Phone No.: (082)300-5456/300-0647 Local 133 Page 19of 43Big 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 2ndFloor, B&E Building Matina Campus, Davao City Telefax: (082) 296-1084 Phone No.: (082)300-5456/300-0647 Local 133 Page 20of 43Essential 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.