# ch3 - McGill Faculty of Engineering MIME 310 Engineering...

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McGill Faculty of Engineering MIME 310 Engineering Economy Chapter 3 – Time Value of Money “Remember that time is money” , Benjamin Franklin (1748) dollar today is worth more than a dollar tomorrow. Outline t i 1 M t F l D i A dollar today is worth more than a dollar tomorrow. Section 1: Monetary Flow Diagrams Section 2: Expressing the time value of money: Interest Rates Section 3: Interest Rate Mechanics • Simple Interest d I t t • Compound Interest • Nominal Interest Rate • Effective Interest Rate ontinuous Compounding • Continuous Compounding Section 4: Time Value Equivalence and Compound Interest Factors 1 Section 5: Examples

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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Monetary Flow Diagrams Monetary Flow Inflow or outflow of cash at a particular point in time •C a pital expenditures and operating expenses are negative flows, i.e. funds flowing out of a project or outflows evenues are ositive ows i e funds flowing into the Revenues are positive flows, i.e. funds flowing into the project or inflows t F lD i Monetary Flow Diagram Describes a project by its stream of inflows and outflows over its life time. 2
McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Monetary Flow Diagrams + W RY FLO 0 1 2 3 4 5 PERIODS ONETA R TIME 1 23 4 5 M POINTS IN TIME 3 -

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McGill Faculty of Engineering MIME 310 Engineering Economy Section 1: Monetary Flow Diagrams End-of-period Convention Outflows and inflows occur at irregular intervals over time Outflows and inflows occurring over a particular period of time are presented by net amounts at d of the periods ver which they represented by net amounts at end of the periods over which they occur 0 1 23 4 5 TIME 4
McGill Faculty of Engineering MIME 310 Engineering Economy Chapter 3 – Time Value of Money Outline Section 1: Monetary Flow Diagrams Section 2: Expressing the time value of money: Interest Rates Section 3: Interest Rate Mechanics • Simple Interest • Compound Interest • Nominal Interest Rate • Effective Interest Rate • Continuous Compounding Section 4: Time Value Equivalence and Compound Interest Factors Section 5: Examples 5

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McGill Faculty of Engineering MIME 310 Engineering Economy Section 2: Interest Rates Relationship between a lender and a borrower of money ender requires ender orrower Lender requires compensation for forgoing the use of Lender Borrower her/his wealth INTEREST 6
McGill Faculty of Engineering MIME 310 Engineering Economy Section 2: Interest Rates Consider the following alternatives: Receive either • \$100 today • \$100 in one year’s time The choice is evident… \$100 today is worth more than \$100 in one year’s time because it can be used or put to work (i.e. invested) immediately.

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ch3 - McGill Faculty of Engineering MIME 310 Engineering...

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