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ANNUAL, DISCRETE, AND PERIODIC COMPOUNDING
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a person borrows some money today, by tomorrow he has to pay more money than the original loan. This is also explained by the time value of money
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ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY SCHOOLOF CIVIL ENGINEERING AND ARCHITECTURE
DEPARTMENT OF CIVIL ENGNEERING
,ASTU Engineering Economics Compiled By: Nati
CHAPTER THREE
ANNUAL, DISCRETE, AND
PERIODIC COMPOUNDING
Instructor: Natnael Fantu
July, 2021
,ASTU Engineering Economics Compiled By: Nati
3.1 Time Value of Money
Introduction:
Every ones that it is better to receive a money (birr)
today than it is to receive a money (Birr) in 10 years, but
how do we quantify the difference?
The Time Value of Money is important when one is
interested either in Investing or Borrowing the money. if
a person invites his money today in bank savings, by next
year he will definitely accumulate more money than his
investment. This accumulation of money over a specified
time period is called as time value of money.
Similarly if a person borrows some money today, by
tomorrow he has to pay more money than the original
loan. This is also explained by the time value of money.
, ASTU Engineering Economics Compiled By: Nati
Two cases may exist in comparing Interest & Inflation.
Consider this Simple Example:
You have 100 Birr today and you want to buy a shirt
present value is 100 is okay;
Suppose you want to deposit in bank with interest rate of
7% and at the end of year you may have 107 Birr.
C.1 after one year the price of shirt increased by10%, 110B.
Case. 2 the price of shirt increased by 5%, 105Birr, due to
Inflation.
Clearly, the rate of Interest should be higher than the rate
of Inflation to make any economic sense of the delayed
purchase.
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