University of Benghazi

Faculty of IT
Software Engineering Department

Engineering ‫االقتصاد‬
Economics ‫الهندسي‬
Course Instructor
MOHAMED ELORFI
 Engineering
Economics

PART 5

Time value of money

(Simple & Compound Interest & Rule 72 )
Fundamental Principle‫ألساسي‬55‫لمعتقد ا‬55‫ا‬

The fundamental principle behind the concept of time

value of money is that, the value of a certain amount of
money today is more valuable than its value tomorrow on
account of timing. The difference in the value of money
today and tomorrow is referred to as time value of money.
‫ن المال اليوم‬2‫غ م‬2‫ة مبل‬2‫ن قيم‬2‫ أ‬،‫ي‬2‫ة للنقود ه‬2‫ة الزمني‬2‫اسي وراء القيم‬2‫د األس‬2‫المعتق‬
‫ي‬2‫ هذا الفارق ف‬.‫ل الوقت‬2‫ة لعام‬2‫د نتيج‬2‫ي الغ‬2‫غ ف‬2‫س المبل‬2‫ة نف‬2‫ن قيم‬2‫ر م‬2‫تكون أكث‬
.‫القيمة بين اليوم والغد يعرف بالقيمة الزمنية للنقود‬
Mohamed Elorfi : Engineering Economics 3
 Reasons for Time Value of Money
‫اء القيمة الزمنية للنقود‬5‫األسباب ور‬
 Risk & uncertainty‫لوضوح‬22‫ ا‬2‫لخطر وعدم‬22‫ا‬

 Inflation 2‫لتضخم‬22‫ا‬

 Consumption ‫الستهالك‬22‫ا‬

 Investment opportunities‫الستثمار‬22‫رصا‬222‫ف‬

Mohamed Elorfi : Engineering Economics 4

 Time Value of Money
The time-value of money is the relationship between interest
and time.‫لزمن‬22‫ائدة وا‬2‫لف‬22‫ينا‬222‫ود هيعالقة ب‬2‫لنق‬22‫لزمنية ل‬22‫لقيمة ا‬22‫ا‬

Because the purchasing power of money changes with time,

interest is what keeps money retain its value as time passes.
‫الن القوة الشرائية للنقود تتغير مع الزمن فان الفائدة هي ما يجعل النقود تحتفظ‬
.‫بقيمتها مع مرور الزمن‬
Mohamed Elorfi : Engineering Economics 5
 Interest Rate‫لفائدة‬55‫سبة ا‬55‫ن‬
– Called also the rate of capital growth, also ROI Return On
Investment, it is the rate of gain received from an
investment.
، ‫ وايضا تسمى العائد من االستثمار‬،‫الفائدة وتسمى أيضا بنسبة نمو رأس المال‬
.‫هي نسبة الكسب المتحصل عليه من االستثمار‬
– It is expressed on an annual basis.‫نوي‬22‫شكلس‬222‫ا ب‬2‫عبر عنه‬22‫ي‬
– For the lender, it consists of‫ي‬222‫نحصر ف‬222‫ئنت‬2‫لدا‬22‫لنسبة ل‬22‫ا‬222‫ب‬
(1) risk of loss ‫لخسارة‬22‫خطر ا‬
(2) administrative expenses‫مصروفاتإدارية‬
(3) profit or pure gain.‫لربح‬22‫ا‬

– For the borrower, it is the cost of using a capital for

immediately meeting his needs.
.‫احتياجات فورية‬ ‫لتلبية‬
Mohamed Elorfi‫المال‬ ‫استخدام رأس‬
: Engineering Economics‫ هي تكلفة‬،‫بالنسبة للمدين‬
6
 Simple Interest

 Calculated on the principal amount only ‫قط‬///‫الساسف‬//‫ ا‬/‫لمبلغ‬//‫حسبعلىا‬///‫ت‬

 Easy (simple) to calculate‫لحساب‬//‫هلة ا‬//‫س‬
 The total simple interest over several periods is computed as:
‫الفائدة البسطة الكلية على عدد من الفترات تحسب كالتالي‬:

