ENGINEERING ECONOMICS
Simple Interest and Discount
ECONOMICS
• Is one of the social sciences which consists of that body of
knowledge dealing with people and their assets or resources.
• Defined also as the sum total of knowledge which treats of the
creation and utilization of goods and services for the satisfaction
of human wants.
ENGINEERING ECONOMY
• Defined as that branch of Economics which involves the
application of definite laws of Economics, theories of investment
and business practices to engineering problems involving cost.
• It may also considered to mean the study of economic problems
with the concept of obtaining the maximum benefit at the least
cost.
• It also involves the study of cost features and other financial
data and their applications in the field of engineering as base for
decision.
INTEREST AND DISCOUNT
Simple Interest and Simple Discount
INTEREST
• is the amount of money or payment for the use of a borrowed
money or capital. (borrower’s viewpoint)
• Is the income produced by the money which the lender has lent.
(lender’s viewpoint)
SIMPLE INTEREST
• The interest on borrowed money if the interest to be paid is
directly proportional to the length of time the amount or principal
is borrowed.
• Interest is on the amount invested or borrowed at a given rate
and for a given time.
• It means that the interest charges grow in a linear function over
a period of time.
SIMPLE INTEREST FORMULA
I = Pin
where:
I – total interest earned by the principal (simple interest)
P – amount of the principal (amount of money borrowed and on which
interest is charged)
i – interest per period / rate of interest / interest rate per period
(expressed in fraction, decimal, percent form)
n – number of interest periods / time in years between the date the
loan is made and the date it matures or becomes repayable to the
lender.
MATURITY AMOUNT (VALUE)
• The total amount the borrower would need to pay back
• The total amount to be repaid which is equal to the sum of the principal and
the total interest
F = P + I = P (1 + in)
ORDINARY AND EXACT SIMPLE INTEREST
Ordinary Simple Interest - Is computed on the basis of one
banker’s year
1 banker’s year = 12 months, each consisting of 30 days = 360
days
Exact Simple Interest – is based on the exact number of days in a
given year. An ordinary year has 365 days while a leap year (which
occurs once every 4 years) has 366 days.
SIMPLE DISCOUNT
• On a negotiable paper is the difference between what it is worth in the future
and its present worth.
Discount = Future Value – Present Value
• It also refers to sale of stock or share at reduced price.
• It may refer to the deduction from the published price of services or goods.
• Is a deduction from the maturity amount of an obligation allowed for paying it
currently. (discount is calculated on the amount at the end of the period)
FORMULA OF SIMPLE DISCOUNT
D = Fdn
where:
D – simple discount
F – amount of maturity
d – discount rate
n – time or term of discount
SAMPLE PROBLEMS
1. Find the interest loan of 1,000 pesos for one year if the interest rate is 12%.
If terms is 2 years?
2. A credit union has issued a 3-year loan of 50,000 pesos at a rate of 10%,
what amount will be repaid at the end of the third year?
3. A 5,000 pesos savings account earned 700 pesos interest in 2 years. What
was the rate of interest given?
4. At the end of 2 years, 36,000 pesos in interest was paid on an 18% simple
interest loan, how much was borrowed?
5. Edward needs 20,000 pesos to buy office furniture for his new office in Las
Piñas. He wants to limit the interest he will pay when he borrows the amount
in a bank to 1,100 pesos only. If the bank charges 11% interest, after how
long must Edward pay his obligation?
SAMPLE PROBLEMS
1. Find the ordinary and exact interest on 15,000 pesos if its invested at 12%
for 60 days.
2. To renovate a portion of her house, Mrs. Lorenzo made a loan of 48,000
pesos from a bank that charges 16% interest. How much did she pay the
bank after 120 days using the ordinary-interest method?
3. Find the maturity value of 4,250 pesos at 9% for 90 days using exact interest
method.
4. Determine the ordinary and exact simple interest on 5,000 pesos for the
period from January 15 to June 20, 1993, if the rate of simple interest is
14%.
5. On May 4, 2002, Julie borrowed 22,000 pesos at 10% interest. Interest and
principal were due on September 6, 2002. What was the total amount paid
by her on that date? Use two methods.
SAMPLE PROBLEMS
1. Find the present value of 2,000 pesos which is due at the end of 90 days at
5% simple discount.
2. Find the amount due at the end of 9 months which present value is 3,000
pesos at 6% simple discount.
3. How long will 3,000 pesos accumulate to 3,050 if the discount rate is 4 1/2
%?
4. If a loan of 3,500 pesos will be paid with 3,750 at the end of one year and 3
months, what is the simple discount rate?
