Eng Economics

Module 1

Interest borrow money from thebank

rent
coast of money simple Interest
D principal
1 Pn I n period
1W 1100 us 1210
I interestrate

ex we borrowed 300
n 5 months Future in 5months Pt 1
I Rt annually a month 3000 150

I 3M XT2 X 12 1
3150.002
150 W

cashflow
Diagram
Example what isthe future worth of 60.000
invested for 81 in 3 years
n
o

up F Pt I
60,00 t 60WO X 3 X 0.08
F 74,400 W
I 14,400.00
ordinary Interest period lyear 360days
Imonth 30days

A man borrowed money from a financing institution amounting to 10,000

Heborrowed on Oct 2020 and will expire on December 2023Howmuch
is the future worth at the end it the interest period assume 71 inheres
perannum

Given P 100.000 I Pnr

n 3years amonth 100 Wo 34 07
r 71 perannum
22166 67

F PTI
IN WO t 22,166.67
17122,166 67
1
Exact Interest period ordinary year 365years
leap year 366year divisibleby4

0
October 3 1 100,00 3.25 0.07
NOV 30 22750 00
Dec 31 F IN NO t22,750 W
2021 1yr 221750.00
2022 yr 36months logsday

IEIYI.am
tsyn
3.25 years
At the end it 2024 how much is the to be paid by theman

F 122,750 8592.5 131342.5

122,750

method it compounding
compounding interest annually I yr
semi annually 2
P I n f
Quarterly 4
100 r 5 1 ios
Bi mostly 6
105 8 5 2
monthly 12
weekly 48
Daily 360 ordinary year
365 exactordinaryyear
366 Leapyear

EngEcon By Sta Maria

Acertain lady invested an amount at 150 on to a bank that willearn
81 compounded semi annually How much would be her money at it
the end of 5 yrs

Given F PAti
N
P no no 150 no it f
r 81
n 2 150,00 1 0
1245
Not 222,036.642
15

compounding compounding period

m n number ofyears
F p Iti m number it interest period peryear
Example A man nowowed from a financing institution an
amount of Flw ow with an interest of 101 semi annual
both parties that the loan shall paid in 5 yr what is the
future worth at theat the agreed period

Given
P 100,0 n m
n 5 F p i ti
5
m 2 semi annually Iw w it E
re 101
162,889 46
i Im 1021 51
F

Example A man borrowed from a financing institution an anoun

of FIN ON with an interest it 101 semi annually both parties
agreed that loanshall be paid in 5 yrs At the end it theagreed
period a man was unableto settle theprincipal with the inter
Forconsideration thefinancing institution extended the loan
period up to tenyrs with a new interest of 101 quarterly
What is the amountof money to bepaid at the end it to
ya
P 100,0 n m
n 5 F p i ti
5
m 2 semi annually Iw w it E
re 101
162,889 46
i Im 1021 51
F Given I
P 162,889.46 F 162,889.46 11 0 0,25754
M 4
n 10 208,830.3524 or 266,913.35
r 101 Given 2
i Em 194 0.025

Annuity
OrdinaryAnnuity

Principal
tinm
Future worth
rate it interestper period
p.AE
I
M compounding period peryear
n number it years n

A number paymentsperyear
ordinary annuity
itiatif y
Example A certain company deposited anequal amount of 10,00 per
monthfor a periodof 20yrs at 8percent interest How
muchis the amount tobe withdrawnat the endit20yd
cashflowdiagram

I 23 240 F A flltiy.my

FE how
to.no
1t0II
Given
A 10no uniformpayment
i Im I
n 20
m 12permonth F 5,890,204.16

8 008
An investor wanted to have an amount 1,500.000 at the
end it to ya How much is uniform amount to be deposited
monthly Assume that the rate of interest is 7

