Money - Time Relationships and Equivalence - Interest basic terms

6 important questions on Money - Time Relationships and Equivalence - Interest basic terms

What does the term capital refer to?

Wealth in the form of money or property that can be used to produce more wealth due to the fact money has a time value.

Capital in the form of money for people, machines, materials, energy and other things can be classified in which 2 basic categories, explain

Equity capital
Owned by individuals who have invested their money or property in a business project or venture in the hope of receiving a profit.

Debt capital/ borrowed capital
Obtained from lenders for investment, in return, the lenders receive interest from the borrowers.

What are 2 fundamental reasons why return to capital in the form of interest and profit is an essential ingredient in (engineering) economy studies?

  1. Interest and profit pay the providers of capital for forgoing its use during the time the capital is being used | Incentive.
  2. Interest and profit are payments for the risk the investor takes in permitting another person, or organization to use his/her capital.
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What is the name of the concept that investors must decide whether the expected return on their capital is sufficient to justify buying into a proposed project or venture?

Opportunity cost

Explain the concept of simple interest and the corresponding formula

Total interest earned or charged is seen as linearly proportional to the initial amount of the loan, interest rate, and the number of interest periods for which the principal is committed.

Explain the concept of compound interest and compare it to simple interest.

The interest charge for any interest period is based on the remaining principal amount plus any accumulated interest charges up to the beginning of that period.

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