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Interest
- is the amount of money paid for the use of borrowed
capital.

Types of Interest
1. Simple Interest
2. Compound Interest

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Simple Interest
- the interest to be paid is proportional to the length of
time the principal is used.

let, P – principal
I – interest earned by the principal
F – future worth of the principal
i – rate of interest
n – number of interest period

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

where, F=P+I
but, I = Pin
thus, F = P + Pin
F = P(1 + in)

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ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Types of Simple Interest

1. Ordinary Simple Interest
- is computed based on one banker’s year.
1 banker’s year = 12 months
1 month = 30 days
1 year = 360 days

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ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
Determine the ordinary simple interest on P10,000
for 9 months and 10 days if the rate of interest is
12%.

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
Anne buys a television set from a merchant who asks P12,500
at the end of 60 days. Anne wishes to pay immediately and
the merchant offers to compute the cash price on the
assumption that money is worth 8% simple interest. What is
the cash price today?

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Types of Simple Interest

2. Exact Simple Interest
- is based on the exact number of days.
1 year = 365 days for ordinary year
= 366 days for leap year

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
Determine the ordinary and exact simple interest on a P10,000
loan from June 16, 2012 to Nov. 11, 2012 if the simple interest
rate is 14%.

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

COMPOUND INTEREST
- the interest together with the principal will earn an
interest for the succeeding periods.
for 1st interest period
F1 = P (1 + in) ; n = 1
so, F1 = P (1 + i)
for 2nd interest period
F2 = P1 (1 + i) ; P1 = F1
F2 = P (1 + i) (1 + i)
thus, for “n” periods F2 = P (1 + i)2
F = P (1 + i)n
Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING
ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
If the sum of P12,000 is deposited in an account earning
interest at the rate of 9% compounded quarterly, what will it
become at the end of 8 years?

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
A man possesses a promissory note, due 3 years hence,
whose maturity value is P6,700.48. If the rate of interest is
10% compounded semi-annually, what is the value of this note
now?

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ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY
Nominal Rate of Interest, in
- rate of interest which is specified for a certain number of
periods per year.
example:
8% compounded quarterly
8% compounded monthly
8% per year compounded monthly

Effective Rate of Interest, ie

- is the actual rate of interest on the principal for one year
example: 8%
8% compounded annually

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
If you invest P10,000 now, it will become P15,000 at the end of
4 years, determine the nominal rate of interest and the
corresponding effective rates if the interest is compounded:
a) semi-annually b) quarterly and c) bi-monthly.

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
If you invest P10,000 now, it will become P15,000 at the end of
4 years, determine the nominal rate of interest and the
corresponding effective rates if the interest is compounded:
a) semi-annually b) quarterly and c) bi-monthly.

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
If you invest P10,000 now, it will become P15,000 at the end of
4 years, determine the nominal rate of interest and the
corresponding effective rates if the interest is compounded:
a) semi-annually b) quarterly and c) bi-monthly.

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
A man wishes his son to receive P 500T ten years from now.
What amount should he invest now if it will earn interest of
12% during the first 5 years and 15% compounded quarterly
during the next five years?

a) P 145,345.34 c) P 135,868.19
b) P 123,433.23 d) P 134,678.90

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ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY
DISCOUNT
- is the difference between the present value and the
worth of money at some time in the future.

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ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
A man borrows P10,000 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?

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
A man borrowed P 5,000 from a bank and agreed to pay the
loan at the end of 9 months. The bank discounted the loan and
gave him P 4000 in cash. a) What was the rate of discount? b)
What was the rate of interest? c) What was the rate of interest
for one year?

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING

ETEEAP CEBU INSTITUTE OF TECHNOLOGY - UNIVERSITY

Example:
A man borrowed P 5,000 from a bank and agreed to pay the
loan at the end of 9 months. The bank discounted the loan and
gave him P 4000 in cash. a) What was the rate of discount? b)
What was the rate of interest? c) What was the rate of interest
for one year?

Answers: a) 20% b) 25% c) 33.33%

Engineering Economics by rnavarro jr DEPARTMENT OF MECHANICAL ENGINEERING