Economics

Ordinary and Exact Simple Interest

Problem No. 1: Determine the following: a.) Simple interest b.) Exact simple interest

on ₱ 5,000.00 for the period of January 18 to October 26, 2016 if the rate of interest is 24%.

Solution:

P = ₱ 5,000.00

i = 24%
period: January 18 to October 26, 2016

January 18-31 13 (Excluding 18)

281
a.) n=360 I = Pi n
February 29 281
= ₱ 5,000.00 (0.24) (360)
March 31 I = ₱ 936.67
April 30
281
May 31 b.) n=366 I = Pi n
281
June 30 = ₱ 5,000.00 (0.24) (366)
I = ₱ 921.31
July 31

August 31

September 30

October 26

282 (no. of days)

Rate of Interest

Problem No. 2: How long will it take ₱ 500.00 to be four times its value if invested at the rate of
7% compounded semi-annually? What is the effective rate of interest?

Solution:

7%
i= = 0.035
2

P = ₱ 500.00

Let: F = 4P

a.) F = P (1+ i) n

4P = ₱ 500.00 (1+0.035) n

4(₱ 500.00) = ₱ 500.00 (1+0.035) n

₱ 2,000.00 = ₱ 500.00 (1+0.035) n

₱ 2,000.00
(1+0.035) n = ₱ 500.00

𝑛 log(1. 035) = log 4

log 4
𝑛=
log (1.035)

40.30
𝑛 = 40.30 periods or 𝑛 = 2
= 20.15 years

b.) ERI = (1+ i) m – 1

= (1+ 0.035) 2 – 1

= 0.071

= 7.1%
Discount

Problem No. 3: Allan borrowed from a bank under a promissory note that he signed in the
amount of ₱ 250 000.00 for a period of one year he received only the amount ₱ 219 150.00 after
the bank collected the advance interest and an additional amount of ₱ 850.00 for notary and
inspection fees. What was the rate of interest that the bank collected in advance?

Solution:

Interest = ₱ 250 000.00 – (₱ 219 150.00 + ₱ 850.00)

= ₱ 30,000.00

Amount he actually received

= ₱ 250 000.00 - ₱ 30,000.00

Amount = ₱ 220,000.00

₱ 30,000.00
Rate of interest = × 100%
₱ 220,000.00

Rate of interest = 13.64%

Annuities

Problem No. 4: Mina inherited a trust fund with a regular endowment of ₱ 200 000.00 every end
of 3 months for 10 years. However she may choose to get a simple lump sum payment at the end
of 4 years. How much is the lump sum if the cost of money is 14% compounded quarterly?

Solution:

A = ₱ 200 000.00

14%
i= = 3.5%
4

P: n = 4(4) = 16

F: n = 4(8) = 24

Lump sum = P + F

1 − (1 + 𝑖)−𝑛 (1 + 𝑖)𝑛 − 1
𝑃=𝐴 [ ] 𝐹 = 𝐴[ ]
𝑖 𝑖

1 − (1 + 0.035)−16 (1 + 0.035)24 − 1
= ₱ 200 000.00 [ ] = ₱ 200 000.00 [ ]
0.035 0.035

P = ₱ 4, 194, 205.942 F = ₱ 3,211,673.521

Lump sum = P + F

= ₱ 4, 194, 205.942 + ₱ 3, 211, 673.521

Lump sum = ₱ 7, 405, 879.463

Depreciation Method using Straight Line Method
Problem No. 5: A company has purchased equipment for ₱ 60,000.00 and paid ₱ 1,600.00 for
freight and delivery charges to the job site. The equipment has a normal life of 6 years with a
trade-in value of ₱ 10,000.00 against the purchase of new equipment at the end of the life.
Determine the annual cost depreciation and the book value at the end of 3 years.

Solution:

CO = ₱ 60,000.00 + ₱ 1,600.00 = ₱ 61,600.00

L = 6 years

CL = ₱ 10,000.00

𝐶𝑂 − 𝐶𝐿 End of period Depreciation Book value

𝑑=
𝐿
in years (n) (d) Cn = CO - Dn

=
₱ 61,600.00−₱ 10,000.00 0 ₱ 8,600.00 ₱ 61,600.00
6
1 ₱ 8,600.00 ₱ 53,000.00
d = ₱ 8,600.00 2 ₱ 8,600.00 ₱ 44,400.00
3 ₱ 8,600.00 ₱ 35,800.00
4 ₱ 8,600.00 ₱ 27,200.00
5 ₱ 8,600.00 ₱ 18,600.00
6 ₱ 8,600.00 ₱ 10,000.00

Determine the book value at the end of 3 years.

n = 3 years

𝐶3 = ₱ 61,600.00 − 3(₱ 8,600.00)

C3 = ₱ 35,800.00