Engineering Economy Simple Interest

The capital originally invested in a transaction is called the principal P. At any time after the investment of the principal , the sum of the principal and the interest due is called the amount F.

Interest- the amount paid for the use of money called the capital for a certain period of time

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

Principal- the amount of money used on which interest is charge.

Rate of interest – the amount earned by one unit of principal during a unit of time.

Ordinary Interest- an interest based on the exact no. of 1 bankers tears is equal to 12 months

1 month=30 days

1 year=350 days

Exact Interest based on the exact no. of days, 365 days for ordinary year and 366 days for leap year.


I=Prt

F=P+I

F=P+Prt

F=P(1+rt)


I=Interest

P=Principal

I= rate of interest in decimal

N= number of interest periods

F= total amount


Discount- is the difference between the future worth and its present worth.

Rate of discount- the discount on one unit of principal per unit of time

D=F-P
D=1-[1/(1+i)]

D=i/(1+i)

Equivalent rate of interest

D=i/(1+i)

i=d/(1-d) rate of interest

A man borrowed P2000 from a bank and promise to pay the amount for one year. He received only the amount of P1920 after the bank collected an advance interest of P80. What was the rate of discoun and the rate of interest that the bank collected in advance?

Solution:

rate of discount= (80/2000 )100=0.04=4%

rate of interest=(80/1920)100=0.0417=4.17%


If you borrowed money from your classmate with a simple interest of 12%, find the present worth of P50000; which is due at the end of 7 months.

SOLUTION:

F=P+I

F=P+Prt

50000=P+P(0.12)(7/12)

P=46728


A price tag of a T-shirt is P1200 is payable in 60 days but if paid with in 30 days it will have a 3% discount. Find the rate of interest.

SOLUTION:

Discount = 0.03(1200)=36

Amount to be paid on 30 days = 1200 – 36=1164

I=Prt

36=1164r(30/360)

r=37%

A loan shark charges 12% simple interest on a P300 loan. How much will be repaid if the load is paid back in one lump sum after three years?

SOLUTION:

A=P+Prt

A=300+300(0.12)(3)

A=P408

A bank charges 12% simple interest on a P300 loan. How much will be repaid if the load is paid in one lump sum after three years?

Solution:

A=P+Prt

A=300+300(0.12)(3)

A=P408


Assignment/seatwork
P5000 is borrowed for 75 days at 16% per annum simple interest. How much will be due at the end of 75 days?

Ans. 5166

If you borrow money from your friend with simple interest of 12%, find the present worth of P20000, which is due at the end of nine months.

P=18348

A bank loan of P2000 was made at 8% simple interest. How long would it take in years for the amount of the loan and interest to equal P 3280.

Ans: 8 years