Simple

Interest:
I = P r t

Problem 1 Mathematics (Engineering Economics)

Ex. Terms of sales:
P90000 payable in 120 days
P85500 payable in 45 days
Find the equivalent annual rate of simple interest if paid in 120 days.

Solution:
Interest = 90000 - 85500
75 days
Interest = 4500
I = Prt 0 45 120

75
4500 = 85500 r
360 85500 90000

r = 0.2526
r = 25.26%
 Simple Interest:
I = P r t

Problem 2 Mathematics (Engineering Economics)

What is the annual rate of simple interest if P265 is earned in four months on an
investment of P15000?

Solution:
I=Prt
4
265 = 15000(r)
12
265 = 5000 r
r = 0.053
r = 5.3%

Problem 3 Mathematics (Engineering Economics)

Determine the principal that would have to be invested to provide P200 of simple
interest income at the end of 2 years if the annual interest is 9%.

Solution:
I=Prt
200 = P(0.09)(2)
P = P1111.11
 Compound Interest:
0 n

P
F

n
F = P(1 + i)

Problem 4 Mathematics (Engineering Economics)

Suppose that the interest rate is 10% per year, compounded annually.
What is the minimum amount of money that would have to be invested for
a two-year period in order to earn P300 in interest?

Solution:
F = P(1 + i)n
Interest = F P = 300
300 = P(1 + i)n P
300 = P(1.10)2 P
P = P1428.57
Problem 5 Mathematics (Engineering Economics)
Suppose that a man lends P1000 for 4 years at 12% per year simple
interest. At the end of 4 years, he invests the entire amount which he then
has for 10 year at 8% interest per year compounded annually. How much
money will he have at the end of the 14 year period?

Solution:
0 12% n

F1 = P + Prt
F1 = 1000 + 1000(0.12)(4) P1= P1000
F1 = 1480
F1=1480

F2 = P2 (1 + i)n 0 8% n

F2 = 1480(1.08)10
F2 = P3195.21
P2= P1480

F2
Problem 6 Mathematics (Engineering Economics)
Compare the interest earned from an investment of P1000 for 15 years
per annum simple interest with the amount of interest that could be earned
if these funds were invested for 15 years at 10% per year, compounded
annually.

Solution:
For simple interest:
I = Prt
I = 1000(0.10)(15)
I = 1500
For compounded interest:
F = P(1 + i)n
I + P = P(1 + i)n
I + 1000 = 1000(1.10)15
I = 3177.25

The compounded interest is 3177.25/1500 = 2.12 times that of simple

interest.

Problem 7 Mathematics (Engineering Economics)

The ABC Co. deposited P100,000 in a bank account on June 15 and
withdrew a total of P115000 exactly one year later. Compute the annual
interest rate which the company has paid.

Solution:
I = Prt
15000 = 100000(r)(1)
r = 0.15 = 15% per year
Interest Compounded Continuously
0 n

P
F

rn
F = Pe where er n = compound amount factor if compounded continuously

I = F P (interest)
r
Effective annual interest rate: Ie = e 1

Problem 8 Mathematics (Engineering Economics)

Compute the interest for an amount of P200,000 for a period of 8 years if
the rate was 16% compounded continuously.

Solution:
F = P er n
F = 200,000e0.16(8)
F = P719,328
I=FP
I = 719,328 200,000
I = P519,328
Deffered Annuity
a) Future Worth 0 1 2 3 4 5 6 7 8 9
n =10
10
A (1 + i)n - 1
F1 = A A A A A
i
F1
n
F2 = F1 (1 + i) 1
n 1=5
F2

b) Present Worth
0 1 2 3 4 5 6
A (1 + i) 1 - 1
n
0 1 2 3 4 5 6 7 8 9 10

F=
i A A A A A A

F F
A[(1+i)n1-i] n 1=5
P= n = 10 F= i
n P
(1 + i)
Problem 9 Mathematics (Engineering Economics)
Find the value after 20 years in pesos of an annuity of P120,000 payable
annually for 8 years, with the first payment at the end of 2 years if money
is worth 5%.

Solution:

11
1 2 3 4 5 6 7 8
0 1 2 3 4 5 6 7 8 9 10 11 12 17 18 19 20

A A A A A A A A
F1

F2

A (1 + i)n - 1
F1 =
i
20000 (1.05)8 - 1
F1 = = P190,982.16
0.05

F2 = F1 (1 + i)n
F2 = 190,982.16(1.05)11 = P326,644.33
Problem 10 Mathematics (Engineering Economics)
Find the present value of an annuity of P25000 payable annually for 8
years with the first payment at the end of 10 years if money is worth 5%.