F l no no
n toyrs
F a
flitoyny
M 12 A
r 71
gtÉ

17,1
01
i 5
A 157 8666.27

A student save 200 a day monthly invested the savings at 71

interest How much is the investment worth at theend it 5 yrs

A 200 20 4no F A
5days X 4Th flitotty
ut
aw
i
if
nm 286,371.61

Deferred Annuity

tht
nm

fitbit ti p a iti
I Engr Velascodecided to subscribe in a globe promowhich mustpaid ow
permonthfor 5yrs However thepayment will start 3yrsafterfrom
today If thepayment is 81 compound monthly How muchisthe value
of themoney today
OTB B 17
A low P u v v
n 5yrs
A Ye

Itn
Mi 12
D 3 yr D low
no

PPT9,318 43
D
Py F Iti 36
49318.43 11
0
1
588826 16 Present

2 Youare to pay a bill in Meralco everymonthfor 5yrs Theaccumulate

amountof the payment youpaid 60 ow at a rate of 61 peryear
Thefirstpayment is done after a yr How much are you paying every
payment
F
n 5yrs 8 6
AHEM 8
60.00 m 12 60000
9 8,4
741
7

ÉÉEE IÉ
1 Determine the exact interest it the borrowed money
amounting to 80,000.00 The loan was released in Jan
28,2004 9 it will mature on Oct 152009 the agreed
interest rate was 121
2004 leap 2009 ordinary 365
Jan 3 Jan 31
pep aa
33661 t t t t t t t t t
a Feb 28
Mar bl Mar 31
Apr 30 N 470.9270 789 Apr 30
May 31 5.71 May 31
June 30 June 30
July 31 I PN r July 31
Aug 31 80.00 5.71 0.12 Aug 31
Sept 30 54816 Sept 30
Oct 31 out
NOV 30 1g
Decide
338

2 Theexactsimpleinterest agreement for a loan amounting to

20.00.00 at 121 interest rate for 5yrs but attheend of the
agreed period the borrowed was unable to pay theduo amount
The leading company instituted a new agreement with the
borrower the loan was extended by 2 years
6months for
an interest rateof 12 compounded quarterly Determine
the amount to be paid at the end of the period of
extension
 D 20.00.00 F PtI
I 121 20,01 20.00 5 0.12
N 5 years 32 000
P 32,00 Iti mE 5 4
32 No tog
43,005.32

3 Marie invested X amount for 10months at 121 simple ordinary

interest at the end it the period it investment she withdrawn
herinvestment total amount she received was 100 ooo 00
She invested the whole amount it 100,000 for 121 compounded
semi annually for 5yrs Howmuch the amount of Xsheinvested
and thefuture amount of her investment after 5yrs 10months

nm
F too on
N 42
F Pt Pnl
100.00 P It n I
F pl w ti
0 512
100 it
I 121 P 1
179,084 77
1

Tigon
90.909.09

4 Allan is
earning 35,000.00 each month I hesaved 151 if
his income After 15yrs ofsavings he decided to invest his
money for 101 compounded quarterly 3 the investment is
good for 5yrs Determine the amount it Allan's investment
at theend of his investment period
P O 15 35 W 15 12 945,000
514
F 945,00 1 t
4 1,548,492.54

5 A man invested 10 ooo per month for loyrs at an interest

A 71 Hewanted to withdraw an equal amount per
month for 10yrs until the investment is exhausted Calculate
a total amount invested at the end of 10yrs
b amount of money withdrawn per month

a F a
th b p A
ft
A
Ijm
10 no
J
1730848 07
20096.61
Annuity Due one wherepayments are made at the beginning
it each period

Formulas P Ata Ea it n t

P A it it n i Eiti
F AKE it ht 1 A
BAY
F A Ea it nti 1
nerd

A man bought an equipment costing 60,00 payable in 12quarterly

payments each installment payable at the beginning of each period
Therate it interest is 241 compounded quartely What is the amount
eachpayment

p 60 on P Ata Eth
N 3
m 4
a fit tattie

12

6393.97
Ayoung woman 22yearsold has just graduated fromcollege She
accept a goodjob desires to establish her own retirement fund
At theend of each yeartherefor she plans to deposit 2,000.00
in a fund at 15 annual interest How old willshe be when the
has an accumulated value of 1,000,000 00

