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Engineering lesson 1

The document explains the concepts of simple and compound interest, including their calculations and formulas. It details various types of interest rates, such as nominal and effective rates, and provides formulas for continuous compounding and bankers' discount. Additionally, it includes cash flow diagrams and steps for solving discrete payments.

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cassius.terraete
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
2 views

Engineering lesson 1

The document explains the concepts of simple and compound interest, including their calculations and formulas. It details various types of interest rates, such as nominal and effective rates, and provides formulas for continuous compounding and bankers' discount. Additionally, it includes cash flow diagrams and steps for solving discrete payments.

Uploaded by

cassius.terraete
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Interest – is the return on capital or cost of

COMPOUND INTEREST
using capital. It is the amount of money paid
for the use of borrowed capital or the
income produced by money, which has -​ the interest for an interest period is
been loaned. calculate on the principal plus total
amount of interest accumulated in
Simple Interest – is calculated using the the previous period. Compound
principal only, ignoring any interest that had interest means “the interest on top of
been accrued in preceding period. interest.

Formulas: Formulas:

I = Pin F = P (1 + i)^n
F=P+I P = F (1 + i)^n
F = P (1 + in) i = r/m
n=mxt

Where:
Where:
I = interest I = interest
i = rate of interest i = rate of interest
n = number of interest period n = number of interest periods
P = principal or present worth m = number of compounding periods
F = accumulated amount or future worth t = time
P = present worth
F = future worth
TYPES OF SIMPLE INTEREST

Rates of Interest
1. Ordinary Simple Interest – simple
interest in which it is assumed that each
Rate of Interest – it is the cost of borrowing
month contains 30 days and consequently
money.
each year has 360 days.

Nominal Rate of Interest – it specifies the


1 month = 30 days
rate of interest and a number of interest
1 year = 360 days (banker’s year)
periods in one year.
2. Exact Simple Interest – simple interest
Formula:
in which the exact number of days per
month is used.
i = r/m
1 ordinary year = 365 days
Where:
1 leap year = 366 days
i = interest rate per interest period
r = nominal interest rate
M=2 for compounded
m = number of compounding periods semi-annually
(every 6 months)
Effective Rate of Interest – it is the actual
or exact rate of interest on the principal M=4 for compounded
during one year. quarterly (every 3
months)
Formulas: M=6 for compounded
bi-monthly (every 2
ER = (1 + i)^m - 1 months)
ER = (1 + r/m)^m - 1
M=8 for compounded
semi-quarterly
Where: (every 1 1/2
ER = effective rate months)
i = interest rate per interest period
r = nominal interest rate M = 12 for compounded
m = number of compounding periods monthly (every
month)

M VALUES M = 24 for compounded


semi-monthly
(every 1/2 month)
M=1 for compounded
annually (every 12
months)

F/P and P/F Factors: Notation and Equations

Factor Factor Name Find/Gi Standard Equation Excel


Notation ven Notation with Factor Functions
Equation Formula

(F/P,i,n) Single-payment F/P F = P(F/P,i,n) F = P(1 + i)ⁿ FV(i%,n,,P)


compound amount

(P/F,i,n) Single-payment P/F P = F(P/F,i,n) P = F(1 + i)⁻ⁿ PV(i%,n,,F)


present worth

CASH FLOW DIAGRAM revenues (positive, upward) for engineering


projects.
– depicts the timing and amount of
expenses (negative, downward) and ●​ Receipt (positive cash flow or cash
inflow
●​ Disbursement (negative cash flow Continuous Compounding Interest
or cash outflow
Formula:

dP/dT = iP
Where:
i = interest rate compounded continuously
P = present worth
t = time

Banker’s Discount

Equation of Value Certain banks lend money in such a way


that they deduct the interest on the money.
An equation of value is obtained by setting They actually don’t lend you money you
the sum of the values on a certain asked for. This type of computing money is
comparison or local date (or focal date) of called banker’s discount. The money
one set of obligations equal to the sum of received by the borrower after the discount
the values on the same date of another set has been deducted is called proceeds.
of obligations.
Formula:
Discrete Payments
d = 1 - (1 + ni)^-n / n
The solution of discrete payments or
number of transactions occurring at different Where:
periods is taking each transaction to the i = rate of interest
base year and equating each value. d = rate of discount
n = number of interest period
Steps in Solving Discrete Payments:

1. Draw the cash flow diagram.


2. Select any convenient focal date.
3. Years on the left of the focal date have a
positive sign while years on the right of the
focal date have a negative sign.
4.Use the principle: Cash Inflow = Cash
Outflow
FORMULA COMPILATION: Where:
i = interest rate per interest period
●​ SIMPLE INTEREST r = nominal interest rate
m = number of compounding periods
Formulas:
●​ EFFECTIVE RATE OF INTEREST
I = Pin
F=P+I Formulas:
F = P (1 + in)
ER = (1 + i)^m - 1
ER = (1 + r/m)^m - 1
Where:

I = interest Where:
i = rate of interest ER = effective rate
n = number of interest period i = interest rate per interest period
P = principal or present worth r = nominal interest rate
F = accumulated amount or future worth m = number of compounding periods

●​ CONTINOUS COMPOUNDING
●​ COMPOUND INTEREST INTEREST

Formulas: Formula:

F = P (1 + i)^n dP/dT = iP
P = F (1 + i)^n Where:
i = r/m i = interest rate compounded continuously
n=mxt P = present worth
t = time
Where:
I = interest ●​ BANKERS DISCOUNT
i = rate of interest
n = number of interest periods Formula:
m = number of compounding periods
t = time d = 1 - (1 + ni)^-n / n
P = present worth
F = future worth
Where:
i = rate of interest
●​ RATE OF INTEREST d = rate of discount
n = number of interest period
Formula:

i = r/m
If Php1,000 becomes Php5,734 after 15
years, when Invested at an unknown rate of
interest compounded semi-annually,
determine the unknown nominal rate and
corresponding effective rate.​
​
F = P (1 + i)^n Where: I = interest i = rate of
interest n = number of interest periods m =
number of compounding periods t = time P
= present worth F = future worth

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