Interest

Interest
and
and
TimeValue
Time Valueof
ofMoney
Money

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

OObbjjeeccttiivveess
• • Understand
Understandthe
themeaning
meaningofofInterest
Interestand
andTime
TimeValue
ValueofofMoney
Moneyand
and
it’stypes.
it’s types.

• • Study
StudyofofVarious
VariousInterest
InterestFactors
Factors

• • Understand
Understandthethemeaning
meaningofofNominal
Nominal&&Effective
EffectiveInterest
InterestRates
Rates

• • Usage
UsageofofInterest
Interestfactor
factortables
tablestotosolve
solveProblems
Problems

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

KKeeyy PPooi innt tss

• • In
I nt et re
e res ts t

• • PPr ri ni nc ci pi pa al l
• • In
I nt et re
e res ts tRRa at et e

• • In
I nt et re
e res ts tPPe re ri oi odd

• • FFuut ut urerea ammo ouunnt to of fmmo onne ey y

• • SSi m
i mppl el ev vs sCCo ommppo ouunndd

Engineering
 Interestand
Interest andTime
TimeValue
ValueofofMoney
Money

• • Money
Moneyhashasa atime
timevalue
valuebecause
becauseititcan
canearn
earnmore
moremoney
moneyover
overtime
time
(earningpower).
(earning power).

• • Time
Timevalue
valueofofmoney
moneyisismeasured
measuredininterms
termsofofinterest
interestrate.
rate.

• • Interest
Interestisisthe
thecost
costofofmoney
money a acost
costtotothe
theborrower
borrowerand andananearning
earningtoto
thelender.
the lender.

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

ElementsofofTransactions
Elements Transactionsinvolve
involveInterest
Interest
1. Initial amount of money in transactions involving debt or investments is called the principal.
1. Initial amount of money in transactions involving debt or investments is called the principal.
2. The interest rate measures the cost or price of money and is expressed as a percentage per period of
2. The interest rate measures the cost or price of money and is expressed as a percentage per period of
time.
time.
3. A period of time, called the interest period, determines how frequently interest is calculated.
3. A period of time, called the interest period, determines how frequently interest is calculated.
4. A specified length of time marks the duration of the transactions and thereby establishes a certain
4. A specified length of time marks the duration of the transactions and thereby establishes a certain
number of interest periods.
number of interest periods.
5. A plan for receipts or disbursements that yields a particular cash flow pattern over a specified length
5. A plan for receipts or disbursements that yields a particular cash flow pattern over a specified length
of time.
of time.
6. A future amount of money results from the cumulative effects of the interest rate over a number of
6. A future amount of money results from the cumulative effects of the interest rate over a number of
interest periods.
interest periods.

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

•
• AnAn= =AAdiscrete
discrete payment or receipt occurring at the end of some interest period.
payment or receipt occurring at the end of some interest period.
•
• i i = =The
The interest rate per interest period.
interest rate per interest period.
•
• NN = =TheThe total number o interest periods.
total number o interest periods.
• P = a sum of money at a time chosen for purposes of analysis as time zero,
• P = a sum of money at a time chosen for purposes of analysis as time zero,
sometimes referred to as the present value or present worth.
sometimes referred to as the present value or present worth.
•
• FF = =AAfuture
future sum of money at the end of the analysis period. This sum may be
sum of money at the end of the analysis period. This sum may be
specified as Fn.
specified as Fn.
•
• AA = =An An end of period payment or receipt in a uniform series that continues for N
end of period payment or receipt in a uniform series that continues for N
periods. This is a special situation where A1 = A2 = …=AN.
periods. This is a special situation where A1 = A2 = …=AN.

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

Engineering
 Interest and Time Value of Money
Interest and Time Value of Money

Engineering