ENGINEERING

ECONOMICS
PREPARED BY:
ENGR. RAMONCITO R. SARZA
WHAT IS ECONOMICS?

ECONOMICS IS THE WISE USE OF

MONEY AND TIME TO CREATE
WEALTH.
WHAT IS ENGINEERING ECONOMICS?
It involves applying economic principles to
engineering aspects, such as when
comparing the corresponding costs of two
alternative capital projects or choosing the
best engineering path based on cost
considerations.
WHAT IS INTEREST? ( I )
The cost incurred by using borrowed funds,
or the profit made from investments.
INTEREST ( I )
SIMPLE COMPOUND
INTEREST OVER INTEREST OVER THE
THE PRINCIPAL / INTEREST
PRESENT AMOUNT
SIMPLE INTEREST
ORDINARY
1 BANKER YEAR = 360 DAYS
EXACT
ORDINARY YEAR = 365 DAYS
LEAP YEAR = 366 DAYS
SIMPLE INTEREST
F = P + I I = Pin F = P + Pin
Where:
F = future worth
MAIN FORMULA
P = principal/present worth
FOR SIMPLE
I = interest INTEREST!!!
i = interest rate
F = P(1+in)
n = number of year
1. A man borrowed P4000 for 75 days at 16% per annum
interest. How much will be due at the end of 75 days?
2. Determine the exact simple interest on p 2000.00 from
January 15 to April 20, 2007, if the rate of simple interest is 14%.
3. If the loan was for 15 months at 16.8% interest a year and the
repayment on a loan was P 12,100.00, how much is the principal
COMPOUND INTEREST

Where:
F = future worth
P = principal/present worth
N = number of payments
i = effective interest
in = nominal interest
MAIN FORMULA
m = number of compounding periods
FOR
COMPOUND
n = number of year
INTEREST!!!
4. Compute the present value of P 5000.00 due in 8 years
if money is worth 12% compounded semi-annually?
5. If the normal interest rate is 3%, how much is P 5000.00 worth
in 10 years in a continuously compounded account? (m =
infinity)

ALT SOLUTION:
6. A man wishes his son to receive P 500,000.00 ten years from now. What
amount should he invest now if it will earn interest of 12% compounded
annually during the first five years and 15% compounded quarterly
during the next five years.

𝐹1 = 500000

𝟎
7. Aaron borrowed a certain amount on January 1990 from Barry. Two
years later, Aaron borrowed again from Barry an amount of P5000.00.
Aaron paid P1000.00 on January 1993 and discharged his balance by
paying P 7500.00 on June 1995. What was the amount borrowed by Aaron
on January 1990 if the interest rate is 8% compounded annually.
1000 7 500
𝑵
1990 1991 1992 1993 1994 1995
F = P (1+𝒊 )
−𝑵
P = F (1+𝒊 )
5000

X+
WHAT IS ANNUITY?
A sequence of equal payments made at
equal periods of time.
TYPES OF ANNUITY
1. ORDINARY
2. ANNUITY DUE
3. DEFFERED
4. PERPETUITY
 ORDINARY ANNUITY
1ST PAYMENT IS AT THE END OF THE 1ST PERIOD.
NOTE: IS CONCENTRATED ONE PERIOD LEFT OF THE FIRST PAYMENT
IS CONCENTRATED OVERLAPPING OF THE LAST PAYMENT

1 2 3 4 5 6 1 2 3 4 5 6
𝟎 𝟎

𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴
𝑷𝑨 𝑭𝑨

(
𝟏 − (1+ 𝒊 )− 𝑵
) ( )
𝑵
(1+ 𝒊 ) −𝟏
𝑷 𝑨= 𝑨 𝑭 𝑨= 𝑨
𝒊 𝒊
8. How much money must you invest today in order to withdraw
P 1000.00 per year for 10 years if the interest rate is 12%.
1 2 3 4 5 6 7 8 9 10
𝟎

𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴
𝑷𝑨
 ANNUITY DUE
1ST PAYMENT IS AT THE START OF THE 1ST PERIOD.
NOTE: FIRST PAYMENT IS AT YEAR 0.
1 2 3 4 5 6
𝟎

