ENSC 2063/ ENSC 20093

ENGINEERING ECONOMY/
ENGINEERING ECONOMICS

BY
FACULTY OF ENGINEERING SCIENCES DEPARTMENT, ESD 2020
Engr. Maricar B. Carreon Engr. Babinezer D. Memoracion
Engr. Eduardo O. Dadivas Engr. Jimmy L. Ocampo
Engr. Carmelita I. Durias Engr. Ruben A. Pureza
Engr. Angela L. Israel Engr. Roland C. Viray
 ENGINEERING ECONOMY
INSTRUCTIONAL MATERIAL

THE OVERVIEW

This instructional material (IM) for Engineering Economy will give the students a good
understanding on what is the time value of money like the present worth and future relation and
how rate of interest affects their respective values. Likewise, it will also show the importance of
equation of value and its use to solve various problems in this subject. Similarly, it will also show
the different types of annuity and how depreciation changes the worth of a property due to passage
of time. It will also give the importance of break-even point in decision making whether a company
can make or break in its operation.

Several sample problems are presented as guide to solve the problems in the assessments at the
end of each module which eventually will give the student a chance to master the use of formulas
as presented in this instructional material.

THE LEARNING OBJECTIVES

This instructional material (IM) for the subject Engineering Economy will discuss the topics which
are commonly given in the Engineering Board Examination such as;
1. Simple Interest
2. Compound Interest
3. Present Worth (P) and Future Worth (F) Relations
4. Discount and Rate of Discount
5. Importance of Equation of Value
6. Annuity and Amortizations
7. Arithmetic and Geometric Gradients
8. Capitalized cost
9. Bond Value Calculation
10. Depreciation and Depletion
11. Break-Even Analysis and Profit Computation

COURSE MATERIALS:
1. Engineering Economy by de Garmo
2. Engineering Economy by Blank et.al.
3. Engineering Economy by Arreola
4. Engineering Economy by Sta Maria
5. Simplified Engineering Economy by Ocampo et.al.
6. Engineering Economy by Engr. Jimmy L. Ocampo at youtube.com

1
MODULE 1

LEARNING OBJECTIVES:
After the completion of Module 1, it is expected that the student have understand the
following:
1. Simple and Compound Interest
2. Present Worth (P) and Future Worth (F) relations
3. Discount and Rate of Discount
4. Importance of Equation of Value

ENGINEERING ECONOMY
- it deals with the use and application of economic principles in the analysis of
engineering decisions.

TOPIC 1 MONEY AND INTEREST

MONEY it is a measure of wealth
INTEREST it is the amount paid for the use of borrowed capital

1. THE SIMPLE INTEREST, SI

- it is the interest earned by the principal alone over a given period of time usually
counted in number of days, months or in years.

a. Ordinary SI
Basis: 30 days / month
360 days / year
12 months / year
b. Exact SI
Basis: 365 days / year
366 days / leap year

NOTE: a year which is exactly divisible by four (4) is a leap year.

FORMULAS:
1. I = Pin
2. F = P (1 + in)
where,
I = interest, P
P = present worth or principal amount, P
i = rate of interest, reported as percent per unit time (yr) and used as
decimal in computation, % per unit time, e.q. 5% per year
n = no. of interest periods, the duration or time usually in years.
F = future worth or accumulated amount, P

NOTE: In formulas 1 and 2, the unit of time in i and n must be consistent.

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EXAMPLES:

1. What is the interest of 8600P after 4 years at 12% simple interest rate?
Solution:
use, I = Pin
where,
P = 8600P
i = 12% e ea = 0.12
n = 4 years
hence,
I = 8600(0.12)(4) = 4128P
2. 5000P will become how much after one year at simple interest of 15%?
Solution:
use, F = P (1 + in)
where,
P = 5000P
i = 15% e ea = 0.15
n = 1 year
hence,
F = 5000 { 1 + (0.15) (1) }
F = 5750P

3. Find the present worth with a total interest of 5000P after 2 years at simple interest
rate of 6.25%.
Solution:
use, I = Pin
where,
I = 5000P
i = 6.25% e ea = 0.0625
n = 2 years
hence,
5000 = P (0.0625) (2)
P = 40,000 P

4. In how many years will the investment to double its value at 5% simple interest?
Solution:
use, F = P (1 + in)
where,
F = 2P
i = 5% e ea = 0.05
hence,
2P = P (1 + 0.05n) n = 20 years

5. A man deposited 10,000P in a bank at 10% per annum for 3 years, 8 months and 25
days. Find the ordinary simple interest.

