ENGINEERING SCIENCES

(ECONOMICS)
ENGINEERING ECONOMY

Simple Interest
Interest - is the money paid for the use of borrowed capital.
Simple Interest
Is the interest to be paid which is proportional to the length of
time the principal is used.
Formulas

1. I = P i n
2. F = P + I
3. F = P (1 + in)
where: I = interest P = principal
F = future amount n = no. of years
i = rate of interest per year
Note:
For Ordinary interest: 1 yr = 360 days
For Exact interest: 1 yr = 365 days
For leap year (exact interest): 1 yr = 366 days
Actual number of days per month:
January = 31 July = 31
February = 28 or 29 August = 31
March = 31 September = 30
April = 30 October = 31
May = 31 November = 30
June = 30 December = 31
Discount
Is the difference between the future worth and the principal
amount.
O − A
1. Discount = O – A 2. Discount Rate =
O
COMPOUND INTEREST
Is the interest earned by the principal which is added to
the principal will also earned interest for the succeeding
period.

Cash Flow diagram

- a graphical presentation of cash flow drawn on a
time scale.
COMPOUND INTEREST
Formulas:
ln (F / P)
1. F = P(1 + i)n 5. n =
ln (1 + i)
F
2. P = 6. No. of years = n/m
(1 + i)n

where:
F
3. i = n −1 t = F/P (t = 2 for double)
P n = number of periods
n = (no. of years)(m)
4. i = in / m i = interest rate per period
COMPOUND INTEREST
Formulas:
7. Compound Interest = amount earned = F - P
8. (1 + i)n = single payment compound amount factor
9. (1+i)-n = single payment present worth factor
Where:
F = future amount P = principal or capital
in = nominal interest rate m = no. of periods per year
m = 1 (annual) m = 2 (semi-annual)
m = 4 (quarterly) m = 6 (bi-monthly)
m = 12 (monthly) m = 365 (daily)
Nominal and Effective Rate of Interest

1. ie = effective interest rate

in m
ie = (1 + i) − 1 = (1 + ) − 1
m
m

2. ie annual = ie semi-annual = ie quarterly = ie bi-monthly

= ie monthly = ie daily
Continuous Compounding

That is if m approaches infinity (m → ∞)

1. Future Worth: F = Pein

2. Present Worth: P = Fe-in

where: e = 2.718
3. Effective interest rate, i e ie = ein - 1
DECREASING VALUE
F = P(1 - i)n

BREAK EVEN ANALYSIS

y
Income Line
Income & Expenses
Profit

Variable Cost Line

Loss
Break-even Point
Fixed Cost

x
Number of units
BREAK EVEN ANALYSIS

A. To Break Even,
Total Income = Total Expenses
B. Income = Variable cost + Fixed cost
C. Profit = Income – (Variable cost + Fixed cost)
D. Loss = (Variable cost + Fixed cost) – Income