Solution:
8

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

A A A A A A A A
F1

A (1 + i) 1 - 1
n

F1 =
i
25000 (1.05)8 - 1
F1 =
0.05
F1 = P238,727.22
F
P=
(1 + i)n
238,727.22
P=
(1.05)17
P = P104,156.11
 Future Worth of Annuity Due
(payments at the beginning of the period)

0 1 2 3 4 5 n

A A A A A A A

A (1 + i)n - 1
F= + A(1 + i)n
i

Problem 11 Mathematics (Engineering Economics)

Mr. Franklin wants to save for a new sportscar that he expects will cost
$3800 4 years from now. How much money will he have to save each
year and deposit in a savings account at the beginning of each year that
pays 6.25% per year compounded annually to buy the car in 4 years.

Solution: 0 1 2 3 4

A (1 + i)n - 1
F= + A(1 + i)n A A A A A
i
F
A (1.0625)4 - 1
38000 = + A(1.0625)4
0.0625
A = P6707.38
Difference between sums of annuity due and
an ordinary annuity:

n
Difference = A [(1 + i) - 1]

Problem 13 Mathematics (Engineering Economics)

What is the difference between the sums of an annuity due and an
ordinary annuity for the following data?
Periodic payment = P150,000
Terms = 20 years
Payment interval = 1 year
Interest rate = 12% compounded annually

Solution:
Difference = A [(1 + i)n - 1]
Difference = 150,000[(1.12)20 - 1]
Difference = P1,296,943.96
Depreciation: Declining Balance Method

Problem 14 Mathematics (Engineering Economics)
Original cost = P150,000 Economic life = 8 years
Salvage value = P9000
Determine the depreciation in the first year using declining balance
method.

Solution:
Dep. = (F.C.)(1 K)m 1 K
SV = FC(1 K)n
9000 = 150000(1 K)8
(1 K)8 = 0.06
1 K = (0.06)0.125 = 0.70351
K = 0.29649
Dep = FC(1 K)m 1 K
Dep = (FC)(1 K)0 K
Dep = FC(K)
Dep = 150,000(0.29649)
Dep = P44,474
Depreciation: MARCS Method (Modified
Accelerated Cost Recovery System Method)



Problem 15 Mathematics (Engineering Economics)
Original cost = P5000
Salvage value = P500
Life n = 5
Compute the depreciation of the equipment on the 3rd year only using
MARCS Method.

Solution:
1 2
1st year dep = (5000) = 1000
2 5
2
2nd year dep = (5000 - 1000) = 1600
5
2
3rd year dep = (5000 - 1000 - 1600) = P960
5
 Depreciation using Straight Line Method


Problem 16 Mathematics (Engineering Economics)
Original cost = P120,000
Salvage value = P10,000
Life n = 10 years
Find the book value after 5 years.

Solution:
(FC - SV)
Total Dep = (5)
n
(120000 - 10000)
Total Dep = (5) = P55000
10

Find the sunk cost if it is sold for P30,000.

Solution:
Sunk cost = 55000 30000 = P25,000
Depreciation using Sum of Years Digit Method


Problem 17 Mathematics (Engineering Economics)
First cost = P900,000
Salvage value = P450,000
Life n = 5 years
Find the sum of the depreciation cost in the first 2 years.

Solution:
n
Sum of years = (1 + n)
2
5
Sum of years = (1 + 5) = 15
2
(FC - SV)(5 + 4)
Total dep after 2 years =
15
(900000 - 450000)(9)
Total dep after 2 years =
15
Total dep after 2 years = P270,000
 Depreciation using Sinking Fund Method


Problem 18 Mathematics (Engineering Economics)
First cost = P100,000
Salvage value = P20,000
Life n = 8 years
Rate of interest = 6%
Find the depreciation at the end of the 6th year using Sinking Fund
Method.

Solution:
(FC - SV)i
Annual dep =
(1 + i)n - 1
(100000 - 20000)(0.06)
Annual dep = 8
= P8082.88
(1.06) - 1
Dep. at the 6th year = P8082.88 (equal for every year)
 Capital Recovery Factor for a Uniform Series
(Annuity)

0 1 2 3 4 n
A (1 + i)n - 1
P=
(1 + i)n i A A A A A A
n
A (1 + i) i
=
P (1 + i)n - 1 P
A
P , i%, n (capital recovery factor)

Problem 19 Mathematics (Engineering Economics)
A certain engineer who is about to retire has accumulated P50,000 in a savings
account that pays 6% per year, compounded annually. Suppose that the engineer
wishes to withdraw a fixed sum of money at the end of each year for 10 years,
what is the amount that can be withdrawn?

