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.
Cash Flows
Deferred Annuity
A = uniform amounts

A A A
k periods

N
0 1 2 0 1 N-1

i=interest rate per period

P = present equivalent F = future
equivalent

A deferred annuity is one where the first payment is made

several periods after the beginning.
Deferred Annuity
•  Finding present equivalent value given a series of uniform equal
receipts
• P=A ( P/A, i%, N) (P/F,i%,k)
• uniform series present worth factor in []
• single payment present worth factor in ()
A businessman invested ₱500,000 in a
trust fund in anticipation of a 5-year
project starting on the year 2023. If
interest rate is 5% compounded annually,
how much should he expect for each year
of the project duration?
A lathe for a machine shop costs ₱245,000 if paid in
cash. If on installment, a buyer should place ₱40,000
down payment and 10 quarterly installments. The
first due is at the end of the first year after purchase.
If money is worth 15% compounded quarterly,
determine the quarterly installments.
On the day his grandson was born, a man invested in a
trust fund such that the boy can receive five annual
payments of ₱100,000 for his education starting with his
18th birthday. Interest is at the rate of 12% per annum.
Should the grandson not use it in his education, he can
withdraw the lump sum on his 25th birthday. How much
was the initial deposit of the grandfather? How much
would be the equivalent lump sum on the 25th year?
When you take your first job, you decide to start saving right
away for your retirement. You put ₱50,000 per year into the
company’s investment plan, which averages 8% interest per
year. Five years later, you move to another job and start a new
investment plan. You never get around to merging the funds in
the two plans. If the first plan continued to earn interest at the
rate of 8% per year for 35 years after you stopped making
contributions, how much is the account worth?
Annuity Due
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 annuity due is one where the payments are made at the

beginning of the period.
Annuity Due
•  Finding present equivalent value given a series of uniform equal
receipts
• P=A + A( P/A, i%, N-1)
• P=A+(1+P/A, i%, N-1)
A farmer bought a tractor payable in 10 semi-annual payments payable at the
beginning of the period. If the semi-annual payment is ₱45,000 at an interest
rate of 20% compounded semi-annually, what was the original cost?
A company bought a printer for
₱30,000 payable in 12 months.
Payments are to be made at the
beginning of each month. If the rate
of interest is 10% compounded
quarterly, determine the amount of
monthly payments.
Perpetuity
A = uniform amounts

A A A A A

∞
0 1 2 3 4 N

i=interest rate per period

P = present equivalent

A perpetuity is an annuity in which payments continue

indefinitely.
Perpetuity
•  P=A( P/A, i%, ∞)
A road project in Davao del Sur will require an annual
maintenance cost of ₱150,000. How much should be
invested now to ensure there is a regular fund for
such, if cost of money is 5%?
What amount of money invested today at 15% interest can provide the following
scholarships:
a. ₱300,000 at the end of each year for 6 years
b. ₱400,000 for the next 6 years
c. ₱500,000 thereafter
A contractor anticipated that three years after project
completion, the steel bridge would require annual
replacement on some parts. If the government would
allot ₱500,000 to be placed in a mutual fund earning
at 6% compounded annually, how much would be
available yearly?
“ In the economy of God, we
are meant to love people and
use things. In the human
economy, we have ended up
loving things and using
people.”
Ravi Zacharias