MODULE 2 : MONEY-TIME RELATIONSHIP AND EQUIVALENCE Flashcards
When allowing someone else to use your
money (investing), you are paid a profit
The Time Value of Money
What you buy today is worth less a year from today
return on investment
___ is the rental value of money. It represent the growth of capital per unit period (period
may be a month, a quarter, semi-annual or a
year)
Interest rate
If i borrow a present sum of money or a
principal P at a simple interest rate i, the annual cost of interest is I = Pi
Simple Interest
Simple Interest formula
Amount owed = P + n I = P (1 + ni)
•The interest due at the end of a period is not paid out but is instead added
to the principal.
• Thus, during the next period, interest is paid on the total sum
Compound Interest
Compound Interest formula
Amount owed = P (1+i)^n
The interest rate used in calculations is known as the ___
effective interest rate
If compounding is once a year, the interest rate is called an ___
effective annual interest rate
• it specifies the rate of interest and a number
of interest periods in one year.
Nominal Rate of Interest
Nominal Rate of Interest formula
i = r / m
it is the actual or exact rate of interest on the principal during one year.
Effective Rate of Interest
Effective Rate of Interest formula
𝐄𝐑 = (1 + r / m)^m - 1
___ is a fundamental concept upon which engineering economy computations are based.
Economic equivalence
___ is a combination of interest rate and time value of money to determine the different amounts of money at different points in time
that are equal in economic value.
Economic equivalence
