Republic of the Philippines
EASTERN VISAYAS STATE UNIVERSITY- ORMOC CAMPUS
Ormoc City, Leyte
DEPARTMENT OF ENGINEERING
BACHELOR OF SCIENCE IN MECHANICAL ENGINEERING
ECON 223 – ENGINEERING ECONOMICS
SY 2024 – 2025
ASSIGNMENT NO.3
JOHN HAROLD L. DIANO ENGR. RICARIDO A. EDIZA
Student Instructor
What is capital
- Refers to financial resources or assets invested in projects or businesses to generate future
benefits. It includes fixed capital (machinery, buildings), working capital (cash,
inventory), equity capital (owner investments), debt capital (borrowed funds), and human
capital (skills, expertise). Capital plays a key role in capital budgeting, where engineers
assess investments to ensure long-term profitability and efficiency.
Equity capital
- Is the money invested in a business by its owners or shareholders in exchange for
ownership. Unlike debt capital, it does not need to be repaid and carries no fixed interest
obligations. It includes funds from personal investments, retained earnings, or the sale of
company shares. Equity capital is essential for funding long-term projects, expansion, and
innovation while absorbing financial risks.
Simple interest
- is the interest calculated only on the initial principal amount over a specific period. It
does not compound, meaning interest does not accumulate on previously earned interest.
FORMULA: SIMPLE INTEREST = Initial amount × Interest rate × time (in years)
Kinds of Simple Interest
Ordinary Simple Interest – Based on a 360-day year (commonly used in banking).
Formula: SIMPLE INTEREST = Initial amount × Interest rate × time (in years)÷ 360
Exact Simple Interest – Based on a 365-day year (used in precise financial calculations).
Formula: SIMPLE INTEREST = Initial amount × Interest rate × time (in years)÷ 365
Compound interest
- is the interest calculated on both the initial principal and the accumulated interest from
previous periods. Unlike simple interest, it allows earnings to grow exponentially over
time.
Formula :
Where:
A = Final amount (including interest)
P = Principal (initial amount)
R = Annual interest rate (decimal or percentage)
N = Number of times interest is compounded per year
T = Time in years
Continuous compounding
- is a special case of compound interest where interest is added infinitely many times in a
given period, leading to maximum possible growth. Instead of being compounded at
fixed intervals (annually, monthly, etc.), it is compounded at every instant.
Formula:
Where:
A = Final amount (including interest)
P = Principal (initial amount)
E = Euler’s number (≈ 2.718)
R = Annual interest rate (decimal or percentage)
T = Time in years
Nominal interest rate
The nominal interest rate is the stated or advertised annual interest rate before considering the
effects of compounding. It does not reflect the actual interest earned or paid over a year if
compounding occurs more than once annually.
Formula:
Where:
R_n = Nominal interest rate (annual)
R = Periodic interest rate
N = Number of compounding periods per year
Effective Interest Rate
The Effective Interest Rate (also called the Effective Annual Rate, EAR) is the actual interest
earned or paid on a loan or investment after accounting for compounding. It represents the true
cost of borrowing or the real return on an investment.
Formula:
Where:
R_e = Effective annual interest rate
R_n = Nominal annual interest rate (stated rate)
N = Number of compounding periods per year
Present Value
Present Value (PV) is the current worth of a future sum of money or cash flow, discounted at a
given interest rate. It helps determine how much a future amount is worth today, considering the
time value of money.
Formula:
Where:
PV = Present Value
FV = Future Value (amount to be received in the future)
R = Discount rate (interest rate per period)
T = Number of periods
Discount
Discount refers to the reduction in the present value of future cash flows due to the time value of
money. It helps determine how much a future amount is worth today by applying a discount rate.
Formula:
Where:
D = Discount amount
FV = Future Value
PV = Present Value
R = Discount rate (interest rate per period)
T = Number of periods
Cash flow
- Cash flows are a fundamental tool in engineering economic analysis. Cash flows
represent transactions in which money changes hands between two or more parties –
lending $10.00 to a friend or making a payment on a car loan, for example. Representing
transactions as cash flows makes it easier to keep track of the important information
included in the transactions. Specifically, there are two characteristics of financial
transactions that are indicated in cash flows:
Value – the magnitude of the transaction being described. This is dependent on two
factors: the amount of money or currency changing hands (a dollar value) and the
direction in which the money is flowing (the orientation of the cash flow). We represent
financial gains (also called receipts or income) as positive in value, and financial losses
(also called disbursements or expenses) as negative in value.
Timing – the time or period in which the cash flow occurs. Often, periods are set to
coincide with interest periods, which will be discussed further in the Time Value of
Money chapter. Typically, periods are in increments of months, quarters (1/4 of a year),
semi-annual, or annual but other time increments may also be used.
Let’s use the example of someone lending $10.00 to a friend. We’ll assume Riley lends his friend
Chris $10.00 on January 1, and Chris pays back the $10.00 on February 1. There are two
transactions in this example: the initial lending on January 1, and the repayment on February 1.
Each can be represented by its own cash flow. From Riley’s perspective, as the lender, the two
cash flows would look like so:
The table in Table 1 gives a concise summary of
the two cash flows involved in the example, from
the lender’s perspective. But how would things
change if we made the same table from Chris’s
(the borrower’s) perspective?
As we can see by comparing Tables 1 and 2,
changing perspectives changes the signage of the
cash flows. This is because when one party gives money to the other, the recipient’s total assets
increase, and the donor’s assets decrease.
The previous example shows how cash flows can be used to summarize the important
information in financial transactions. When conducting an analysis in a spreadsheet it is
common to list cash flows in tabular format. When trying visualize or explain the financial
transactions in a particular analysis, cash flows can be represented in a much simpler way – the
cash flow diagram. The next section covers cash flow diagrams in detail.
Cash Flow Diagrams are simple graphical representations of financial transactions. The
diagrams consist of arrows, such as in the diagram shown below.