Simple Interest = (Principal)(number of periods)(interest

rate)
SI = P.i.n
Where:
SI = amount of interest earned or paid‫لمدفوع‬//‫لمستحقأو ا‬//‫لفائدة ا‬//‫ ا‬/‫مبلغ‬
P = principal amount lent or borrowed ‫لمستلف‬//‫لمقترضأو ا‬//‫الساسا‬//‫ ا‬/‫لمبلغ‬//‫ا‬
i = interest rate per interest period‫ترة‬///‫كلف‬//‫لفائدة ل‬//‫سبة ا‬//‫ن‬
n = number of interest periods ‫ائدة‬/‫لف‬//‫تا‬/‫ترا‬///‫دد ف‬/‫ع‬
Mohamed Elorfi : Engineering Economics 7
 Simple Interest Example
Suppose that $50,000 is borrowed at a simple
interest rate of 8% annually. At the end of two
years the interest owed would be:
%8 ‫يطة‬/‫بة فائدة بس‬/‫تالفها بنس‬/‫م اس‬/‫ف دوالر ت‬/‫ أل‬50 ‫ن‬/‫ا أ‬/‫و افترضن‬/‫ل‬
:‫ فان مبلغ الفائدة المستحق بعد سنتان هو‬،‫سنويا‬

SI = P0(i)(n)
SI = $ 50,000 (0.08) (2)
= $ 8,000

Mohamed Elorfi : Engineering Economics 8

 Simple Interest Example

If someone borrowed $1,000 for 3 years with a simple

interest of 10%........... then the total interest is

Solution:

SI = P*i*n

SI = 1,000 * 0.1 * 3 = $300

Mohamed Elorfi : Engineering Economics 9

 Simple Interest Example

Green Tree Financing lent an engineering company $100,000 to retrofit an

environmentally unfriendly building. The loan is for 3 years at 10% per year
simple interest. How much money will the firm repay at the end of 3 years?
3 ‫ القرض لمدة‬.‫ لشركة هندسية لترميم مبنى غير صديق للبيئة‬100,000$ ‫اقرضت (قرين تي المالية) مبلغ‬
‫ ما هو المبلغ الذي ستدفعه الشركة كفائدة بسيطة عن استالف المبلغ االساسي في‬.%10 ‫سنوات بفائدة بسيطة‬
‫ سنوات؟‬3 ‫نهاية‬

solution

Total interest for 3 years:

I = P.i.n

Total interest (I) = $100,000 (0.10) (3) = $30,000

Mohamed Elorfi : Engineering Economics 10

 Simple Interest Example
Year by Year Analysis Simple Interest:
Year 1:
SI1= $100,000(0.10) = $10,000
Year 2:
SI2= $100,000(0.10) = $10,000
Year 3:
SI3= $100,000(0.10) = $10,000

Total due after n years = Principal + Simple Interest

= P + SI = P + Pin = P (1+in)
Total due after 3years = 100,000 (1+0.3)= $130,000

Mohamed Elorfi : Engineering Economics 11

 Compound Interest
Compound means to stop and compute
‫مركبة تعني قف واحسب‬
In this application, compounding means to compute the interest
owed at the end of the period and then add it to the unpaid
balance of the loan
‫يد القرض‬/‫ا لرص‬/‫م باضافته‬/‫م ق‬/‫ة الفترة ث‬/‫ي نهاي‬/‫تحقة ف‬/‫ة الفائدة المس‬/‫ب قيم‬/‫ي احس‬/‫ب يعن‬/‫ا التركي‬/‫هن‬
.‫المتبقي‬
 Interest then “earns interest”‫ائدة‬///‫جنيف‬///‫لفائدة ت‬//‫انا‬///‫وهكذا ف‬
Compound interest reflects the effect of the time value of money
on the interest also.
‫الفائدة المركبة ايضا تعكس تأثير القيمة الزمنية للنقود على الفائدة‬

Mohamed Elorfi : Engineering Economics 12

 Compound Interest
General Formula FVn = P0 (1+i)n

Over 5 time periods:

FV1 = P0 (1+i)1
FV2 = P0 (1+i)2
FV3 = P0 (1+i)3
FV4 = P0 (1+i)4
FV5 = P0 (1+i)5
Mohamed Elorfi : Engineering Economics 13
 Compound Interest Example

Given:
• Amount today (P0): $50,000
• Compound Interest rate (i): 11%
• Number of periods (n): 5

What is the future value?

