ANNUAL, DISCRETE, AND PERIODIC COMPOUNDING

ADAMA SCIENCE AND TECHNOLOGY UNIVERSITY SCHOOL
OF 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.