Interest Formulas
Single cash flow formulas
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Single Cash Accumulation
The accumulated value of a present sum invested at a given interest rate after some time can be expressed as
F = P (1 + i)n (1)
where
F = accumulated value in the future
P = principal or present sum invested
i = interest rate per period
n = number of interest periods
The factor " (1 + i)n " is known as the "single payment compound amount factor".
Example - Accumulated amount
An amount of 1000 is invested at a interest rate 10% per year for 10 years. The accumulated amount can be calculated like
F = 1000 (1 + 0.1)10
= 2594
Discounting Process
The present value of a future cash flow can be calculated with discounting process and is expressed like
P = F 1/(1 + i)n (2)
where
P = present value
F = future cash flow
i = discount rate or discounting factor
n = numbers of periods to the cash flow
The factor " 1/(1 + i)n " is known as the "single payment present worth factor".
Example - The present value of a future sum
A sum of 1000 is paid after 10 years. The discount rate is 10% per year. The present value of the future payment can be calculated like
P = 1000 1/(1 + 0.1)10
= 386
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