FVn = P0 (1+i)n
FV5 = 50,000 (1+0.11)5
FV5 = 50,000 (1.68506) = $84,253

Mohamed Elorfi : Engineering Economics 14

 Compound Interest over time
Assume an engineering company borrows $100,000 at 10% per year
compound interest and will pay the principal and all the interest after 3
years. Compute the annual interest and total amount due after 3 years.
Graph the interest and total owed for each year, and compare with the
previous example that involved simple interest.
‫ل‬//‫غ القرض وك‬//‫ع مبل‬//‫وف تدف‬//‫ وس‬%10 ‫ة‬//‫ بفائدة مركب‬100,000$ ‫ت‬//‫ية اقترض‬//‫ة هندس‬//‫ن شرك‬//‫افترض أ‬
‫م الفائدة‬//‫ ارس‬.‫نوات‬//‫ س‬3 ‫د‬//‫ي بع‬//‫غ االجمال‬//‫نوية والمبل‬//‫ب الفائدة الس‬//‫ احس‬.‫نوات‬//‫ س‬3 ‫د‬//‫تحقة بع‬//‫الفائدة المس‬
.‫واالجمالي المستحق عن كل سنة وقارن النتائج بالمثال السابق للفائدة البسيطة‬
solution:‫لحل‬//‫ا‬

Period Interest amount Total due

1 100,000(0.10) = $10,000 100,000 + 10,000 = $110,000

2 110,000(0.10) = $11,000 110,000 + 11,000 = $121,000

3 121,000(0.10) = $12,100 121,000 + 12,100 =

$133,100
Mohamed Elorfi : Engineering Economics 15
 Methods of calculating interest

P=$100,000
Simple interest

1 2 3

P=$100,000
I1=$10,000 I2=$10,000 I3=$10,000

Compound interest

1 2 3 Owe at t = 3 years:

$100,000 + 10,000 + 11,000 + 12,100

I1=$10,000 = $133,100

I2=$11,000

I3=$12,100
Mohamed Elorfi : Engineering Economics 16
 The power of compounding
The power of compounding can have an astonishing effect on
the accumulation of wealth.   This table shows the results of
making a one-time investment of $10,000    for 30 years using
12% simple interest, and 12% interest compounded yearly and
quarterly.
‫ن خالل‬2‫ك م‬2‫ح ذل‬2‫ي يوض‬2‫ الجدول التال‬.‫ع الثروة‬2‫ي تجمي‬2‫ل ف‬2‫ر هائ‬2‫ا تأثي‬2‫ب له‬2‫قوة التركي‬
‫ة‬2‫نويا ومركب‬2‫ة س‬2‫يطة ومركب‬2‫ بس‬%12 ‫بة فائدة‬2‫ا بنس‬2‫ عام‬30 ‫ لمدة‬10,000$ ‫غ‬2‫تثمار مبل‬2‫اس‬
.‫ربع سنوي‬

Type of Interest Principal Plus Interest Earned

Simple 46,000.00
Compounded Yearly 299,599.22
Compounded Quarterly 347,109.87

Mohamed Elorfi : Engineering Economics 17

 The power of compounding
Future Value of a Single $1,000 Deposit

20000
10% Simple
15000 Interest
10000 7% Compound
Interest
5000 10% Compound
Interest
0
1st Year 10th 20th 30th
Year Year Year
Mohamed Elorfi : Engineering Economics 18
 The Rule-Of-72
How long does it take to double $5,000 at a
compound rate of 12% per year (approx.)?
‫ة‬22‫بة فائدة مركب‬2‫ بنس‬5,000$ ‫غ‬2‫ة مبل‬2‫ت لمضاعف‬2‫ن الوق‬2‫يأخذ م‬2‫م س‬22‫ك‬
.‫ سنويا‬%12

Approx. Years to Double = 72 / i%

72 / 12% = ~ 6 Years

‫ فما هو الوقت؟‬5,000$ ‫ بدال من‬10,000$ ‫لو كان المبلغ هو‬

Mohamed Elorfi : Engineering Economics 19
 Rule-Of-72 Exercises
E1: An Investor is earning a 9% on his investments. How long will it
take him to double his money?
‫ كم من الوقت سيستغرقه لمضاعفة أمواله؟‬،‫ على استثماراته‬%9 ‫مستثمر يحصل على‬

72 / 9% = 8 years

E2: An Investor needs to double his money in seven years. What rate of
return must he earn to do this successfully?
‫ ما هي نسبة الفائدة التي تحقق ذلك بنجاح؟‬،‫مستثمر يريد مضاعفة أمواله في سبع سنوات‬

72 / 7 = 10.2857%

Mohamed Elorfi : Engineering Economics 20