NOTRE DAME OF DADIANGAS UNIVERSITY ENGINEERING ECONOMY
COLLEGE OF ENGINEERING ARCHITECTURE AND TECHNOLOGY
MODULE 4: Compound Interest Sample Problems:
This module builds on the concept of the Time Value 1. By the condition of a will the sum of P25, 000 is left to
of Money by introducing compound interest, where interest is be held in trust by her guardian until it amounts to P45,
earned not only on the original principal but also on previously 000. When will the girl receive the money if the fund is
accumulated interest. Students will learn how compound invested at 8% compounded quarterly? 7.42 yrs
interest drives long-term financial growth and cost escalation, 2. At a certain interest rate compounded semiannually
making it the most widely used interest model in modern P5, 000 will amount to P20, 000 after 10 years. What
engineering and financial decisions. is the amount at the end of 15 years? P39,973.74
3. A man wishes his son to receive P200, 000 ten years
Objectives: from now. What amount should he invest if it will earn
1. Explain the concept of compound interest and its interest of 10% compounded annually during the first 5
applications. years and 12% compounded quarterly during the next
2. Solve compound interest problems. 5 years? P68,757.82
3. Compare compound interest with simple interest and 4. Gart opened an account P200,000 in the bank today at
analyze when compound interest is more applicable. the rate of 3% per annum. After two years, he deposits
another P400,000. After another five years, he will
Key Definitions and Terms withdraw P500,000. How much money does he have
on his account after the 10th year? P229,127.81
Compound Interest - Interest calculated on the
principal and accumulated interest from previous Seatwork:
periods.
Compounding Period - The frequency at which 1. In 1940, the average value of a house is P290,000. In
interest is added to the principal (annually, semi- 1990, the average value of a house is P7,910,000.
annually, monthly, daily). What was the rate of interest for the house?
2. Ronna was listening to her parents talking about what
Nominal Interest Rate (r) - The stated annual interest
a good deal compounded interest was for a retirement
rate before considering compounding frequency.
account. She wondered how much money she would
Effective Interest Rate (ER) - The actual annual rate
have if she invested P2000 at age 20 at 2.8% annual
earned or paid after compounding is considered.
interest compounded quarterly (four times each year)
Present Value (P) - The current worth of a future and left it until she reached age 65. Determine what the
amount of money. value of the P2000 would become.
Future Value (F) - The value of an investment or loan 3. What is the difference in the amount of money in the
after compounding over time. bank after five years if P2500 is invested at 3.2%
Number of Compounding Periods (m) - Total interest compounded annually or at 2.9% interest
number of times interest is compounded over the life compounded annually?
of the investment or loan. 4. The Fresh and Green Company has a savings plan for
Why do online banks advertise daily compounding instead employees. If an employee makes an initial deposit of
of monthly compounding? P1000, the company pays 8% interest compounded
quarterly. If an employee withdraws the money after
Why Compound Interest Matters in Engineering and five years, how much is in the account?
Economics
Compound interest is used in:
Bank loans and mortgages
Long-term investments and savings
Project cost escalation
Retirement and pension funds
Infrastructure financing and public debt
Compound Interest Formulas
1. Future Value (Maturity Value)
𝐹 = 𝑃(1 + 𝑖)𝑛
𝑟
n = mt and 𝑖 = 𝑚