Symbols used in engineering economy computation and

their Meanings:
P = Value or sum of money at the Present time.
F = Value or sum of money at the Future time.
A = A series of consecutives, end of period payments of money per unit
time (month, year...)
n = number of interest periods (month, year...)
i = interest rate per interest period (1 year, 1 month)
t = time , stated in periods ; years, months , days .
Pr = Principle
I = Interest = Final amount – Principle

Simple And Compound Interest Rates:

1.Simple Interest
Interest paid (earned) on only the original amount, or principal,
borrowed (lent) as
follow:
Total simple interest = Pni ,AND Final sum after n periods = P (1+ni)

Example 1:
A company borrow $ 100000 for 3 years at simple interest rate of 6 % per year ,
how much money will be the owe at the end of 3 years .
Solution:
Interest = Pni = 100000 * 3 * .06 = $ 18000
Final owe = Principle + Interest = 100000 + 18000 = $ 118000 or calculated as
follow:
Final owe after 3 years = P(1+ni) = 100000 (1+3*0.06) = $ 118000

2. Compound Interest
Interest paid (earned) on any previous interest earned, as well as on the principal
borrowed (lent).
Total compound interest = P [(1+i)n -1]
Final sum after n periods = P (1+i) n
Note:
The above mentioned equations are used only when values of „ i„ is constant and
cases of single payment occurred at the beginning and end of interest periods
only without payments in between

Example 2:
Repeat the previous problem in case of using compound interest.
Solution :
Total compound interest = 100000[(1+.06)3 -1] = $ 19102
Final owe after 3 years = Principle + Interest = 100000 + 19102 = $ 119102
OR Final owe after 3 years = 100000(1+0.06)3 = $ 119102
Example 3:
If you have 2000 L.E in a saving account and you deposit 200 L.E each year for 5
years. List the values of engineering economy symbols and the final value at
the end of interest periods if the interest rates are 10% per year.
Solution:
P = 2000 L.E ; A = 200 L.E ; i = 10% ; n = 5 years; F ?
P1 = sum at end of year 1 = P(1+i) + 200 = 2000(1.1) +200 = 2400 L.E
P2 = sum at end of year 2 = P1 (1+ i ) + 200 = 2400(1.1)+200 = 2840 l..E
P3 = sum at end of year 3 = P2 (1+ i ) + 200 = 2840(1.1) + 200 = 3324 L.E
P4= sum at end of year 4 = P3 (1+ i ) + 200 = 3324 (1.1) + 200 = 3856.4 L.E
P5 = sum at end of year 5 = P4 (1+ i ) + 200 = 3856.4(1.1) + 200 = 4444.04 L.E
Final sum at the end of the five years = 4444.04 L.E

Cash Flow Diagram :

The cash flow defined as the flow of receipts (income) and cash disbursement
(costs) which occur over a given time interval.
The cash flow diagram is simply a graphical representation of cash flows drawn
on a time scale as shown.
General Rules:
- The cash flow follows the “end – period conventions “i.e. all cash flows occur at
the end of interest period. End of period means one time period from date of
transaction.
- The direction of arrows is very important as “+” represents income &
“– “represents disbursements.
- All unknown values for the symbols P, A, F, n, i are represented by a question
mark “?
- Time 0 represent the present time while the times 1, 2, ….. , 5 are the end of
time periods 1, 2,3,4,5.

Example 4:
A person deposited 10000 L.E now into his account which pays 10% per year. He
plans withdraw an equal end of year amount of 2000 L.E for 5 years starting
next year and closing account by with drawing the remaining money at the of
sixth year . Construct the cash flow diagram. Find the amount of exit in each of
end interest periods and the remaining sum.
Solution:
P1 = sum at end of year 1 = P (1+i ) - 2000 = 10000(1.1) - 2000 = 9000 L.E
P2 = sum at end of year 2 = P1 (1+ i ) - 2000 = 9000( 1.1 ) – 2000 = 7900 l..E
P3 = sum at end of year 3 = P2 (1+ i ) - 2000 = 7900( 1.1 ) - 2000 = 6690 L.E
P4= sum at end of year 4 = P3 ( 1+ i ) -2000 = 6690 ( 1.1 ) - 2000 = 5359 L.E
P5 = sum at end of year 5 = P4 (1+ i ) - 2000 = 5359( 1.1 ) - 2000 = 3894.9L.E
P6 = sum at end of year 5 = P5(1+ i ) – 0.0 = 3894.9( 1.1 ) – 0.0 = 4284.39 L.E
The remaining sum = 4284.39 L.E
Note: The height of arrows represents the value of money e.g height of arrow at
10000 L.E < height of 2000 L.E.
Example 5:
One want to make a deposit into his account so that he can withdraw an equal
amount of 500 L.E per year for the first 3 years starting one year after deposit
and a different annual amount of 750 L.E per year for the following two years .
Draw the cash flow diagram and find the value of the deposit if i = 10 % per
year.
Solution:
P1= sum at end of year 1= P (1+i ) - 500 = 1.1*P - 500
P2= sum at end of year 2= P1 (1+ i ) - 500 = (1.1*P - 500 )( 1.1 ) – 500 = 1.21*P-
1050
P3= sum at end of year 3= P2 (1+ i ) - 500 = (1.21*P-1050 )( 1.1 ) - 500 = 1.331*P-
1655
P4 sum at end of year 4 = P3 ( 1+ i ) -750 = (1.331*P-1655 )( 1.1 ) - 750 =
1.4641*P-2570.5
P5=sum at end of year 5= P4(1+ i )- 750 = (1.4641*P-2570.5)( 1.1 )- 750 =
1.61051*P-3577.55
P5= The remaining sum = 0.0 =1.61051*P-3577.55
Then; P = Deposited value = 3577.55/1.61051 = 2221.377 L.E .
P=?
A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E
A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500
L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750
A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E
A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500
L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750
A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E
A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500
L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750
A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E
A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500
L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750 A1=500 L.E A2=750
A1=500 L.E
A2=750 0 1 2 3 4 5
i = 10 %