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EECO 003-3:

ENGINEERING ECONOMY

ENGR. JERRIC D. ALMANZOR


Instructor
IE Department
Examples:
1. Suppose that you borrow $8,000 now, promising to
repay the loan principal plus accumulated interest
in four years at i = 10% per year. How much would
you repay at the end of four years?
2. An investor (owner) has an option to purchase a
tract of land that will be worth $10,000 in six years.
If the value of the land increases at 8% each year,
how much should the investor be willing to pay
now for this property?
3. Find the present value of $1,347.89 in 3.5 years,
with 6.77% interest compounded semiannually.
4. Find the compound amount for $57,809.34 at 12%
compounded quarterly for 5 years.
Examples:
5. Suppose you make a 15 equal annual deposits of
$1,000 each into a bank account paying 5%
interest per year. The first deposit will be made
one year from today. How much money can be
withdrawn from this bank account immediately
after 15th deposit?
6. If a certain machine undergoes a major overhaul
now, its output can be increased by 20% - which
translates into additional cash flow of $20,000 at
the end of each year for five years. If i = 15% per
year, how much can we afford to invest to overhaul
this machine?
ANNUITY
Annuity is defined as a series of equal
payments occurring at equal interval of time.
When an annuity has a fixed time span, it is
known as annuity certain.

Types of Annuity Certain:


1. Ordinary Annuity is a type of annuity
where the payments are made at the end of
each period beginning from the first period.
2. Annuity Due is a type of annuity where the
payments are made at the beginning of
each period starting from the first period.
ANNUITY
Types of Annuity Certain:
3. Deferred Annuity is a type of annuity
where the first payment does not begin until
some later date in the cash flow.

Examples:
1. Suppose that a father, on the day his son is
born, wishes to determine what lump amount
would have to be paid into an account bearing
interest of 12% per year to provide withdrawals
of $2,000 on each of the sons 18th, 19th, 20th,
and 21st birthdays.
ANNUITY
Examples:
2. As an addition to the Problem No. 1,
suppose that the father wishes to determine
the equivalent worth of the four $2,000
withdrawals as of the sons 24th birthday. This
could mean that four amounts were never
withdrawn or possibly that the son took them
and immediately redeposited them in an
account also earning interest at 12% per year.
Using the subscript system, calculate F 24.
ANNUITY
Examples:
3. Suppose mike was born today, his mother
wishes to determine what lump sum amount
would have to be paid into an account bearing
interest of 20% per year provide withdrawals of
$5,000 on each of Mike 23rd, 24th, and 25th
birthdays.