖)
actual and more precise interest rate P=A [ 𝑖
]
per period.
2.) Due annuity – paid every beginning of
Formulas: the month
𝑗 (1+𝑖)𝑦𝑛 −1
1.) i =𝑛 F=A[ 𝑖
][1+i]
1− (1+𝑖) −𝑦𝑛
P=A [ ][1+i]
𝑖
2.) ie = (1+i)n - 1
3.) Deferred Annuity – paid after a certain
Number of time of delay
Method of
Period per 4.) Perpetuity Annuity – paid indefinitely or
Compounding
year(n) forever
Annually 1 P=
𝐴
Semi – annually 2 𝑖
𝐴
Quarterly 4 Fn = 𝑖 (1 + 𝑖)𝑦𝑛
Bi – monthly 6
Monthly 12
Weekly 52
 5.) Annuity with continuous compounded d=A
interest
(𝐶 −𝐶 )𝑖
𝑜 𝐿
- replace “ i ” by “ ei – 1 “ in the formulas for d = (1+𝑖) 𝑛 −1
ordinary annuity.
𝑒 𝑖𝑛 −1 (1+𝑖)𝑛 −1
F=A[ 𝑒 𝑖 −1
] Dn = d [ ]
𝑖
1− 𝑒 −𝑖𝑛
P=A [ 𝑒 𝑖−1 ]
3.) Sum of Year’s Digit Method (SOYDM)

Bond Value 2(𝐿−𝑛+1)

d=[ 𝐿(𝐿+1)
][ 𝐶𝑜 − 𝐶𝐿 ]
I = Fr
𝑛(2𝐿−𝑛+1)
Dn = [ 𝐿(𝐿+1)
][ 𝐶𝑜 − 𝐶𝐿 ]
1− (1+𝑖)−𝑦𝑛 -n
P=I( 𝑖
) + C (1+i)
C n = Co – D n
I → Dividend
4.) Declining Balance Method (DBM)
F → Face or Par Value
𝐿 𝐶
k = 1 - √𝐶𝑜
r → Bond Rate 𝐿

n → Maturity Period Cn = Co (1-k)n

i → yield of investment dn = Cok(1-k)n-1

P → Present Worth Dn = Co [ 1-(1-k)n ]

F → Future Worth Dn = Co – Cn

C = F ( if F is not given) 5.) Double Declining Balance Method (DDBM)

2
Capitalized Cost replace “k” by “ 𝐿 “
𝑀 𝑅 𝐼−𝑆 2
C=I+ 𝑖
+ (1+𝑖)𝑚−1 + (1+𝑖)𝑛 −1 Cn = Co (1 - 𝐿)n

I → Initial Cost dn =
2𝐶𝑜
(1
2
- )n-1
𝐿 𝐿
M → Maintenance Cost 2
Dn = Co [ 1 - (1 - 𝐿)n ]
R → Revenue Cost
Dn = Co – Cn
S → Salvage Value
Breakeven Analysis
n & m → # of years
S = VC + FC
Depreciation Methods
S →Income = Selling price x units sold(n)
1.) Straight Line Method (SLM)
VC → Variable Cost
𝐶𝑜 −𝐶𝐿
d= 𝐿
FC → Fix Cost
Cn = Co – dn
n → number of units sold
Dn = dn
𝑛
Dn = 𝐿 (𝐶𝑜 − 𝐶𝐿 )
Prepared by:
2.) Sinking Fund Method (SFM)
Engr. Kurt Ryan D. Velasco
F = 𝐶𝑜 − 𝐶𝐿