A
F
2,000.00
1,000,000.00 85151
1,000,00011

1 1 Hons
8880 0 15
F
AMMI
76 I ISIN
Log76 Nog lis

NYgi.tn
3H224Ns5
Amortization

A person amortize a house lot for year at selling price it

1 ow ow to be paid monthly at 61

period outstanding principal at interestducat principal repaid

the beginning a period end itperiod payment
at endofperiod
I 1,00 ow 5,000 86,066.42 81,066.42
2 918,933.58 4,594.67 86,066.42 81,471.75
3 837,516.88 4187.58 86,066.42 81.818.84
4 755,698.04 3778.49 86,066.42 82,287.93
5 673,410.11 3367.05 86,066.42 82.699.37
6 590,710.74 2953.55 86.066.42 83,112.87
7 507,597.87 2537.99 86,066.42 83,528.43
8 424,069 2120.35 86.066.42 83.946.07
9 340,122.93 1,700.61 86.066.42 84.365.86
10 255,757.16 1,278.79 86,066.42 84,787.63
11 170,969.49 85485 86,066.41 85,211.57
12 85,757.92 428.79 86106642 85,637.63

0
outstanding principal repaid i 0.005
outstanding principal x interest
payment interest due
A 86,066.42
Acompany purchased a car amounting to 1,700,000 payable in
5yearstobe paid quarterly at 81 compounded quarterly
Calculate forquarterly payment provid a table for the amortization
schedule

A
i Off 0.02

1
Deferred Part 2
Annuity
n F future worth
11 ti t
it gym
F A P presentworth
i A annuity
1 ym
p A Yoon i to y years
n method it
compounding
i interest rate
me delayed year

Engr Velascodecided to subscribe in a globe promowhich mustpaid ow

permonthfor 5yrs However thepayment will start 3yrsafterfrom
today If thepayment is 81 compound monthly How muchisthe value
of themoney today
Iti Ym
to
A 1000
p p
y 5yrs
i 81 0.08 5112 5 3
toy
n 12
M 3
p mo
Iggy
4
1 4639.982
F low i to 00671513

81,302 61
 Youare to pay a bill in Meralco everymonthfor 5yrs Theactuimilate
amountof the payment youpaid 60 ow at a rate of 61 peryear
Thefirstpayment is done after a yr How much are you paying every
payment
m
F A iti
A a
F 60 W 60 W A it
r O OU
ni I A 778.33
i O 06
5 yrs
y
M 4yrs

it I
i i

0 I 2 3 my m n

it J
ACiti I
F Present annuity
i
I
Aditi
PI nm
Iti
htm

Youare to pay a bill in Meralco everymonthfor 5yrs Theaccumulate

amountof the payment youpaid 60 ow at a rate of 61 peryear
Thefirstpayment is done after a yr How much are you paying every
payment
F 60K F
Allltify 1
5ynxiz mining t 1859.972
m
lynx12 months 60k
A i km 9
1 Engr Salvador to pay her bill in credit card in
First payment is
installment basis 60000 at the end of the 1st year
720000 at theend of 3rd year 30000 at the end of 6th year and
8000 at theend of 8thyear How much is the total payment of Engr Salvador
after 10 years at a rate of 101 per annum

solution
60.000 110.1072 72600

20,00172600 110.1073 123250.6

30 Not 123250.6 110.1032 185433.226
8,00 185433.2261110.1072 1234054.20351

2 When youtakeyour firstjob youdecided tostart saving rightaway for

your retirement Youput 5,00peryear into thecompany's retirementplan
Which averages 81 interest
peryear Fiveyears later you move to another
job I start a new retirement plan Younever get around to merging thefunds
inthe twoplans Ifthe first plan continued toearn interest at therate of81
peryear for35yrs after you stopped making contributions how much is the
amount worth
ordinary Annuity
29.333.0048
A 5h0 F Afllt.in compounding
non
r 81 F Pati
n 5
50
751
114 29.333.0048 1 004
51
F
433,698.57522
3
Perpetuity anamount of 8 ow v0 is to be paid indefinitely
at a rate it 81 Howmuch is the present worth