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 Solution:
use, I = Pin

where,
P = 10,000P
i = 10% e ea = 0.10
1𝑦𝑟 1𝑦𝑟
n = 3 years + 8 months x + 25 days x
12 𝑚𝑜𝑠 360 𝑑𝑎𝑦𝑠
n = 3.74 years
hence,
I = 10000 (0.10) (3.74)
= 3740P

6. 10,000P was deposited in a bank at 10% per annum from Jan 15,2020 to Oct 25,2020.
Find the accumulated amount based on exact simple interest computation.
Solution:
use, F = P(1 + in)
where,
P = 10,000P
i = 10% per year = 0.1
n = ? year
2020
Count the no of days covered by the deposit, = 505 e ac
4
hence,
2020 is a Leap year and 366 days / Leap year

𝐽𝑎𝑛 15 31 16 "𝑒𝑥𝑐𝑙𝑢𝑑𝑒 𝐽𝑎𝑛 15"

𝐹𝑒𝑏𝑟𝑢𝑎𝑟𝑦 29 "𝑙𝑒𝑎𝑝 𝑦𝑒𝑎𝑟"
𝑀𝑎𝑟𝑐ℎ 31
𝐴𝑝𝑟𝑖𝑙 30
𝑀𝑎𝑦 31
𝐽𝑢𝑛𝑒 30
𝐽𝑢𝑙𝑦 31
𝐴𝑢𝑔 31
𝑆𝑒𝑝𝑡 30
𝑂𝑐𝑡 1 25 25 "𝑖𝑛𝑐𝑙𝑢𝑑𝑒 𝑂𝑐𝑡 25"

n = 284 days
284
n= = 0.776 yr
366
hence,
F = 10000 1 0.1 0.776 = 10776P

7. A price tag of 1500P is payable in 70 days but if paid in 35 days it will have a 5%
discount. Find the rate of interest.
Solution:
use, F = P (1 + in)

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 where,
F = 1500P
P = 1500 0.05 (1500)
P = 1425P
1𝑦𝑟
n = 35 days = 0.0972 yr
360 𝑑𝑎𝑦𝑠
hence,
1500 = 1425 { 1 + i (0.0972) }
i = 0.5415 = 54.15% per yr

TOPIC 2 COMPOUND INTEREST

- it is the interest on top of interest.

1. Nominal Rate of Interest ( j ) = the rate of interest that specifies the no of interest
periods in one year.
Ex:
j = 12% compounded quarterly (n1 = 4) --- i = 3% per quarter
FORMULA:
𝒋
i=
𝒏𝟏
where n1 = no. of interest periods in one year.

Common Methods of Values of n1

Compounding

annually 1
semi-annually every 6 mos 2
quarterly every 3 mos 4
bi-monthly every 2 mos 6
monthly 12
daily 365

2. Effective Rate of Interest ( ie ) = the actual rate of interest in one year.

FORMULAS:
a. ie = ( 1 + i )n1 - 1
𝒋
b. ie = ( 1 + )n1 1
𝒏𝟏
Importance of ie
1. To identify which interest rate is higher
2. To convert an interest rate to other method of compounding.

NOTE: Two interest rates are equal if their effective rates are equal.

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EXAMPLES:

1. A bank charges 1.5% per month on credit card. Find (a) the nominal rate of interest
compounded monthly (b) the effective rate of interest (c) the equivalent nominal rate of
interest which is compounded quarterly.
Solution:
a) i=
𝑛1
where,
i = 1.5% per month
n1 = 12
j=?
hence,
1.5 =
12
j = 18% compounded monthly

b) ie = ( 1 + i )n1 - 1
hence,
ie = ( 1 + 0.015)12 1
ie = 0.1956
ie = 19.56% per ear

c) 1.5% per month to ___% compounded quarterly

ie (quarterly) = ie (monthly)
n1 = 4 n1 = 12
j=? i = 0.015
( 1 + )4 1 = ( 1 + 0.015)12 1
4
solve for j,
j = 0.1827
j = 18.27% compounded quarterly

2. A bank advertises 9.5% account that yields 9.84% annually. Find how often is the
interest compounded?
Solution:
j = 9.5% compounded n1 = ?
ie = 9.84%
use,
ie = ( 1 + )n1 1
𝑛1
0.095
0.0984 = ( 1 + )n1 1
𝑛1
by ES, Shift solve
n1 = 3.88 4
hence,
9.5% is compounded quarterly

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 3. Find the nominal rate, which is converted quarterly could be used instead of 12%
compounded semi-annually.
Solution:
12% compounded semi-annually to __% compounded quarterly
ie (quarterly) = ie (semi-annually)
n1 = 4 n1 = 2
j=? j = 0.12