( )
−( 𝑵 −𝟏 )
𝟏 −(1+ 𝒊 )
𝑷 𝑨 = 𝑨+ 𝑨
𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝒊
𝑷𝑨
9. A man acquires a loan of P500000.00. He will amortize his loan by 10
annual payments but will commence 5 years after the loan was acquired.
If money is worth 10% compounded annually, what was his annual
amortization?
1 2 3 4 5 6
𝟎

400 𝑘 400 𝑘 400 𝑘 400 𝑘 400 𝑘

𝑷𝑨
 DEFERRED ANNUITY
1ST PAYMENT WILL NOT HAPPEN AT THE BEGINNING
OR THE END OF THE 1ST PERIOD.
NOTE: = NUMBER OF YEARS DEFFERED
1 2 3 4 5 6
𝟎

( )
−𝑵
𝟏 −(1+ 𝒊 ) −( 𝑴)
𝑷 𝑨= 𝑨 (1+ 𝒊 )
𝑀 𝐴 𝐴 𝐴 𝐴 𝒊
𝑷𝑨
 10. A man acquires a loan of P500000.00. He will amortize his loan by 10
annual payments but will commence 5 years after the loan was acquired.
If money is worth 10% compounded annually, what was his annual
amortization?
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
𝟎

𝑀 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴 𝐴
𝑷𝑨
PERPETUITY
SERIES OF UNIFORM PAYMENTS WHICH CONTINUES INDEFINITELY.

1 2 3 4 5 𝑖𝑛𝑓𝑖𝑛𝑖𝑡𝑦
𝟎

𝐴 𝐴 𝐴 𝐴 𝐴 𝐴
𝑷𝑨

𝑨
𝑷 𝑨=
𝒊
11. How much money must you deposit today in an account earning 10%
compounded annually so that you can withdraw P 25000 yearly
indefinitely starting at the end of the 10th year?
1 2 3 4 5 6 7 8 9 10 𝑖𝑛𝑓𝑖𝑛𝑖𝑡𝑦
𝟎

25 𝑘 25 𝑘
𝑀
𝑷𝑨
WHAT IS DEPRECIATION?
Depreciation is the decrease in an asset's value,
may be caused by a number of other factors as
well such as unfavorable market conditions, etc.
STRAIGHT LINE METHOD
MODE: 3,2 (LINEAR)
X Y Sample problem: A machine has an initial cost of P50000
1 0 FC and a salvage value of P10000 after 10 years. What is the
book value after five years.
2 n SV
X Y
BOOK VALUE @M YEARS: 1 0 50000
mŷ 2 10 10000

ANNUAL DEPRECIATION:
BOOK VALUE @M YEARS:
0ŷ - mŷ mŷ
TOTAL DEPRECIATION: 5ŷ
0ŷ - mŷ P30000
DECLINING BALANCE METHOD
MODE: 3, 6 (Exponential)
Sample problem: A machine costing P 720,000.00 is
X Y estimated to have a life of ten years. If the annual rate of
1 0 FC depreciation is 25%, determine the total depreciation using
2 1 FC(1 – K) the constant percentage method or declining balance
method.

BOOK VALUE @M YEARS: X Y

1 0 720000
mŷ
2 1 720000(1 – 0.25)
ANNUAL DEPRECIATION: TOTAL DEPRECIATION:
(m-1)ŷ - mŷ (0)ŷ - nŷ

TOTAL DEPRECIATION: (0)ŷ - 10ŷ

P 679,454
(0)ŷ - nŷ
SUM OF THE YEARS DIGIT METHOD
MODE: 3,3 (QUADRATIC)
X Y Sample problem: An asset is purchased for P120,000.00. Its
1 0 FC estimated life is 10 years, after which it will be sold for
P12,000.00. Find the depreciation for the 2nd year using the
2 n SV
sum of the years digit method.
3 n+1 SV

BOOK VALUE @M YEARS: X Y

1 0 120000
mŷ 2 10 12000
ANNUAL DEPRECIATION: 3 11 12000
ANNUAL DEPRECIATION:
(m-1)ŷ - mŷ
(m-1)ŷ – mŷ
TOTAL DEPRECIATION:
(2-1)ŷ – 2ŷ
(0)ŷ - nŷ P 17672.73