p F Pt bg
8 100 ow 00

Acar is to paid 15.00.00 forever at a rate of 91

What is the amount of the car after a
year at 61
compounded quarterly
lm
F p i ti
p 15,19 166666 6667 11
07
166666 6667 7284856.5897 or
284856 60

continues compounding

f.AT p A

Anindividual wants to know the value of his money after

I year if he deposits low monthly at a rate of 61 compound
continuo
sty
a we

41,89546511
0,1 0445
838 la su.ua or
12336 41646
 You are paying too monthly for an account at a nominal
rate it 0.51 per month What is the present value it the
account of the paying for 36 months

p a 100
14
t.iq
of a aw1 a
100 32 14108962 3214 108962 or 3214 11

3286.37
A track is payable 10 ow for 7
yn at the rate of 41 compound
continously Calculate thefuture worth

F
É 10Wg 79 177.57

Arithmetic Gradient

G
Atif
Pa
Ein Ein
Py Pa I PL offish
Ar A at AG Fa Iti n
1 An amount it 500 ow will be deposited at the end of
next year into an account for the repair of bridges in the
town If estimated that the amount to be deposited will
increase
by 100,000 peryear for 9yrs after Determine the
equivalent present worth if the rate is at 51 peryear
j 51
A 5W W Py Pat PG
G 100 Ow

w.nlytioo.w1
t 0

4.79
I
3.860.417.465 3.165.41

7,026,072 25
0 I 2 3 4 5 6 7 8 9 10

50
ON
yo
so
900
1000

1100
1200
1300
No
Geometric Gradient

Pa a Y for g ti Pg TAI g i

where
constant rate ofchange in decimal form by which the
g
cash flow value increases or decreases from one period to
the next The gradient g can be t or

Ai initial cash flow in year

Pg present worth of the entire geometric gradient including

the initial amount Al

1 An annual maintenance cost it a machine is 500thisyearIt is

expected to increase 51 eachyear If therateofinterest is 71 compound

annually howmuch money must be set aside today to cover all the
maintenance expenses forthenext a years

1
Pg a.lt I 500 49
7 4.298.81

F p Iti 4 298.81 1 to 07 4599 73

1 Ascholarship will award 60 W forever each year
the first scholarship will be awarded 6years from now
If the interest rate is 81 how much will it cost to fully
fund this today
750 W P it in
A 60 000
r 0.08 P 784 1506756.756J
P
914 go.no

2 An investment option is available with continuo compounding

at 51 if you invest 800now How much interest income
willyou earn it you cash out after 3.5 years
gig
F
8wf 439.370.7542
Depreciation
the decrease in value of physical properties or assets
with the passage it time use It is the non cash method of
representing the reduction in value of a tangible asset
Specifically it is an accounting concept that set an
annual deduction considering the factor of time and use
on an asset's value An asset is depreciable if it has
a determinate useful life of more than one
year in
business or something to produce an income

Adjusted cost basis the asset's original cost basisused

to compute depreciation deductions adjusted by allowabl
increases or decreases

FIRST Cost or cost basis the unadjusted cost basis

of an asset It is the initial cost of acquiring an
asset

BOOK VALUE THE original cost basis of the property

includingany adjustments less all allowable depreciation
deductions
MARKET VALUE THE amountpaid to a willingseller by a willing
buyer of an asset

Salvage Valve the estimated value of a property at the

end of a property's life
methods at calculating Depreciation

1 Straight line method

simplest method
assumes that a constant amount is depreciated
peryear over the useful life of a property

