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MONEY
LEARNING OBJECTIVES
Rational of Time
Preference for Money
Uncertainty
Current consumption
Possibility of investment opportunity
Simple Interest
Compound Interest
The interest that is earned on a given deposit and has become
part of principal at the end of a specified period
CV = Po (1 + I)n
where CV = Compound value
Po = Principal amount
I= Interest per annum
n= Number of years for which compound is done.
(1 + I)n = CVIFI..n or future value inter factor for interest and
n years.
I
1 M
m n
found
= Interest rate
Doubling Period
Rule of 72 = 72/I
Rule of 69 = 0.35+(69/I)
I=Interest rate [ for example 10%, 20%, 30%, etc.]
PV = CIFt
t = 1(1 + I)t
CIF1
+
PV =
1
(1 + I)
Where:
or
CIF2 +
(1 + I)2
CIF1
(1 + I)1
PV = Present value
CIF = Cash inflow
t = Year in which cash inflows are receivable
I = Interest rate or discounting factor or cost of capital
n = Duration of cash inflows stream
CIF
CIF
de
(1 + I)1
(1 + I) n - 1
I (1 + I)n
CIF2 +
(1 + I)2
=
CIF (PVIFAI . n)
CIFn
+ CIF n
(1 + I)
(1 + I)n-1
Annuity due
PVAn=CIF(FVIFI.n) (1+I)
OR
PVAn=CIF 1-(1+I)-n (1+I)
Sinking Fund
Sinking Fund Factor: Estimation of annual payments so as to
receive an accumulate pre-determined amount after a future
date
Ap =
FVA n
I
1 (1 I) n 1
= FVIFAI . n
Loan Amortisation
Loan Amortisation: Payment of loan over a specified period
in the equal or unequal instalments
LI = PA
I (1 + I)n
(1 + I)n 1
or
LI = PA PVIFAn . I