Solution:
A
P , 6%, 10 = 0.1359

A (1 + i)n - 1
P=
(1 + i)n i
A (1 + i)n i
=
P (1 + i)n - 1
A (1.06)10 (0.06)
=
P (1.06)10 - 1 A
= 0.1359
A 50000
= 0.1359 A = P6795
P
 Present Worth Factor (Uniform Series) Annuity

A (1 + i)n - 1 0 1 2 3 n
P=
(1 + i)n i
P (1 + i)n - 1 A A A A A
= (present worth factor)
A n
(1 + i) i
P
P
A , i%, n (present worth factor)

Problem 20 Mathematics (Engineering Economics)
An engineer is planning his retirement has decided that he will have to withdraw
P10,000 from his savings account at the end of each year. How much money must
the engineer have in the bank at the start of his retirement if his money earns 6%
per year, compounded annually and he is planning a 12 year retirement (12
annual withdrawals)?

Solution:
(P / A, 6%, 12) = 8.3839
A (1 + i)n - 1
P=
(1 + i)n i
P (1 + i)n - 1
=
A (1 + i)n i
P (1.06)12 - 1
= = 8.3839
A (1.06)12 (0.06)
P
= 8.3839
A
P
= 8.3839
10000
P = P83839
 Sinking Fund Method (Uniform Series, Annuity)


0 1 2 3 n
A (1 + i)n - 1
F=
i A A A A
A i
= (sinking fund factor)
F (1 + i)n - 1 F



Problem 21 Mathematics (Engineering Economics)
Suppose that a fixed sum of money A will be deposited in a savings account at the
end of each year for 20 years. If the bank pays 6% per year, compounded
annually, find A such that a total of P50,000 will be accumulated at the end of the
20 year period.

Solution: 0 1 2 3 4 20
(A / F, 6%, 20) = 0.02718
A (1 + i)n - 1 A A A A A
F=
i
A i F=50000
=
F (1 + i)n - 1
A 0.06
= (sinking fund factor)
F (1.06)20 - 1
A
= 0.02718
F
A
= 0.02718
50000
A = P1359
 Gredient Series Factor
5G

4G
A 1 n 3G
= - (gredient series factor) 2G
G i (1 + i)n - 1
G


0 1 2 3 4 5 n


Convert to a uniform series:
A A A A A A


0 1 2 3 4 5 n



Problem 22 Mathematics (Engineering Economics)
Dr. Anderson plans to make a series of gradient-type withdrawals from his savings
account over a 10 year period, beginning at the end of the second year. What
equal annual withdrawals would be equivalent to a withdrawal of P1000 at the end
of the second year, P2000 at the end of the 3rd year . . . . P9000 at the end of the
10th year, if the bank pays 9% per year compounded annually?

Solution: 9000
8000 (A/G, 9%, 10)=3.7978
A 1 n 4000
= - 3000
G i (1 + i)n - 1 2000
1000
A 1 10
= -
G 0.09 (1.09)10 - 1 0 1 2 3 4 5 9 10
A
= 3.7978
G
A A A A A A A
A
= 3.7978
1000
0 1 2 3 4 5 9 10
A = P3797.80
Problem 23 Mathematics (Engineering Economics)
The ABD Company is building a new plant, whose equipment maintenance costs are
expected to be P500 the first year, P150 the second year, P200 the third year, $250 the
fourth year, etc., increasing by P50 per year through the 10th year. The plant is expected to
have a 10-year life. Assuming the interest rate is 8%, compounded annually, how much
should the company plan to set aside now in order to pay for the maintenance?

Solution: 0 1 2 3 4 5 6 7 8 9 10
G (1 + i) - 1
n
n
P1 = -
i (1 + i)n i (1 + i)n 550 150 200 250 300 350 400 450 500 550

G = P50 i = 0.08 n = 10 G(P/G, i = 8, n = 10)

0 1 2 3 4 5 6 7 8 9 10
50 (1.08)10 - 1 10
P1 = -
0.08 (1.08)10 (0.08) (1.08)10
100 150
200
P1 = P1298.84 250
300
350
400
450
500
n 550
A[(1 + i) - 1]
P2 = 0 1 2 3 4 5 6 7 8 9 10
(1 + i)n i
(1.08)10 - 1
P2 = 100 10
= P671 400
(1.08) (0.08)

400 0 1 2 3 4 5 6 7 8 9 10
P3 =
(1.08)1
P3 = P370.37 A A A A A A A A A A=100

F2
Total P = P1 + P2 + P3
Total P = 1298.84 + 671 + 370.37
Total P = P2340.21
Problem 24 Mathematics (Engineering Economics)
A mine is for sale. A mining engineer estimates that, at current production
levels, the mine will yield an annual net income of P80,000 for 15 years,
after which the mineral will be exhausted. If an investors MARR is 15%,
what is the maximum amount he can bid on this property?
(MARR = min. attractive rate of return)

Solution:

0 1 2 3 4 15
A[(1 + i)n - 1]
P=
(1 + i)n i A A A A A

800 (1.15)15 - 1
P=
(1.15)15 (0.15) P

P = P467,789.61

(P / A, i = 0.15, n = 15) ------ 5.8474 from table

P = 80000(5.8474)
P = P467,789.61