Annual Depreciation Total Depreciation DAN

DA Foye DN

Book value FC Dn where FC First cost

Bu su salvage value
Dn L useful life
n years
1 I 1 I I
n L
A commercial building has a salvage value of Php Im
After 50years Annual depreciation is Php 2m Using SIM
after how many years should you sell the building for
Php 30m
FC Dal TSU BU Fe Dn
SV IM 2m 50 t IM Dn Fe Bu
L 50yrs 101M 101 30
DA Fam 71M
BV 30M Dn DAN
Bt
n 721 35.59
 Thefirst cost of a machine is t.fm with a salvage
value of 300 ow at the end of its 6 yrs of life Determine
the total depreciation after three years using sum
18
FC
Sv
1.8M
zw w
Da
MY 81 250 ow

L 6yrs Dn DAN 1250 00 3 750 OW

Dn
n 3

2 Sinking Fund Method

a depreciation method wherein funds will
accumulate fur replacement purpose

fifty
Annual Depreciation Da where
FC Firstcost

Da 11
total Depreciation Dn
71 L useful life

n years
Book Value Bu FC Dn

A machine costs 300.0W with a salvage value it 50,000

at theend of its 10 Yearlife If money is worth 6 annually
use SFM to determine the depreciation at its 6th
year

FC 300,000 L 10 years n 6years

SV 50,000 is o og yo Dn
 D 300,000
10
50,0007 0.06
170.06 1

Da 18,966 99 Div 18,966.99111

0.0676 I
0.06

I DN 132,000.80

RANI.FR RIVERA

3 Sumofyears Digitmethod
an accumulated depreciation technique based on the
assumption that tangibleproperties are usually productivewhom
theyare now and their use decrease asthey become old

sum of years f ut 1 Note

Total Depreciation Dn Fe su
Iggy su salvage value

Bookvalue BV FC Dn n years

ex An equipment costs 1.5m at the end of its economic life of

5yrs itssalvage value is 500,000 using 504D what will its
bookvalue be for the third year
FC 1.5 M
SV
L 5yrs
5W OO Dn 1.5m O 5m
Ftt
n 3yrs Im Es hoop
Buz
BV3 15M 800 000
700 000

Declining Balance method

assets are depreciated on a higher rate in the initial years
than in the subsequent years Under this method a constant
depreciation rate is applied to an assets declining book value
eachyear Thisresults is an accelerated depreciation higher
depreciation values in the early years at the life of an assets

also known as reducing balance method

Annual rate of Depreciation K Su FC l K

Book value Bu FC l K
Depreciation at n years Dn FC l K K
Total Depreciation Di FC BV
where
su salvage value
FC first cost
n years
L usefullife
ex Theequipment bought at a price it 450.0W has an
economic life it 5years asalvage value of 50,000 Thecost of

money is 121 per year compute for the first years depreciation
n't
SV FC l K
50 00 450 cu 1 a
s
D FC fl k k
450,00 1 0.3556 0.3556
K O 3556 p 160,020
Double Declining Balance method

a type it declining balance where K E

Ex Thecost of a machine is 1.8 m with a salvage value of
4W ow at the end of its 5 year life Determine thedepreciation
after 3 years using the DDBM

BV FC l K 13 FC BU
3
1.8 1 E 1.8 388 8W
388 SW 1,411 200.00

Break Even Analysis

refers to the point at which total costs total revenue
areequal A break even point analysis is used to determine the
number ofunits or amount it revenue needed to cover total
costs
Break Even Quantity Tepnalunithvarfalfcosttunit
Wh
Fixedcost costs that do not change with varying outpu
e.gsalary rent utilitybills etc

sales priceperunit selling price per unit sold

variable cost perunit cost required to create a unit

contribution margin salesprice per unit variable cost unit

per

BEQ Éummargin
Ex A company sells an its for 10.00each If the
man facturing
cost is 60 ow per month and labor cost is
2 W per unit how many units be sold to break even

BEQ
Spf 69 1 7500 units

An electronics company manufactures a part at a cost

of 600 per unit If the maintenance cost of equipment
is at IN on every six months employee salaries are at
20 ooo per 10 employees per month what is the monthly
volume ofsale to be made to break even if they sell the
part at 75 on per unit

tet
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