MODULE 11 Part C

Project Management and Economy

– Effective and nominal

Expected Outcomes
After completing this module, you should
be able to describe: the interest and its
equivalent related to engineering cost
 Contents
• Verify and analyze the engineering economic based on;
• Interest and its equivalent
• Simple interest
• Compound interest
• Single payment
• Uniform series sinking fund
• Uniform series compound amount
• Capital recovery
• Uniform series present worth
• Uniform gradient present worth
• Effective and nominal (Compound Interest Table guide)
2
Two different calculation approach

Calculation with
formula

Calculation with
Compound Interest Table

3
Table of Contents

4
 Table of Contents
Types of compound payment

Interest

Years

interest interest interest

5
 Single payment
F=?

0 8 12 20

1000 3000 1500

P at n=0 P at n=8 P at n=12

Single payment
Example - Based on CFD above, what happen to your money after 20 years?
Solution
• With i = 6%
• F = 1000(F/P,6%,20) + 3000(F/P,6%,12) + 1500(F/P,6%,8)
• F = 1000(3.2071) + 3000(2.0122) + 1500(1.5938)
• F = $11634.50
6
 Single payment
F=1000000

0 20
P? at n=20

P=?
Single payment
Example - If you want to become a millionaire in 20
years, how much money you must own for now?
Solution
• With i = 6%
• P = 1000000 (P/F, 6%,20)
• P = 1000000 (0.3118)
• P = $311800

7
 Uniform payment
F=1000000

0 20

A=? A? at n=20

Uniform payment
Example - If you want to become a millionaire in 20
years (zero savings today), how much money you
must invest every year?
Solution
• With i = 6%
• A = 1000000 (A/F, 6%,20)
• A = 1000000 (0.0272)
• A = $27200
8
 Uniform payment
F=1000000

0 20

P=150k
A=?
Uniform payment
Example - If you want to become millionaire in 20
years with 150k you own now, how much you require
to invest yearly?
Solution
• 1000000 = 150000 (F/P, 6,20) + x
• *x = A/F,i,n
• 1000000 = 150000 (3.207) + x
9
 Uniform payment
• x = $518950
• So, x?
• With x = F = $518950 at (A/F,i,n) = (A/F, 6%,20)
• (A/F,i,n) = 518950(0.0272)
• (A/F,i,n) = $14115.44 invest yearly
Check..
• =(F/P,i,n) + (F/A,i,n)
• =150000(3.207) + 14115.14(36.786)
• =481050 +519239.54
• =$1000289.50

10
 Uniform payment
• Example - Let say you graduate from UMP and your 1st job
salary is $2500. In 5 years time you intend to get married by
saving some of your salary. The wedding ceremony require
$30000 expenses. So how much do you need to save each
month in 5 years with 6% interest @ dividend?

11
 Uniform payment
F=30000

0 5

P= 0 A=?

Solution
• A/F,i,n = (A/F, 6%, 5) = 30000
• = 30000 (0.1774)
• = $5332 yearly
• =$443.5 monthly
12
 Inconsistent payment
• If the years are count several years from now and not count
directly from year 1, the sum need to count by a few steps.
• Firstly the sum counted to previous year.
• Secondly, the sum is a total to require years that we intend to
know.
• Then the calculation path as usual.

13
 Inconsistent payment
• Example - You have $5000 now and you intend to save it. However, for the next of 2
years of your 1st job you targeted to enjoy yourself without any saving by taking
vacation, cinema, home theater, snooker etc. (joli). Then, after 3 years you realize
you need to get marry and require to save $500 yearly until year 8 to prepare for
your marriage. So, what is equivalent present worth of your money now with i = 9%?

PT=?

0 3 8

P= 5000 A= 500

14
 Inconsistent payment
PT=? PT=?
PA

0 3 8 0 2 3 8

P= 5000 A= 500 P= 5000 A= 500

Solution
• PT = A (P/A,i,n)(P/F,i,n) + 5000
• PT = 500(P/A, 9,6)(P/F,9,2) + 5000 * P/A at year 2 now change to become F
• PT = 500(4.486)(0.8417) + 5000
• PT = 6887.93 (if you having this amount today, there is no need for annual saving of $500)
15
 Inconsistent payment
F=?
0 8

P=
6887.93 A= $0

Example - And what is the future worth of

money by doing the saving (in the previous
example) with 8% interest in 8 years?
Solution
• (F/P, i, n) = (F/P, 8%, 8) = 6887.93 (1.851)
• = $12749.56
Is it enough for your ceremony?

16
 Inconsistent payment
• Example - You make a saving $1000 annually from year 3 to
year 5. Then you stop your saving. Later at year 9 to year 13
you save $1500 yearly. What is the present worth of money
should you prepare equally today with 15% interest rate?
P=?

0 3 4 5 9 10 11 12 13

A1=$1000 A2=$1500

17
 Inconsistent payment
sum counted to
• Solution previous year

At year 2nd

At year 8th

5 years ‘A’
$26300.1 3 years ‘A’

18
 Inconsistent payment
• Example - sum counted to
previous year

19
 Inconsistent payment
• Example -
sum counted to
previous year

20
 Inconsistent payment
• Example -

21
 Inconsistent payment

Solutions
• PT = 60 (P/A, 8%, 7) + 40 (P/A, 8%, 4) (P/F, 8%, 3) + 10 (P/G, 8%, 4) (P/F,
8%, 3)
• PT = 60 (5.2064) + 40 (3.3121) (0.7938) + 10 (4.650) (0.7938)
• PT = $454.46
22