Engineering Economics interest formulae
Various Engineering Economics Interest Formulas
Interest rate can be classified into simple
interest rate and compound interest rate.
- · In simple interest, the interest is calculated, based on the initial deposit for every interest period.
- · In this case, calculation of interest on interest is not applicable.
- · In compound interest, the interest for the current period is computed based on the amount (principal plus interest up to the end of the previous period) at the beginning of the current period.
The notations which are used in various
interest formulae are as follows:
- Ø P = principal amount
- Ø n = No. of interest periods
- Ø i = interest rate (It may be compounded monthly, quarterly, semiannually or annually)
- Ø F = future amount at the end of year n
- Ø A = equal amount deposited at the end of every interest period
- Ø G = uniform amount which will be added/subtracted period after period to/from the amount of deposit A1 at the end of period 1
Tabulation of various interest formulae
Method
|
Diagram
|
Example
|
To find
|
Available data
|
Formula
|
Single-Payment Compound Amount
|
 |
A person
deposits some fixed amount in bank for some years
|
F
|
P, i, n
|
P (F/P, i, n)
|
Single-Payment Present Worth Amount
|
 |
A person
wishes to have a future sum of Rs 1,00,000 after 10 years
|
P
|
F, i, n
|
F (P/F, i, n)
|
Equal-Payment Series Compound Amount
|
 |
Deposit money
in R.D (Recurring deposit)
|
F
|
A, i, n
|
A (F/A, i, n)
|
Equal-Payment Series Sinking Fund
|
 |
A company
deposit an equal amount at the end of every year for the next 15years to get
Rs.5,00,000
|
A
|
F, i, n
|
F (A/F, i, n)
|
Equal-Payment Series Present Worth Amount
|
 |
A reserve
amount (P) which gives annual equal amount for ‘n’ years
|
P
|
A, i, n
|
A(P/A, i, n)
|
Equal-Payment Series capital recovery
|
 |
Loan
repayment
|
A
|
P, i, n
|
P (A/P, i, n)
|
Uniform Gradient series annual equivalent method
|
 |
Depositing
amount at every year in an incremental order
|
A
|
A1, G,
i, n
|
A1 +
G (A/G, i, n)
|
Effective Interest rate
|
If the
interest rate is calculated quarterly or halfly instead of annually
|
R
|
i, C
|
(1 + i/C)C
−1
|
