ECO 101

November 21, 2017

LEARNING OUTCOMES

• INTRODUCTION
• BASIC TERMS AND PRINCIPLES OF ECONOMICS
• INTEREST (SIMPLE AND COMPOUND)
• RATE OF INTERESTS
Economics
• is how to satisfy you unlimited needs or wants with a limited
resources.
• It’s how you use your resources in an efficient way to satisfy
your need or targets.
Engineering Economy
• Involves the application of definite laws of Economics, theories
of investment and business practices to engineering problems
involving cost.
• Is the analysis and evaluation of factors that will affect the
economic success of engineering projects to the end that a
recommendation can be made which will ensure the best use of
capital (decision making).
 Why Engineering Economy is Important to
Engineers
• Engineers design and create
• Designing involves economic decisions
• Engineers must be able to incorporate economic analysis into
their creative efforts
• Often engineers must select and implement from multiple
alternatives
• Understanding and applying time value of money, economic
equivalence, and cost estimation are vital for engineers
• A proper economic analysis for selection and execution is a
fundamental task of engineering
INTEREST
• It is the amount of money paid for the use of borrowed capital
or the income produced by money which has been loaned.
The time value of money is the most
important concept in engineering
economy

INTEREST RATE ( i )
• Interest paid over a time period expressed as a percentage of
principal.
INTEREST RATE (%)
• Amount earned by one unit of interest accrued per time unit
= x 100
principal during a unit of time principal
SIMPLE INTEREST
The total interest earned or charged is linearly proportional to the
initial amount of the loan (principal), the interest rate and the
number of interest periods for which the principal is committed.
I = Pin 1
I = interest
P = amount of the principal (present worth)
i = rate of interest per interest period (interest rate)
n = number of interest periods

The total amount or future worth (F) to be repaid,

F = P + I = P + Pin
F = P(1+in) 2
ORDINARY AND EXACT SIMPLE INTEREST
ORDINARY SIMPLE INTEREST – is computed on the basis of one
banker’s year, which is

1 banker’s year = 12 months, each consisting of 30 days

1 interest period= 360 days
EXACT SIMPLE INTEREST – is based on the exact number of days
in a year, 365 days for an ordinary year and 366 days for a leap year.
ORDINARY SIMPLE INTEREST
𝒅
ISO = P i ( )
If d is the number of days 𝟑𝟔𝟎
3
in the interest period, then EXACT SIMPLE INTEREST
𝒅
IEO = P i ( ) for ordinary year
𝟑𝟔𝟓
𝒅 4
IEO = P i ( ) for leap year
𝟑𝟔𝟔
EXAMPLE #1
• Determine the ordinary simple interest of P10,000 for 9
months and 10 days if the rate of interest is 12%.
Based on a banker’s year,
9 months and 10 days = 9(30) + 10 = 280 days
280
Ordinary simple interest = P10,000 (0.12) = P933.3
360
ORDINARY SIMPLE INTEREST
𝒅
ISO = P i ( )
𝟑𝟔𝟎
3
EXACT SIMPLE INTEREST
𝒅
IEO = P i ( ) for ordinary year
𝟑𝟔𝟓
𝒅 4
IEO = P i ( ) for leap year
𝟑𝟔𝟔
 EXAMPLE #2
• Determine the ordinary and exact simple interest on P5,000 for
the from January 15 to June 20, 2007, if the rate of simple
interest is 14%.
Ordinary simple interest
First determine the number of days in the = P5,000 (0.14) 156 = P303.3
given period. 360
January 15-31 = 16 days (excluding January 15) Exact simple interest =
P5,000 (0.14) 156 = P299.18
February = 28 365
March = 31 ORDINARY SIMPLE INTEREST
April = 30 ISO = P i ( )
𝒅
𝟑𝟔𝟎
May = 31 3
June = 20 (including June 20) EXACT SIMPLE INTEREST
𝒅
TOTAL = 156 days IEO = P i ( ) for ordinary year
𝟑𝟔𝟓
𝒅 4
IEO = P i ( ) for leap year
𝟑𝟔𝟔
 EXAMPLE #2
• Rose Ann borrows P6,400 from a loan firm. The rate of simple
interest is 15% but the interest is to be deducted from the loan
at the time the money is borrowed. At the end of one year he
has to pay back P10,000. What is the actual rate of interest?

P = P10,000 – 0.15(P10,000) =
P8,500
F=P(1+in)
i = 15% = 0.15
P10,000 = P8,500 [ 1 + i (n=1) ]
n=1
i = 0.1765 = 17.65%
F = P10,000
F = P + I = P + Pin
2 F = P(1+in)
COMPOUND INTEREST
In calculations of compound interest, the interest for an interest
period is calculated on the principal plus total amount of interest
accumulated in previous periods. Thus compound interest means
“interest on top of interest”
Interest Principal at Interest earned Compound amount at the end of period
period beginning of during period
period
1 P Pi P+Pi =P(1+i)
2 P(1+i) P(1+i) i P(1+i) + P(1+i) i = P(1+i)²
3 P(1+i)² P(1+i)² i P(1+i)² + P(1+i)² i = P(1+i)³
... ... .. . . ....
n P(1+i)𝑛−1 P(1+i)𝑛−1 i P(1+i)𝑛−1 + P(1+i)𝑛−1 i =
=P(1+i)𝑛 = F

F = P(𝟏 + 𝒊)𝒏 5
 F = P(𝟏 + 𝒊)𝒏 5
“Single Payment
Compound Amount Factor”
(F/P , i% , n) “F given P at i per cent in n interest periods”

F = P (F/P , i% , n) 5.1

P = F(𝟏 + 𝒊)−𝒏 6
“Single Payment Present worth
Factor”
(P/F , i% , n) “P given F at i per cent in n interest periods”

P = F (P/F , i% , n) 6.1