Professional Documents
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09/10/17
Engineering Economy
Physical impairment
Inadequacy
Obsolescence
Rental or lease possibilities
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TIME-MONEY
RELATIONSHIP
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Interest
I = Pin F = P (1 + in)
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Two Classification of
Simple Interest
Ordinary simple interest
is computed on the basis of one bankers year
which is equivalent to 360 days or 30 days per
month.
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Rates of Interest
Nominal rate of interest this specifies
the rate of interest and the number of interest
periods per year.
The nominal rate of interest is:
i = r/m
where: i = rate of interest per interest period
r = nominal interest rate
m = no. of compounding periods / year
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Compounding rate m
annually 1
semi-annually 2
quarterly 4
monthly 12
semi-monthly 24
bi-monthly 6
weekly 52
bi-weekly 26
daily 365
Effective interest rate is the actual
or exact rate of interest earned on the
principal during one year
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TYPES OF COMPOUNDING
Discrete compounding
Interest is compounded at the end of discrete
periods of time
Continuous Compounding
Continuous compounding assumes that cash
flow occurs at discrete intervals but
compounding is continuous throughout the
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09/10/17
Consider a nominal interest rate of
interest per year r, if the interest is
compounded m times a year, with one
unit of principal invested at a year.
F = Pern P = Fe-rn
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COMPOUND INTEREST
the interest is said to be compound whenever the
interest change for any interest period is based on the
remaining principal amount plus any accumulated
interest charges up to the beginning of that period,
also defined as interest on top of interest
F = P (1 + r/m)mn P = F (1 + r/m)-mn
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SAMPLE
BOARD
PROBLEMS:
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Determine the exact and ordinary
simple interest on P10,500 for the
period from Nov. 10, 2099 to
December 15, 2100, if the rate of
interest is 22%?
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If you borrowed money from your
friend with simple interest of 12%,
find the present worth of
P50, 000 which is due at the end of 7
months.
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Find the exact interest if the
ordinary interest is P333.36.
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Find the present worth of a future
payment of P100, 000 to be made
in 10 years with an interest of
12% compounded quarterly.
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ANNUITY
An annuity consists of a series of equal
payments made at equal intervals of time.
TYPES OF ANNUITY
Ordinary Annuity is one where the equal payments are made at the end of each period starting from the first period.
future worth given A:
29 F = A ((1+i) n 1)/i
present worth given A: 09/10/17
P= A (1- (1+i)-n) /i
Annuity due is one where the payments are
made at the beginning of each period.
eferred Annuity annuity wherein the first period payment is made several periods after
e beginning of annuity.
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Perpetuity annuity where the payments
continue indefinitely.
P = A/i
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How much money must you
invest today in order to withdraw
P2,000 annually for 10 years if
the interest rate is 9%?
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DEPRECIATION
DEPRECIATION METHOD
Basic Formula:
(annual depreciation cost)
d = (Co-SV) / N
Basic Formula:
d= i (Co - SV) / ((1+i) N-1)
Dn = d ((1+i) n-1) / i
BVn = Co - Dn
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Declining Balance Method (DBM)
the basic assumption is that the annual cost of
depreciation is a constant percentage of the salvage
value at the beginning of the year.
SV Basic Formula:
k =1 N
Co
BVn = Co (1-k) n
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Double-Declining
Balance Method (DDBM)
the depreciation cost in any year is a constant ratio
of the book value at the beginning of the year.
The book value for this method can never be zero.
Basic Formula:
All formula for DDBM is the same with DBM
except for the computation of k.
k= 2/N
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Sum of the Years-Digit (SYD)
this provides a very rapid depreciation during
the early years of life of the property, and
therefore enables faster recovery of capital.
Basic Formula:
Sum of the years = N (N+1)/2
Reverse digit = n (N- n/2 +0.5)
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BREAK-EVEN ANALYSIS
when two or more alternatives are a function of
the same variable, it may be desirable to find the
value of the variable that will result in equal cost
for the alternatives being considered. This value
is known as break-even point.
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QUESTION # 4
A father of a boy deposited to a trust
company a sufficient amount of money on
the day his son was born so that the boy
could received five annual payments of
P 10,000 each of his college tuition fees
starting with his eighteenth birthday . How
much did the father deposited? i = 12%
a. P 10,500 c. P50,000
b. P 5,250
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d. P13,550
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QUESTION # 5
A father of a boy deposited to a trust company a
sufficient amount of money on the day his son was
born so that the boy could received five annual
payments of P 10,000 each of his college tuition fees
starting with his eighteenth birthday . What if the son
elect not to withdraw the annual payments and
decided to withdraw a single lump sum amount on
his 25th birthday. How much did the boy received
as the single payment ? i = 12%
a. P 95,550 c. P100,000
b. P 89,250 d. P75,480 09/10/17
QUESTION # 6
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QUESTION # 11
Three Engineers met in a school reunion and were
discussing their relative successes by comparing their
investments earning 8% compounded annually. Engr. A
says he has P200,000 invested now. Engr. B says he had
P160,000 invested 4 yrs ago and Engr. C says he will
receive P230,000 five years from now. Considering that
these investments are intact and no change in interest rate is
to occur during the study period. Which of the following
statements is true basing your calculation on these
investments?
a. Engr. A is the poorest b. Engr. C is the poorest
c. Engr.
57 B is the poorest d. Engr. A is the richest
09/10/17
QUESTION # 12
If the sum of P 15,000 is deposited in
account earning interest at the rate of 12%
compounded quarterly, what will be the
principal at the end of 10 years?
A. P37,630
B. P48,930
C. P52,340
D. P55,520
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QUESTION # 13
A machine was purchased 5 years ago at a cost
of P 120,000. Its estimate salvage value at the
end of 10 years is P 10,000. If it is sold now for
P 30,000. What is the sink cost if the
depreciation method used is straight line
method?
A. P 21,000
B. P 30,000
C. P 35,000
D.59 P 25,000
09/10/17
QUESTION # 14
I want to have P 1M in 20 years, what is my
monthly deposit in 8% compounded
monthly?
A. P 3,948
B. P 1,846
C. P 1,689
D. P 2,694
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QUESTION # 15