• • 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
