• • Compounding relates to what is the future value of a N1 invested at certain interest rate over a period of time.
• Discounting on the other hand relates to how much in the present (present value) is needed to be invested to make a certain sum of money in the future
• It is common to here terms like, interest rate, simple interest, compound interest, annuity, perpetuity etc when quantifying time value for money.
• It means Mr Jameel will get an interest of 10% on N10, 000. To calculate this interest we multiply 10,000 by 10%.
• To calculate the future value of an investment this formula is used FV= PV (1+ r)
• where FV is future value, PV is present value and r is the rate of interest
• Applying this in our illustration will give
• : 10000(1+0.1) = 10000x 1 + 10,000 x 0.1= 11,000 or 10,000x (1.1) =11,000
• kindly note that Future value for a given number of years is given as FV= PV (1+ r)^n
• where ^n means the power of n
• So if Mr. Jameel invested the sum for 3 years, the computation will be thus
• 10,000 (1 + 0.1)^3 = 10,000 (1.1)^3 = 10,000 (1.331) = N13,310
• We can also rearrange the formula to compute Present Value (PV) that is, when we want to know how much to invest now at certain interest rate to get a certain sum of money in the