ENGINEERING ECONOMY

Prepared By: Diane Mae Fabroa

Today's Agenda

Discuss the rate of interest and

annuity
Solve problems related to rate of
interest and annuity

TUP-MANILA
INTEREST RATE
the amount earned by a unit principal per time.
2 TYPES
1. NOMINAL RATE OF INTEREST
Specifies the rate of interest and the number of interest periods per year.

Example #1: If 1,000.00 becomes 1, 811.36 after 5 years when invested

at an unknown rate of interest compounded bimonthly. Determine the
unknown nominal rate.
Example #1: If 100,000.00 becomes 126,824.18 after 2 years when
invested at an unknown rate of interest compounded bimonthly.
Determine the unknown nominal rate.
Example #1: If 100,000.00 becomes 126,824.18 after 2 years when
invested at an unknown rate of interest compounded bimonthly.
Determine the unknown nominal rate.
2. EFFECTIVE RATE OF INTEREST
The actual rate of interest on the principal for one year.

continuously compounding

Example #2: If the sum of 12,000 is deposited in an account in one

year earning an interest rate of 8% compounded quarterly, what is
the effective rate?
Example #2: If the sum of 12,000 is deposited in an account in one
year earning an interest rate of 8% compounded quarterly, what is
the effective rate?

ER=?
Example #2: If the sum of 12,000 is deposited in an account in one
year earning an interest rate of 8% compounded quarterly, what is
the effective rate?

ER=8.24%
Example #3: Determine the effective rate of interest if money is
worth 5.7% compounded continuosly.
Example #3: Determine the effective rate of interest if money is
worth 5.7% compounded continuosly.
Example #3: Determine the effective rate of interest if money is
worth 5.7% compounded continuosly.
Example #3: Determine the effective rate of interest if money is
worth 5.7% compounded continuosly.
ANNUITY
series of equal payments made at equal intervals of
time.
TYPES OF ANNUITY
1. ORDINARY ANNUITY
- one where equal payments are made at the end of each payment period
starting from the first period.

2. DEFERRED ANNUITY
- it is also an ordinary annuity but the payment of the first amount is deferred a
certain number of periods after the first.
TYPES OF ANNUITY
3. ANNUITY DUE
-is one where payments are made at the start of each period, beginning from the
first period.

4. PERPETUITY
- it is also an ordinary annuity but the payment of the first amount is deferred a
certain number of periods after the first.
 Example 1: A steam boiler is purchased on the basis of guaranteed
performance. However, initial tests indicate that the operating cost will be
400.00 more per year that guaranteed. If the expected life is 25 years and
money is worth 10%, what deduction from the purchase price would
compensate the buyer for the additional operating cost?

P=
 Example 1: A steam boiler is purchased on the basis of guaranteed
performance. However, initial tests indicate that the operating cost will be
400.00 more per year that guaranteed. If the expected life is 25 years and
money is worth 10%, what deduction from the purchase price would
compensate the buyer for the additional operating cost?

P=

P=3630.82
 Example 1: A steam boiler is purchased on the basis of guaranteed
performance. However, initial tests indicate that the operating cost will be
400.00 more per year that guaranteed. If the expected life is 25 years and
money is worth 10%, what deduction from the purchase price would
compensate the buyer for the additional operating cost?

P=

P=3630.82
Example 2: How much much be deposited at 6% each year beginning on
January 1, year 1 in order to accumulate 5,000 on the date of the last
deposit, January 1, year 6?
Example 2: How much much be deposited at 6% each year beginning on
January 1, year 1 in order to accumulate 5,000 on the date of the last
deposit, January 1, year 6?

A=716.81
And we're done for the day!

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