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Big Picture in Focus:
ULO-1b.
Be able to determine the simple interest and
compound interest, cash flow diagrams and their applications to real life situations.
Metalanguage
The most essential terms below are defined for you to have a better understanding of
this section in the course.
1. INTEREST
Interest is the charge paid for the use of borrowed capital or the income produced by
money which has been loaned.
2. TYPES OF INTEREST
Interest can be applied to loan in two types: Simple and Compound. Simple interest is
an interest relative to the principal amount only while compound interest is an interest
on interest. Simple interest works in favor with the borrower because it keeps the
accumulated amount that you pay lower than it would be with the compound interest.
Compound interest, on the other hand, works in favor with the investor because it
returns to compound as much as possible to get the most of the investment.
3. SIMPLE INTEREST
Simple Interest is a quick method of calculating interest charged on a loan. It is
determined by multiplying the interest rate by the principal by the number of periods.
These type of interest benefits consumers who pay loans on time or early each month.
Auto loans and short-term personal loans are common examples of simple interest
loans.
4. COMPOUND INTEREST
Compound interest is an interest on top of interest. The general formula in solving the
future amount after “n” periods is expressed as follows:
5. DISCOUNT
Discount is a deduction from the usual cost of products or services, typically given from
prompt or advance payment. Discount is an interest on loaned amount immediately
deducted from the loan upon release of it considering a 1 year end period. It is an
interest paid in advance.
6. INFLATION
Inflation is the increase in the prices for goods and services from one year to another
thus decreasing the purchasing power of the money
7. CASH FLOW DIAGRAM ANALYSIS
A cash flow diagram is a graphical representation of cash flows on a time scale. Receipt
is taken as the positive cash flow and disbursement as a negative cash flow. Cash flow
diagram can be viewed in two different perspective: By the investor and by the
borrower.

College of Engineering Education
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nd
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Matina Campus, Davao City
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Phone No.: (082)300-5456/300-0647 Local 133
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Essential Knowledge
The objective of a cost engineer is to deal with the money and economy.
In order to
understand the flow of money, one must know the following economic parameters:
1. SIMPLE INTEREST
Simple Interest is a quick method of calculating interest charged on a loan. It is
determined by multiplying the interest rate by the principal by the number of periods.
These type of interest benefits consumers who pay loans on time or early each month.