GE301 Unit 2

Lecture 2.3: Compound Interest

Discount
Inflation

George Y. Chao Jr.

Assistant Professor
Department of Chemical Engineering
University of Santo Tomas
Compound Interest Solving for F:
F = P (F/P, i%, n)
F = P (1 + i)n
P single payment compound amount factor
(1 + i)n
0 1 2 3 n-1 n

F
Solving for P:
P = F (P/F, i%, n)
P = F (1 + i)-n (1 + i)-n
single payment present worth factor
Calculations on Compound Interest
1. What amount of money invested today at 3% compounded
quarterly will amount to ₱25,000 after 5 years?
P
20 interest periods
20 quarters
0 1 2 3 4 5 years

n = 5 yrs x 4 = 20

₱25,000
P = F (P/F, i%, n)
P = ₱25,000 (P/F, 0.75%, 20)
-n -20
P = ₱25,000 (1 + i)
0.0075)
P = ₱21,529.75
Calculations on Compound Interest
Equation of Value
2. A young mechanic bought a car worth ₱1,500,000 if
paid in cash. On the instalment basis, he paid a down
payment of ₱280,000; ₱220,000 at the end of the first
year; ₱250,000 at the end of the second year;
₱300,000 at the end of the third year; the remaining
balance will be paid at the end of the fifth year. How
much will he pay at the end of the fifth year if interest
is 8% compounded annually?
Calculations on Compound Interest
Equation of Value
3. A young mechanic bought a car worth ₱1,500,000 if
paid in cash. On the instalment basis, he paid a down
payment of ₱280,000; ₱220,000 at the end of the first
year; ₱250,000 at the end of the second year;
₱300,000 at the end of the third year; the remaining
balance will be paid at the end of the fifth year. How
much will he pay at the end of the fifth year if interest
is 8% compounded quarterly?
Practice Problems on Compound Interest
Refer to page 51 to page 52 of the textbook:

Solve numbers 5, 6, 7…

Are you doing it?

Continuous Compounding
Where:
r = rate of interest
t = number of years
Prob. What is the future worth of ₱20,000 after 10 years if
interest is 8% compounded continuously?
Discount and Discount Rate (d)
Where:

i = interest rate per period

d = discount rate per period

Refer to pages 14 to 16 for examples…

Inflation and Inflation Rate (f)

Where:
FC = future cost
PC = present cost
F= future worth
P = present worth
f = annual inflation rate
t = number of years

For examples, please refer to page 16 and 17…