Technological University of the Philippines - Manila College of Industrial Technology

Engineering Economics

Assignment # 4 – COMPOUND INTEREST

1. It is the practice of almost all bank in the Philippines that when they grant a loan, the interest for one year is automatically deducted the
principal amount upon release of money to a borrower. Let us therefore assume that you applied for a loan with a bank and the
P80,000.00 was approved at an interest rate of 14% of which P11,200.00 was deducted and you were given a check of P68,800.00.
Since you have to pay the amount of P80,000.00 one year after, what then will be effective interest rate?

Given: I = P 11,200 P = 68,800 r= 0.14 t = 1 yr i = ?

Solution: I = Pit

11,200 = (68,800) (i) (1)

11, 200 = 68,800i

11,200/68,800 = 68, 800/68, 800

i = 0.1628 or 16.28%
2. A businessman wishes to earn 7% of his capital after payment of taxes. If the income from an available investment will be taxed at
an average rate of 42%, what minimum rate of return, before payment of taxes, must the investment offer be justified?
solution:
100r * 0.58 = 0.07
100r =12.07
r = 0.1207 or 12.07%

3. How long will it take money to double itself if invested at 5% compounded annually?

Given: F = 2
P=1
r = 5% = 0.05
m=1
t=?
solution:
F = P ( 1 + r/m ) ^mt
2 = 1 (1 + 0.05/1) ^1t
2 = 1.05^t
Log 2 = t log 1.05
0.3010 = t (0.02119)
0.3010/0.02119 = t0.02119/0.02119
t = 14.20
t = 14 years and 2 months
4. The amount of P50,000.00 was deposited in the bank earning an interest of 7.5% per annum. Determine the total amount at the
end of 5 years, if the principal and interest were not withdrawn during the period.
Given:
P = 50,000
r = 7.5% = 0.075
t = 5 years
m=1
F=?
solution:
F = P (1 + r/m)^mt
F = 50000 (1 + 0.075/1)^(1)(5)
F = 71,781.47

5. What is the corresponding effective interest rate of 18% compounded semi-quarterly?

Given:
r = 18% = 0.18
m = (2)(4) = 8
ie = ?
solution:
ie = (1 + 0.18/8)^8 -1
ie = 0.1948 or 19.48%
 6. Find the present worth of a future payment of P100,000.00 to be made in 10 years with an interest of 12% compounded quarterly.
F = 100,000
r = 12% = 0.12
t = 10 Years
m=4
P=?
Solution:
P = F (1 + r/m)^-mt
P = 100,000 ( 1 + 0.12/4)^-(4)(10)
P = 30,655.68
7. In how many years is required for P2,000.00 to increase by P3,000.00 if interest at 12% compounded semi-annually?
Given:
P = 2,000
F = 5, 000
r = 12% = 0.12
m= 2
t=?
solution:
F = P (1 + r/m)^mt
5000 = 2000 (1 + 0.12/2)^2t
t = 7.86 or 7 years and 8 months
8. Compute the equivalent rate of 6% compounded semi-annually to a rate compounded quarterly.
Given: r = 6% = 0.06
m=2
m2 = 4
r2 = ?
solution:
ie = (1+r/m)^m-1
ie = (1 + 0.06/2)^2 – 1
ie = 0.0609
0.0609 = (1 + x/4)^4 – 1
r = 0.0596 or 5.96%

9. If P5,000.00 shall accumulate for 10 years at 8% compounded quarterly. Find the compounded interest at the end of 10 years.
Given:
P = 5000
t = 10 years
r = 8% = 0.08
m=4
F=?
Solution:
F = P (1 + r/m)^mt
F = 5000 (1 + 0.08/4)^(4)(10)
F = 11,040.20 – 5000
Compound interest = 6,040.20
10. By the condition of a will, the sum of P2,000.00 is left to a girl to be held in a trust fund by her guardian until it amounts to P50,000.00.
When will the girl receive the money if the fund is invested at 8% compounded quarterly?
Given: P = 2000
F = 50,000
r = 8% = 0.08
m=4
t=?
solution:
F = P (1+r/m)^mt
50,000=2,000 (1 + 0.08/4)^(4)(t)
t = 40 years and 6months

11. A student plan to deposit P1,500.00 in the bank now and another P3,000.00 for the next 2 years. If he plans to withdraw P5,000.00 3
years after his last deposit for the purpose of buying shoes, what will be the amount of money left in the bank after one year of his
withdrawal? Effective annual interest rate is 10%.
Given: P = 1,500
r = 10% = 0.10
t=2
m=1
F=?
Solution:
F1= P (1+r/m)^mt
F1=1,500(1+0.10/1)^(1)(2)
F1= 1,815 + 3000
F1 = 4,815
F2= 4,815 (1 + 0.10/1)^(1)(3)
F2 = 6,408.77 – 5000
F2= 1,408.77
F3 = 1,408.77 (1 + 0.10/1)^(1)(1)
F3= 1,549.64

12. When will an amount be tripled with an interest of 11.56%?

13. How much must be invested on January 1, 2023 in order to accumulate P2,000.00 on January 1, 2028? Money worth 6%.
Given: F = 2,000
t = 5 years
r = 6% = 0.06
m=1
P=?
Solution:
P = F (1+r/m)^-mt
P = 2000 (1+0.06/1)^-(1)(5)
P = 1,494.52

14. A man borrowed P1,000,000.00 at the rate of 12% per annum, compounded quarterly. What is the effective rate?
Given:
r = 12% = 0.12
m=4
ie = ?
solution:
ie = (1+r/m)^m – 1
ie = (1 + 0.12/4)^4 -1
ie = 0.1255 or 12.55%
15. A firm borrows P2,000.00 for 6 years at 8%. At the end of 6 years, it renews the loan for the amount due plus P2,000.00 more for 2
years at 8%. What is the lump sum due?
Given: P = 2,000 r = 8% =0.08 t1 = 6 t2= 2

Solution:
F = P (1+r/m)^mt
F = 2000(1+0.08/1)^(1)(6)
F = 3173.75
F2 = 2000(1 + 0.08/1)^(1)(2)
F2 = 2332.8
F = 3173.75 + 2332.8
F = 5506.55

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