0.12
( 1 + )4 1=(1+ )2 1
4 2
j = 0.1183 = 11.83% compounded quarterly

TOPIC 3 P AND F RELATION WITH COMPOUNDED INTEREST

CASH FLOW DIAGRAM, CFD

1 2 3
___ǀ___ǀ___ǀ___ _ _ n

i
F
FORMULAS:
1. F = P ( 1 + i )n
2. P = F ( 1 + i )-n
where,
( 1 + i )n = Single Payment Compound Amount Factor or
Future Value Factor (FVF)
( 1 + i )-n = Single Payment Present Value Factor (PVF)

EXAMPLES:

1. In 1906, an original painting of Picasso has a market price of 600P and in 1995 its
price has increased to 29,000,000P. What is the rate of interest of the painting?
Solution:
F = P(1 + i)n
where,
F = 29,000,000
P = 600P
n = 1995 1906 = 89 years
hence,
29,000,000 = 600(1 + i )89
i = 0.1288
i = 12.9%

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 2. If 10,000P is invested at 12% interest compounded monthly, find the 1st yr interest.
Solution:
j = 12% compounded monthly (n1 = 12)
12
i= =
𝑛1 12
i = 1% per month
I=F P ------------------------ 1

where,
F = P (1 + i)n
P = 100,000P
i = 0.01
n = 1 yr = 12 mos

hence,
F = 100,000(1 + 0.01)12 = 112682.5P
subst. values to 1,
I = 112682.5 100,000
= 12682.50P

3. After how many years will an investment triple if invested at 10% per annum, net of
deduction, compounded quarterly?
Solution:
F = P(1 + i )n
where,
F = 3P
j = 10% compounded quarterly (n1 = 4)
10
i= = 2.5% per quarter
4
hence,
3P = P(1 + 0.025)n
n = 44.5 quarters
1𝑦𝑟
in yrs n = 44.5 quarters = 11.12 yrs
4 𝑢𝑎𝑟𝑡𝑒𝑟𝑠

TOPIC 4 P and F Relation with Continuously Compounded Interest

*recall The Exponential Law of Change in the Differential Equations

𝑥
ln = kt or x = x0 ekt
𝑥0
in monetary values x=F
x0 = P
k = j = continuously compounded interest
t = n, yrs
FORMULAS:
1. F = Pejn j in decimal
2. ie = ej 1 n in yrs

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 EXAMPLE:

1. Find the effective interest equivalent to 12% compounded continuously.

Solution:
use, ie = ej 1 = e0.12 1
ie = 0.1275
= 12.75%

2. What is the future worth of 10,000P when invested at the rate of 12% compounded
continuously for 5 yrs?
Solution:
use, F = Pejn = 10000 e0.12(5)
F = 18221.19P

TOPIC 5 DISCOUNT, D
- it is the difference between the future worth (F) and the present worth (P)

FORMULAS:
1. D = F P
Rate of Discount, d = the discount on one unit in one unit of time.
P = 1(1+i)-1

CFD

________________ n = 1
0

F = 1P
hence,
𝑫
2. d = 1 (1 + i)-1 or =
𝑭
𝒅 𝑫
3. i = or =
𝟏−𝒅 𝑷

EXAMPLE:

1. What is the corresponding rate of interest for 18% simple discount rate?
Solution:
𝑑
use, i =
1−𝑑
where,
d = 18% = 0.18
hence,
0.18
i= = 0.2195
1 − 0.18

i = 21.95%

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TOPIC 6 EQUATION OF VALUE, EV
- it is the resulting equation when comparing two sets of obligations at a certain
point of comparison called focal date.

EV at a focal date,
∑↑=∑↓
where,
∑ ↑ = sum of cash inflow
∑ ↓ = sum of cash outflow
NOTE: Use EV to solve unknown in a CFD.

EXAMPLE:

1. 12,000P is borrowed now at 12% interest. The 1st payment is 4000P and is made 3
years from now. Find the balance on the debt immediately after the 1st payment.
Solution:
draw CFD

12000
12000 (1.12)3

i = 12% per year

________________ 3 yrs
0

4000P

B = ? balance

set up EV at 3,
∑↑=∑↓

12000 (1.12)3 = 4000 + B

B = 12860P

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 2nd Solution:

12000P

i = 12% = 0.12

3
0

4000P

4000(1.12)-3
B
-3
B(1.12)

using zero as focal date

∑↑=∑↓

12000 = 4000(1.12)-3 + B(1.12)-3

B = 12860P

2. An investment pays 6000P at the end of the 1st year, 4000P at the end of the 2nd year
and 2000P at the end of the 3rd year. Compute the present value of the investment if a
10% rate of return is required.
Solution:
draw CFD

P=? i = 10% per r

1 2 3 yr

0 _____ǀ_____ǀ_____ǀ_
2000P
4000P
6000P

using zero as focal date, EV is

∑↑=∑↓
P = 2000(1.1)-3 + 4000(1.1)-2 + 6000(1.1)-1
P = 10262.96P

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