Engineering

Economy
SY 2020-21
UNIT 2
 Time and
Money
Relationship
 • Identify the different types of interest and
terminologies used;
• Compute for interest, present value, future
value, and discount;
• Understand inflation and its effect;
Objective • Comprehend and familiarize the use of cash
flow diagrams;
• Comprehend the concepts of annuity; and
• Apply the concepts of annuity in evaluating
engineering decisions.
The Concept of
Equivalence
 • Established when there is a difference
between future payment/s and a present sum
of money
• Considers the comparison of alternative
options, or proposals, by reducing them to an
Economic equivalent basis, depending on:
• Interest rate
Equivalence • Amounts of money involved
• Timing of the affected monetary receipts and/or
expenditures
• Manner in which the interest or profit on
invested capital is paid and in which the initial
capital is recovered
 • An equation of value by setting the sum of
the values on a certain comparison or focal
Economic date
Equivalence • There is equilibrium at a chosen focal point
(inflows = outflows)
Cash Flows
Cash Flow Diagrams and Tables
A = ₱2,524
3

1
0 1 2 3 4 5

4 i = 10% p.a.

P = ₱8,000
2
Cash Flow Diagrams and Tables
i=effective rate per interest period
N=number of compounding periods (years, months, quarters)
P=present sum of money
F=future sum of money
A=annuity, a series of equal payments occurring at equal period of times
 Rule A Cash flows cannot be added or subtracted
unless they occur at the same point in time.

Cash Flow To move a cash flow forward in time by one

Diagrams Rule B unit, multiply the magnitude of the cash flow

by (1+i), where i is the interest rate that
reflects the time value of money.
and Tables
To move a cash flow backward in time by one
Rule C unit, divide the magnitude of the cash flow by
(1+i).
 • 

• Finding F when Given P

• (1+i)N single payment compound amount
factor
Future Value
 • 

• Finding P when Given F

• (1+i)-N single payment present worth factor
Present
Value
How much money will Mr. Santos receive
in 5 years, if he invests ₱250,000 today, will
add ₱300,000 in year 2 and ₱100,000 in
year 4? Interest is at 10% compounded
semi-annually.
How much balance will you return to the
bank on year 4, for a loan of ₱400,000, if
you will pay ₱100,000 in year 2? Cost of
money is 12% compounded quarterly.
A girl saved ₱50,000 in the bank today. She
withdrew ₱10,000 a year after. She then saved
₱20,000 and ₱30,000 respectively in the next
two years. She withdrew ₱15,000 to travel
abroad after a year. How much is left in the bank
if interest is at 10% compounded annually?
Ordinary Annuity
A = uniform amounts

A A A A A A

N
0 1 2 3 4 N-1

i=interest rate per period

P = present equivalent F = future
equivalent

An ordinary annuity is where payments are made at the

end of each period.
Ordinary Annuity
•  Finding present equivalent value given a series of uniform equal
receipts
• P=A ( P/A, i%, N)
• uniform series present worth factor in []
In the next 7 years, a little boy will be
receiving ₱5,000 every year from the mutual
fund invested by his grandfather. What should
be the initial deposit, if the interest rate was
5% compounded annually?
Ordinary Annuity
•  Finding future equivalent value given a series of uniform equal
receipts
• F=A ( F/A, i%, N)
• uniform series compound amount factor in []
Every year, a businessman allots ₱250,000 to be
deposited for a future investment. If he does this
in the next 8 years, how much would be the
equivalent value of his deposits on the 8th year if
interests were a)10% compounded annually
b)10% compounded quarterly?
Ordinary Annuity
•  Finding amount A of a uniform series when given the equivalent
present value
• A=P ( A/P, i%, N)
• capital recovery factor in []
Ordinary Annuity
•  Finding amount A of a uniform series when given the equivalent future
value
• A=F ( A/F, i%, N)
• sinking fund factor in []
Mr. Ramos availed a ₱500,000 loan in a bank at 8%
simple interest for 4 years. However, due to some
difficulties, he was not able to settle it on time. Good
enough, the manager reconsidered the extension of the
loan for another 3 years with the condition that it will
be paid in 6 semi-annual payments at an interest rate of
10.25% per annum. How much would be the 6 semi-
annual payments?
A chemical engineer wishes to set up a special
fund by making uniform semi-annual end-of-
period deposits for 20 years. The fund is to
provide ₱100,000 at the end of each of every
five years of the 20-year period. If interest is 8%
compounded semi-annually, what is the required
semi-annual deposits to be made?
“ Compound interest is the
eighth wonder of the world. He
who understands it, earns it; he
who doesn’t, pays it.”
Albert Einstein